Fundamentals of Financial ManagementEleventh Edition.docx

Fundamentals of Financial ManagementEleventh Edition.docx

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FundamentalsofFinancialManagementEleventhEdition

FundamentalsofFinancialManagement

EleventhEdition

SOLUTIONSTOPROBLEMS

CONTENTS

CHAPTER4TheValuationofLong-TermSecurities

CHAPTER5RiskandReturn

CHAPTER8OverviewofWorkingCapitalManagement

CHAPTER9CashandMarketableSecuritiesManagement

CHAPTER10AccountsReceivable

CHAPTER11Short-TermFinancing

CHAPTER15RequiredReturnsandtheCostofCapital

CHAPTER16OperatingandFinancialLeverage

CHAPTER17CapitalStructureDetermination

CHAPTER18DividendPolicy

CHAPTER19TheCapitalMarket

CHAPTER20Long-TermDebt,PreferredStock,andCommonStock

CHAPTER4

1.Priceperbond$907.10

2.Priceperbond$904.30

3.Currentprice:

p0=$80.00

Laterprice:

p0=$66.67

Thepricedropsby$13.33

4.Rateofreturn=20%

5.PresentvalueofstockV=$22.63

6.a）$37.5

b）$30.00

c）$37.50

Eitherthepresentstrategy（a）orstrategy（c）bothresultinthesamemarketpricepershare.

7.a）8percent

b）YTC=9.64percent

wesolveforYTCbycomputer

8.V=$75

9.V=$689.41

10.a）g=0.05

b）expecteddividendyield=0.07

c）expectedcapitalgainsyield=g=0.05

11.a）semiannualyield=0.0402

b）0.0804

c）effectiveannualyield=0.0820

12.a）tryinga4percentsemiannualYTMasastartingpointforatrial-and-errorapproach,weget

P0=$1,067.55

Since$1,067.55islessthan$1,120,weneedtotryalowerdiscountrate,say3percent

P0=$1,223.47

Toapproximatetheactualdiscountrate,weinterpolatebetween3and4percent,

X=0.0066

Inaddition,semiannualYTM=0.03+0.0066=0.0366,or3.66percent.（TheuseofacomputerprovidesaprecisesemiannualYTMfigureof3.64percent.）

b）semiannualYTM*2=nominalYTM

nominalYTM=0.0732

C）effectiveannualYTM=0.0754

13.a）oldChicago’s12-yearbondsshouldshowagreaterpricechangethanRedFrog’sbonds.Witheverything,thesameexceptformaturity,thelongerthematurity,thegreaterthepricefluctuationassociatedwithagivenchangeinmarketrequiredreturn.Thecloserintimethatyouaretotherelativelylargematurityvaluebeingrealized,thelessimportantareinterestpaymentsindeterminingthemarketprice,andthelessimportantisachangeinmarketrequiredreturnonthemarketpriceofthesecurity.

b）RedFrog:

P0=$1,041

OldChicago:

P0=$1,086.14

OldChicago’spriceperbondchangesby（$1,086.14-$1,000=$86.14,whileRedFrog’spriceperbondchangesbylessthanhalfthatamount,or（$1,041-$$1,000）=$41

14.a）$36.67

b）$31.14

c）$44.40

CHAPTER5

1.a）Thestandarddeviationis11.36%

b）Thereisa30percentprobabilitythattheactualreturnwillbezero（prob.E（R）=0Is20%）orless（prob.E（R）

also,byinspectionweseethatthedistributionisskewedtotheleft.

2.a）Forareturnthatwillbezeroorless,standardizingthedeviationfromtheexpectedvalueofreturnweobtain（0%-20%）/15%=-1.333standarddeviations.TurningtoTableVatthebackofthebook,1.333fallsbetweenstandarddeviationsof1.30and1.35.Thesestandarddeviationscorrespondtoareasunderthecurveof0.0968and0.0885respectively.Thismeansthatthereisapproximatelya9%probabilitythatactualreturnwillbezeroorless.（Interpolatingfor1.333,wefindtheprobabilitytobe9.13%）

b）10percent:

Standardizeddeviation（10%-20%）/15%=-0.667.

probabilityof10percentorlessreturn=（approx.）25percent.

Probabilityof10percentormorereturn=75percent.

20percent:

50percentprobabilityofreturnbeingabove20percent.

30percent:

standardizeddeviation=（30%-20%）/15%=0.667.Probabilityf30percentormorereturn=（approx.）25percent.

40percent:

standardizeddeviation=1.333

probabilityof40percentormorereturn=（approx.）9percent

50percent:

Standardizeddeviation=2.00

Probabilityof50percentormorereturn=2.28percent

3.Thebetaisapproximately0.5.Thisindicatesthatexcessreturnsforthestockfluctuatelessthanexcessreturnsforthemarketportfolio.Thestockhasmuchlesssystematicriskthanthemarketasawhole.Itwouldbeadefensiveinvestment.

4.Req.（RA）=0.16

Req.（RB）=0.13

Req.（RC）=0.106

Req.（RD）=0.190

Req.（RE）=0.148

5.Expectedreturn=0.1538

7.a）Selena’sexpectedreturnis0.1602.

b）TheexpectedreturnonSelena’sportfolioincreasesto16.82percent,becausetheadditionalfundsareinvestedinthehighestexpectedreturnstock.

8.Requiredreturn=0.154

Assumingthattheperpetualdividendgrowthmodelisappropriate,wegetV=$45.45

9.A）thebetaofaportfolioissimplyaweightedaverageofthebetasoftheindividualsecuritiesthatmakeuptheportfolio.

