ANSWERS TO END-OF-CHAPTER QUESTIONS: Chapter 9
9-1 a. The corporate tax rate is lowered. b. The Federal Reserve tightens credit. c. The firm uses more debt; that is, it increases its debt/assets ratio. d. The dividend payout ratio is increased. e. The fir

CHAPTER 6
6-1
FUTURE VALUE
If you deposit $10,000 in a bank account that pays 10 percent interest annually, HOW MUCH MONEY WILL BE IN YOUR ACCOUNT AFTER 5 YEARS?
0
10%
1
2
3
4
5 FV5 = ?
PV = 10,000 FVn FV5 PV (1 + i)n $10,000(1.10)5 $10,000(1.61051) $16,1

Chapter 3: ANSWERS TO END-OF-CHAPTER QUESTIONS
3-1
The emphasis of the various types of analysts is by no means uniform nor should it be. Management is interested in all types of ratios for two reasons. First, the ratios point out weaknesses that should b

Chapter 2: ANSWERS TO END-OF-CHAPTER QUESTIONS
2-1
The four financial statements contained in most annual reports are the balance sheet, income statement, statement of retained earnings, and statement of cash flows. No, because the $20 million of retained

Chapter 13 Capital Structure and Leverage
LEARNING OBJECTIVES
After reading this chapter, students should be able to:
Explain why capital structure policy involves a trade-off between risk and return, and list the four primary factors that influence capit

Chapter 12 Other Topics in Capital Budgeting
LEARNING OBJECTIVES
After reading this chapter, the student should be able to:
Use the replacement chain method to compare projects with unequal lives. Explain why conventional NPV analysis impact on the firm

Chapter 11 Cash Flow Estimation and Risk Analysis
LEARNING OBJECTIVES
After reading this chapter, students should be able to:
Discuss difficulties and relevant considerations in estimating net cash flows, and explain the four major ways that project cash

Chapter 10 The Basics of Capital Budgeting
LEARNING OBJECTIVES
After reading this chapter, students should be able to:
Define capital budgeting, explain why it is important, and state how project proposals are generally classified. List the steps involv

Chapter 9 The Cost of Capital
LEARNING OBJECTIVES
After reading this chapter, students should be able to:
Explain what is meant by a firm's weighted average cost of capital. Define and calculate the component costs of debt and preferred stock. Explain w

Chapter 5 Risk and Rates of Return
LEARNING OBJECTIVES
After reading this chapter, students should be able to:
Define dollar return and rate of return. Define risk and calculate the expected rate of return, standard deviation, and coefficient of variati

Answers and Solutions: 2 - 1
Ch 2: SOLUTIONS TO END-OF-CHAPTER PROBLEMS
2-1
NI = $3,000,000; EBIT = $6,000,000; T = 40%; Interest = ? Need to set up an income statement and work from the bottom up. EBIT Interest EBT Taxes (40%) NI $6,000,000 1,000,000 $5,

CHAPTER 15 B-1 Answers to Concepts Review and Critical Thinking Questions 1. 2. 3. 4.
5.
It is the minimum rate of return the firm must earn overall on its existing assets. If it earns more than this, value is created. Book values for debt are likely to b

Answers to Concepts Review and Critical Thinking Questions 1. 2. 3. The value of any investment depends on its cash flows; i.e., what investors will actually receive. The cash flows from a share of stock are the dividends. Investors believe the company wi

Answers to Concepts Review and Critical Thinking Questions 1. 2. 3. No. As interest rates fluctuate, the value of a Treasury security will fluctuate. Long-term Treasury securities have substantial interest rate risk. All else the same, the Treasury securi

Answers to Concepts Review and Critical Thinking Questions 1. 2. The four parts are the present value (PV), the future value (FV), the discount rate (r), and the life of the investment (t). Compounding refers to the growth of a dollar amount through time

Chapter 17 Dividends and Dividend Policy
Learning Objectives
1. Explain what a dividend is and describe the different types of dividends and the dividend payment process. 2. Explain what a stock repurchase is and how companies repurchase their stock. 3. D

Chapter 11
Cash Flows and Capital Budgeting Learning Objectives
1. Explain why incremental after-tax free cash flows are relevant in evaluating a project, and be able to calculate them for a project. 2. Discuss the five general rules for incremental after

CHAPTER 10 The Fundamentals of Capital Budgeting Learning Objectives
1. Discuss why capital budgeting decisions are the most important decisions made by a firm's management. 2. Explain the benefits of using the net present value (NPV) method to analyze ca

Chapter 13 The Cost of Capital
Learning Objectives
1. Explain what the weighted average cost of capital for a firm is and why it is often used as a discount rate to evaluate projects. 2. 3. 4. Calculate the cost of debt for a firm. Calculate the cost of c

Chapter 9 Stock Valuation
Learning Objectives
1. 2.
List and describe the four types of secondary markets. Explain why many financial analysts treat preferred stock as a special type of bond rather than as a true equity security.
3. Describe how the gener

Chapter 6
Discounted Cash Flows and Valuation Learning Objectives
1. Explain why cash flows occurring at different times must be discounted to a common date before they can be compared, and be able to compute the present value and future value for multipl

Chapter 5 The Time Value of Money
Learning Objectives
1. Explain what the time value of money is and why it is so important in the field of finance. 2. Explain the concept of future value, including the meaning of principal amount, simple interest, and co

Chapter 7 Risk and Return
Learning Objectives
1. Explain the relation between risk and return. 2. Describe the two components of a total holding period return, and calculate this return for an asset. 3. Explain what an expected return is, and calculate th

Chapter 4 Analyzing Financial Statements
Learning Objectives
1. Explain the three perspectives from which financial statements can be viewed. 2. Describe common-size financial statements, explain why they are used, and be able to prepare and use them to a

Chapter 3 Financial Statements, Cash Flows, and Taxes
Learning Objectives
1. Discuss generally accepted accounting principles (GAAP) and their importance to the economy. 2. Know the balance sheet identity, and explain why a balance sheet must balance. 3.