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principles managerial finance
Principles Of Managerial Finance 7th Edition Lawrence J Gitman, Chad J Zutter - Solutions
1–10 Describe the role of corporate ethics policies and guidelines, and discuss the relationship that is believed to exist between ethics and share price.
1–9 What is risk? Why must risk as well as return be considered by the financial manager who is evaluating a decision alternative or action?
1–8 For what three main reasons is profit maximization inconsistent with wealth maximization?
1–7 What is the goal of the firm and, therefore, of all managers and employees?Discuss how one measures achievement of this goal.
2. What responsibility, if any, does Google have to protect the privacy of those who interact with other people wearing Glass? On June 27, 2012, at the Google I/O conference, Google introduced an exciting new product called Glass. Essentially a computer that users wear like a pair of eyeglasses,
1. Is the goal of maximization of shareholder wealth necessarily ethical or unethical? On June 27, 2012, at the Google I/O conference, Google introduced an exciting new product called Glass. Essentially a computer that users wear like a pair of eyeglasses, Google Glass performs many of the
1–6 Why is the study of managerial finance important to your professional life regardless of the specific area of responsibility you may have within the business firm? Why is it important to your personal life?
1–5 Briefly name and describe some organizational forms other than corporations that provide owners with limited liability.
1–4 Describe the roles and the relationships among the major parties in a corporation: stockholders, board of directors, and managers. How are corporate owners rewarded for the risks they take?
1–3 Which legal form of business organization is most common? Which form is dominant in terms of business revenues?
1–2 What is the financial services area of finance? Describe the field of managerial finance.
1–1 What is finance? Explain how this field affects all the activities in which businesses engage.
6.. Describe the nature of the principal–agent relationship between the owners and managers of a corporation, and explain how various corporate governance mechanisms attempt to manage agency problems.
5.. I dentify the primary activities of the financial manager.
4.. Describe how the managerial finance function is related to economics and accounting.
3.. Describe the goal of the firm, and explain why maximizing the value of the firm is an appropriate goal for a business.
2.. Describe the legal forms of business organization.
1.. Define finance and the managerial finance function.
E8–5 You wish to calculate the risk level of your portfolio based on its beta. The five stocks in the portfolio with their respective weights and betas are shown in the accompanying table. Calculate the beta of your portfolio. Stock Portfolio weight Beta Alpha 20% 1.15 Centauri 10 0.85 Zen 15
P8–2 Return calculations For each of the investments shown in the following table, calculate the rate of return earned over the unspecified time period. Investment Cash flow during period End-of- Beginning-of- period value period value A -$ 800 $ 1,100 $ 100 B 15,000 120,000 118,000 C 7,000
P8–3 Risk preferences Sharon Smith, the financial manager for Barnett Corporation, wishes to evaluate three prospective investments: X, Y, and Z. Sharon will evaluate each of these investments to decide whether they are superior to investments that her company already has in place, which have an
P8–4 Risk analysis Solar Designs is considering an investment in an expanded product line. Two possible types of expansion are being considered. After investigating the possible outcomes, the company made the estimates shown in the following table.a. Determine the range of the rates of return for
P8–5 Risk and probability Micro-Pub, Inc., is considering the purchase of one of two microfilm cameras, R and S. Both should provide benefits over a 10-year period, and each requires an initial investment of $4,000. Management has constructed the accompanying table of estimates of rates of return
P8–6 Bar charts and risk Swan’s Sportswear is considering bringing out a line of designer jeans. Currently, it is negotiating with two different well-known designers. Because of the highly competitive nature of the industry, the two lines of jeans have been given code names. After market
P8–7 Coefficient of variation Metal Manufacturing has isolated four alternatives for meeting its need for increased production capacity. The following table summarizes data gathered relative to each of these alternatives.a. Calculate the coefficient of variation for each alternative.b. If the
P8–8 Standard deviation versus coefficient of variation as measures of risk Greengage, Inc., a successful nursery, is considering several expansion projects. All the alternatives promise to produce an acceptable return. Data on four possible projects follow.a. Which project is least risky,
P8–9 Rate of return, standard deviation, and coefficient of variation Mike is searching for a stock to include in his current stock portfolio. He is interested in Hi-Tech, Inc.; he has been impressed with the company’s computer products and believes that Hi-Tech is an innovative market player.
