Chapter Solutions.pdf - Course Outline Topic 1 2 3 4 5 6 7 8 9 10 Introduction to Financial Management Financial Statements Analysis The Time Value of

Chapter Solutions.pdf - Course Outline Topic 1 2 3 4 5 6 7...

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3 Course Outline Topic Reference 1 Introduction to Financial Management Chapter 1 2 Financial Statements Analysis Chapter 2, 3, 4 3 The Time Value of Money Chapter 5 4 Discounted Cash Flow Valuation Chapter 6 5 Investment Decisions Chapter 9 6 Bond and Stock Valuation Chapter 7, 8 7 Capital Budgeting Chapter 10, 11 8 Market Efficiency Chapter 12 9 Risk and Return Chapter 13 10 Cost of Capital Chapter 14 4 TableofContents 1 Topic 1 Introduction to Financial Management .............................................................. 9 1.1 Introduction ................................................................................................................. 9 1.1.1 Why Study Financial Management ...................................................................... 9 1.1.2 The Objective of Financial Management ............................................................. 9 1.1.3 The Financial Decisions ....................................................................................... 9 1.2 The Corporate Firm ................................................................................................... 10 1.2.1 Sole Proprietorship ............................................................................................. 10 1.2.2 Partnership ......................................................................................................... 11 1.2.3 Corporation ........................................................................................................ 11 1.2.4 A Comparison .................................................................................................... 12 1.3 The Agency Problem and Control of the Corporation .............................................. 12 1.3.1 Principal-Agency Relationship .......................................................................... 13 1.3.2 Evidence from the Oil Industry .......................................................................... 15 2 Topic 2 Financial Statements Analysis ......................................................................... 16 2.1 The Balance Sheet ..................................................................................................... 16 2.1.1 Assets ................................................................................................................. 17 2.1.2 Liabilities ........................................................................................................... 17 2.1.3 Equity ................................................................................................................. 18 2.1.4 The Accounting Identity .................................................................................... 18 2.1.5 Managerial Issues ............................................................................................... 18 2.2 The Income Statement ............................................................................................... 19 2.2.1 Revenues ............................................................................................................ 19 2.2.2 Expenses ............................................................................................................ 20 2.2.3 Depreciation ....................................................................................................... 20 2.2.4 Taxes .................................................................................................................. 20 2.3 Cash Flow .................................................................................................................. 22 2.3.1 The Importance of Cash Flow ............................................................................ 22 2.3.2 The Cash Flow Identity ...................................................................................... 22 2.4 Financial Ratio Analysis ........................................................................................... 25 2.4.1 Liquidity Ratios ................................................................................................. 27 2.4.2 Solvency Ratios ................................................................................................. 27
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5 2.4.3 Asset Management Ratios .................................................................................. 28 2.4.4 Profitability Ratios ............................................................................................. 30 2.4.5 Market Value Ratios .......................................................................................... 30 2.4.6 Linking Ratios .................................................................................................... 32 2.4.7 Managerial Implications .................................................................................... 32 2.5 Growth Analysis ........................................................................................................ 33 2.5.1 Sustainable Growth ............................................................................................ 33 2.5.2 Du Pont Decomposition ..................................................................................... 34 2.5.3 Capital Structure and Sustainable Growth ......................................................... 35 2.5.4 A Note on Sustainable Growth Rate .................................................................. 35 3 Topic 3 The Time Value of Money .............................................................................. 37 3.1 A Motivating Example .............................................................................................. 37 3.1.1 Basis for Comparison ......................................................................................... 40 3.2 Future Value and Compounding ............................................................................... 40 3.2.1 Effects of Compounding .................................................................................... 40 3.2.2 Calculate Future Values with BAII Plus ............................................................ 43 3.3 Present Value and Discounting ................................................................................. 43 3.3.1 Effects of Discounting ....................................................................................... 44 3.3.2 Calculate Present Values with BAII Plus .......................................................... 45 3.4 The Discount Rate ..................................................................................................... 46 3.5 The Number of Periods ............................................................................................. 48 3.6 Spreadsheet Application ............................................................................................ 49 4 Topic 4 Discounted Cash Flow Valuation .................................................................... 50 4.1 Multiple Cash Flows ................................................................................................. 50 4.1.1 Future Value of a Series of Cash Flows ............................................................. 50 4.1.2 Present Value of a Series of Cash Flows ........................................................... 51 4.2 Annuity ...................................................................................................................... 52 4.2.1 Present Value of an Annuity .............................................................................. 52 4.2.2 Future Value of an Annuity ............................................................................... 56 4.3 Annuity Due .............................................................................................................. 57 4.4 Perpetuity .................................................................................................................. 58 4.5 Comparing Rates ....................................................................................................... 58 4.5.1 Effective Annual Rate (EAR) ............................................................................ 59 6 4.5.2 Annual Percentage Rate (APR) ......................................................................... 60 5 Topic 5 Investment Decisions ....................................................................................... 62 5.1 Capital Investment Projects ....................................................................................... 62 5.2 Net Present Value ...................................................................................................... 63 5.2.1 Why Positive NPV? ........................................................................................... 64 5.2.2 More than Two Alternatives .............................................................................. 65 5.2.3 Investment Projects with Different Lives .......................................................... 66 5.3 The Internal Rate of Return (IRR) ............................................................................ 67 5.3.1 Nonconventional Cash Flows ............................................................................ 69 5.3.2 Mutually Exclusive Investments ........................................................................ 70 5.4 The Payback Rule ...................................................................................................... 72 5.5 The Average Accounting Return ............................................................................... 74 5.6 Profitability Index ..................................................................................................... 75 5.7 Comprehensive Problems .......................................................................................... 76 6 Topic 6 Bond and Stock Valuation ............................................................................... 79 6.1 What is a Bond? ........................................................................................................ 79 6.2 How to Value Bonds? ............................................................................................... 79 6.2.1 Pure Discount Bonds .......................................................................................... 79 6.2.2 Coupon Bonds .................................................................................................... 80 6.2.3 Consol ................................................................................................................ 83 6.3 Yield to Maturity ....................................................................................................... 83 6.4 What is a Common Stock? ........................................................................................ 84 6.5 How to Value Stocks? ............................................................................................... 84 6.6 Modeling Dividends .................................................................................................. 85 6.6.1 Zero Growth ....................................................................................................... 86 6.6.2 Constant Growth ................................................................................................ 86 6.6.3 Nonconstant Growth .......................................................................................... 89 6.7 Total Return ............................................................................................................... 89 6.8
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