公司理财答案英文版

CHAPTER 2 B-9Answers to Concepts Review and Critical Thinking Questions1.Capital budgeting (deciding on whether to expand a manufacturing plant), capital structure (deciding whether to issue new equity and use the proceeds to retire outstanding debt), and working capital management (modifying the firms credit collection policy with its customers).2.Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, hard to raise capital funds. Some advantages: simpler, less regulation, the owners are also the managers, sometimes personal tax rates are better than corporate tax rates.3.The primary disadvantage of the corporate form is the double taxation to shareholders of distributed earnings and dividends. Some advantages include: limited liability, ease of transferability, ability to raise capital, unlimited life, and so forth.4.The treasurers office and the controllers office are the two primary organizational groups that report directly to the chief financial officer. The controllers office handles cost and financial accounting, tax management, and management information systems, while the treasurers office is responsible for cash and credit management, capital budgeting, and financial planning. Therefore, the study of corporate finance is concentrated within the treasury groups functions.5.To maximize the current market value (share price) of the equity of the firm (whether its publicly-traded or not).6.In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect the directors of the corporation, who in turn appoint the firms management. This separation of ownership from control in the corporate form of organization is what causes agency problems to exist. Management may act in its own or someone elses best interests, rather than those of the shareholders. If such events occur, they may contradict the goal of maximizing the share price of the equity of the firm.7.A primary market transaction.8.In auction markets like the NYSE, brokers and agents meet at a physical location (the exchange) to match buyers and sellers of assets. Dealer markets like Nasdaq consist of dealers operating at dispersed locales who buy and sell assets themselves, communicating with other dealers either electronically or literally over-the-counter.9.Such organizations frequently pursue social or political missions, so many different goals are conceivable. One goal that is often cited is revenue minimization; i.e., provide whatever goods and services are offered at the lowest possible cost to society. A better approach might be to observe that even a not-for-profit business has equity. Thus, one answer is that the appropriate goal is to maximize the value of the equity.10.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.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. What should the firm do?”12.The goal will be the same, but the best course of action toward that goal may be different because of differing social, political, and economic institutions.13.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.14.We would expect agency problems to be less severe in other countries, primarily due to the relatively small percentage of individual ownership. Fewer individual owners should reduce the number of diverse opinions concerning corporate goals. The high percentage of institutional ownership might lead to a higher degree of agreement between owners and managers on decisions concerning risky projects. In addition, institutions may be better able to implement effective monitoring mechanisms on managers than can individual owners, based on the institutions deeper resources and experiences with their own management. The increase in institutional ownership of stock in the United States and the growing activism of these large shareholder groups may lead to a reduction in agency problems for U.S. corporations and a more efficient market for corporate control.15.How much is too much? Who is worth more, Jack Welch or Tiger Woods? The simplest answer is that there is a market for executives just as there is for all types of labor. Executive compensation is the price that clears the market. The same is