公司理财英文版第十四章

CHAPTER 14CAPITAL STRUCTURE: BASIC CONCEPTSAnswers to Concepts Review and Critical Thinking Questions1.Assumptions of the Modigliani-Miller theory in a world without taxes: 1) Individuals can borrow atthe same interest rate at which the firm borrows. Since investors can purchase securities on margin, an individual’s effective interest rate is probably no higher than that for a firm.Therefore, this assumption is reasonable when applying MM’s theory to the real world.If a firm were able to borrow at a rate lower than individuals, the firm’s val ue would increase through corporate leverage.As MM Proposition I states, this is not the case in a world with no taxes. 2) There are no taxes. In the real world, firms do pay taxes. In the presence of corporate taxes, the value of a firm is positively related to its debt level. Since interest payments are deductible, increasing debt reduces taxes and raises the value of the firm. 3) There are no costs of financial distress. In the real world, costs of financial distress can be substantial. Since stockholders eventually bear these costs, there are incentives for a firm to lower the amount of debt in its capital structure. This topic will be discussed in more detail in later chapters.2.False. A reduction in leverage will decrease both the risk of the stock and its expected return.Modigliani and Miller state that, in the absence of taxes, these two effects exactly cancel each other out and leave the price of the stock and the overall value of the firm unchanged.3.False. Modigliani-Miller Proposition II (No Taxes) states that the required return on a firm’s equityis positively related to the firm’s debt-equity ratio [R S= R0+ (B/S)(R0–R B)]. Therefore, any increase in the amount of debt in a firm’s capital structure will increase the required return on the firm’s equity.4.Interest payments are tax deductible, where payments to shareholders (dividends) are not taxdeductible.5.Business risk is the equity risk arising from the nature of the firm’s operating activity, and is directlyrelated to the systematic risk of the firm’s assets. Financial risk is the equity risk that is due entirely to the firm’s chosen capital structure. As financial leverage, or the use of debt financing, increases, so does financial risk and, hence, the overall risk of the equity. Thus, Firm B could have a higher cost of equity if it uses greater leverage.6.No, it doesn’t follow. While it is true that the equity and debt costs are rising, the key thing toremember is that the cost of debt is still less than the cost of equity. Since we are using more and more debt, the WACC does not necessarily rise.7.Because many relevant factors such as bankruptcy costs, tax asymmetries, and agency costs cannoteasily be identified or quantified, it’s practically impossible to determi ne the precise debt/equity ratio that maximizes the value of the firm. However, if the firm’s cost of new debt suddenly becomes much more expensive, it’s probably true that the firm is too highly leveraged.8.It’s called leverage (or “gearing” in the UK) because it magnifies gains or losses.B-2 SOLUTIONS9.Homemade leverage refers to the use of borrowing on the personal level as opposed to the corporatelevel.10.The basic goal is to minimize the value of non-marketed claims.Solutions to Questions and ProblemsNOTE: All end-of-chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem.Basic1. a. A table outlining the income statement for the three possible states of the economy is shownbelow. The EPS is the net income divided by the 2,500 shares outstanding. The last row shows the percentage change in EPS the company will experience in a recession or an expansion economy.Recession Normal ExpansionEBIT £5,600 £14,000 £18,200Interest 0 0 0NI £5,600 £14,000 £18,200EPS% EPS –60 –––+30b.If the company undergoes the proposed recapitalization, it will repurchase:Share price = Equity / Shares outstandingShare price = £150,000/2,500Share price = £60Shares repurchased = Debt issued / Share priceShares repurchased =£60,000/£60Shares repurchased = 1,000The interest payment each year under all three scenarios will be:Interest payment = £60,000(.05) = £3,000CHAPTER 14 B-3 The last row shows the percentage change in EPS the company will experience in a recession or an expansion economy under the proposed recapitalization.Recession Normal ExpansionEBIT £5,600 £14,000 £18,200Interest 3,000 3,000 3,000NI £2,600 £11,000 £15,200EPS%∆EPS –76.36 –––+38.182. a. A table outlining the income statement with taxes for the three possible states of the economyis shown below. The share price is still £60, and there are still 2,500 shares outstanding. The last row shows the percentage change in EPS the company will experience in a recession or an expansion economy.Recession Normal ExpansionEBIT £5,600 £14,000 £18,200Interest 0 0 0Taxes 1,960 4,900 6,370NI £3,640 £9,100 £11,830EPS%∆EPS –60 –––+30b. A table outlining the income statement with taxes for the three possible states of the economyand assuming the company undertakes the proposed capitalization is shown below. The interest payment and shares repurchased are the same as in part b of Problem 1.Recession Normal ExpansionEBIT £5,600 £14,000 £18,200Interest 3,000 3,000 3,000Taxes 910 3,850 5,320NI £1,690 £7,150 £9,880EPS%∆EPS –76.36 –––+38.18Notice that the percentage change in EPS is the same both with and without taxes.3. a.Since the company has a market-to-book ratio of 1.0, the total equity of the firm is equal to themarket value of equity. Using the equation for ROE:ROE = NI/£150,000B-4 SOLUTIONSThe ROE for each state of the economy under the current capital structure and no taxes is:Recession Normal ExpansionROE .0373 .0933 .1213%∆ROE –60 –––+30The second row shows the percentage change in ROE from the normal economy.b.If the company undertakes the proposed recapitalization, the new equity value will be:Equity = £150,000 – 60,000Equity = £90,000So, the ROE for each state of the economy is:ROE = NI/£90,000Recession Normal ExpansionROE .0222 .1156 .1622%∆ROE –76.36 –––+38.18c.If there are corporate taxes and the company maintains its current capital structure, the ROE is:ROE .0243 .0607 .0789%∆ROE –60 –––+30If the company undertakes the proposed recapitalization, and there are corporate taxes, the ROE for each state of the economy is:ROE .0144 .0751 .1054%∆ROE –76.36 –––+38.18Notice that the percentage change in ROE is the same as the percentage change in EPS. The percentage change in ROE is also the same with or without taxes.4. a.Under Plan I, the unlevered company, net income is the same as EBIT with no corporate tax.The EPS under this capitalization will be:EPS = €220,000/150,000 sharesEPS = €1.47Under Plan II, the levered company, EBIT will be reduced by the interest payment. The interest payment is the amount of debt times the interest rate, so:NI = €220,000 – .10(€1,500,000)NI = €70,000CHAPTER 14 B-5 And the EPS will be:EPS = €70,000/60,000 sharesEPS = €1.17Plan I has the higher EPS when EBIT is €220,000.b.Under Plan I, the net income is €650,000 and the EPS is:EPS = €650,000/150,000 sharesEPS = €4.33Under Plan II, the net income is:NI = €650,000 – .10(€1,500,000)NI = €500,000And the EPS is:EPS = €500,000/60,000 sharesEPS = €8.33Plan II has the higher EPS when EBIT is €650,000.c.To find the breakeven EBIT for two different capital structures, we simply set the equations forEPS equal to each other and solve for EBIT. The breakeven EBIT is:EBIT/150,000 = [EBIT – .10(€1,500,000)]/60,000EBIT = €250,0005.We can find the price per share by dividing the amount of debt used to repurchase shares by thenumber of shares repurchased. Doing so, we find the share price is:Share price = €1,500,000/(150,000 – 60,000)Share price = €16.67 per shareThe value of the company under the all-equity plan is:V= €16.67(150,000 shares) = €2,500,000And the value of the company under the levered plan is:V = €16.67(60,000 shares) + €1,500,000 debt = €2,500,000B-6 SOLUTIONS6. a.The income statement for each capitalization plan is:I II All-equityEBIT ฿10,000 ฿10,000 ฿10,000Interest 1,650 2,750 0NI ฿8,350 ฿7,250 ฿10,000EPSPlan II has the highest EPS; the all-equity plan has the lowest EPS.b.The breakeven level of EBIT occurs when the capitalization plans result in the same EPS. TheEPS is calculated as:EPS = (EBIT – R D D)/Shares outstandingThis equation calculates the interest payment (R D D) and subtracts it from the EBIT, which results in the net income. Dividing by the shares outstanding gives us the EPS. For the all-equity capital structure, the interest term is zero. To find the breakeven EBIT for two different capital structures, we simply set the equations equal to each other and solve for EBIT. The breakeven EBIT between the all-equity capital structure and Plan I is:EBIT/1,400 = [EBIT – .10(฿16,500)]/1,100EBIT = ฿7,700And the breakeven EBIT between the all-equity capital structure and Plan II is:EBIT/1,400 = [EBIT – .10(฿27,500)]/900EBIT = ฿7,700The break-even levels of EBIT are the same because of M&M Proposition I.c.Setting the equations for EPS from Plan I and Plan II equal to each other and solving for EBIT,we get:[EBIT – .10(฿16,500)]/1,100 = [EBIT – .10(฿27,500)]/900EBIT = ฿7,700This break-even level of EBIT is the same as in part b again because of M&M Proposition I.CHAPTER 14 B-7d.The income statement for each capitalization plan with corporate income taxes is:I II All-equityEBIT ฿10,000 ฿10,000 ฿10,000Interest 1,650 2,750 0Taxes 3,340 2,900 4,000NI ฿5,010 ฿4,350 ฿6,000EPSPlan II still has the highest EPS; the all-equity plan still has the lowest EPS.We can calculate the EPS as:EPS = [(EBIT – R D D)(1 – t C)]/Shares outstandingThis is similar to the equation we used before, except that now we need to account for taxes.Again, the interest expense term is zero in the all-equity capital structure. So, the breakeven EBIT between the all-equity plan and Plan I is:EBIT(1 – .40)/1,400 = [EBIT – .10(฿16,500)](1 – .40)/1,100EBIT = ฿7,700The breakeven EBIT between the all-equity plan and Plan II is:EBIT(1 – .40)/1,400 = [EBIT – .10(฿27,500)](1 – .40)/900EBIT = ฿7,700And the breakeven between Plan I and Plan II is:[EBIT – .10(฿16,500)](1 –.40)/1,100 = [EBIT – .10(฿27,500)](1 – .40)/900EBIT = ฿7,700The break-even levels of EBIT do not change because the addition of taxes reduces the income of all three plans by the same percentage; therefore, they do not change relative to one another.7.To find the value per share of the stock under each capitalization plan, we can calculate the price asthe value of shares repurchased divided by the number of shares repurchased. So, under Plan I, the value per share is:P = ฿11,000/200 sharesP = ฿55 per shareAnd under Plan II, the value per share is:P = ฿27,500/500 sharesP = ฿55 per shareB-8 SOLUTIONSThis shows that when there are no corporate taxes, the stockholder does not care about the capital structure decision of the firm. This is M&M Proposition I without taxes.CHAPTER 14 B-9 8. a.The earnings per share are:EPS = Rs.16,000/2,000 sharesEPS = Rs.8.00So, the cash flow for the company is:Cash flow = Rs.8.00(100 shares)Cash flow = Rs.800b.To determine the cash flow to the shareholder, we need to determine the EPS of the firm underthe proposed capital structure. The market value of the firm is:V = Rs.70(2,000)V = Rs.140,000Under the proposed capital structure, the firm will raise new debt in the amount of:D = 0.40(Rs.140,000)D = Rs.56,000This means the number of shares repurchased will be:Shares repurchased = Rs.56,000/Rs.70Shares repurchased = 800Under the new capital structure, the company will have to make an interest payment on the new debt. The net income with the interest payment will be:NI = Rs.16,000 – .08(Rs.56,000)NI = Rs.11,520This means the EPS under the new capital structure will be:EPS = Rs.11,520/1,200 sharesEPS = Rs.9.60Since all earnings are paid as dividends, the shareholder will receive:Shareholder cash flow = Rs.9.60(100 shares)Shareholder cash flow = Rs.960c.To replicate the proposed capital structure, the shareholder should sell 40 percent of theirshares, or 40 shares, and lend the proceeds at 8 percent. The shareholder will have an interest cash flow of:Interest cash flow = 40(Rs.70)(.08)Interest cash flow = Rs.224B-10 SOLUTIONSThe shareholder will receive dividend payments on the remaining 60 shares, so the dividends received will be:Dividends received = Rs.9.60(60 shares)Dividends received = Rs.576The total cash flow for the shareholder under these assumptions will be:Total cash flow = Rs.224 + 576Total cash flow = Rs.800This is the same cash flow we calculated in part a.d.The capital structure is irrelevant because shareholders can create their own leverage orunlever the stock to create the payoff they desire, regardless of the capital structure the firm actually chooses.9. a.The rate of return earned will be the dividend yield. The company has debt, so it must makean interest payment. The net income for the company is:NI = $73,000 – .10($300,000)NI = $43,000The investor will receive dividends in pr oportion to the percentage of the company’s share they own. The total dividends received by the shareholder will be:Dividends received = $43,000($30,000/$300,000)Dividends received = $4,300So the return the shareholder expects is:R = $4,300/$30,000R = .1433 or 14.33%b.To generate exactly the same cash flows in the other company, the shareholder needs to matchthe capital structure of ABC. The shareholder should sell all shares in XYZ. This will net $30,000. The shareholder should then borrow $30,000. This will create an interest cash flow of:Interest cash flow = .10($30,000)Interest cash flow = –$3,000The investor should then use the proceeds of the stock sale and the loan to buy shares in ABC.The investor will receive dividends in proportion to the percentage of the company’s share they own. The total dividends received by the shareholder will be:Dividends received = $73,000($60,000/$600,000)Dividends received = $7,300CHAPTER 14 B-11B-12 SOLUTIONSThe total cash flow for the shareholder will be:Total cash flow = $7,300 – 3,000Total cash flow = $4,300The shareholders return in this case will be:R = $4,300/$30,000R = .1433 or 14.33%c.ABC is an all equity company, so:R E= R A = $73,000/$600,000R E= .1217 or 12.17%To find the cost of equity for XYZ, we need to use M&M Proposition II, so:R E = R A + (R A– R D)(D/E)(1 – t C)R E = .1217 + (.1217 – .10)(1)(1)R E = .1433 or 14.33%d.To find the WACC for each company, we need to use the WACC equation:WACC = (E/V)R E + (D/V)R D(1 – t C)So, for ABC, the WACC is:WACC = (1)(.1217) + (0)(.10)WACC = .1217 or 12.17%And for XYZ, the WACC is:WACC = (1/2)(.1433) + (1/2)(.10)WACC = .1217 or 12.17%When there are no corporate taxes, the cost of capital for the firm is unaffected by the capital structure; this is M&M Proposition I without taxes.10.With no taxes, the value of an unlevered firm is the interest rate divided by the unlevered cost ofequity, so:V = EBIT/WACC¥35,000,000 = EBIT/.14EBIT = .14(¥35,000,000)EBIT = ¥4,900,000CHAPTER 14 B-13 11.If there are corporate taxes, the value of an unlevered firm is:V U = EBIT(1 – t C)/R UUsing this relationship, we can find EBIT as:¥35,000,000 = EBIT(1 – .40)/.14EBIT = ¥8,166,667The WACC remains at 14 percent. Due to taxes, EBIT for an all-equity firm would have to be higher for the firm to still be worth ¥35 million.12. a.With the information provided, we can use the equation for calculating WACC to find the costof equity. The equation for WACC is:WACC = (E/V)R E + (D/V)R D(1 – t C)The company has a debt-equity ratio of 1.5, which implies the weight of debt is 1.5/2.5, and the weight of equity is 1/2.5, soWACC = .12 = (1/2.5)R E + (1.5/2.5)(.12)(1 – .35)R E = .1830 or 18.30%b.To find the unlevered cost of equity, we need to use M&M Proposition II with taxes, so:R E = R0 + (R0– R D)(D/E)(1 – t C).1830 = R0 + (R0– .12)(1.5)(1 – .35)R U = .1519 or 15.19%c.To find the cost of equity under different capital structures, we can again use the WACCequation. With a debt-equity ratio of 3, the cost of equity is:.12 = (1/4)R E + (3/4)(.12)(1 – .35)R E = .2460 or 24.60%With a debt-equity ratio of 1.0, the cost of equity is:.12 = (1/2)R E + (1/2)(.12)(1 – .35)R E = .1620 or 16.20%And with a debt-equity ratio of 0, the cost of equity is:.12 = (1)R E + (0)(.12)(1 – .35)R E = WACC = .12 or 12%B-14 SOLUTIONS13.a. For an all-equity financed company:WACC = R U = R E = .12 or 12%b.To find the cost of equity for the company with leverage, we need to use M&M Proposition IIwith taxes, so:R E = R0 + (R0– R D)(D/E)(1 – t C)R E = .12 + (.12 – .08)(.1/.9)(1 – .35)R E = .1243 or 12.43%ing M&M Proposition II with taxes again, we get:R E = R0 + (R0– R D)(D/E)(1 – t C)R E = .12 + (.12 – .08)(.50/.50)(1 – .35)R E = .1460 or 14.60%d.The WACC with 10 percent debt is:WACC = (E/V)R E + (D/V)R D(1 – t C)WACC = .90(.1243) + .10(.08)(1 – .35)WACC = .1171 or 11.71%And the WACC with 50 percent debt is:WACC = (E/V)R E + (D/V)R D(1 – t C)WACC = .50(.1460) + .50(.08)(1 – .35)WACC = .0990 or 9.90%14. a.The value of the unlevered firm is:V = EBIT(1 – t C)/R0V = ₫95,000(1 – .35)/.22V = ₫280,681.82b.The value of the levered firm is:V = V U + t C DV = ₫280,681.82 + .35(₫60,000)V = ₫301,681.82CHAPTER 14 B-15 15.We can find the cost of equity using M&M Proposition II with taxes. Doing so, we find:R E = R0 + (R0– R D)(D/E)(1 – t)R E = .22 + (.22 – .10)(₫60,000/₫241,681.82)(1 – .35)R E = .2394 or 23.94%Using this cost of equity, the WACC for the firm after recapitalization is:WACC = (E/V)R E + (D/V)R D(1 – t C)WACC = .2394(₫241,681.82/₫301,681.82) + .10(1 –.35)(₫60,000/₫301,681.82)WACC = .2047 or 20.47%When there are corporate taxes, the overall cost of capital for the firm declines the more highly leveraged is the firm’s capital structure. This is M&M Proposition I with taxes.16. Since Unlevered is an all-equity firm, its value is equal to the market value of its outstanding shares.Unlevered has 10 million shares of common stock outstanding, worth ¥80 per share. Therefore, the value of Unlevered:V U = 10,000,000(¥80) = ¥800,000,000Modigliani-Miller Proposition I states that, in the absence of taxes, the value of a levered firm equals the value of an otherwise identical unlevered firm. Since Levered is identical to Unlevered in every way except its capital structure and neither firm pays taxes, the value of the two firms should be equal. Therefore, the market value of Levered, Inc., should be ¥800 million also. Since Levered has 4.5 million outstanding shares, worth ¥100 per share, the market value of Levered’s equity is:E L = 4,500,000(¥100) = ¥450,000,000The market value of Levered’s debt is ¥325 million. The value of a levered firm equals the market value of its debt plus the market value of its equity. Therefore, the current market value of Levered, Inc. is:V L = B + SV L = ¥325,000,000 + 450,000,000V L = ¥775,000,000The market value of Levered’s equity needs to be ¥475 million, ¥25 million higher than its current market value of ¥450 million, for MM Proposition I to hold. Since Levered’s market value is less than Unlevered’s market value, Levered is relatively underpriced and an investor should buy shares of the firm’s stock.B-16 SOLUTIONSIntermediate17.To find the value of the levered firm, we first need to find the value of an unlevered firm. So, thevalue of the unlevered firm is:V U = EBIT(1 – t C)/R0V U = (Rs.35,000)(1 – .35)/.14V U = Rs.162,500Now we can find the value of the levered firm as:V L = V U + t C DV L = Rs.162,500 + .40(Rs.70,000)V L = Rs.190,500Applying M&M Proposition I with taxes, the firm has increased its value by issuing debt. As long as M&M Proposition I holds, that is, there are no bankruptcy costs and so forth, then the company should continue to increase its debt/equity ratio to maximize the value of the firm.18.With no debt, we are finding the value of an unlevered firm, so:V = EBIT(1 – t