КФ / Лекции / Brealey Myers - Principles Of Corporate Finance 7th Ed (eBook)

Chapter 1

1.(a) Real; (b) executive airplanes; (c) brand names;

(d)financial; (e) bonds; (f) investment; (g) capital budgeting; (h) financing.

2.a. Financial assets, such as stocks or bank loans, are claims held by investors. Corporations sell

financial assets to raise the cash to invest in real assets such as plant and equipment. Some real assets are intangible.

b.Capital budgeting means investment in real assets. Financing means raising the cash for this investment.

c.The shares of public corporations are traded on stock exchanges and can be purchased by a wide range of investors. The shares of closely held corporations are not traded and are not generally available to investors.

d.Unlimited liability: investors are responsible for all the firm’s debts. A sole proprietor has unlimited liability. Investors in corporations have limited liability. They can lose their investment, but no more.

e.A corporation is a separate legal “person” with unlimited life. Its owners hold shares in the business. A partnership is a limited-life agreement to establish and run a business.

3.c, d, e, and g are real assets. Others are financial.

4.Double taxation and agency costs due to separation of ownership and control. Public organizations also face the higher costs of complying with legal requirements and communicating with dispersed shareholders.

5.a, c, d.

6.c, d.

7.Principal–agent issues, often amplified by asymmetric information.

8.Conflicts of interest or differences in incentives create principal–agent problems. Agency costs are incurred if value-maximizing decisions are not made and if principals incur costs of monitoring or control.

Chapter 2

1.(a) Negative; (b) PV C1/ 11 r 2; (c) NPV C0

1C1/ 11 r 22; (d) r is the return foregone by investing in the project rather than the capital market; (e) the return offered by default-free U.S. Treasury securities.

2.DF1 .867; discount rate .154, or 15.4%.

3.(a) .909; (b) .833; (c) .769.

4.(a) Return profit/investment (132 100)/100

.32, or 32%; (b) Negative (if the rate of interest r equals 32%, NPV 0); (c) PV 132/1.10 120, or $120,000; (d) NPV 100 120 20, or $20,000.

5.Net present value rule: Invest if NPV is positive. Rate of return rule: Invest if the rate of return exceeds the opportunity cost of capital. They give the same answer.

6.The return foregone by investing in a project rather than in securities. The opportunity cost of capital for a risk-free investment is the interest rate on government bonds. For risky investments firms need to estimate the return expected by investors from securities of similar risk.

7.A would lend and consume $120 next year. G would consume now. Neither would invest at 14%.

8.They will vote for a only. The other tasks can be carried out just as efficiently by stockholders.

9.To protect and enhance their reputations; because compensation is tied to earnings and stock price; supervision by the board of directors; the threat of takeover.

10.Investors were concerned that Salomon’s damaged reputation would drive away its customers.

Chapter 3

1.$1.00.

2.125/139 .899.

3.596 .285 $170.

4.374/ 11.09 29 $172.

5.PV 432/1.15 137/ 11.15 22 797/ 11.15 23

376 104 524 1,004.

6.100 11.15 28 $305.90.

7.NPV 1548 138/.09 $14.67.

8.PV 4/ 1.14 .04 2 $40.

9.$1,006,512.

10.(a) PV 1/.10 $10; (b) PV (1/.10)/(1.10)7 10/2

$5 (approximately); (c) PV 10 5 $5 (approximately); (d) PV C/(r g) 10,000/(.10 .05)

$200,000.

11.a. From Appendix Table 1, 1/(1.05)5 .784. You

therefore need to set aside 10,000 .784 $7,840.

b.From Appendix Table 3, the present value of $1 a year for 6 years at 8% is $4.623. Therefore you need to set aside 12,000 4.623 $55,476.

c.From Appendix Table 2, 1.086 1.587. Therefore, at the end of 6 years you would have 1.587 160,476 55,476 2 $7,935.

12.11.25 2/ 11.21 2 1 .033, or 3.3%.

13.(a) 1,000e.12 5 1,000e.6 $1,822; (b) PV 5e .12 85e .96 $1.915 million; (c) PV C/r(1 e rt)2,000/.12(1 e .12 15) $13,912.

