Errata for Ross, et al., Fundamentals of Corporate Finance, 8Ce
Chapter 7, question 22:
Add: “The Yield to Maturity (YTM) is 7.2%” to the end of the question below.
Chapter 16, Appendix A
Solutions Manual
Chapter 6 (corrections are in red type)
70. (LO2) The monthly payments with a balloon payment loan are calculated assuming a longer
amortization schedule, in this case, 30 years. The payments based on a 30-year repayment
schedule would be:
First you need to get the EMR (periodic monthly rate) since it is paid monthly and the mortgage is
8.1% APR which under the Bank Act is compounded semi-annually. Thus the EMR = (1+.081/2)^1/6
-1 = 0.006638834 or .00664 rounded.
PVA = $750,000 = C({1 – [1 / (1 + .006638834)]360} / (.006638834))
C = $5,485.78
Now, at time = 8, we need to find the PV of the payments which have not been made. The
balloon payment will be:
PVA = $5,485.78({1 – [1 / (1 + .006638834)]12(22)} / (.006638834))
PVA = $682,273.1284
Chapter 8 (replacement question follows)
11. (LO1) The price of a stock is the PV of the future dividends. This stock is paying four dividends, so the price of
the stock is the PV of these dividends using the required return. The price of the stock is:
P0 = $10 / 1.11 + $14 / 1.112 + $18 / 1.113 + $22 / 1.114 + $26/1.115 = $63.45
Chapter 17 (corrections are in red type)
13 . (LO2)
a.
We can find the new borrowings for the company by multiplying the equity investment by the debtequity ratio, so we get:
New debt = 1.2($54M) = $64.8M
Adding the new retained earnings, we get:
Maximum investment with no outside equity financing = $54M + 1.2($54M) = $118.8M
b.
A debt-equity ratio of 1.2 implies capital structure is 54.545% debt and 45.455% equity. The equity
portion of the planned new investment will be:
Equity portion of investment funds = .45455($74M) = $33.6367M
This is the addition to retained earnings, so the total available for dividend payments is:
Residual = $54M – 33.6367 = $20.3633M
This makes the dividend per share:
Dividend per share = $20.3633M/19M shares = $1.071752632
c.
The borrowing will be:
Borrowing = $74M – 33.6367M = $40.3633M
Alternatively, we could calculate the new borrowing as the weight of debt in the capital structure times
the planned capital outlays, so:
Borrowing = .54545($74M) = $40. 3633M
The addition to retained earnings is $33.6367 M, which we calculated in part b.
d.
If the company plans no capital outlays, no new borrowing will take place. The dividend per share will
be:
Dividend per share = $54M/19M shares = $2.84
Intermediate
14. (LO2) The price of the stock today is the PV of the dividends, so:
P0 = $1.85/1.15 + $58/1.152 = $45.46502836
To find the equal two year dividends with the same present value as the price of the stock, we set up the
following equation and solve for the dividend (Note: The dividend is a two year annuity, so we could solve
with the annuity factor as well):
$45.46502836 = D/1.15 + D/1.152
D = $27.96627907
We now know the cash flow per share we want each of the next two years. We can find the price of stock
in one year, which will be:
P1 = $58/1.15 = $50.43478261
Since you own 1,000 shares, in one year you want:
Cash flow in Year one = 1,000($27.96627907) = $27,966.63
But you’ll only get:
Dividends received in one year = 1,000($1.85) = $1850
Thus, in one year you will need to sell additional shares in order to increase your cash flow. The number of
shares to sell in year one is:
Shares to sell at time one = ($27,966.63 – 1,850)/$50.43478261 = 517.8297327 shares
At Year 2, you cash flow will be the dividend payment times the number of shares you still own, so the Year 2
cash flow is:
Year 2 cash flow = $58(1,000 – 517.83) = $27,965.86
Chapter 20 (the highlighted text is incorrect; the text is red is the corrected text)
14. (LO4) The cash flow from either policy is:
Cash flow = (P – v)Q
So, the cash flows from the old policy are:
Cash flow from old policy = ($86 – 47)(3,510)
Cash flow from old policy = $136,890
And the cash flow from the new policy would be:
Cash flow from new policy = ($88 – 47)(3,620)
Cash flow from new policy = $148,420
So, the incremental cash flow would be:
Incremental cash flow = $148,420 – 136,890
Incremental cash flow = $11,530
The incremental cash flow is a perpetuity. The cost of initiating the new policy is:
Cost of new policy = –[PQ + v(Q – Q)]
So, the NPV of the decision to change credit policies is:
86
NPV = –[($88)(3,510) + ($47)(3,620 – 3,510)] + $11,530/.025
NPV = $147,150 154,170
Barry should proceed.
18. (LO3) We can use the equation for the NPV we constructed in Problem 17. Using the sales figure of 3,750
units and solving for P, we get:
86
NPV = 0 = [–$88(3,510) – ($47)(3,750 – 3,510)] + [(P – 47)(3,750) – ($86 – 47)(3,510)]/.025
0 = –$308,880 – 11,280 + $150,000P – 7,050,000 – 5,475,600
-301,860-176250
$150,000P = $12,845,760 $12,838,740
P = $85.64 85.59