assignment # 2 and mini case #2 on Sunday 20 March 2022. It is related to the topic "cost of capital". You need to solve problems 1-15, pages 371-373. In addition, you need to solve the mini-case on pages 376-377
9781111444389.pdf FREQUENTLY USED SYMBOLS ACP Average collection period ADR American Depository Receipt APR Annual percentage rate AR Accounts receivable b Beta coefficient, a measure of an asset’s market risk bL Levered beta bU Unlevered beta BEP Basic earning power BVPS Book value per share CAPM Capital Asset Pricing Model CCC Cash conversion cycle CF Cash flow; CFt is the cash flow in Period t CFPS Cash flow per share CR Conversion ratio CV Coefficient of variation Δ Difference, or change (uppercase delta) Dps Dividend of preferred stock Dt Dividend in Period t DCF Discounted cash flow D/E Debt-to-equity ratio DPS Dividends per share DRIP Dividend reinvestment plan DRP Default risk premium DSO Days sales outstanding EAR Effective annual rate, EFF% EBIT Earnings before interest and taxes; net operating income EBITDA Earnings before interest, taxes, depreciation, and amortization EPS Earnings per share EVA Economic Value Added F (1) Fixed operating costs (2) Flotation cost FCF Free cash flow FVN Future value for Year N FVAN Future value of an annuity for N years g Growth rate in earnings, dividends, and stock prices I Interest rate; also denoted by r I/YR Interest rate key on some calculators INT Interest payment in dollars IP Inflation premium IPO Initial public offering IRR Internal rate of return LP Liquidity premium M (1) Maturity value of a bond (2) Margin (profit margin) M/B Market-to-book ratio MIRR Modified Internal Rate of Return MRP Maturity risk premium MVA Market Value Added n Number of shares outstanding N Calculator key denoting number of periods N(di) Represents area under a standard normal distribution function NOPAT Net operating profit after taxes NOWC Net operating working capital NPV Net present value P (1) Price of a share of stock in Period t; P0 = price of the stock today (2) Sales price per unit of product sold Pc Conversion price Pf Price of good in foreign country Ph Price of good in home country PN A stock’s horizon, or terminal, value P/E Price/earnings ratio PMT Payment of an annuity PPP Purchasing power parity PV Present value PVAN Present value of an annuity for N years Q Quantity produced or sold QBE Breakeven quantity r (1) A percentage discount rate, or cost of capital; also denoted by i (2) Nominal risk-adjusted required rate of return r̄ “r bar,” historic, or realized, rate of return r̂ “r hat,” an expected rate of return r* Real risk-free rate of return rd Before-tax cost of debt re Cost of new common stock (outside equity) rf Interest rate in foreign country rh Interest rate in home country ri Required return for an individual firm or security rM Return for “the market” or for an “average” stock rNOM Nominal rate of interest; also denoted by iNOM rps (1) Cost of preferred stock (2) Portfolio’s return rPER Periodic rate of return rRF Rate of return on a risk-free security rs (1) Required return on common stock (2) Cost of old common stock (inside equity) ρ Correlation coefficient (lowercase rho); also denoted by R when using historical data ROA Return on assets ROE Return on equity RP Risk premium RPM Market risk premium RR Retention rate S (1) Sales (2) Estimated standard deviation for sample data (3) Intrinsic value of stock (i.e., all common equity) SML Security Market Line ∑ Summation sign (uppercase sigma) σ Standard deviation (lowercase sigma) σ2 Variance t Time period T Marginal income tax rate TVN A stock’s horizon, or terminal, value TIE Times interest earned V Variable cost per unit VB Bond value VL Total market value of a levered firm Vop Value of operations Vps Value of preferred stock VU Total market value of an unlevered firm VC Total variable costs w Proportion