14.(a) $12.625 million; (b) $12.705 million; (c) $12.712 million.

15.$1,133.55. This calculation assumes annual coupon payments and compounding.

16.The yield to maturity is the (single) discount rate that gives a present value equal to a bond’s price. It is calculated by trial and error, by computer or calculator, or from bond tables.

Chapter 4

1.(a) True; (b) true.

2.Investors who buy stocks may get their return from capital gains as well as dividends. But the future stock price always depends on subsequent dividends. There is no inconsistency.

3.P0 110 110 2/1.10 $109.09.

4.r 5/40 .125.

5.P0 10/ 1.08 .05 2 $333.33.

6.By year 4, earnings will grow to $18.23 per share. Forecasted price per share at year 4 is 18.23/.08

$227.91.

$145.83.

8.Z’s forecasted dividends and prices grow as follows:

Calculate the expected rates of return:

From year 0 to 1: 10 1350 333.33 2 .08. 333.33

From year 1 to 2: 10.50 1367.50 350 2 .08. 350

From year 2 to 3: 11.03 1385.88 367.50 2 .08 367.50

Double expects 8% in each of the first 2 years. Triple expects 8% in each of the first 3 years.

9.(a) False; (b) true.

10.PVGO 0, and EPS1 equals the average future earnings the firm could generate under no-growth policy.

11.Free cash flow equals the net cash flow available to shareholders after paying for all future investments. Free cash flow can be negative if investments are large. Dividends are the cash paid out to stockholders. A company could have negative free cash flow but sell new shares and still pay a dividend.

12.Dividends or free cash flow are forecasted to a horizon, and a horizon value is added. Two-stage models are used when near-term cash flows grow at irregular or unsustainable rates. For example, the company may be recovering from a period of low profits, or profitability and growth may be high for a limited period.

13.The value at the end of a forecast period. It can be estimated by the constant-growth DCF formula or by using price–earnings or market–book ratios for similar companies. If PVGO 0 at the horizon date H, horizon value equals earnings forecasted at date H 1 divided by r.

14.Earnings forecasted for date H 1 divided by r.

6.The checklist would include: forecasting cash flows in euros (taking account of French inflation); recognizing French corporate tax rules and rates; and discounting at a euro cost of capital.

7.Comparing present values can be misleading when projects have different economic lives and the projects are part of an ongoing business. For example, a machine that costs $100,000 per year to buy and lasts 5 years is not necessarily more expensive than a machine that costs $75,000 per year to buy but lasts only 3 years. Calculating the machines’ equivalent annual costs allows an unbiased comparison.

8.Plan to undertake the project at the future date which yields the highest NPV today. (This assumes certainty. We consider timing under uncertainty in Chapter 22.)

9.PV cost 1.5 .2 14.09 $4.319 million. Equivalent annual cost 4.319/14.09 .306, or $306,000.

10.a. NPVA $100,000; NPVB $180,000.

b. Equivalent cash flow of A 100,000/1.736$57,604; equivalent cash flow of B 180,000/ 2.487 $72,376.

c. Machine B.

11.Replace at end of 5 years 1$80,000 $72,376 2.

1.(a) About 13%; (b) about 9%; (c) about 1%; (d) about 20% (less in recent years); (e) less (diversification reduces risk).

2.Expected payoff is $100 and expected return is zero. Variance is 20,000 (percent squared) and standard deviation is 141%.

3.(a) 35.5%; (b) 7.1%.

4.Standard deviation of returns, correlated, less, unique, market.

5.Mr. Interchange had a lower average return than the S&P (15.6% versus 19.4%) but also a lower standard deviation (12.0% versus 14.9%).

6.(a) False; (b) true; (c) true; (d) true; (e) false.

7.d

9.(a) 26%; (b) zero; (c) .75; (d) less than 1.0 (the portfolio’s risk is the same as the market, but some of this risk is unique risk).

10.1.3 (Diversification does not affect market risk.)

