Corporate Finance Pearson Solutions Manual

Preview text Solutions Manual Corporate Finance Ross, Westerfield, Jaffe, and Jordan 11th edition Prepared: Brad Jordan University of Kentucky Joe Smolira Belmont University 4 SOLUTIONS MANUAL 7. We would expect agency problems to be less severe in other countries, primarily due to the relatively small percentage of individual ownership. Fewer individual owners should reduce the number of diverse opinions concerning corporate goals. The high percentage of institutional ownership might lead to a higher degree of agreement between owners and managers on decisions concerning risky projects.

Instructor's Solutions Manual (Download only) for Corporate Finance, 4th Edition. Jonathan Berk, Stanford University. Peter DeMarzo, Stanford University. Solutions Manual The solutions manual provides brief solutions to all end of chapter problems. You can find more complete solutions online through MyLab Finance. Instructors Manual The instructors’ manual includes brief chapter summaries and learning objectives. Test Bank The test bank provides examples of brief quiz or homework problems.

In addition, institutions may be better able to implement effective monitoring mechanisms on managers than can individual owners, based on the deeper resources and experiences with their own management. The increase in institutional ownership of stock in the United States and the growing activism of these large shareholder groups may lead to a reduction in agency problems for U.S. Corporations and a more efficient market for corporate control.

However, this may not always be the case. If the managers of the mutual fund or pension plan are not concerned with the interests of the investors, the agency problem could potentially remain the same, or even increase since there is the possibility of agency problems between the fund and its investors. How much is too much? Who is worth more, Larry Ellison or Tiger Woods?

The simplest answer is that there is a market for executives just as there is for all types of labor. Executive compensation is the price that clears the market. The same is true for athletes and performers. Having said that, one aspect of executive compensation deserves comment. A primary reason executive compensation has grown so dramatically is that companies have increasingly moved to compensation. Such movement is obviously consistent with the attempt to better align stockholder and management interests.

In recent years, stock prices have soared, so management has cleaned up. It is sometimes argued that much of this reward is due to rising stock prices in general, not managerial performance. Perhaps in the future, executive compensation will be designed to reward only differential performance, i.e., stock price increases in excess of general market increases.

Maximizing the current share price is the same as maximizing the future share price at any future period. The value of a share of stock depends on all of the future cash flows of company.

Another way to look at this is that, barring large cash payments to shareholders, the expected price of the stock must be higher in the future than it is today. Who would buy a stock for today when the share price in one year is expected to be CHAPTER 2 ACCOUNTING STATEMENTS, TAXES, AND CASH FLOW Answers to Concepts Review and Critical Thinking Questions 1.

Every asset can be converted to cash at some price. However, when we are referring to a liquid asset, the added assumption that the asset can be quickly converted to cash at or near market value is important. The recognition and matching principles in financial accounting call for revenues, and the costs associated with producing those revenues, to be when the revenue process is essentially complete, not necessarily when the cash is collected or bills are paid. Note that this way is not necessarily the way accountants have chosen to do it.

The bottom line number shows the change in the cash balance on the balance sheet. As such, it is not a useful number for analyzing a company. The major difference is the treatment of interest expense. The accounting statement of cash flows treats interest as an operating cash flow, while the financial cash flows treat interest as a financing cash flow.

The logic of the accounting statement of cash flows is that since interest appears on the income statement, which shows the operations for the period, it is an operating cash flow. In reality, interest is a financing expense, which results from the choice of debt and equity. We will have more to say about this in a later chapter. When comparing the two cash flow statements, the financial statement of cash flows is a more appropriate measure of the performance because of its treatment of interest. Market values can never be negative.

Imagine a share of stock selling for This would mean that if you placed an order for 100 shares, you would get the stock along with a check for How many shares do you want to buy? More generally, because of corporate and individual bankruptcy laws, net worth for a person or a corporation cannot be negative, implying that liabilities cannot exceed assets in market value. For a successful company that is rapidly expanding, for example, capital outlays will be large, possibly leading to negative cash flow from assets. In general, what matters is whether the money is spent wisely, not whether cash flow from assets is positive or negative. Probably not a good sign for an established company to have negative cash flow from operations, but it would be fairly ordinary for a so it depends.