P8–10 Assessing return and risk Swift Manufacturing must choose between two asset purchases.The annual rate of return and the related probabilities given in the following table summarize the firm’s analysis to this point.a. For each project, compute:(1) The range of possible rates of return.(2)
P8–11 Integrative: Expected return, standard deviation, and coefficient of variation Three assets—F, G, and H—are currently being considered by Perth Industries. The probability distributions of expected returns for these assets are shown in the following table.a. Calculate the expected value
P8–13 Portfolio return and standard deviation Jamie Wong is considering building an investment portfolio containing two stocks, L and M. Stock L will represent 40% of the dollar value of the portfolio, and stock M will account for the other 60%. The expected returns over the next 6 years,
P8–14 Portfolio analysis You have been given the expected return data shown in the first table on three assets—F, G, and H—over the period 2016–2019.Using these assets, you have isolated the three investment alternatives shown in the following table.a. Calculate the expected return over the
P8–15 Correlation, risk, and return Matt Peters wishes to evaluate the risk and return behaviors associated with various combinations of assets V and W under three assumed degrees of correlation: perfectly positive, uncorrelated, and perfectly negative.The expected returns and standard deviations
P8–17 Total, nondiversifiable, and diversifiable risk David Talbot randomly selected securities from all those listed on the New York Stock Exchange for his portfolio. He began with a single security and added securities one by one until a total of 20 securities were held in the portfolio. After
P8–18 Graphical derivation of beta A firm wishes to estimate graphically the betas for two assets, A and B. It has gathered the return data shown in the following table for the market portfolio and for both assets over the last 10 years, 2006–2015a. On a set of “market return (x axis)–asset
P8–19 Graphical derivation and interpreting beta You are analyzing the performance of two stocks. The first, shown in Panel A, is Cyclical Industries Incorporated. Cyclical Industries makes machine tools and other heavy equipment, the demand for whichrises and falls closely with the overall state
P8–21 Betas Answer the questions below for assets A to D shown in the table.a. What impact would a 10% increase in the market return be expected to have on each asset’s return?b. What impact would a 10% decrease in the market return be expected to have on each asset’s return?c. If you
P8–23 Portfolio betas Rose Berry is attempting to evaluate two possible portfolios, which consist of the same five assets held in different proportions. She is particularly interested in using beta to compare the risks of the portfolios, so she has gathered the data shown in the following
P8–24 Capital asset pricing model (CAPM) For each of the cases shown in the following table, use the capital asset pricing model to find the required return. Risk-free Market Case rate, RF return, T Beta, B ABCDE 5% 8% 1.30 8 13 0.90 9 10 6 29 12 -0.20 15 1.00 10 0.60
P8–27 Portfolio return and beta Jamie Peters invested $100,000 to set up the following portfolio 1 year ago.a. Calculate the portfolio beta on the basis of the original cost figures.b. Calculate the percentage return of each asset in the portfolio for the year.c. Calculate the percentage return
P8–30 Integrative: Risk, return, and CAPM Wolff Enterprises must consider several investment projects, A through E, using the capital asset pricing model (CAPM) and its graphical representation, the security market line (SML). Relevant information is presented in the following table.a. Calculate
1.. Jane is considering investing in three different stocks or creating three distinct twostock portfolios. Jane considers herself to be a rather conservative investor. She is able to obtain forecasted returns for the three securities for the years 2015 through 2021.The data are given in the
ST8–1 Portfolio analysis You have been asked for your advice in selecting a portfolio of assets and have been given the following data:You have been told that you can create two portfolios—one consisting of assets A and B and the other consisting of assets A and C—by investing equal
P10–10 NPV: Mutually exclusive projects Hook Industries is considering the replacement of one of its old drill presses. Three alternative replacement presses are under consideration.The relevant cash flows associated with each are shown in the following table.The firm’s cost of capital is
ST5–3 Present values of single amounts and streams You have a choice of accepting either of two 5-year cash flow streams or single amounts. One cash flow stream is an ordinary annuity, and the other is a mixed stream. You may accept alternative A or B, either as a cash flow stream or as a single
E5–4 Your firm has the option of making an investment in new software that will cost$130,000 today and is estimated to provide the savings shown in the following table over its 5-year life.Should the firm make this investment if it requires a minimum annual return of 9%on all investments? Year 12