C)/R0V = $9,000(1 – .35)/.18V = $32,500With debt, we simply need to use the equation for the value of a levered firm. With 50 percent debt, one-half of the firm value is debt, so the value of the levered firm is:V= V U + t C DV = $32,500 + .35($32,500/2)V = $38,187.50And with 100 percent debt, the value of the firm is:V= V U + t C DV = $32,500 + .35($32,500)V = $43,875CHAPTER 14 B-17 19.According to M&M Proposition I with taxes, the increase in the value of the company will be thepresent value of the interest tax shield. Since the loan will be repaid in equal installments, we need to find the loan interest and the interest tax shield each year. The loan schedule will be:Year Loan Balance Interest Tax Shield0 元1,000,0001 500,000 元80,000 .35(元80,000) = 元28,0002 0 40,000 .35(元40,000) = 元14,000So, the increase in the value of the company is:Value increase = 元28,000/1.08 + 元14,000/(1.08)2Value increase = 元37,928.6720. a.Since Alpha Corporation is an all-equity firm, its value is equal to the market value of itsoutstanding shares. Alpha has 5,000 shares of common stock outstanding, worth €20 per share, so the value of Alpha Corporation is:V Alpha = 5,000(€20) = €100,000b.Modigliani-Miller Proposition I states that in the absence of taxes, the value of a levered firmequals the value of an otherwise identical unlevered firm. Since Beta Corporation is identical to Alpha Corporation in every way except its capital structure and neither firm pays taxes, the value of the two firms should be equal. So, the value of Beta Corporation is €100,000 as well.c.The value of a levered firm equals the market value of its debt plus the market value of itsequity. So, the value of Beta’s equity is:V L = B + S€100,000 = €25,000 + SS = €75,000d.The investor would need to invest 20 percent of the total market value of Alpha’s equity,which is:Amount to invest in Alpha = .20(€100,000) = €20,000Beta has less equity outstanding, so to purchase 20 percent of Beta’s equity, the investor wou ld need:Amount to invest in Beta = .20(€75,000) = €15,000e.Alpha has no interest payments, so the euro return to an investor who owns 20 percent of thecompany’s equity would be:Euro return on Alpha investment = .20(€35,000) = €7,000B-18 SOLUTIONSCHAPTER 14 B-19 Beta Corporation has an interest payment due on its debt in the amount of:Interest on Beta’s debt = .12(€25,000) = €3,000So, the investor who owns 20 percent of the company would receive 20 percent of EBIT minus the interest expense, or:Euro return on Beta investment = .20(€35,000 – 3,000) = €6,400f.From part d, we know the initial cost of purchasing 20 percent of Alpha Corporation’s equity is€20,000, but the cost to an investor of purchasing 20 percent of Beta Corporation’s equity is only €15,000. In order to purchase €20,000 wor th of Alpha’s equity using only €15,000 of his own money, the investor must borrow €5,000 to cover the difference. The investor will receive the same euro return from the Alpha investment, but will pay interest on the amount borrowed, so the net euro return to the investment is:Net euro return = €7,000 – .12(€5,000) = €6,400Notice that this amount exactly matches the euro return to an investor who purchases 20 percent of Beta’s equity.g.The equity of Beta Corporation is riskier. Beta must pay off its debt holders before its equityholders receive any of the firm’s earnings. If the firm does not do particularly well, all of the firm’s earnings may be needed to repay its debt holders, and equity holders will receive nothing.21. a. A firm’s debt-equity ratio is the market value of the firm’s debt divided by the market value ofa firm’s equity. So, the debt-equity ratio of the company is:Debt-equity ratio = MV of debt / MV of equityDebt-equity ratio = ₦10,000,000 / ₦20,000,000Debt-equity ratio = .50b.We first need to calculate the cost of equity. To do this, we can use the CAPM, which gives us:R S = R F + [E(R M) –R F]R S = .08 + .90(.18 – .08)R S = .1700 or 17.00%In the absence of ta xes, a firm’s weighted average cost of capital is equal to:R WACC = [B / (B + S)]R B + [S / (B + S)]R SR WACC = (₦10,000,000/₦30,000,000)(.14) + (₦20,000,000/₦30,000,000)(.17)R WACC = .16000 or 16.00%B-20 SOLUTIONSc. According to Modigliani-Miller Proposition II with no taxes:R S = R0 + (B/S)(R0–R B).17 = R0 + (.50)(R0– .14)R0 = .1600 or 16.00%This is consistent with Modigliani-Miller’s proposition that, in the absence of taxes, the cost of capital for an all-equity firm is equal to the weighted average cost of capital of an otherwise identical levered firm.22. a.To purchase 5 percent of Knight’s equity, the investor would need:Knight investment = .05(€1,714,000) = €85,700And to purchase 5 percent of Veblen without borrowing would require:Veblen investment = .05(€2,400,000) = €120,000In order to compare euro returns, the initial net cost of both positions should be the same.Therefore, the investor will need to borrow the difference between the two amounts, or:Amount to borrow = €120,000 – 85,700 = €34,300An investor who owns 5 percent of Knight’s equity will be entitled to 5 percent of the firm’s earnings available to common stock holders at the end of each year. While Knight’s expected operating income is €300,000, it must pay €60,000 to debt holders before distributing any of its earnings to stockholders. So, the amount available to this shareholder will be:Cash flow from Knight to shareholder = .05(€300,000 – 60,000) = €12,000Veblen will distribute all of its earnings to shareholders, so the shareholder will receive:Cash flow from Veblen to shareholder = .05(€300,000) = €15,000However, to have the same initial cost, the investor has borrowed €34,300 to invest in Veblen, so interest must be paid on the borrowings. The net cash flow from the investment in Veblen will be:Net cash flow from Veblen investment = €15,000 – .06(€34,300) = €12,942For the same initial cost, the investment in Veblen produces a higher euro return.b.Both of the two strategies have the same initial cost. Since the euro return to the investment inVeblen is higher, all investors will choose to invest in Veblen over Knight. The process of investors purchasing Veblen’s equity rather than Knight’s will cause the market value of Veblen’s equity to rise and the market value of Knight’s equity to fall. Any differences in the euro returns to the two strategies will be eliminated, and the process will cease when the total market values of the two firms are equal.。

第十四章：有效资本市场和行为学挑战1. To create value, firms should accept financing proposals with positive net present values. Firms can create valuable financing opportunities in three ways: 1) Fool investors. A firm can issue a complex security to receive more than the fair market value. Financial managers attempt to package securities to receive the greatest value. 2) Reduce costs or increase subsidies. A firm can package securities to reduce taxes. Such a security will increase the value of the firm. In addition, financing techniques involve many costs, such as accountants, lawyers, and investment bankers. Packaging securities in a way to reduce these costs will also increase the value of the firm. 3) Create a new security. A previously unsatisfied investor may pay extra for a specialized security catering to his or her needs. Corporations gain from developing unique securities by issuing these securities at premium prices.2. The three forms of the efficient markets hypothesis are: 1) Weak form. Market prices reflect information contained in historical prices. Investors are unable to earn abnormal returns using historical prices to predict future price movements. 2) Semi-strong form. In addition to historical data, market prices reflect all publicly-available information. Investors with insider, or private information, are able to earn abnormal returns. 3) Strong form. Market prices reflect all information, public or private. Investors are unable to earn abnormal returns using insider information or historical prices to predict future price movements.3. a. False. Market efficiency implies that prices reflect all available information, but it does not imply certain knowledge. Many pieces of information that are available and reflected in prices are fairly uncertain. Efficiency of markets does not eliminate that uncertainty and therefore does not imply perfect forecasting ability.b. True. Market efficiency exists when prices reflect all available information. To be efficient in the weak form, the market must incorporate all historical data into prices. Under thesemi-strong form of the hypothesis, the market incorporates all publicly-available information in addition to the historical data. In strong form efficient markets, prices reflect all publicly and privately available information.c. False. Market efficiency implies that market participants are rational. Rational people will immediately act upon new information and will bid prices up or down to reflect that information.d. False. In efficient markets, prices reflect all available information. Thus, prices will fluctuate whenever new information becomes available.