12.False. Corporations can reduce risk by diversifying but so can investors. Therefore they will not be prepared to pay extra for the stocks of diversified companies.

Chapter 8

1.(a) 7%; (b) 27% with perfect positive correlation; 1% with perfect negative correlation; 19.1% with no correlation; (c) See Figure 1; (d) No, measure risk by beta, not by standard deviation.

2.(a) Portfolio A (higher expected return, same risk);

(b) Cannot say (depends on investor’s attitude toward risk); (c) Portfolio F (lower risk, same expected return).

3.a. Figure 8.13b: Diversification reduces risk (e.g., a

mixture of portfolios A and B would have less risk than the average of A and B).

b.Those along line AB in Figure 8.13a.

c.See Figure 2.

4.(a) See Figure 3; (b) A, D, G; (c) F; (d) 15% in C.

(e) Put 25/32 of your money in F and lend 7/32 at 12%: Expected return 7/32 12 25/32 18 16.7%; standard deviation 7/32 0 (25/32) 32 25%. If you could borrow without limit, you would achieve as high an expected return as you’d like, with correspondingly high risk, of course.

5.The best portfolio will be a combination of lending or borrowing, plus investment in the stock portfolio with the highest ratio of expected risk premium to standard deviation. See Figure 8.6.

6.(a) r 4 .68(10 4) 8.08%; (b) Amazon.com at 23.5%; (c) Exxon Mobil at 6.4%; (d) lower; (e) higher.

7.(a) True; (b) false (it offers twice the market risk premium); (c) false.

8.Because beta does not seem to explain average returns. The relationship between beta and average return has been too “flat”—see Figure 8.9. Other factors, such as the book-to-market ratio, seem to explain differences in average returns.

9. r rf b11rfactor 1 rf 2 b21rfactor 2 rf 2 … ,

r expected return on stock, rf risk-free interest rate,

expected return on portfolio of stocks that is exposed only to the jth economic factor,sensitivity of stock to returns on jth factor.

10.(a) 7%; (b) 7 1(5) 1( 1) 1(2) 13%; (c) 7 0(5) 2( 1) 0(2) 5%; (d) 7 1(5) ( 1.5)( 1)1(2) 15.5%.

11.Market factor (risk premium), size factor (return on small-firm stocks less return on large-firm stocks), book-to-market factor (return on high book-to- market stocks less return on low book-to-market stocks).

Chapter 9

1.Overestimate.

2.False. Beta depends on returns, not on the levels of stock price or the market index.

3.27% was explained by market movements, 73% by unique risk. Unique risk shows up as the scatter of points around the fitted line. The standard error is

.38, so plus or minus two standard errors gives a range of 1.26 to 2.78.

4.assets 0 .40 .5 .60 .30, r 10 .30118 10 2 12.4%.

5.a. rf 1rm rf 2 8 1.5 9 21.5%.

debt

b. assets debt adebt equity b

equityequity adebt equity b

46

0 4 6 1.5 4 6

.9.

c.rf assets(rm rf) 8 .9 9 16.1%;

d.r 16.1%; (e) rf (rm rf) 8 1.2 9

18.8%.

6.(a) .73; (b) It would not change at all; (c) r 5

.73(6) 9.4%.

7.(a) True; (b) false; (c) true.

8.(a) A (higher fixed cost); (b) C (more cyclical revenues).

9.Certainty equivalent; CEQt/[(1 rf)t]; less than; rf(rm rf); declines at a constant rate.

10.a.

110121

1.10 1.102 $200.

b.CEQ1/1.05 110/1.10, CEQ1 $105; CEQ2/ 1.052 121/1.102, CEQ2 $110.25.

c.Ratio1 105/110 .95; Ratio2 110.25/121 .91.

Chapter 10

1.a. Analysis of how project profitability and NPV change if different assumptions are made about sales, cost, and other key variables.

b.Project NPV is recalculated by changing several inputs to new, but consistent values.

c.Determines the level of future sales at which project profitability or NPV equals zero.

d.An extension of sensitivity analysis which explores all possible outcomes and weights each by its probability.

e.A graphical technique for displaying possible future events and decisions taken in response to those events.

f.Option to modify a project at a future date.

g.The additional present value created by the option to bail out of a project, and recover part of the initial investment, if the project performs poorly.

h.The additional present value created by the option to invest more and expand output, if a project performs well.