CHAPTER 2 7 2. The income statement for the company is: Income Statement Sales Costs Depreciation EBIT Interest EBT Taxes Net income 55,300 One equation for net income is: Net income Dividends Addition to retained earnings Rearranging, we get: Addition to retained earnings Net income Dividends Addition to retained earnings Addition to retained earnings 3. To find the book value of current assets, we use: NWC CA CL. Rearranging to solve for current assets, we get: Current assets Net working capital Current liabilities Current assets The market value of current assets and net fixed assets is given, so: Book value CA Book value NFA Book value assets 4.

Market value CA Market value NFA Market value assets Taxes Taxes The average tax rate is the total tax paid divided taxable income, so: Average tax rate Average tax rate.3054, or The marginal tax rate is the tax rate on the next of earnings, so the marginal tax rate 8 SOLUTIONS MANUAL 5. To calculate OCF, we first need the income statement: Income Statement Sales Costs Depreciation EBIT Interest Taxable income Taxes Net income 10,900 2,100 1,250 2,220 OCF EBIT Depreciation Taxes OCF 2,100 2,220 OCF 6. Is battlefield multiplayer split screen. Net capital spending NFAend NFAbeg Depreciation Net capital spending Net capital spending 7. The debt account will increase million, the amount of the new debt issue. Since the company sold 5 million new shares of stock with a par value, the common stock account will increase million. The capital surplus account will increase million, the value of the new stock sold above its par value. Since the company had a net income of million, and paid million in dividends, the addition to retained earnings was million, which will increase the accumulated retained earnings account.

So, the new debt and equity portion of the balance sheet will be: 8. Debt Total debt equity Preferred stock Common stock par value) Accumulated retained earnings Capital surplus Total equity Total Liabilities Equity Cash flow to creditors Interest paid Net new borrowing Cash flow to creditors (LTDend LTDbeg) Cash flow to creditors Cash flow to creditors Cash flow to creditors 10 SOLUTIONS MANUAL b.

Change in NWC NWCend NWCbeg (CAend CLend) (CAbeg CLbeg) 185) 170) 125) 105 c. To find the cash flow generated the assets, we need the operating cash flow, and the capital spending. So, calculating each of these, we find: Operating cash flow Net income Depreciation Operating cash flow 90 Note that we can calculate OCF in this manner since there are no taxes. Capital spending Ending fixed assets Beginning fixed assets Depreciation Capital spending 90 Now we can calculate the cash flow generated the assets, which is: Cash flow from assets Operating cash flow Capital spending Change in NWC Cash flow from assets 80 12. With the information provided, the cash flows from the firm are the capital spending and the change in net working capital, so: Cash flows from the firm Capital spending Additions to NWC Cash flows from the firm (2,300) And the cash flows to the investors of the firm are: Cash flows to investors of the firm Sale of debt Sale of common stock Dividends paid Cash flows to investors of the firm 15,200 CHAPTER 2 11 13.

The interest expense for the company is the amount of debt times the interest rate on the debt. So, the income statement for the company is: Income Statement Sales Cost of goods sold Selling costs Depreciation EBIT Interest Taxable income Taxes Net income b. 29,600 65,400 22,890 42,510 And the operating cash flow is: OCF EBIT Depreciation Taxes OCF 22,890 OCF 14. To find the OCF, we first calculate net income.

Income Statement Sales Costs Other expenses 6,700 Depreciation 18,400 EBIT Interest Taxable income Taxes 25,370 Net income Dividends Additions to RE a. OCF EBIT Depreciation Taxes OCF 18,400 25,370 OCF b. CFC Interest Net new LTD CFC CFC Note that the net new debt is negative because the company repaid part of its longterm debt. CFS Dividends Net new equity CFS 8,100 CFS CHAPTER 2 13 16. The market value of equity cannot be negative. A negative market value in this case would imply that the company would pay you to own the stock.