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 is the required return—investors buy assets with returns in excess of the required return (positive NPV), bidding up the price and thus causing the return to fall to the required return (zero NPV); investors sell assets with returns less than the required return (negative NPV), driving the price lower and thus causing the return to rise to the required return (zero NPV).5. The market is not weak form efficient.6. Yes, historical information is also public information; weak form efficiency is a subset of semi-strong form efficiency.7. Ignoring trading costs, on average, such investors merely earn what the market offers; thetrades all have zero NPV. If trading costs exist, then these investors lose by the amount of the costs.8. Unlike gambling, the stock market is a positive sum game; everybody can win. Also, speculators provide liquidity to markets and thus help to promote efficiency.9. The EMH only says, within the bounds of increasingly strong assumptions about the information processing of investors, that assets are fairly priced. An implication of this is that, on average, the typical market participant cannot earn excessive profits from a particular trading strategy. However, that does not mean that a few particular investors cannot outperform the market over a particular investment horizon. Certain investors who do well for a period of time get a lot of attention from the financial press, but the scores of investors who do not do well over the same period of time generally get considerably less attention from the financial press.10. a. If the market is not weak form efficient, then this information could be acted on and a profit earned from following the price trend. Under (2), (3), and (4), this information is fully impounded in the current price and no abnormal profit opportunity exists.b. Under (2), if the market is not semi-strong form efficient, then this information could be used to buy the stock ―cheap‖before the rest of the market discovers the financial statement anomaly. Since (2) is stronger than (1), both imply that a profit opportunity exists; under (3) and (4), this information is fully impounded in the current price and no profit opportunity exists.c. Under (3), if the market is not strong form efficient, then this information could be used as a profitable trading strategy, by noting the buying activity of the insiders as a signal that the stock is underpriced or that good news is imminent. Since (1) and (2) are weaker than (3), all three imply that a profit opportunity exists. Note that this assumes the individual who sees the insider trading is the only one who sees the trading. If the information about the trades made by company management is public information, it will be discounted in the stock price and no profit opportunity exists. Under (4), this information does not signal any profit opportunity for traders; any pertinent information the manager-insiders may have is fully reflected in the current share price.11. A technical analyst would argue that the market is not efficient. Since a technical analyst examines past prices, the market cannot be weak form efficient for technical analysis to work. If the market is not weak form efficient, it cannot be efficient under stronger assumptions about the information available.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 positive signal to the market. To use investor sentiment in technical analysis, you would probably want to construct a ratio such as a bulls/bears ratio. To use the ratio, simply compare the historical ratio to the market to determine if a certain level on the ratio indicates a market upturn or downturn. Of course, there is a group of investors called contrarians who view the market signals as reversed. That is, if the number of bearish investors reaches a certain level, the market will head up. For a contrarian, these signals are reversed.13. Taken at face value, this fact suggests that markets have become more efficient. The increasing ease with which information is available over the Internet lends strength to thisconclusion. On the other hand, during this particular period, large-capitalization growth stocks were the top performers. Value-weighted indexes such as the S&P 500 are naturally concentrated in such stocks, thus making them especially hard to beat during this period. So, it may be that the dismal record compiled by the pros is just a matter of bad luck or benchmark error.14. It is likely the market has a better estimate of the stock price, assuming it is semistrong form efficient. However, semistrong form efficiency only states that you cannot easily profit from publicly available information. If financial statements are not available, the market can still price stocks based upon the available public information, limited though it may be. Therefore, it may have been as difficult to examine the limited public information and make an extra return.15. a. Aerotech‘s stock price should rise immediately after the announcement of the positive news.b. Only scenario (ii) indicates market efficiency. In that case, the price of the stock rises immediately to the level that reflects the new information, eliminating all possibility of abnormal returns. In the other two scenarios, there are periods of time during which an investor could trade on the information and earn abnormal returns.16. False. The stock price would have adjusted before the founder‘s death only if investors had perfect forecasting ability. The 12.5 percent increase in the stock price aft er the founder‘s death indicates that either the market did not anticipate the death or that the market had anticipated it imperfectly. However, the market reacted immediately to the new information, implying efficiency. It is interesting that the stock price rose after the announcement of the founder‘s death. This price behavior indicates that the market felt he was a liability to the firm.17. The announcement should not deter investors from buying UPC‘s stock. If the market is semi-strong form efficient, the stock price will have already reflected the present value of the payments that UPC must make. The expected return after the announcement should still be equal to the expected return before the announcement. UPC‘s current stockholders bear the burden of the loss, since the stock price falls on the announcement. After the announcement, the expected return moves back to its original level.18. The market is often considered to be relatively efficient up to the semi-strong form. If so, no systematic profit can be made by trading on publicly-available information. Although illegal, the lead engineer of the device can profit from purchasing the firm‘s stock before the news release on the implementation of the new technology. The price should immediately and fully adjust to the new information in the article. Thus, no abnormal return can be expected from purchasing after the publication of the article.19. Under the semi-strong 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 firm‘s current or its future cash flows. Thus, the stock price will not change after the announcement of increased earnings.20. Because the number of subscribers has increased dramatically, the time it takes for information in the newsletter to be reflected in prices has shortened. With shorter adjustment periods, it becomes impossible to earn abnormal returns with the information provided by Durkin. If Durkin is using only publicly-available information in its newsletter, its ability topick stocks is inconsistent with the efficient markets hypothesis. Under the semi-strong form of market efficiency, all publicly-available information should be reflected in stock prices. The use of private information for trading purposes is illegal.21. You should not agree with your broker. The performance ratings of the small manufacturing firms were published and became public information. Prices should adjust immediately to the information, thus preventing future abnormal returns.22. Stock prices should immediately and fully rise to reflect the announcement. Thus, one cannot expect abnormal returns following the announcement.23. a. No. Earnings information is in the public domain and reflected in the current stock price.b. Possibly. If the rumors were publicly disseminated, the prices would have already adjusted for the possibility of a merger. If the rumor is information that you received from an insider, you could earn excess returns, although trading on that information is illegal.c. No. The information is already public, and thus, already reflected in the stock price.24. Serial correlation occurs when the current value of a variable is related to the future value of the variable. If the market is efficient, the information about the serial correlation in the macroeconomic variable and its relationship to net earnings should already be reflected in the stock price. In other words, although there is serial correlation in the variable, there will not be serial correlation in stock returns. Therefore, knowledge of the correlation in the macroeconomic variable will not lead to abnormal returns for investors.25. The statement is false because every investor has a different risk preference. Although the expected return from every well-diversified portfolio is the same after adjusting for risk, investors still need to choose funds that are consistent with their particular risk level.26. The share price will decrease immediately to reflect the new information. At the time of the announcement, the price of the stock should immediately decrease to reflect the negative information.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 there will be a discovery on any given day. If there is no discovery on a particular day, the price should fall slightly because the good event did not occur. The substantial price increases on the rare days of discovery should balance the small declines on the other days, leaving CARs that are horizontal over time.28. Behavioral finance attempts to explain both the 1987 stock market crash and the Internet bubble by changes in investor sentiment and psychology. These changes can lead to non-random price behavior.。