or weight wd Weight of debt wps Weight of preferred stock ws Weight of common equity raised internally by retaining earnings wce Weight of common equity raised externally by issuing stock WACC Weighted averaged cost of capital X Exercise price of option YTC Yield to call YTM Yield to maturity Financial Management: Theory and Practice THIRTEENTH EDITION M ICHAE L C . EHRHARDT University of Tennessee EUGENE F . B R I GHAM University of Florida Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States Financial Management: Theory and Practice, Thirteen Edition Michael C. Ehrhardt and Eugene F. Brigham VP/Editorial Director: Jack W. Calhoun Publisher: Joe Sabatino Executive Editor: Mike Reynolds Developmental Editor: Michael Guendelsberger Senior Editorial Assistant: Adele Scholtz Marketing Manager: Nathan Anderson Marketing Coordinator: Suellen Ruttkay Content Project Manager: Jacquelyn K Featherly Technology Production Analyst: Starratt Alexander Senior Manufacturing Coordinator: Kevin Kluck Production House/Compositor: Integra Software Services Pvt. Ltd. Senior Art Director: Michelle Kunkler Cover and Internal Designer: Rokusek Design Cover Images: © Lael Henderson/Stock Illustration Source/Getty Images, Inc. ©2011, 2009 South-Western, a part of Cengage Learning ALL RIGHTS RESERVED. No part of this work covered by the copyright herein may be reproduced, transmitted, stored or used in any form or by any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, Web distribution, information networks, or information storage and retrieval systems, except as permitted under Sec- tion 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the publisher. For product information and technology assistance, contact us at Cengage Learning Customer & Sales Support, 1-800-354-9706 For permission to use material from this text or product, submit all requests online at www.cengage.com/permissions Further permissions questions can be emailed to permissionrequest@cengage.com ExamView® and ExamView Pro® are registered trademarks of FSCreations, Inc. Windows is a registered trademark of the Microsoft Corporation used herein under license. Macintosh and Power Macintosh are registered trademarks of Apple Computer, Inc. used herein under license. Library of Congress Control Number: 2010920554 Student Edition ISBN 13: 978-1-4390-7810-5 Student Edition ISBN 10: 1-4390-7810-6 Package Student Edition ISBN 13: 978-1-4390-7809-9 Package Student Edition ISBN 10: 1-4390-7809-2 South-Western Cengage Learning 5191 Natorp Boulevard Mason, OH 45040 USA Cengage Learning products are represented in Canada by Nelson Education, Ltd. For your course and learning solutions, visit www.cengage.com Purchase any of our products at your local college store or at our preferred online store www.CengageBrain.com Printed in the United States of America 1 2 3 4 5 6 7 14 13 12 11 10 www.cengage.com/permissions www.cengage.com www.CengageBrain.com Brief Contents Preface xix PART 1 Fundamental Concepts of Corporate Finance 1 CHAPTER 1 An Overview of Financial Management and the Financial Environment 3 Web Extensions 1A: An Overview of Derivatives 1B: A Closer Look at the Stock Markets CHAPTER 2 Financial Statements, Cash Flow, and Taxes 47 Web Extensions 2A: The Federal Income Tax System for Individuals CHAPTER 3 Analysis of Financial Statements 87 PART 2 Fixed Income Securities 121 CHAPTER 4 Time Value of Money 123 Web Extensions 4A: The Tabular Approach 4B: Derivation of Annuity Formulas 4C: Continuous Compounding CHAPTER 5 Bonds, Bond Valuation, and Interest Rates 173 Web Extensions 5A: A Closer Look at Zero Coupon Bonds 5B: A Closer Look at TIPS: Treasury Inflation-Protected Securities 5C: A Closer Look at Bond Risk: Duration 5D: The Pure Expectations Theory and Estimation of Forward Rates PART 3 Stocks and Options 215 CHAPTER 6 Risk, Return, and the Capital Asset