true for athletes and performers. Having said that, one aspect of executive compensation deserves comment. A primary reason executive compensation has grown so dramatically is that companies have increasingly moved to stock-based compensation. Such movement is obviously consistent with the attempt to better align stockholder and management interests. In recent years, stock prices have soared, so management has cleaned up. It is sometimes argued that much of this reward is simply due to rising stock prices in general, not managerial performance. Perhaps in the future, executive compensation will be designed to reward only differential performance, i.e., stock price increases in excess of general market increases.Answers to Concepts Review and Critical Thinking Questions1.Liquidity measures how quickly and easily an asset can be converted to cash without significant loss in value. Its desirable for firms to have high liquidity so that they have a large factor of safety in meeting short-term creditor demands. However, since liquidity also has an opportunity cost associated with itnamely that higher returns can generally be found by investing the cash into productive assetslow liquidity levels are also desirable to the firm. Its up to the firms financial management staff to find a reasonable compromise between these opposing needs.2.The recognition and matching principles in financial accounting call for revenues, and the costs associated with producing those revenues, to be “booked” when the revenue process is essentially complete, not necessarily when the cash is collected or bills are paid. Note that this way is not necessarily correct; its the way accountants have chosen to do it.3.Historical costs can be objectively and precisely measured whereas market values can be difficult to estimate, and different analysts would come up with different numbers. Thus, there is a tradeoff between relevance (market values) and objectivity (book values).4.Depreciation is a noncash deduction that reflects adjustments made in asset book values in accordance with the matching principle in financial accounting. Interest expense is a cash outlay, but its a financing cost, not an operating cost.5.Market values can never be negative. Imagine a share of stock selling for $20. This would mean that if you placed an order for 100 shares, you would get the stock along with a check for $2,000. How many shares do you want to buy? More generally, because of corporate and individual bankruptcy laws, net worth for a person or a corporation cannot be negative, implying that liabilities cannot exceed assets in market value.6.For a successful company that is rapidly expanding, for example, capital outlays will be large, possibly leading to negative cash flow from assets. In general, what matters is whether the money is spent wisely, not whether cash flow from assets is positive or negative.7.Its probably not a good sign for an established company, but it would be fairly ordinary for a start-up, so it depends.8. For example, if a company were to become more efficient in inventory management, the amount of inventory needed would decline. The same might be true if it becomes better at collecting its receivables. In general, anything that leads to a decline in ending NWC relative to beginning would have this effect. Negative net capital spending would mean more long-lived assets were liquidated than purchased.9.If a company raises more money from selling stock than it pays in dividends in a particular period, its cash flow to stockholders will be negative. If a company borrows more than it pays in interest, its cash flow to creditors will be negative.10.The adjustments discussed were purely accounting changes; they had no cash flow or market value consequences unless the new accounting information caused stockholders to revalue the derivatives.Solutions to Questions and ProblemsBasic1.Balance SheetCA$3,000CL$900OE = $9,000 5,900= $3,100NFA 6,000LTD5,000NWC= $3,000 900 = $2,100TA$9,000OE 3,100TL + OE$9,0002.Income StatementSales$432,000Costs 210,000Depreciation 25,000EBIT$197,000Interest 8,000EBT$189,000Taxes 