会计专业公司理财英文版The accounting profession is essential for effective financial management within a company. Accountants play a crucial role in recording, analyzing, and interpreting financial information to guide business decisions. In the context of a company, the accounting profession encompasses various aspects such as financial reporting, internal controls, tax compliance, and auditing.Financial management in a company involves thestrategic planning and monitoring of financial resources to achieve organizational objectives. This includes budgeting, investment analysis, risk management, and financial forecasting. Effective financial management ensures the company's long-term sustainability and growth.In the international business environment, the accounting profession and company financial management are often referred to as "Accounting and Corporate Finance." This term encompasses the broader scope of financialactivities within a company, including accounting principles, financial analysis, investment strategies, and capital budgeting.The accounting profession and company financial management are crucial for maintaining transparency, accountability, and compliance with regulatory requirements. It also provides stakeholders, such as investors, creditors, and government agencies, with the necessary information to make informed decisions and assess the company's financial health.In summary, the accounting profession and company financial management are integral components of a company's operations, ensuring the accurate recording of financial transactions, sound financial decision-making, and compliance with relevant laws and regulations.。

公司理财英文版Company Financial ManagementIntroductionFinancial management is a critical aspect of running a successful business. It involves planning, organizing, controlling, and monitoring the company's financial resources to achieve its objectives. Effective financial management ensures that the company has sufficient funds, optimal utilization of resources, and profitability. This article provides an overview of the key components of company financial management, including financial planning, budgeting, forecasting, cash flow management, and risk management.Financial PlanningFinancial planning is the foundation of effective financial management. It involves assessing the company's current financial position, setting financial objectives, and developing strategies to achieve those objectives. The financial planning process includes analyzing the company's revenue and expenses, cash flow, assets and liabilities, and financial ratios. This analysis helps identify areas of improvement and opportunities for growth.One of the key aspects of financial planning is setting realistic and achievable financial goals. These goals can be short-term or long-term and should align with the company's overall business objectives. Financial goals may include increasing revenue, reducing expenses, improving profitability, or expanding into newmarkets. Setting specific, measurable, attainable, relevant, and time-bound (SMART) goals enhances the effectiveness of financial planning.BudgetingBudgeting is an integral part of financial management as it helps allocate financial resources effectively. A budget is a comprehensive plan that outlines the company's expected revenue and expenses for a specific period, typically a year. It serves as a roadmap for financial decision-making and helps control spending, ensure profitability, and allocate resources efficiently.The budgeting process involves gathering relevant financial data, estimating revenue and expenses, and projecting cash flows. The budget should be realistic, achievable, and aligned with the company's financial goals. It should also be flexible enough to adapt to changing circumstances and market conditions. Regular monitoring and review of the budget help identify variances and take corrective actions if necessary.ForecastingForecasting is an essential component of financial management as it helps anticipate future financial trends and outcomes. It involves analyzing historical data, market trends, and economic indicators to predict the company's financial performance. Forecasting enables companies to make informed decisions, identify potential risks and opportunities, and develop strategies to mitigate risks and exploit opportunities.Cash Flow ManagementCash flow management is crucial for the financial stability and success of a company. It involves monitoring and controlling the company's cash inflows and outflows to ensure sufficient liquidity and meet financial obligations. Effective cash flow management minimizes the risk of cash shortages, improves financial flexibility, and enhances the company's ability to invest in growth opportunities.To manage cash flow effectively, companies need to accurately forecast cash inflows from sales, investments, and financing activities. They also need to monitor and control cash outflows, including payments to suppliers, employee salaries, and loan repayments. Efficient working capital management, such as optimizing inventory levels and extending payment terms with suppliers, can help improve cash flow.Risk ManagementRisk management is an integral part of company financial management. It involves identifying, assessing, and mitigating financial risks that may impact the company's financial stability and performance. Some common financial risks include market risks, credit risks, liquidity risks, and operational risks.To manage financial risks effectively, companies need to develop robust risk management strategies and processes. This includes diversifying investments, hedging against currency or interest ratefluctuations, implementing internal controls and governance structures, and having effective insurance coverage. Regular monitoring and review of risk management strategies help ensure their effectiveness and relevance in the changing business environment.ConclusionEffective financial management is crucial for the success of any company. It involves planning, budgeting, forecasting, cash flow management, and risk management. Financial planning helps set realistic and achievable financial goals, while budgeting allocates financial resources effectively. Forecasting helps anticipate future financial trends and outcomes, and cash flow management ensures sufficient liquidity. Lastly, risk management mitigates financial risks that may impact the company's financial stability and performance. By implementing sound financial management practices, companies can improve profitability, maximize shareholder value, and achieve long-term sustainability.。

Chapter 2: Accounting Statements and Cash Flow2.10AssetsCurrent assetsCash $ 4,000Accounts receivable 8,000Total current assets $ 12,000Fixed assetsMachinery $ 34,000Patents 82,000Total fixed assets $116,000Total assets $128,000Liabilities and equityCurrent liabilitiesAccounts payable $ 6,000Taxes payable 2,000Total current liabilities $ 8,000Long-term liabilitiesBonds payable $7,000Stockholders equityCommon stock ($100 par) $ 88,000Capital surplus 19,000Retained earnings 6,000Total stockholders equity $113,000Total liabilities and equity $128,0002.11One year ago TodayLong-term debt $50,000,000 $50,000,000Preferred stock 30,000,000 30,000,000Common stock 100,000,000 110,000,000Retained earnings 20,000,000 22,000,000Total $200,000,000 $212,000,0002.12Total Cash Flow ofthe Stancil CompanyCash flows from the firmCapital spending $(1,000)Additions to working capital (4,000)Total $(5,000)Cash flows to investors of the firmShort-term debt $(6,000)Long-term debt (20,000)Equity (Dividend - Financing) 21,000Total $(5,000)[Note: This table isn’t the Statement of Cash Flows, which is only covered in Appendix 2B, since the latter has th e change in cash (on the balance sheet) as a final entry.]2.13 a. The changes in net working capital can be computed from:Sources of net working capitalNet income $100Depreciation 50Increases in long-term debt 75Total sources $225Uses of net working capitalDividends $50Increases in fixed assets* 150Total uses $200Additions to net working capital $25*Includes $50 of depreciation.b.Cash flow from the firmOperating cash flow $150Capital spending (150)Additions to net working capital (25)Total $(25)Cash flow to the investorsDebt $(75)Equity 50Total $(25)Chapter 3: Financial Markets and Net Present Value: First Principles of Finance (Advanced)3.14 $120,000 - ($150,000 - $100,000) (1.1) = $65,0003.15 $40,000 + ($50,000 - $20,000) (1.12) = $73,6003.16 a. ($7 million + $3 million) (1.10) = $11.0 millionb.i. They could spend $10 million by borrowing $5 million today.ii. They will have to spend $5.5 million [= $11 million - ($5 million x 1.1)] at t=1.Chapter 4: Net Present Valuea. $1,000 ⨯ 1.0510 = $1,628.89b. $1,000 ⨯ 1.0710 = $1,967.15c. $1,000 ⨯ 1.0520 = $2,653.30d. Interest compounds on the interest already earned. Therefore, the interest earned inSince this bond has no interim coupon payments, its present value is simply the present value of the $1,000 that will be received in 25 years. Note: As will be discussed in the next chapter, the present value of the payments associated with a bond is the price of that bond.PV = $1,000 /1.125 = $92.30PV = $1,500,000 / 1.0827 = $187,780.23a. At a discount rate of zero, the future value and present value are always the same. Remember, FV =PV (1 + r) t. If r = 0, then the formula reduces to FV = PV. Therefore, the values of the options are $10,000 and $20,000, respectively. You should choose the second option.b. Option one: $10,000 / 1.1 = $9,090.91Option two: $20,000 / 1.15 = $12,418.43Choose the second option.c. Option one: $10,000 / 1.2 = $8,333.33Option two: $20,000 / 1.25 = $8,037.55Choose the first option.d. You are indifferent at the rate that equates the PVs of the two alternatives. You know that rate mustfall between 10% and 20% because the option you would choose differs at these rates. Let r be thediscount rate that makes you indifferent between the options.