ACCOUNTING 471
PRINCIPLES OF ACCOUNTING
SECTION 003
FALL 2007
Course Instructor:
Instructor:
Office:
Email:
Office Hours:
Andreas Simon
School of Education (SEB), Room 2340, 610 East University Avenue
ansimon@umich.edu
Monday, 1:00 3:00pm in SEB Room 234
7.
Because many relevant factors such as bankruptcy costs, tax asymmetries, and agency costs cannot
easily be identified or quantified, it is practically impossible to determine the precise debt/equity
ratio that maximizes the value of the firm. However,
c.
Previous IRS regulations required a straightline calculation of interest. The total interest
received by the bondholder is:
Total interest = $1,000 110.71 = $889.29
The annual interest deduction is simply the total interest divided by the maturity of
CHAPTER 16
CAPITAL STRUCTURE: BASIC
CONCEPTS
Answers to Concepts Review and Critical Thinking Questions
1.
Assumptions of the ModiglianiMiller theory in a world without taxes: 1) Individuals can borrow at
the same interest rate at which the firm borrows.
b.
7.
If the bond is callable, then the bond value will be less than the amount computed in part a. If
the bond price rises above the call price, the company will call it. Therefore, bondholders will
not pay as much for a callable bond.
The price of the b
So, the value of the call provision to the company is:
Value = .65($1,293.88 1,077.63) / 1.08
Value = $130.15
10. The company should refund when the NPV of refunding is greater than zero, so we need to find the
interest rate that results in a zero NPV. Th
9.
a.
The price of the bond today is the present value of the expected price in one year. So, the price
of the bond in one year if interest rates increase will be:
P1 = $80 + $80 / .09
P1 = $968.89
If interest rates fall, the price if the bond in one year
So, the number of shares you need to purchase is:
Number of shares to purchase = (600,000 .1250) + 1
Number of shares to purchase = 75,001
And the total cost to you will be the shares needed times the price per share, or:
Total cost = 75,001 $39
Total cos
4.
Under cumulative voting, she will need 1/(N + 1) percent of the stock (plus one share) to guarantee
election, where N is the number of seats up for election. So, the percentage of the companys stock
she needs is:
Percent of stock needed = 1/(N + 1)
Per
14. As the interest rate falls, the call option on the callable bonds is more likely to be exercised by the
bond issuer. Since the noncallable bonds do not have such a drawback, the value of the bond will go
up to reflect the decrease in the market rate
CHAPTER 15
LONGTERM FINANCING: AN
INTRODUCTION
Answers to Concepts Review and Critical Thinking Questions
1.
The indenture is a legal contract and can run into 100 pages or more. Bond features which would be
included are: the basic terms of the bond, the
27. In an efficient market, the cumulative abnormal return (CAR) for Prospectors would rise
substantially at the announcement of a new discovery. The CAR falls slightly on any day when no
discovery is announced. There is a small positive probability that
5.
The following table summarizes the main difference between debt and equity:
Repayment is an obligation of the firm
Grants ownership of the firm
Provides a tax shield
Liquidation will result if not paid
Debt
Yes
No
Yes
Yes
Equity
No
Yes
No
No
Companies
Cumulative Abnormal Returns
2
CAR
1.8
1.7
1.5
1.8
1.7
1.6
1
0.5
0
0.1
0.2
0.1
0.1
0.5
4
3
2
1
0
1
2
3
4
Days from announcement
The market reacts favorably to the announcements. Moreover, the market reacts only on the day of
the announcement. Befo
19. Under the semistrong form of market efficiency, the stock price should stay the same. The
accounting system changes are publicly available information. Investors would identify no changes
in either the firms current or its future cash flows. Thus, th
12. Investor sentiment captures the mood of the investing public. If investors are bearish in general, it
may be that the market is headed down in the future since investors are less likely to invest. If the
sentiment is bullish, it would be taken as a po
e.
True. Competition among investors results in the rapid transmission of new market information.
In efficient markets, prices immediately reflect new information as investors bid the stock price
up or down.
4.
On average, the only return that is earned i
CHAPTER 14
EFFICIENT CAPITAL MARKETS AND
BEHAVIORAL CHALLENGES
Answers to Concepts Review and Critical Thinking Questions
1.
To create value, firms should accept financing proposals with positive net present values. Firms can
create valuable financing opp
24. The $4 million cost of the land 3 years ago is a sunk cost and irrelevant; the $5.1 million appraised
value of the land is an opportunity cost and is relevant. The $6 million land value in 5 years is a
relevant cash flow as well. The fact that the com
b.
RE = [(0.80)(1.05)/$61] + .05
RE = .0638 or 6.38%
Using the CAPM, the cost of equity is:
RE = .055 + 1.50(.1200 .0550)
RE = .1525 or 15.25%
c.
When using the dividend growth model or the CAPM, you must remember that both are
estimates for the cost of e
To find the required return on preferred stock, we can use the preferred stock pricing equation, which
is the level perpetuity equation, so the required return on the companys preferred stock is:
R P = D 1 / P0
RP = $4 / $78
RP = .0513 or 5.13%
Notice tha
15. a.
b.
Projects Y and Z.
Using the CAPM to consider the projects, we need to calculate the expected return of each
project given its level of risk. This expected return should then be compared to the expected
return of the project. If the return calcul
We would accept the project if the NPV is positive. The NPV is the PV of the cash outflows plus the
PV of the cash inflows. Since we have the costs, we just need to find the PV of inflows. The cash
inflows are a growing perpetuity. If you remember, the eq
Building Theories From Case Study Research
Eisenhardt, Kathleen M
Academy of Management. The Academy of Management Review; Oct 1989; 14, 4; ProQuest Central
pg. 532
Reproduced with permission of the copyright owner. Further reproduction prohibited without
Better stories and better constructs: The case for rigor and
Academy of Management. The Academy of Management Review; Jul 1991; 16, 3; ProQuest Central
pg. 620
Reproduced with permission of the copyright owner. Further reproduction prohibited without perm
ARTIKEL1:METRICSANDANALYTICS:USEANDIMPACT

If HR wants to play a strategic role in organizations, it needs to develop its ability to
measure how human capital decisions affect the business and how business
decisions affect human capital.

HR often falls