P5–2 Future value calculation Without referring to the preprogrammed function on your financial calculator, use the basic formula for future value along with the given interest rate, r, and the number of periods, n, to calculate the future value of $1 in each of the cases shown in the following
P5–4 Future values For each of the cases shown in the following table, calculate the future value of the single cash flow deposited today at the end of the deposit period if the interest is compounded annually at the rate specified. Case Single cash flow Interest rate Deposit period (years) ABC $
P5–10 Present value calculation Without referring to the preprogrammed function on your financial calculator, use the basic formula for present value, along with the given opportunity cost, r, and the number of periods, n, to calculate the present value of $1 in each of the cases shown in the
P5–11 Present values For each of the cases shown in the following table, calculate the present value of the cash flow, discounting at the rate given and assuming that the cash flow is received at the end of the period noted. Case Single cash flow Discount rate End of period (years) A $ 7,000 12%
P5–16 Time value comparisons of single amounts In exchange for a $20,000 payment today, a well-known company will allow you to choose one of the alternatives shown in the following table. Your opportunity cost is 11%.a. Find the value today of each alternative.b. Are all the alternatives
P5–17 Cash flow investment decision Tom Alexander has an opportunity to purchase any of the investments shown in the following table. The purchase price, the amount of the single cash inflow, and its year of receipt are given for each investment. Which purchase recommendations would you make,
P5–19 Future value of an annuity For each case in the accompanying table, answer the questions that follow.a. Calculate the future value of the annuity, assuming that it is (1) An ordinary annuity.(2) An annuity due.b. Compare your findings in parts a(1) and a(2). All else being identical, which
P5–20 Present value of an annuity Consider the following cases.a. Calculate the present value of the annuity, assuming that it is (1) An ordinary annuity.(2) An annuity due.b. Compare your findings in parts a(1) and a(2). All else being identical, which type of annuity—ordinary or annuity
P5–26 Perpetuities Consider the data in the following table.Determine the present value of each perpetuity. Perpetuity Annual amount Discount rate ABC A $ 20,000 8% 100,000 10 3,000 6 D 60,000 5
P5–28 Value of a mixed stream For each of the mixed streams of cash flows shown in the following table, determine the future value at the end of the final year if deposits are made into an account paying annual interest of 12%, assuming that no withdrawals are made during the period and that the
P5–29 Value of a single amount versus a mixed stream Gina Vitale has just contracted to sell a small parcel of land that she inherited a few years ago. The buyer is willing to pay $24,000 at the closing of the transaction or will pay the amounts shown in the following table at the beginning of
P5–30 Value of mixed streams Find the present value of the streams of cash flows shown in the following table. Assume that the firm’s opportunity cost is 12%. A B C Year Cash flow Year Cash flow Year Cash flow 1 -$2,000 1 $10,000 1-5 $10,000/yr 2 3,000 2-5 5,000/yr 6-10 8,000/yr 3 4,000 6 7,000
P5–31 Present value: Mixed streams Consider the mixed streams of cash flows shown in the following table.a. Find the present value of each stream using a 15% discount rate.b. Compare the calculated present values and discuss them in light of the undiscounted cash flows totaling $150,000 in each
P5–33 Funding budget shortfalls As part of your personal budgeting process, you have determined that in each of the next 5 years you will have budget shortfalls. In other words, you will need the amounts shown in the following table at the end of the given year to balance your budget, that is, to
P5–34 Relationship between future value and present value: Mixed stream Using the information in the accompanying table, answer the questions that follow.a. Determine the present value of the mixed stream of cash flows using a 5% discount rate.b. How much would you be willing to pay for an
P5–35 Relationship between future value and present value: Mixed stream The table below shows a mixed cash flow stream except that the cash flow for year 3 is missing.Suppose that somehow you know that the present value of the entire stream is $32,911.03 and that the discount rate is 4%. What is
P5–37 Compounding frequency, time value, and effective annual rates For each of the cases in the following table:a. Calculate the future value at the end of the specified deposit period.b. Determine the effective annual rate, EAR.c. Compare the nominal annual rate, r, to the effective annual
P5–38 Continuous compounding For each of the cases in the following table, find the future value at the end of the deposit period, assuming that interest is compounded continuously at the given nominal annual rate. ABC Case Amount of initial deposit $1,000 Nominal annual Deposit period rate, r
P5–42 Deposits to accumulate future sums For each of the cases shown in the following table, determine the amount of the equal, annual, end-of-year deposits necessary to accumulate the given sum at the end of the specified period, assuming the stated annual interest rate. Case ABCD Sum to be
