Solutions to Chapter 22
International Financial Management
1.
a.
You can buy: 100/1.4621 = 68.395 euros for $100
You can buy: 100 1.4621= 146.21 dollars for 100 euros
You can buy: 100 1.1322 = 113.22 Swiss francs for $100
You can buy: 100/1.1322 = 88.32 d
Financial Management
Risk and Return (Chapter 11 to 12)
Topics
I. Historical Performance
II. Expected returns
III. Risk
IV. Risk and Return in a portfolio context
V. Diversification
VI. Portfolio Theory
VII. Market risk and Beta
VIII. Capital Asset Pricin
Solutions to Chapter 16
Debt Policy
1.
a.
True.
b.
False. As financial leverage increases, the expected rate of return on equity rises
by just enough to compensate for its higher risk. The value of the firm and
stockholders wealth are unaffected.
c.
False
NAME:
To complete the homework assignments in the templates provided:
1. The question is provided for each problem. You may need to refer to your textbook for
additional information in a few cases.
2. You will enter the required information into the shade
2. Which of the following statements regarding shareholder equity accounts is false?
A. Treasury stock refers to corporate investments in U.S. Treasury bills and bonds.
> A is correct because Treasury stock refers to stocks repurchased by the company.
My
2. Which of the following statements regarding shareholder equity accounts is false?
A. Treasury stock refers to corporate investments in U.S. Treasury bills and bonds.
> A is correct because Treasury stock refers to stocks repurchased by the company.
My
1. The shareholders of the Pickwick Paper Company need to elect six directors. There are
400,000 shares outstanding. How many shares do you need to own to ensure that you can elect at
least one director if the company has cumulative voting?
A. 66,667 shar
1 A trust officer at the blackburg National Bank needss to determine how to
invest $100,000 in the following collection of bonds to maximize the annual
return.
Bond
Annual Return
Maturity
Risk
Taxfree
A
9.5%
Long
High
Yes
B
8.0%
Short
Low
Yes
C
9.0%
Lon
Chapter One: Goals and Gover
nance of the Firm
FINC 210:
Financial Management
Chapter One
1
Chapter One
After studying this chapter you should be able t
o:
1. Understand the advantages and disadvanta
ges of corporations, partnership and sole pr
oprietorsh
Chapter Eight: Net Present Value
and Other Investment Criteria
FINC 210:
Financial Management
1
Topics Covered
Investment Evaluation Methods
Net Present Value
Payback Period
Internal Rate of Returns
Profitability Index
2
Investments are good if the p
InterestonInterestConsider a $2,800 deposit earning 7 percent interest
per year for 10 years. How much total interest is earned on the original
deposit (excluding interest earned on interest)?
$696.41
$196.00
$2,656.41
$1,960.00
Hint $2,800 * 7% *10 =
NET PRESENT VALUE and OTHER INVESTMENT RULES
1. Why Use Net Present Value?
Accepting positive NPV projects benefits shareholders.
NPV uses cash flows
NPV uses all the cash flows of the project
NPV discounts the cash flows properly
Reinvestment assumpti
Chapter Three: Accounting and Finance
Financial Management
31
Chapter Three
Accounting and Finance
Understanding financial accounting is essential to
understanding corporate finance.
Key Components of the Financials:
The Balance Sheet
The Income Statemen
Chapter Seven: Valuing Stock
Financial Management
1
Topics Covered
1.
2.
3.
4.
5.
Three ways to value a firm
Nature of stock
Valuing Equity Securities
Growth Stock vs. Income Stock
Efficient Market Theory (optional)
2
1. Measures of Value
Three ways to va
Chapter Eight: Net Present Value
and Other Investment Criteria
FINC 210:
Financial Management
1
Topics Covered
Investment Evaluation Methods
Net Present Value
Payback Period
Internal Rate of Returns
Profitability Index (optional)
2
Investment Evaluati
Chapter Eleven: Risk
FINC 210:
Financial Management
1
Topics Covered
I.
II.
III.
IV.
V.
VI.
Historical Performance
Expected returns
Risk
Risk and Return in a portfolio context
Diversification
Thinking about Risk
I. Historical Performance: Rate of Return
Chapter Thirteen: Weighted
Average Cost of Capital
(WACC)
FINC 210:
Financial Management
1
Topics Covered
Weighted Average Cost of Capital
(WACC)
Measuring Capital Structure
Calculating Required Rates of Return
Calculating WACC
Interpreting WACC
Cost
Chapter Ten: Project
Analysis
FINC 210:
Financial Management
1
Topics Covered
1. How to handle uncertainty
a. Sensitivity Analysis
b. Scenario Analysis
c. Break Even Analysis
2. Operating Leverage
3. Real Options and the Value of Flexibility
2
1. How To H
Exercise for Chapter 9 to 12
Chapter 9 Cash flow analysis
1. Which of the following should be treated as an incremental cash flow when
computing the NPV of an investment?
a. A reduction in the sales of a company's other products caused by the
investment.
FORMULAR
FV = C0(1 + r)T
PV
Perpetuity
PV
PVIF
T
1T
1 r T
r
FV C0 1
m
PV
C
r g
1
1
PVIFA 1
r (1 r ) T
mT
Zero Growth
P0
C
r
PV
CT
1 r
Annuity
Div
R
C
r
FV
Stock valuation
Constant Growth
P0
Div
R g
1
1
T
(1 r )
C
(1 r ) T 1
r
Differenti
Financial Management
Chapter Five Time Value of Money
Topic 1 : Derivation of Perpetuity formula

Pays an amount C starting next period and pays this same constant amount C in
each period forever.
PV ( Perpetuity ) =
Let
a=
C1
C
C
+ 2 2 + 3 3 +
(1+r) (1+
Financial Management
Chapter 5 Time Value of Money
Topics
I. The Basics
1. The Timeline
2. Basic rule
II. Value of cash flows that are moved forward in time
III. Value of cash flows that are moved backward in time
IV. Multiple cash payments
 FV and PV of
Chapter 12
Systematic Risk
and the Equity
Risk Premium
In Chapter 11 we found:
For large portfolios, investors expect higher re
turns for higher risk
However, the same does not hold true for indi
vidual stocks
Stocks have both unsystematic and systema
Chapter 13
The Cost of Capital
Topics Covered
Weighted Average Cost of Capital (WACC)
Measuring Capital Structure
Calculating Required Rates of Return
Calculating WACC
Interpreting WACC
Chapter 13
2
Cost of Capital
Cost of Capital Since a firm can ra
FINC210
Financial Management
Chapter 6
Valuing Bonds
Learning Objectives
Distinguish among a bond's coupon rate, current yield,
and yield to maturity.
Find the market price of a bond given its yield to
maturity, find a bond's yield given its price, and
d
FINC210
Financial Management
Chapter 3
Accounting and Finance
Sources of information in financial
markets
Our focus
Financial
information
Friends
Investors
Media
Firm visit
Insiders
2
Learning Objectives
1.
2.
3.
Understand the role of accounting and the
Financial Management
Chapter 4
Measuring Corporate Performance
1
Learning objectives
1.
2.
3.
4.
Calculate and interpret market value and market
value added
Calculate and interpret measures for performance,
profitability, efficiency, liquidity, and levera