Solutions to All Chapters (9ed) Suggested Problems.docx -...

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CHAPTER 1 INTRODUCTION TO CORPORATE FINANCE 10. (LO3) Presumably, the current stock value reflects the risk, timing, and magnitude of all future cash flows, both short-term and long-term. If this is correct, then the statement is false. 11. (LO3) An argument can be made either way. At the one extreme, we could argue that in a market economy, all of these things are priced. There is thus an optimal level of, for example, ethical and/or illegal behavior, and the framework of stock valuation explicitly includes these. At the other extreme, we could argue that these are non-economic phenomena and are best handled through the political process. A classic (and highly relevant) thought question that illustrates this debate goes something like this: “A firm has estimated that the cost of improving the safety of one of its products is $30 million. However, the firm believes that improving the safety of the product will only save $20 million in product liability claims and lost customer goodwill. What should the firm do?” 13. (LO4)   The goal of management should be to maximize the share price for the current shareholders. If management believes that it can improve the profitability of the firm so that the share price will exceed $35, then they should fight the offer from the outside company. If management believes that this bidder or other unidentified bidders will actually pay more than $35 per share to acquire the company, then they should still fight the offer. However, if the current management cannot increase the value of the firm beyond the bid price, and no other higher bids come in, then management is not acting in the interests of the shareholders by fighting the offer. Since current managers often lose their jobs when the corporation is acquired, poorly monitored managers have an incentive to fight corporate takeovers in situations such as this. CHAPTER 2 FINANCIAL STATEMENTS, TAXES, AND CASH FLOWS 22. (LO3) a. Total assets 2014 = $914 + 3,767 = $4,681 Total liabilities 2014 = $365 + 1,991 = $2,356 Owners’ equity 2014 = $4,681 – 2,356 = $2,325 Total assets 2015 = $990 + 4,536 = $5,526 Total liabilities 2015 = $410 + 2,117 = $2,527 Owners’ equity 2015 = $5,526 – 2,527 = $2,999 b. NWC 2014 = CA14 – CL14 = $914 – 365 = $549 NWC 2015 = CA15 – CL15 = $990– 410 = $580 Change in NWC = NWC15 – NWC14 = $580 – 549 = $31 c. We can calculate net capital spending as: Net capital spending = Net fixed assets 2015 – Net fixed assets 2014 + Depreciation Net capital spending = $4,536 – 3,767 + 1,033= $1,802 So, the company had a net capital spending cash flow of $1,802. We also know that net capital spending is: Net capital spending = Fixed assets bought – Fixed assets sold $1,802 = $1,890 – Fixed assets sold Fixed assets sold = $1,890 – 1,802 = $88 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 = $11,592 – 5,405 – 1,033= $5,154 EBT = EBIT – Interest = $5,154 – 294 = $4,860 Taxes = EBT 0.35 = $4,860 0.35 = $1,701 OCF = EBIT + Depreciation – Taxes = $5,154 + 1,033 – 1,701 = $ 4,486 Cash flow from assets = OCF – Change in NWC – Net capital spending. = $4,192 – 31 – 1,802 = $2, 359 d. Net new borrowing = LTD15 – LTD14 = $2,117 – 1,991 = $126 Cash flow to creditors = Interest – Net new LTD = $294 – 126 = $168 Net new borrowing

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