P5–47 Loan payment Determine the equal, annual, end-of-year payment required each year over the life of the loans shown in the following table to repay them fully during the stated term of the loan. Loan Principal Interest rate Term of loan (years) ABC $12,000 8% 3 60,000 12 10 75,000 10 D 4,000
P5–51 Growth rates You are given the series of cash flows shown in the following table.a. Calculate the compound annual growth rate between the first and last payment in each stream.b. If year-1 values represent initial deposits in a savings account paying annual interest, what is the annual rate
P5–55 Choosing the best annuity Raina Herzig wishes to choose the best of four immediate-retirement annuities available to her. In each case, in exchange for paying a single premium today, she will receive equal, annual, end-of-year cash benefits for a specified number of years. She considers the
P5–57 Loan rates of interest John Flemming has been shopping for a loan to finance the purchase of a used car. He has found three possibilities that seem attractive and wishes to select the one with the lowest interest rate. The information available with respect to each of the three $5,000 loans
P5–58 Number of years to equal future amount For each of the following cases, determine the number of years it will take for the initial deposit to grow to equal the future amount at the given interest rate. Case Initial deposit Future amount Interest rate ABCDE $ 300 $ 1,000 7% 12,000 15,000 5
P5–60 Number of years to provide a given return In each of the following cases, determine the number of years that the given annual end-of-year cash flow must continue to provide the given rate of return on the given initial amount. Case Initial amount Annual cash flow Rate of return A B C $
1... At the end of 2015, Uma Corporation is considering undertaking a major long-term project in an effort to remain competitive in its industry. The production and sales departments have determined the potential annual cash flow savings that could accrue to the firm if it acts soon. Specifically,
ST10–1 All techniques with NPV profile: Mutually exclusive projects Fitch Industries is in the process of choosing the better of two equal-risk, mutually exclusive capital expenditure projects, M and N. The relevant cash flows for each project are shown in the following table. The firm’s cost
E10–1 Elysian Fields, Inc., uses a maximum payback period of 6 years and currently must choose between two mutually exclusive projects. Project Hydrogen requires an initial outlay of $25,000; project Helium requires an initial outlay of $35,000. Using the expected cash inflows given for each
E13–3 Ashkenazi Companies has the following stockholders’ equity account:Assuming that state laws define legal capital solely as the par value of common stock, how much of a per-share dividend can Ashkenazi pay? If legal capital were more broadly defined to include all paid-in capital, how much
ST15–1 Cash discount decisions The credit terms for each of three suppliers are shown in the following table. (Note: Assume a 365-day year.)a. Determine the approximate cost of giving up the cash discount from each supplier.b. Assuming that the firm needs short-term financing, indicate whether it
ST9–1 Individual costs and WACC Humble Manufacturing is interested in measuring its overall cost of capital. The firm is in the 40% tax bracket. Current investigation has gathered the following data:Debt The firm can raise debt by selling $1,000-par-value, 10% coupon interest rate, 10-year bonds
E10–2 Herky Foods is considering acquisition of a new wrapping machine. The initial investment is estimated at $1.25 million, and the machine will have a 5-year life with no salvage value. Using a 6% discount rate, determine the net present value (NPV)of the machine given its expected operating
E13–4 The board of Kopi Industries is considering a new dividend policy that would set dividends at 60% of earnings. The recent past has witnessed earnings per share(EPS) and dividends paid per share as shown in the following table.Based on Kopi’s historical dividend payout ratio, discuss
ST7–2 Free cash flow valuation Erwin Footwear wishes to assess the value of its Active Shoe Division. This division has debt with a market value of $12,500,000 and no preferred stock. Its weighted average cost of capital is 10%. The Active Shoe Division’s estimated free cash flow each year from
E13–5 The current stockholders’ equity account for Hilo Farms is as follows:Hilo has announced plans to issue an additional 5,000 shares of common stock as part of its stock dividend plan. The current market price of Hilo’s common stock is $20 per share. Show how the proposed stock dividend
P13–1 Dividend payment procedures At the quarterly dividend meeting, Wood Shoes declared a cash dividend of $1.10 per share for holders of record on Monday, July 10.The firm has 300,000 shares of common stock outstanding and has set a payment date of July 31. Prior to the dividend declaration,
E10–5 Cooper Electronics uses NPV profiles to visually evaluate competing projects. Key data for the two projects under consideration are given in the following table. Using these data, graph, on the same set of axes, the NPV profiles for each project using discount rates of 0%, 8%, and the IRR.