$10,000 / (1 + r) = $20,000 / (1 + r)5(1 + r)4 = $20,000 / $10,000 = 21 + r = 1.18921r = 0.18921 = 18.921%The $1,000 that you place in the account at the end of the first year will earn interest for six years. The $1,000 that you place in the account at the end of the second year will earn interest for five years, etc. Thus, the account will have a balance of$1,000 (1.12)6 + $1,000 (1.12)5 + $1,000 (1.12)4 + $1,000 (1.12)3= $6,714.61PV = $5,000,000 / 1.1210 = $1,609,866.18a. $1.000 (1.08)3 = $1,259.71b. $1,000 [1 + (0.08 / 2)]2 ⨯ 3 = $1,000 (1.04)6 = $1,265.32c. $1,000 [1 + (0.08 / 12)]12 ⨯ 3 = $1,000 (1.00667)36 = $1,270.24d. $1,000 e0.08 ⨯ 3 = $1,271.25e. The future value increases because of the compounding. The account is earning interest on interest. Essentially, the interest is added to the account balance at the e nd of every compounding period. During the next period, the account earns interest on the new balance. When the compounding period shortens, the balance that earns interest is rising faster.The price of the consol bond is the present value of the coupon payments. Apply the perpetuity formula to find the present value. PV = $120 / 0.15 = $800a. $1,000 / 0.1 = $10,000b. $500 / 0.1 = $5,000 is the value one year from now of the perpetual stream. Thus, the value of theperpetuity is $5,000 / 1.1 = $4,545.45.c. $2,420 / 0.1 = $24,200 is the value two years from now of the perpetual stream. Thus, the value of the perpetuity is $24,200 / 1.12 = $20,000.pply the NPV technique. Since the inflows are an annuity you can use the present value of an annuity factor.ANPV = -$6,200 + $1,200 81.0= -$6,200 + $1,200 (5.3349)= $201.88Yes, you should buy the asset.Use an annuity factor to compute the value two years from today of the twenty payments. Remember, the annuity formula gives you the value of the stream one year before the first payment. Hence, the annuity factor will give you the value at the end of year two of the stream of payments.A= $2,000 (9.8181)Value at the end of year two = $2,000 20.008= $19,636.20The present value is simply that amount discounted back two years.PV = $19,636.20 / 1.082 = $16,834.88The easiest way to do this problem is to use the annuity factor. The annuity factor must be equal to $12,800 / $2,000 = 6.4; remember PV =C A T r. The annuity factors are in the appendix to the text. To use the factor table to solve this problem, scan across the row labeled 10 years until you find 6.4. It is close to the factor for 9%, 6.4177. Thus, the rate you will receive on this note is slightly more than 9%.You can find a more precise answer by interpolating between nine and ten percent.[ 10% ⎤[6.1446 ⎤a ⎡r ⎥bc ⎡6.4 ⎪ d⎣9%⎦⎣6.4177 ⎦By interpolating, you are presuming that the ratio of a to b is equal to the ratio of c to d.(9 - r ) / (9 - 10) = (6.4177 - 6.4 ) / (6.4177 - 6.1446)r = 9.0648%The exact value could be obtained by solving the annuity formula for the interest rate. Sophisticated calculators can compute the rate directly as 9.0626%.[Note: A standard financial calculator’s TVM keys can solve for this rate. With annuity flows, the IRR key on “advanced” financial c alculators is unnecessary.]a. The annuity amount can be computed by first calculating the PV of the $25,000 which youThat amount is $17,824.65 [= $25,000 / 1.075]. Next compute the annuity which has the same present value.A$17,824.65 = C 507.0$17,824.65 = C (4.1002)C = $4,347.26Thus, putting $4,347.26 into the 7% account each year will provide $25,000 five years from today.b. The lump sum payment must be the present value of the $25,000, i.e., $25,000 / 1.075 =$17,824.65The formula for future value of any annuity can be used to solve the problem (see footnote 11 of the text).Option one: This cash flow is an annuity due. To value it, you must use the after-tax amounts. Theafter-tax payment is $160,000 (1 - 0.28) = $115,200. Value all except the first payment using the standard annuity formula, then add back the first payment of $115,200 to obtain the value of this option.AValue = $115,200 + $115,200 30.010= $115,200 + $115,200 (9.4269)= $1,201,178.88Option two: This option is valued similarly. You are able to have $446,000 now; this is already on an after-tax basis. You will receive an annuity of $101,055 for each of the next thirty years. Those payments are taxable when you receive them, so your after-tax payment is $72,759.60 [= $101,055 (1 - 0.28)].AValue = $446,000 + $72,759.60 30.010= $446,000 + $72,759.60 (9.4269)= $1,131,897.47Since option one has a higher PV, you should choose it.et r be the rate of interest you must earn.$10,000(1 + r)12 = $80,000(1 + r)12= 8r = 0.18921 = 18.921%First compute the present value of all the payments you must make for your children’s educati on. The value as of one year before matriculation of one child’s education isA= $21,000 (2.8550) = $59,955.$21,000 415.0This is the value of the elder child’s education fourteen years from now. It is the value of the younger child’s education sixteen years from today. The present value of these isPV = $59,955 / 1.1514 + $59,955 / 1.1516= $14,880.44You want to make fifteen equal payments into an account that yields 15% so that the present value of the equal payments is $14,880.44.A= $14,880.44 / 5.8474 = $2,544.80Payment = $14,880.44 / 15.015This problem applies the growing annuity formula. The first payment is$50,000(1.04)2(0.02) = $1,081.60.PV = $1,081.60 [1 / (0.08 - 0.04) - {1 / (0.08 - 0.04)}{1.04 / 1.08}40]= $21,064.28This is the present value of the payments, so the value forty years from today is$21,064.28 (1.0840) = $457,611.46se the discount factors to discount the individual cash flows. Then compute the NPV of the project. NoticeYou can still use the factor tables to compute their PV. Essentially, they form cash flows that are a six year annuity less a two year annuity. Thus, the appropriate annuity factor to use with them is 2.6198 (= 4.3553 - 1.7355).Year Cash Flow Factor PV0.9091 $636.371$70020.8264 743.769003 1,000 ⎤4 1,000 ⎥ 2.6198 2,619.805 1,000 ⎥6 1,000 ⎦7 1,250 0.5132 641.508 1,375 0.4665 641.44Total $5,282.87NPV = -$5,000 + $5,282.87= $282.87Purchase the machine.Chapter 5: How to Value Bonds and StocksThe amount of the semi-annual interest payment is $40 (=$1,000 ⨯ 0.08 / 2). There are a total of 40 periods;i.e., two half years in each of the twenty years in the term to maturity. The annuity factor tables can be usedto price these bonds. The appropriate discount rate to use is the semi-annual rate. That rate is simply the annual rate divided by two. Thus, for part b the rate to be used is 5% and for part c is it 3%.A+F/(1+r)40PV=C Tra. $40 (19.7928) + $1,000 / 1.0440 = $1,000Notice that whenever the coupon rate and the market rate are the same, the bond is priced at par.b. $40 (17.1591) + $1,000 / 1.0540 = $828.41Notice that whenever the coupon rate is below the market rate, the bond is priced below par.c. $40 (23.1148) + $1,000 / 1.0340 = $1,231.15Notice that whenever the coupon rate is above the market rate, the bond is priced above par.a. The semi-annual interest rate is $60 / $1,000 = 0.06. Thus, the effective annual rate is 1.062 - 1 =0.1236 = 12.36%.A+ $1,000 / 1.0612b. Price = $30 12.006= $748.48A+ $1,000 / 1.0412c. Price = $30 1204.0= $906.15Note: In parts b and c we are implicitly assuming that the yield curve is flat. That is, the yield in year 5applies for year 6 as well.rice = $2 (0.72) / 1.15 + $4 (0.72) / 1.152 + $50 / 1.153= $36.31The number of shares you own = $100,000 / $36.31 = 2,754 sharesPrice = $1.15 (1.18) / 1.12 + $1.15 (1.182) / 1.122 + $1.152 (1.182) / 1.123+ {$1.152 (1.182)(1.06) / (0.12 - 0.06)} / 1.123= $26.95[Insert before last sentence of question: Assume that dividends are a fixed proportion of earnings.] Dividend one year from now = $5 (1 - 0.10) = $4.50Price = $5 + $4.50 / {0.14 - (-0.10)}= $23.75Since the current $5 dividend has not yet been paid, it is still included in the stock price.Chapter 6: Some Alternative Investment Rulesa. Payback period of Project A = 1 + ($7,500 - $4,000) / $3,500 = 2 yearsPayback period of Project B = 2 + ($5,000 - $2,500 -$1,200) / $3,000 = 2.43 yearsProject A should be chosen.b. NPV A = -$7,500 + $4,000 / 1.15 + $3,500 / 1.152 + $1,500 / 1.153 = -$388.96NPV B = -$5,000 + $2,500 / 1.15 + $1,200 / 1.152 + $3,000 / 1.153 = $53.83Project B should be chosen.a. Average Investment:($16,000 + $12,000 + $8,000 + $4,000 + 0) / 5 = $8,000Average accounting return:$4,500 / $8,000 = 0.5625 = 56.25%b. 1. AAR does not consider the timing of the cash flows, hence it does not consider the timevalue of money.2. AAR uses an arbitrary firm standard as the decision rule.3. AAR uses accounting data rather than net cash flows.aAverage Investment = (8000 + 4000 + 1500 + 0)/4 = 3375.00Average Net Income = 2000(1-0.75) = 1500=> AAR = 1500/3375=44.44%a. Solve x by trial and error:-$8,000 + $4,000 / (1 + x) + $3000 / (1 + x)2 + $2,000 / (1 + x)3 = 0x = 6.93%b. No, since the IRR (6.93%) is less than the discount rate of 8%.Alternatively, the NPV @ a discount rate of 0.08 = -$136.62.a. Solve r in the equation:$5,000 - $2,500 / (1 + r) - $2,000 / (1 + r)2 - $1,000 / (1 + r)3- $1,000 / (1 + r)4 = 0By trial and error,IRR = r = 13.99%b. Since this problem is the case of financing, accept the project if the IRR is less than the required rate of return.IRR = 13.99% > 10%Reject the offer.c. IRR = 13.99% < 20%Accept the offer.d. When r = 10%:NPV = $5,000 - $2,500 / 1.1 - $2,000 / 1.12 - $1,000 / 1.13 - $1,000 / 1.14When r = 20%:NPV = $5,000 - $2,500 / 1.2 - $2,000 / 1.22 - $1,000 / 1.23 - $1,000 / 1.24= $466.82Yes, they are consistent with the choices of the IRR rule since the signs of the cash flows change only once.A/ $160,000 = 1.04PI = $40,000 715.0Since the PI exceeds one accept the project.Chapter 7: Net Present Value and Capital BudgetingSince there is uncertainty surrounding the bonus payments, which McRae might receive, you must use the expected value of McRae’s bonuses in the computation of the PV of his contract. McRae’s salary plus the expected value of his bonuses in years one through three is$250,000 + 0.6 ⨯ $75,000 + 0.4 ⨯ $0 = $295,000.Thus the total PV of his three-year contract isPV = $400,000 + $295,000 [(1 - 1 / 1.12363) / 0.1236]+ {$125,000 / 1.12363} [(1 - 1 / 1.123610 / 0.1236]= $1,594,825.68EPS = $800,000 / 200,000 = $4NPVGO = (-$400,000 + $1,000,000) / 200,000 = $3Price = EPS / r + NPVGO= $4 / 0.12 + $3=$36.33Year 0 Year 1 Year 2 Year 3 Year 4 Year 51. Annual Salary$120,000 $120,000 $120,000 $120,000 $120,000 Savings2. Depreciation 100,000 160,000 96,000 57,600 57,6003. Taxable Income 20,000 -40,000 24,000 62,400 62,4004. Taxes 6,800 -13,600 8,160 21,216 21,2165. Operating Cash Flow113,200 133,600 111,840 98,784 98,784 (line 1-4)$100,000 -100,0006. ∆ Net workingcapital7. Investment $500,000 75,792*8. Total Cash Flow -$400,000 $113,200 $133,600 $111,840 $98,784 $74,576*75,792 = $100,000 - 0.34 ($100,000 - $28,800)NPV = -$400,000+ $113,200 / 1.12 + $133,600 / 1.122 + $111,840 / 1.123+ $98,784 / 1.124 + $74,576 / 1.125= -$7,722.52Real interest rate = (1.15 / 1.04) - 1 = 10.58%NPV A = -$40,000+ $20,000 / 1.1058 + $15,000 / 1.10582 + $15,000 / 1.10583= $1,446.76NPV B = -$50,000+ $10,000 / 1.15 + $20,000 / 1.152 + $40,000 / 1.153= $119.17Choose project A.PV = $120,000 / {0.11 - (-0.06)}t = 0 t = 1 t = 2 t = 3 t = 4 t = 5 t = 6 ...