Theportfoliobetais1.115

b）Expectedportfolioreturn=14.69%or0.1469

SolutiontoAppendixAproblem

10.E（Rp）=0.121

Thestandarddeviationoftheportfolioequalsto0.00856

CHAPTER8

1.

a）Totalassetturnover=1.867

Returnonassetsbeforetaxes=18.67%

b）

Profit

CurrentAssets

FixedAssets

TotalAssets

ReturnonAssets

28,000

10,000

100,000

110,000

25.45%

28,000

25,000

100,000

125,000

22.4%

28,000

40,000

100,000

140,000

20%

28,000

55,000

100,000

155,000

18.06%

28,000

70,000

100,000

170,000

16.47%

28,000

85,000

100,000

185,000

15.14%

28,000

100,000

100,000

200,000

14.00%

c）Theimplicitassumptionin（b）aboveisthatthelevelofworkingcapitalhasnoimpactonsalesorcosts.Onecanvisualizesituationswheresalesarelostbecauseofstockoutsandcostsmayincreaseasmorelosttimeinproductioniscausedbyshortagesofmaterials.

2.

b）Finance$4millionofworkingcapitalwithpermanentsourcesoffunds.Financefixedasseswithcommonstockandretainedearnings.Financehetemporaryworkingcapitalwithshort-termdebt.

3.A）Alternative1:

bankloancost:

$96,000

Alternative2:

Termloancost$67,500

Bankloancost$42,000

Totalcost$109,500

Alternative3:

Termloancost$135,000

Bankloancost$12,000

Totalcost$147,000

Alternative1islowestincostbecausethecompanyborrowsatlowerrate,12percentversus13.5percent,andbecauseitdoesnotpayinterestonfundsemployedwhentheyarenotneeded.

b）Whilealternative1ischeapestitentailsfinancingtheexpectedbuildupinpermanentfundsrequirements（$500,000）onashort-termbasis.Thereisariskconsiderationinthatifthingsturnbadthecompanyisdependentonitbankforcontinuingsupport.Thereisriskofloanrenewalandinterestrateschanging.

Alternative2involvesborrowingtheexpectedincreaseinpermanentfundsrequirementsonatermbasis.Asaresult,onlytheexpectedseasonalcomponentftotalneedswouldbefinancedwithshort-termdebt.

Alternative3,themostconservativefinancingplanofthethree,involvesfinancingonatermbasismorethantheexpectedbuild-upinpermanentfundsrequirements.Inallthreecases,thereistheriskthatactualtotalfundsrequirementswilldifferfromthosethatareexpected.

Chapter9

1.a）$2,520,000

b）Fundsreleased=$840,000

Valueoffundsreleasedonanannualbasis=$75,600

Thecompanyshouldnotinauguratetheplan.

c）Valueoffundsreleasedonanannualbasis=$37,800

Thecompanyshouldundertaketheplan.

2.a）annualsaving=$35,000

b）maximumchargebyNewOrleansbank=$105,000

3.Ifthecompanywerecertainofthepatternshown,itwouldwishtohavethefollowingdepositsinitspayrollaccountinordertocoverthechecksthatwerecashed:

Friday$30,000

Monday60,000

Tuesday37,500

Wednesday15,000

Thursday7,500

$150,000

Ifemployeecheckcashingbehaviorissubjecttofluctuations,thecompanywillneedtomaintain“buffer”cashintheaccount.Thegreatertheuncertainty,thegreaterthebufferthatwillbeneeded.

4.a）$1,230,000

b）$615,000

c）Interestearned=$615,000*10%=$61,500

Cost=250transfers*41stores*$7cost=$71,750

Asthecostexceedstheinterestearnedonthenetreleasedfunds,thearrangementwouldnotbeworthwhile.Thetransfersarenotlargeenoughtooffsetthefixedcost.0

5.Nospecificsolutionrecommended.

Chapter10

1.

CreditPolicy

A

B

C

D

a.Incrementalsales

$28,800,000

$1,800,000

$1,200,000

$600,000

b.Incrementalprofitability

28,000

180,000

120,000

60,000

c.Newreceivable

Turnover

8

6

4

2.5

d.Additionalreceivables

$350,000

$300,000

$300,000

$240,000

e.Additional

Investment

315,000

270,000

270,000

216,000

f.Opportunitycost

94,500

81,000

81,000

64,800

g.b>f?

Yes

Yes

Yes

No

ThecompanyshouldadoptcreditpolicyCbecauseincrementalprofitabilityexceedstheincreasedcarryingcostsforpoliciesA,B,C,butnotforpolicyD.

2.

CreditPolicy

A

B

C

D

a.Incrementalsales

$28,800,000

$1,800,000

$1,200,000

$600,000

b.Percentdefault

3%

6%

10%

15%

b.Incrementalbad-debtlosses

$84,000

108,000

120,000

90,000

d.opportunitycost

94,500

81,000

81,000

64,800

e.Totalcosts

178,500

189,000

201,000

154,800

b.Incrementalprofitability

280,000

180,000

120,000

60,000

g.f>e?

Yes

No

No

No

AdoptcreditpolicyA.itistheonlyonewhereincrementalprofitabilityexceedsopportunitycostsplusbad-debtlosses.

3.

CreditPolicy

A

B

C

D

a.Incrementalsales

$28,800,000

$1,800,000

$1,200,000

$600,000

b.Percentdefault

1.5%

3%

5%

7.5%

b.Incrementalbad-debtlosses

$42,000

54,000

60,000

45,000

d.opportunitycost

94,500

81,000

81,000

64,800

e.Totalcosts

136,500

135,000

141,000

109,800

b.Incrementalprofitability

280,000

180,000

120,000

60,000

g.f>e?

Yes

yes

No

No

CreditpolicyBnowwouldbebest.Anymoreliberalcreditpolicybeyondthispointwouldonlyresultinmoreincrementalcoststhanbene