P13–4 Dividend constraints The Howe Company’s stockholders’ equity account follows:The earnings available for common stockholders from this period’s operations are $100,000, which have been included as part of the $1.9 million retained earnings.a. What is the maximum dividend per share that
P9–1 Concept of cost of capital Mace Manufacturing is in the process of analyzing its investment decision-making procedures. Two projects evaluated by the firm recently involved building new facilities in different regions, North and South. The basic variables surrounding each project analysis
P10–3 Choosing between two projects with acceptable payback periods Shell Camping Gear, Inc., is considering two mutually exclusive projects. Each requires an initial investment of $100,000. John Shell, president of the company, has set a maximum payback period of 4 years. The after-tax cash
P13–6 Low-regular-and-extra dividend policy Bennett Farm Equipment Sales, Inc., is in a highly cyclic business. Although the firm has a target payout ratio of 25%, its board realizes that strict adherence to that ratio would result in a fluctuating dividend and create uncertainty for the firm’s
P15–3 Credit terms Purchases made on credit are due in full by the end of the billing period.Many firms extend a discount for payment made in the first part of the billing period. The original invoice contains a type of shorthand notation that explains the credit terms that apply. (Note: Assume a
P9–3 Before-tax cost of debt and after-tax cost of debt David Abbot is interested in purchasing a bond issued by Sony. He has obtained the following information on the security.a. Calculate the before-tax cost of the Sony bond.b. Calculate the after-tax cost of the Sony bond given the corporate
P13–7 Alternative dividend policies Over the last 10 years, a firm has had the earnings per share shown in the following table.a. If the firm’s dividend policy were based on a constant payout ratio of 40% for all years with positive earnings and 0% otherwise, what would be the annual dividend
P9–4 Cost of debt using the approximation formula For each of the following $1,000-parvalue bonds, assuming annual interest payment and a 40% tax rate, calculate the after-tax cost to maturity using the approximation formula. Bond Life (years) Underwriting fee ABCDE 20 $25 Discount (-) or premium
P13–8 Alternative dividend policies Given the earnings per share over the period 2008–2015 shown in the following table, determine the annual dividend per share under each of the policies set forth in parts a through d.a. Pay out 50% of earnings in all years with positive earnings.b. Pay $0.50
P7–3 Preferred dividends In each case in the following table, how many dollars of preferred dividends per share must be paid to preferred stockholders in the current period before common stock dividends are paid? Case Type Dividend per Periods of Par value share per period dividends passed AR A
P9–5 The cost of debt Gronseth Drywall Systems, Inc., is in discussions with its investment bankers regarding the issuance of new bonds. The investment banker has informed the firm that different maturities will carry different coupon rates and sell at different prices. The firm must choose among
P10–7 Net present value: Independent projects Using a 14% cost of capital, calculate the net present value for each of the independent projects shown in the following table, and indicate whether each is acceptable. Project A Project B Project C Project D Project E Initial investment (CFO) $26,000
ST11–2 Risk-adjusted discount rates CBA Company is considering two mutually exclusive projects, A and B. The following table shows the CAPM-type relationship between a risk index and the required return (RADR) applicable to CBA Company.Project data are as follows:a. Ignoring any differences in
P13–9 Stock dividend: Firm Columbia Paper has the following stockholders’ equity account.The firm’s common stock has a current market price of $30 per share.a. Show the effects on Columbia of a 5% stock dividend.b. Show the effects of (1) a 10% and (2) a 20% stock dividend.c. In light of your
P15–6 Cash discount decisions Prairie Manufacturing has four possible suppliers, all of which offer different credit terms. Except for the differences in credit terms, their products and services are virtually identical. The credit terms offered by these suppliers are shown in the following
E6–2 The yields for Treasuries with differing maturities on a recent day were as shown in the table below.a. Use the information to plot a yield curve for this date.b. If the expectations hypothesis is true, approximately what rate of return do investors expect a 5-year Treasury note to pay 5
P13–10 Cash versus stock dividend Milwaukee Tool has the following stockholders’ equity account. The firm’s common stock currently sells for $4 per share.a. Show the effects on the firm of a cash dividend of $0.01, $0.05, $0.10, and $0.20 per share.b. Show the effects on the firm of a 1%, 5%,
E6–3 The yields for Treasuries with differing maturities, including an estimate of the real rate of interest, on a recent day were as shown in the following table.Use the information in the preceding table to calculate the inflation expectation for each maturity. Maturity Yield Real rate of
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