$12,000 $6,000 $6,000 $6,000$4,000$12,000 $6,000 $6,000 ...The present value of one cycle is:A+ $4,000 / 1.064PV = $12,000 + $6,000 306.0= $12,000 + $6,000 (2.6730) + $4,000 / 1.064= $31,206.37The cycle is four years long, so use a four year annuity factor to compute the equivalent annual cost (EAC).AEAC = $31,206.37 / 406.0= $31,206.37 / 3.4651= $9,006The present value of such a stream in perpetuity is$9,006 / 0.06 = $150,100o evaluate the word processors, compute their equivalent annual costs (EAC).BangAPV(costs) = (10 ⨯ $8,000) + (10 ⨯ $2,000) 414.0= $80,000 + $20,000 (2.9137)= $138,274EAC = $138,274 / 2.9137= $47,456IOUAPV(costs) = (11 ⨯ $5,000) + (11 ⨯ $2,500) 3.014- (11 ⨯ $500) / 1.143= $55,000 + $27,500 (2.3216) - $5,500 / 1.143= $115,132EAC = $115,132 / 2.3216= $49,592BYO should purchase the Bang word processors.Chapter 8: Strategy and Analysis in Using Net Present ValueThe accounting break-even= (120,000 + 20,000) / (1,500 - 1,100)= 350 units. The accounting break-even= 340,000 / (2.00 - 0.72)= 265,625 abalonesb. [($2.00 ⨯ 300,000) - (340,000 + 0.72 ⨯ 300,000)] (0.65)= $28,600This is the after tax profit.Chapter 9: Capital Market Theory: An Overviewa. Capital gains = $38 - $37 = $1 per shareb. Total dollar returns = Dividends + Capital Gains = $1,000 + ($1*500) = $1,500 On a per share basis, this calculation is $2 + $1 = $3 per sharec. On a per share basis, $3/$37 = 0.0811 = 8.11% On a total dollar basis, $1,500/(500*$37) = 0.0811 = 8.11%d. No, you do not need to sell the shares to include the capital gains in the computation of the returns. The capital gain is included whether or not you realize the gain. Since you could realize the gain if you choose, you should include it.The expected holding period return is:()[]%865.1515865.052$/52$75.54$50.5$==-+There appears to be a lack of clarity about the meaning of holding period returns. The method used in the answer to this question is the one used in Section 9.1. However, the correspondence is not exact, because in this question, unlike Section 9.1, there are cash flows within the holding period. The answer above ignores the dividend paid in the first year. Although the answer above technically conforms to the eqn at the bottom of Fig. 9.2, the presence of intermediate cash flows that aren’t accounted for renders th is measure questionable, at best. There is no similar example in the body of the text, and I have never seen holding period returns calculated in this way before.Although not discussed in this book, there are two generally accepted methods of computing holding period returns in the presence of intermediate cash flows. First, the time weighted return calculates averages (geometric or arithmetic) of returns between cash flows. Unfortunately, that method can’t be used here, because we are not given the va lue of the stock at the end of year one. Second, the dollar weighted measure calculates the internal rate of return over the entire holding period. Theoretically, that method can be applied here, as follows: 0 = -52 + 5.50/(1+r) + 60.25/(1+r)2 => r = 0.1306.This produces a two year holding period return of (1.1306)2 – 1 = 0.2782. Unfortunately, this book does not teach the dollar weighted method.In order to salvage this question in a financially meaningful way, you would need the value of the stock at the end of one year. Then an illustration of the correct use of the time-weighted return would be appropriate. A complicating factor is that, while Section 9.2 illustrates the holding period return using the geometric return for historical data, the arithmetic return is more appropriate for expected future returns.E(R) = T-Bill rate + Average Excess Return = 6.2% + (13.0% -3.8%) = 15.4%. Common Treasury Realized Stocks Bills Risk Premium -7 32.4% 11.2% 21.2%-6 -4.9 14.7 -19.6-5 21.4 10.5 10.9 -4 22.5 8.8 13.7 -3 6.3 9.9 -3.6 -2 32.2 7.7 24.5 Last 18.5 6.2 12.3 b. The average risk premium is 8.49%.49.873.125.246.37.139.106.192.21=++-++- c. Yes, it is possible for the observed risk premium to be negative. This can happen in any single year. The.b.Standard deviation = 03311.0001096.0=.b.Standard deviation = = 0.03137 = 3.137%.b.Chapter 10: Return and Risk: The Capital-Asset-Pricing Model (CAPM)a. = 0.1 (– 4.5%) + 0.2 (4.4%) + 0.5 (12.0%) + 0.2 (20.7%) = 10.57%b.σ2 = 0.1 (–0.045 – 0.1057)2 + 0.2 (0.044 – 0.1057)2 + 0.5 (0.12 – 0.1057)2+ 0.2 (0.207 – 0.1057)2 = 0.0052σ = (0.0052)1/2 = 0.072 = 7.20%Holdings of Atlas stock = 120 ⨯ $50 = $6,000 ⨯ $20 = $3,000Weight of Atlas stock = $6,000 / $9,000 = 2 / 3Weight of Babcock stock = $3,000 / $9,000 = 1 / 3a. = 0.3 (0.12) + 0.7 (0.18) = 0.162 = 16.2%σP 2= 0.32 (0.09)2 + 0.72 (0.25)2 + 2 (0.3) (0.7) (0.09) (0.25) (0.2)= 0.033244σP= (0.033244)1/2 = 0.1823 = 18.23%a.State Return on A Return on B Probability1 15% 35% 0.4 ⨯ 0.5 = 0.22 15% -5% 0.4 ⨯ 0.5 = 0.23 10% 35% 0.6 ⨯ 0.5 = 0.34 10% -5% 0.6 ⨯ 0.5 = 0.3b. = 0.2 [0.5 (0.15) + 0.5 (0.35)] + 0.2[0.5 (0.15) + 0.5 (-0.05)]+ 0.3 [0.5 (0.10) + 0.5 (0.35)] + 0.3 [0.5 (0.10) + 0.5 (-0.05)]= 0.135= 13.5%Note: The solution to this problem requires calculus.Specifically, the solution is found by minimizing a function subject to a constraint. Calculus ability is not necessary to understand the principles behind a minimum variance portfolio.Min { X A2 σA2 + X B2σB2+ 2 X A X B Cov(R A , R B)}subject to X A + X B = 1Let X A = 1 - X B. Then,Min {(1 - X B)2σA2 + X B2σB2+ 2(1 - X B) X B Cov (R A, R B)}Take a derivative with respect to X B.d{∙} / dX B = (2 X B - 2) σA2+ 2 X B σB2 + 2 Cov(R A, R B) - 4 X B Cov(R A, R B)Set the derivative equal to zero, cancel the common 2 and solve for X B.X BσA2- σA2+ X B σB2 + Cov(R A, R B) - 2 X B Cov(R A, R B) = 0X B = {σA2 - Cov(R A, R B)} / {σA2+ σB2 - 2 Cov(R A, R B)}andX A = {σB2 - Cov(R A, R B)} / {σA2+ σB2 - 2 Cov(R A, R B)}Using the data from the problem yields,X A = 0.8125 andX B = 0.1875.a. Using the weights calculated above, the expected return on the minimum variance portfolio isE(R P) = 0.8125 E(R A) + 0.1875 E(R B)= 0.8125 (5%) + 0.1875 (10%)= 5.9375%b. Using the formula derived above, the weights areX A = 2 / 3 andX B = 1 / 3c. The variance of this portfolio is zero.σP 2= X A2 σA2 + X B2σB2+ 2 X A X B Cov(R A , R B)= (4 / 9) (0.01) + (1 / 9) (0.04) + 2 (2 / 3) (1 / 3) (-0.02)= 0This demonstrates that assets can be combined to form a risk-free portfolio.14.2%= 3.7%+β(7.5%) ⇒β = 1.40.25 = R f + 1.4 [R M– R f] (I)0.14 = R f + 0.7 [R M– R f] (II)(I) – (II)=0.11 = 0.7 [R M– R f] (III)[R M– R f ]= 0.1571Put (III) into (I) 0.25 = R f + 1.4[0.1571]R f = 3%[R M– R f ]= 0.1571R M = 0.1571 + 0.03= 18.71%a. = 4.9% + βi (9.4%)βD= Cov(R D, R M) / σM 2 = 0.0635 / 0.04326 = 1.468= 4.9 + 1.468 (9.4) = 18.70%Weights:X A = 5 / 30 = 0.1667X B = 10 / 30 = 0.3333X C = 8 / 30 = 0.2667X D = 1 - X A - X B - X C = 0.2333Beta of portfolio= 0.1667 (0.75) + 0.3333 (1.10) + 0.2667 (1.36) + 0.2333 (1.88)= 1.293= 4 + 1.293 (15 - 4) = 18.22%a. (i) βA= ρA,MσA / σMρA,M= βA σM / σA= (0.9) (0.10) / 0.12= 0.75(ii) σB= βB σM / ρB,M= (1.10) (0.10) / 0.40= 0.275(iii) βC= ρC,MσC / σM= (0.75) (0.24) / 0.10= 1.80(iv) ρM,M= 1(v) βM= 1(vi) σf= 0(vii) ρf,M= 0(viii) βf= 0b. SML:E(R i) = R f + βi {E(R M) - R f}= 0.05 + (0.10) βiSecurity βi E(R i)A 0.13 0.90 0.14B 0.16 1.10 0.16C 0.25 1.80 0.23Security A performed worse than the market, while security C performed better than the market.Security B is fairly priced.c. According to the SML, security A is overpriced while security C is under-priced. Thus, you could invest in security C while sell security A (if you currently hold it).a. The typical risk-averse investor seeks high returns and low risks. To assess thetwo stocks, find theReturns:State of economy ProbabilityReturn on A*Recession 0.1 -0.20 Normal 0.8 0.10 Expansion0.10.20* Since security A pays no dividend, the return on A is simply (P 1 / P 0) - 1. = 0.1 (-0.20) + 0.8 (0.10) + 0.1 (0.20) = 0.08 = 0.09 This was given in the problem.Risk:R A - (R A -)2 P ⨯ (R A -)2 -0.28 0.0784 0.00784 0.02 0.0004 0.00032 0.12 0.0144 0.00144 Variance 0.00960Standard deviation (R A ) = 0.0980βA = {Corr(R A , R M ) σ(R A )} / σ(R M ) = 0.8 (0.0980) / 0.10= 0.784βB = {Corr(R B , R M ) σ(R B )} / σ(R M ) = 0.2 (0.12) / 0.10= 0.24The return on stock B is higher than the return on stock A. The risk of stock B, as measured by itsbeta, is lower than the risk of A. Thus, a typical risk-averse investor will prefer stock B.b. = (0.7) + (0.3) = (0.7) (0.8) + (0.3) (0.09) = 0.083σP 2= 0.72 σA 2 + 0.32 σB 2 + 2 (0.7) (0.3) Corr (R A , R B ) σA σB = (0.49) (0.0096) + (0.09) (0.0144) + (0.42) (0.6) (0.0980) (0.12) = 0.0089635 σP = = 0.0947 c. The beta of a portfolio is the weighted average of the betas of the components of the portfolio. βP = (0.7) βA + (0.3) βB = (0.7) (0.784) + (0.3) (0.240) = 0.621Chapter 11:An Alternative View of Risk and Return: The Arbitrage Pricing Theorya. Stock A:()()R R R R R A A A m m Am A=+-+=+-+βεε105%12142%...Stock B:()()R R R R R B B m m Bm B=+-+=+-+βεε130%098142%...Stock C:()R R R R R C C C m m Cm C=+-+=+-+βεε157%137142%)..(.b.