Pricing Model 217 Web Extensions 6A: Continuous Probability Distributions 6B: Estimating Beta with a Financial Calculator CHAPTER 7 Stocks, Stock Valuation, and Stock Market Equilibrium 267 Web Extensions 7A: Derivation of Valuation Equations CHAPTER 8 Financial Options and Applications in Corporate Finance 305 PART 4 Projects and Their Valuation 333 CHAPTER 9 The Cost of Capital 335 Web Extensions 9A: The Required Return Assuming Nonconstant Dividends and Stock Repurchases CHAPTER 10 The Basics of Capital Budgeting: Evaluating Cash Flows 379 Web Extensions 10A: The Accounting Rate of Return (ARR) CHAPTER 11 Cash Flow Estimation and Risk Analysis 423 Web Extensions 11A: Certainty Equivalents and Risk-Adjusted Discount Rates i i i PART 5 Corporate Valuation and Governance 471 CHAPTER 12 Financial Planning and Forecasting Financial Statements 473 Web Extensions 12A: Advanced Techniques for Forecasting Financial Statements Accounts CHAPTER 13 Corporate Valuation, Value-Based Management and Corporate Governance 511 PART 6 Cash Distributions and Capital Structure 557 CHAPTER 14 Distributions to Shareholders: Dividends and Repurchases 559 CHAPTER 15 Capital Structure Decisions 599 Web Extensions 15A: Degree of Leverage PART 7 Managing Global Operations 639 CHAPTER 16 Working Capital Management 641 Web Extensions 16A: Secured Short-Term Financing CHAPTER 17 Multinational Financial Management 691 PART 8 Tactical Financing Decisions 731 CHAPTER 18 Lease Financing 733 Web Extensions 18A: Leasing Feedback 18B: Percentage Cost Analysis 18C: Leveraged Leases CHAPTER 19 Hybrid Financing: Preferred Stock, Warrants, and Convertibles 759 Web Extensions 19A: Calling Convertible Issues CHAPTER 20 Initial Public Offerings, Investment Banking, and Financial Restructuring 787 Web Extensions 20A: Rights Offerings PART 9 Special Topics 825 CHAPTER 21 Mergers, LBOs, Divestitures, and Holding Companies 827 Web Extensions 21A: Projecting Consistent Debt and Interest Expenses CHAPTER 22 Bankruptcy, Reorganization, and Liquidation 869 Web Extensions 22A: Multiple Discriminant Analysis CHAPTER 23 Derivatives and Risk Management 899 Web Extensions 23A: Risk Management with Insurance PART 10 Advanced Issues 929 CHAPTER 24 Portfolio Theory, Asset Pricing Models, and Behavioral Finance 931 CHAPTER 25 Real Options 971 Web Extensions 25A: The Abandonment Real Option 25B: Risk-Neutral Valuation CHAPTER 26 Analysis of Capital Structure Theory 995 iv Brief Contents Appendixes Appendix A Solutions to Self-Test Problems 1029 Appendix B Answers to End-of-Chapter Problems 1063 Appendix C Selected Equations and Data 1071 Appendix D Values of the Areas under the Standard Normal Distribution Function 1085 Glossary 1087 Name Index 1113 Subject Index 1119 Web Chapters CHAPTER 27 Providing and Obtaining Credit CHAPTER 28 Advanced Issues in Cash Management and Inventory Control CHAPTER 29 Pension Plan Management CHAPTER 30 Financial Management in Not-for-Profit Businesses Brief Contents v Contents Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xix PART 1 Fundamental Concepts of Corporate Finance 1 C H A P T E R 1 An Overview of Financial Management and the Financial Environment 3 The Five-Minute MBA 4 Box: Say Hello to the Global Economic Crisis! 5 The Corporate Life Cycle 5 Box: Columbus Was Wrong—the World Is Flat! And Hot, and Crowded! 6 The Primary Objective of the Corporation: Value Maximization 9 Box: Ethics for Individuals and Businesses 10 Box: Corporate Scandals and Maximizing Stock Price 13 An Overview of the Capital Allocation Process 13 Financial Securities 15 The Cost of Money 19 Financial Institutions 23 Financial Markets 27 Trading Procedures in Financial Markets 29 Types of Stock Market Transactions 30 Box: Rational Exuberance? 31 The Secondary Stock Markets 31 Box: Measuring the Market 33 Stock Market Returns 34 The Global Economic Crisis 36 The Big