The market value of equity can be stated as: equity Max TL), So, if TA is equity is equal to and if TA is equity is equal to We should note here that while the market value of equity cannot be negative, the book value of equity can be negative. Taxes Growth Taxes Income Each firm has a marginal tax rate of 34 percent on the next of taxable income, despite their different average tax rates, so both firms will pay an additional in taxes.

Income Statement Sales COGS expenses Depreciation EBIT Interest Taxable income Taxes 0 Net income OCF EBIT Depreciation Taxes OCF 0 OCF c. Net income was negative because of the tax deductibility of depreciation and interest expense. However, the actual cash flow from operations was positive because depreciation is a expense and interest is a financing expense, not an operating expense.

A firm can still pay out dividends if net income is it just has to be sure there is sufficient cash flow to make the dividend payments. Change in NWC Net capital spending Net new equity 0.

(Given) Cash flow from assets OCF Change in NWC Net capital spending Cash flow from assets 0 0 Cash flow to stockholders Dividends Net new equity Cash flow to stockholders 0 Cash flow to creditors Cash flow from assets Cash flow to stockholders Cash flow to creditors Cash flow to creditors 14 SOLUTIONS MANUAL Cash flow to creditors is also: Cash flow to creditors Interest Net new LTD So: Net new LTD Interest Cash flow to creditors Net new LTD Net new LTD 20. The income statement is: Income Statement Sales Cost of goods sold Depreciation EBIT Interest Taxable income Taxes Net income 14,500 2,900 2,900 690 2,210 884 b. OCF EBIT Depreciation Taxes OCF 2,900 884 OCF c. Change in NWC NWCend NWCbeg (CAend CLend) (CAbeg CLbeg) 2,785) 2,520) 2,110 Net capital spending NFAend NFAbeg Depreciation 15,470 2,900 CFA OCF Change in NWC Net capital spending 450 4,550 The cash flow from assets can be positive or negative, since it represents whether the firm raised funds or distributed funds on a net basis. In this problem, even though net income and OCF are positive, the firm invested heavily in both fixed assets and net working it had to raise a net in funds from its stockholders and creditors to make these investments. Cash flow to creditors Interest Net new LTD 0 16 SOLUTIONS MANUAL To calculate the cash flow from assets, we must first calculate the operating cash flow.

The operating cash flow is calculated as follows (you can also prepare a traditional income statement): EBIT Sales Costs Depreciation EBIT 5,932 1,190 EBIT EBT EBIT Interest EBT 328 EBT Taxes EBT.40 Taxes.40 Taxes OCF EBIT Depreciation Taxes OCF 1,190 2,916 OCF Cash flow from assets OCF Change in NWC Net capital spending Cash flow from assets 168 1,910 Cash flow from assets d. Net new borrowing LTD15 LTD14 Net new borrowing 2,380 Net new borrowing Net new borrowing Debt issued Debt retired Debt retired Debt retired Cash flow to creditors Interest Net new LTD Cash flow to creditors Cash flow to creditors CHAPTER 2 17 22. Cash Accounts receivable Inventory Current assets Net fixed assets Total assets Cash Accounts receivable Inventory Current assets Net fixed assets Total assets Balance sheet as of Dec.

31, 2014 Accounts payable 6,527 Notes payable 11,604 Current liabilities debt equity Total liab. Equity Balance sheet as of Dec. 31, 2015 Accounts payable 7,352 Notes payable 11,926 Current liabilities debt equity Total liab. Equity 953 42,124 895 42,677 2014 Income Statement Sales COGS 3,235.00 Other expenses 767.00 Depreciation 1,350.00 EBIT Interest 630.00 EBT Taxes 1,162.80 Net income 2015 Income Statement Sales COGS 3,672.00 Other expenses 641.00 Depreciation 1,351.00 EBIT Interest 724.00 EBT Taxes 1,259.02 Net income Dividends Additions to RE Dividends Additions to RE 1,110.20 23.