2. (a) False; (b) true; (c) true; (d) true; (e) true;

(f)false.

3.It shows how the project would fare under consistent combinations of input assumptions. Sensitivity analysis changes only one input at a time.

4.Monte Carlo helps reveal what can go wrong (or right) with a project. It helps the manager to obtain an accurate forecast of expected cash flows. It also helps in assessing project risk and determining the appropriate discount rate.

5.a. Describe how project cash flow depends on the underlying variables.

b.Specify probability distributions for forecast errors for these cash flows.

c.Draw from the probability distributions to simulate the cash flows.

6.Option to expand; option to abandon; option to postpone investment; production options.

7.(a) True; (b) true; (c) false; (d) false.

8.If prices of raw materials may change (e.g., price of oil relative to gas), the firm may be able to switch between them. Similarly, if consumer tastes change, the firm may be able to change output quickly and cheaply.

Chapter 11

1.Your best estimate is $1,000 per acre, the actual market value. Why do a discounted-cash-flow analysis to estimate market value when you can observe it directly?

2.(a) False; (b) true; (c) true; (d) false.

3.$15

4.Product prices tend to equilibrium levels at which efficient producers see capacity expansion as zeroNPV. Calculating NPV from the point of view of a European competitor allowed estimation of this equilibrium price.

5.First consider whether renting the building and opening the Taco Palace is positive NPV. Then consider whether to buy (instead of renting) based on your optimistic view of local real estate.

6.The present value of the future price of gold is equal to today’s price. Just multiply production volume by today’s gold price.

7.(a) 160/1.05 $152.4 million; (b) The expected rate of return is rf (rm rf) .05 1.2(.12

.05) .134, or 13.4%. The expected price is 1,524 1.134 1,728. The certainty equivalent price is 1,600.

8.The second-hand market value of older planes falls by enough to make up for their higher fuel consumption. Also, the older planes are used on routes where fuel efficiency is relatively less important.

9.b and d are clear lessons. c can be true: reduction in profits from an existing project is a valid concern. But if competitor’s new products would harm existing projects in any case, there is no reason to hold back on your new product. a is wrong: growth or high-tech products do not necessarily mean positive NPV. e is wrong: the book value of a plant does not show the opportunity cost of using it.

Chapter 12

1.(a) False; (b) true; (c) true; (d) false; (e) true (e.g., marketing programs and training); (f) false.

2.a. Can lead to investment in negative-NPV projects.

b.Confuses the relative NPVs of projects proposed by different business units.

Chapter 13

1.c

2.Weak, semistrong, strong, strong, weak.

3.(a) False; (b) false; (c) true; (d) false; (e) false; (f) true.

4.(a) Decline to $200; (b) less; (c) A slight abnormal fall (the split is likely to have led investors to expect an above-average rise in dividends).

5.(a) False; (b) true; (c) false; (d) true; (e) false; (f) true (a small change in price in the absence of new information causes a large increase in demand).

6.6 1 .2 1.45 5 2 1.05%.

7.(a) True; (b) false; (c) true; (d) true.

8.Decrease. The stock price already reflects an expected 25% increase. The 20% increase conveys bad news relative to expectations.

9.a. An investor should not buy or sell shares based on apparent trends or cycles in returns.

b.A CFO should not speculate on changes in interest rates or foreign exchange rates. There is no reason to think that the CFO has superior information.

c.A financial manager evaluating the creditworthiness of a large customer could check the customer’s stock price and the yield on its debt. A falling stock price or a high yield could indicate trouble ahead.

d.Don’t assume that accounting choices which increase or decrease earnings will have any effect on stock price.

e.The company should not seek diversification just to reduce risk. Investors can diversify on their own.

f.Stock issues do not depress price if investors believe the issuer has no private information.

2. (a) False; (b) true; (c) true; (d) false.