66,150Net income$122,8503.Net income = divs + add. to ret. earnings; add. to ret. earnings = $122,850 65,000 = $57,8504.EPS= NI / shares = $122,850 / 30,000 = $4.10 per shareDPS= divs / shares = $65,000 / 30,000 = $2.17 per share5.NWC = CA CL; CA = $900K + 1.8M = $2.7MBook value CA = $2.7M Market value CA = $2.9MBook value NFA= $1.6M Market value NFA = $1.5MBook value assets= $2.7M + 1.6M = $4.3M Market value assets = $2.9M + 1.5M = $4.4M6.Taxes = 0.15($50K) + 0.25($25K) + 0.34($25K) + 0.39($185K 100K) = $55,4007.Average tax rate = $55,400 / $185,000 = 29.95%; marginal tax rate = 39%8.Income StatementSales$9,750OCF= EBIT + D TCosts 5,740 = $3,010 + 1,000 969.50 = $3,040.50Depreciation 1,000EBIT$3,010Interest 240Taxable income$2,770Taxes (35%) 969.50Net income$1,800.509.Net capital spending = NFAend NFAbeg + depreciation = $3.5M 3.1M + 850K = $1.25M10.Change in NWC = NWCend NWCbeg = (CAend CLend) (CAbeg CLbeg)= ($1,440 525) ($1,200 720) = $915 480 = $43511.Cash flow to creditors= interest paid net new borrowing = $400K (LTDend LTDbeg) = $400K ($3.6M 3.1M) = $400K 500K = $100K12.Cash flow to stockholders= dividends paid net new equity = $500K (commonend + APISend) (commonbeg + APISbeg) = $500K ($825K + 7.8M) ($750K + 7.2M)= $500K $8.625M 7.95M = $175K13.Cash flow from assets = cash flow to creditors + cash flow to stockholders = $100K 175K = $275KCash flow from assets = $275K = OCF change in NWC net capital spending = OCF ($195K) 600K = $275K Operating cash flow = $275K 195K + 600K = $130KIntermediate14.Income StatementSales$130,000a. OCF= EBIT + Depreciation TaxesCosts 82,000 = $38,500 + 6,000 8,330 = $36,170Other expenses 3,500b. CFC = interest net new LTDDepreciation 6,000 = $14,000 ( 6,000) = $20,000EBIT$38,500c. CFS = dividends net new equityInterest 14,000 = $6,400 2,830 = $3,570Taxable income$24,500d. CFA = CFC + CFS = $20,000 + 3,570 Taxes (34%) 8,330= $23,570Net income $16,170 $23,570 = OCF net cap. sp. change in NWC; Net cap. sp.= inc. in NFA + depreciationDividends $6,400 = $5,000 + 6,000 = $11,000Add. to ret. earnings$9,770Change in NWC = OCF net cap. sp. CFA = $36,170 11,000 23,570 = $1,60015.Net income = dividends + addition to ret. earnings = $800 + 4,000 = $4,800EBT = NI / ( 1 tax rate) = $4,800 / 0.65 = $7,385EBIT = EBT + interest = $7,385 + 1,200 = $8,585Sales costs = EBDIT = $21,000 10,000 = $11,000Depreciation = EBDIT EBIT = 11,000 8,585 = $2,41516.Balance SheetCash$300,000Accounts payable$700,000Accounts receivable150,000Notes payable 145,000Inventory 425,000Current liabilities$845,000Current assets$875,000Long-term debt 1,300,000Total liabilities$2,145,000Tangible net fixed assets3,500,000Intangible net fixed assets 775,000Common stock?Total assets$5,150,000Accumulated ret. earnings 2,150,000Total liab. & owners equity$5,150,000? = $5,150,000 2,150,000 2,145,000 = $855,00017.Owners equity = Max (TA TL), 0; if TA = $3,600, OE = $700; if TA = $2,300, OE = $018.a.Taxes Growth = 0.15($50K) + 0.25($25K) + 0.34($5K) = $15,450 Taxes Income = 0.15($50K) + 0.25($25K) + 0.34($25K) + 0.39($235K) + 0.34($8.665M) = $3,060,000b. Each firm has a marginal tax rate of 34% on the next $10,000 of taxable income, despite their different average tax rates, so both firms will pay an additional $3,400 in taxes.19.Income StatementSales$900,000b.OCF = EBIT + D TCOGS 600,000 = $25,000 + 105,000 0 = $130,000A&S expenses 170,000c.Net income was negative because of theDepreciation 105,000tax deductibility of depreciation and int-EBIT$25,000erest expense. However, the actual cashInterest 85,000flow from operations was positiveTaxable income($60,000)because depreciation is a non-cashTaxes (35%) 0expense and interest is a financing, not a.Net income($60,000)an operating, expense.20.A firm can still pay out dividends if net income is negative; it just has to be sure there is sufficient cash flow to make the dividend payments.Change in NWC = net cap. sp. = net new equity = 0. (Assumed)Cash flow from assets = OCF change in NWC net cap. sp. = $130K 0 0 = $130KCash flow to stockholders = dividends net new equity = $25K 0 = $25KCash flow to creditors = cash flow from assets cash flow to stockholders = $130K 25K = $105KCash flow to creditors = interest net new LTD;Net new LTD = interest cash flow to creditors = $85K 105K = $20K21.Income StatementSales$12,200b.OCF = EBIT + D T Cost of good sold9,000 = $1,600 + 1,600 476 = $2,724Depreciation 1,600c.Change in NWC = NWCend NWCbegEBIT$1,600 = (CAend CLend) (CAbeg CLbeg)Interest 200 = ($3,100 1,800) ($2,000 1,500)Taxable income$1,400 = $1,300 500 = $800Taxes (34%) 476Net cap. sp. = NFAend NFAbeg + Da.Net income $924 = $8,400 8,000 + 1,600 = $2,000CFA = OCF change in NWC net cap.sp = $2,724 800 2,000 = $76The cash flow from assets can be positive or negative, since it represents whether the firm raised funds or distributed funds on a net basis. In this problem, even though net income and OCF are positive, the firm invested heavily in both fixed assets and net working capital; it had to raise a net $76 in funds from its stockholders and creditors to make these investments.d.Cash flow to creditors= interest net new LTD = $200 0 = $200Cash flow to stockholders= cash flow from assets cash flow to creditors = $76 200 = $276 = dividends net new equity; Net new equity = $300 + 276 = $576The firm had positive earnings in an accounting sense (NI 0) and had positive cash flow from operations. The firm invested $800 in new net working capital and $2,000 in new fixed assets. The firm had to raise $76 from its stakeholders to support this new investment. It accomplished this by raising $576 in the form of new equity. After paying out $300 of this in the form of dividends to shareholders and $200 in the form of interest to creditors, $76 was left to just meet the firms cash flow needs for investment.22.a.Total assets 2001 = $625 + $2,800 = $3,425; total liabilities 2001 = $245 + 1,400 = $1,645Owners equity 2001 = $3,425 1,645 = $1,780Total assets 2002 = $684 + 3,100 = $3,784; total liabilities 2002 = $332 + 1,600 = $1,932Owners equity 2002 = $3,784 1,932 = $1,852b.NWC 2001 = CA01 CL01 = $625 245 = $380NWC 2002 = CA02 CL02 = $684 332 = $352Change in NWC 2002 = NWC02 NWC01 = $352 380 = $28 c.Net cap. sp. = NFA02 NFA01 + D02 = $3,100 2,800 + 700 = $1,000Net cap. sp. = fixed assets bought fixed assets sold$1,000 = $1,500 fixed assets sold; fixed assets sold = $1,500 1,000 = $500EBIT = Sales costs depreciation = $8,100 3,920 700 = $3,480EBT = EBIT interest = $3,480 212 = $3,268; Tax = EBIT .35 = $3,268 .35 = $1,143.80OCF02 = EBIT + Dep Taxes = $3,480 + 700 1,143.80 = $3,036.20Cash flow from assets = OCF inc. in NWC net cap. sp. = $3,036.20 (28) 1,000 = $2,064.20d.Net new borrowing = LTD02 LTD01 = $1,600 1,400 = $200Cash flow to creditors = interest net new LTD = $212 200 = $12Net new borrowing = $200 = debt issued debt retired; debt retired = $300 200 = $100Challenge23.Net cap. sp.= NFAend NFAbeg + D= (NFAend NFAbeg) + (D + ADbeg) ADbeg= (NFAend NFAbeg)+ ADend ADbeg= (NFAend + ADend) (NFAbeg + ADbeg) = FAend FAbeg24.a.The tax bubble causes average tax rates to catch up to marginal tax rates, thus eliminating the tax advantage of low marginal rates for high income corporations.b.Taxes = 0.15($50K) + 0.25($25K) + 0.34($25K) + 0.39($235K) = $113.9KAverage tax rate = 113.9K / 335K = 34%; Marginal tax rate on next dollar of income = 34%For corporate taxable income levels of $335K to $10M, average tax rates are equal to marginal tax rates.Taxes = 0.34($10M) + 0.35($5M) + 0.38($3.333M) = $6,416,667Average tax rate = 6,416,667 / 18,333,334 = 35%; Marginal tax rate on next dollar of income = 35%. For corporate taxable income levels over $18,333,334, average tax rates are again equal to marginal tax rates.c.Taxes = 0.34($200K) = $68K = 0.15($50K) + 0.25($25K) + 0.34($25K) + X($100K);X(100K) = 68K 22.25K = 45.75K; X = 45.75K / 100K = 45.75%25.12/31/01 Balance Sheet12/31/02 Balance SheetCash$1,505A/P$1,581Cash$1,539A/P$1,533A/R1,992N/P 291A/R2,244N/P 273Inventory 3,542CL$1,872Inventory 3,640CL$1,806CA$7,039LTD 5,040CA$7,423LTD 5,880NFA 12,621OE12,748NFA 12,922OE 12,659TA$19,660TL&E$19,660TA$20,345 TL&E$20,3452001 Income Statement2002 Income StatementSales$2,870.00Sales$3,080.00COGS987.00COGS1,121.00Other expenses238.00Other expenses196.00Dep 413.00Dep 4