()[]()[]()[]()()()()()()[]()()CB A m cB A m c m B m A m CB A P 25.045.030.0%2.14R 1435.1%925.1225.045.030.0%2.14R 37.125.098.045.02.130.0%7.1525.0%1345.0%5.1030.0%2.14R 37.1%7.1525.0%2.14R 98.0%0.1345.0%2.14R 2.1%5.1030.0R 25.0R 45.0R 30.0R ε+ε+ε+-+=ε+ε+ε+-+++++=ε+-++ε+-++ε+-+=++= c.i.()R R R A B C =+-==+-==+-=105%1215%142%)1113%09815%142%)137%157%13715%142%168%..(..46%.(......ii.R P =+-=12925%1143515%142%)138398%..(..To determine which investment investor would prefer, you must compute the variance of portfolios created bymany stocks from either market. Note, because you know that diversification is good, it is reasonable to assume that once an investor chose the market in which he or she will invest, he or she will buy many stocks in that market.Known:E EF ====001002 and and for all i.i σσεε..Assume: The weight of each stock is 1/N; that is, X N i =1/for all i.If a portfolio is composed of N stocks each forming 1/N proportion of the portfolio, the return on the portfolio is 1/N times the sum of the returns on the N stocks. Recall that the return on each stock is 0.1+βF+ε.()()()()()()[]()()()()()()()[]()[]()[]()()[]()()()()()j i 2j i 22j i i 2222222222P P P P iP ,0.04Corr 0.01,Cov s =isvariance the ,N as limit In the ,Cov 1/N 1s 1/N s )(1/N 1/N F 2F E 1/N F E 0.10.1/N F 0.1E R E R E R Var 0.101/N 00.1E 1/N F E 0.11/N F 0.1E R E 1/N F 0.1F 0.1(1/N)R 1/N R εε+β=εε+β∞⇒εε-+ε+β=ε∑+εβ+β=ε+β=-ε+β+=-==+β+=ε+β+=ε∑+β+=ε+β+=ε+β+==∑∑∑∑∑∑∑∑()()()()()()Thus,F R f E R E R Var R Corr Var R Corr ii ip P p i j PijR 1i =++=++===+=+010*********002250040002500412212111222.........,,εεεεεεa.()()()()Corr Corr Var R Var R i j i j p pεεεε112212000225000225,,..====Since Var ()()R p 1 Var R 2p 〉, a risk averse investor will prefer to invest in the second market.b. Corr ()()εεεε112090i j j ,.,== and Corr 2i()()Var R Var R pp120058500025==..。

罗斯《公司理财》英文习题答案DOCchap014公司理财习题答案第十四章Chapter 14: Long-T erm Financing: An Introduction14.1 a. C om m on Stock A ccountPar V alue$135,430$267,715 shares ==b. Net capital from the sale of shares = Common Stock + Capital SurplusNet capital = $135,430 + $203,145 = $338,575Therefore, the average price is $338,575 / 67,715 = $5 per shareAlternate solution:Average price = Par value + Average capital surplus= $2 + $203,145 / 67,715= $5 per sharec. Book value = Assets - Liabilities = Equity= Common stock + Capital surplus + Retained earnings= $2,708,600Therefore, book value per share is $2,708,600 / 67,715= $40.14.2 a. Common stock = (Shares outstanding ) x (Par value)= 500 x $1= $500Total = $150,500b.Common stock (1500 shares outstanding, $1 par) $1,500Capital surplus* 79,000Retained earnings 100,000Total $180,500* Capital Surplus = Old surplus + Surplus on sale= $50,000 + ($30 - $1) x 1,000=$79,00014.3 a. Shareholder s’ equityCommon stock ($5 par value; authorized 500,000shares; issued and outstanding 325,000 shares)$1,625,000 Capital in excess of par* 195,000Retained earnings** 3,794,600Total $5,614,600*Capital surplus = 12% of Common Stock= (0.12) ($1,625,000)= $195,000**Retained earnings = Old retained earnings + Net income - Dividends= $3,545,000 + $260,000 - ($260,000)(0.04)= 3,794,600b. Shareholders’ equity$1,750,000Common stock ($5 par value; authorized 500,000shares; issued and outstanding 350,000 shares)Capital in excess of par* 170,000Retained earnings 3,794,600Total $5,714,600*Capital surplus is reduced by the below par sale, i.e. $195,000 - ($1)(25,000) =$170,00014.4 a. Under straight voting, one share equals one vote. Thus, to ensure the election of onedirector you must hold a majority of the shares. Since two million shares areoutstanding, you must hold more than 1,000,000 shares to have a majority of votes.b. Cumulative voting is often more easily understood through a story. Remember thatyour goal is to elect one board member of the seven who will be chosen today.Suppose the firm has 28 shares outstanding. You own 4 of the shares and one otherperson owns the remaining 24 shares. Under cumulative voting, the total number ofvotes equals the number of shares times the number of directors being elected,(28)(7) = 196. Therefore, you have 28 votes and the other stockholder has 168 votes.Also, suppose the other shareholder does not wish to have your favorite candidateon the board. If that is true, the best you can do to try to ensure electing onemember is to place all of your votes on your favorite candidate. To keep yourcandidate off the board, the other shareholder must have enough votes to elect allseven members who will be chosen. If the other shareholder splits her votes evenlyacross her seven favorite candidates, then eight people, your one favorite and herseven favorites, will all have the same number of votes. There will be a tie! If shedoes not split her votes evenly (for example 29 28 28 28 28 28 27) then yourcandidate will win a seat. To avoid a tie and assure your candidate of victory, youmust have 29 votes which means you must own more than 4 shares.Notice what happened. If seven board members will be elected and you want to becertain that one of your favorite candidates will win, you must have more than one-eighth of the shares. That is, the percentage of the shares you must have to win ismore than1.(The num ber of m em bers being elected The num ber you w ant to select)Also notice that the number of shares you need does not change if more than oneperson owns the remaining shares. If several people owned the remaining 168shares they could form a coalition and vote together.Thus, in the Unicorn election, you will need more than 1/(7+1) = 12.5% of theshares to elect one board member. You will need more than (2,000,000) (0.125) =250,000 shares.Cumulative voting can be viewed more rigorously. Use the facts from the Unicornelection. Under cumulative voting, the total number of votesequals the number of公司理财习题答案第十四章shares times the number of directors being elected, 2,000,000 x 7 = 14,000,000. Let x be the number of shares you need. The number of shares necessary is7x14,000,0007x7x250,000.>-==>> You will need more than 250,000 shares.14.5 She can be certain to have one of her candidate friends be elected under the cumulativevoting rule. The lowest percentage of shares she needs to own to elect at least one out of 6candidates is higher than 1/7 = 14.3%. Her current ownership of 17.3% is more thanenough to ensure one seat. If the voting rule is staggered as described in the question, shewould need to own more than 1/4=25% of the shares to elect one out of the three candidatesfor certain. In this case, she will not have enough shares.14.6 a. You currently own 120 shares or 28.57% of the outstanding shares. You need to control 1/3 of the votes, which requires 140 shares. You need just over 20 additional shares to elect yourself to the board.b. You need just over 25% of the shares, which is 250,000 shares. At $5 a share it willcost you $2,500,000 to guarantee yourself a seat on the board.14.7 The differences between preferred stock and debt are:a. The dividends of preferred stock cannot be deducted as interest expenses whendetermining taxable corporate income. From the individual investor’s point of view,preferred dividends are ordinary income for tax purposes. From corporate investors,80% of the amount they receive as dividends from preferred stock are exempt fromincome taxes.b. In liquidation, the seniority of preferred stock follows that of the debt and leads thatof the common stock.c. There is no legal obligation for firms to pay out preferred dividends as opposed tothe obligated payment of interest on bonds. Therefore, firms cannot be forced intodefault if a preferred stock dividend is not paid in a given year. Preferred dividendscan be cumulative or non-cumulative, and they can also be deferred indefinitely.14.8 Some firms can benefit from issuing preferred stock. The reasons can be:a. Public utilities can pass the tax disadvantage of issuing preferred stock on to theircustomers, so there is substantial amount of straight preferred stock issued byutilities.b. Firms reporting losses to the IRS already don’t have positive income for taxdeduction, so they are not affected by the tax disadvantage of dividend vs. interestpayment. They may be willing to issue preferred stock.c. Firms that issue preferred stock can avoid the threat of bankruptcy that exists withdebt financing because preferred dividends are not legal obligation as interestpayment on corporate debt.14.9 a. The return on non-convertible preferred stock is lower than the return on corporatebond for two reasons:i. Corporate investors receive 80% tax deductibility on dividends if they hold thestock. Therefore, they are willing to pay more for the stock; that lowers its return.ii. Issuing corporations are willing and able to offer higher returns on debt since theinterest on the debt reduces their tax liabilities. Preferred dividends are paid outof net income, hence they provide no tax shield.b. Corporate investors are the primary holders of preferred stock since, unlikeindividual investors, they can deduct 80% of the dividend when computing their taxliability. Therefore, they are willing to accept the lower return which the stockgenerates.14.10 The following table summarizes the main differencebetween debt and equity.Debt EquityRepayment is an obligation of the firm Yes NoGrants ownership of the firm No YesProvides a tax shield Yes NoLiquidation will result if not paid Yes NoCompanies often issue hybrid securities because of the potential tax shield and thebankruptcy advantage. If the IRS accepts the security as debt, the firm can use it as a tax shield. If the security maintains the bankruptcy and ownership advantages of equity, the firm has the best of both worlds.14.11 The trends in long-term financing in the United States were presented in the text. If CableCompany follows the trends, it will probably use 80% internal financing, net income of the project plus depreciation less dividends, and 20% external financing, long term debt and equity.。