Chapter 12 - Agency Problems, Compensation, and Performance Measurement
+ Câu hỏi lý thuyết cuối chương 1: 1-5,7,10,12
CHAPTER 1
Introduction to Corporate Finance
1.
a.
real
b.
executive airplanes
c.
brand names
d.
financial
e.
bonds
*f.
investment or capital budgeting
*g.
capital budgeting or investment
h.
financing
*Note that f and g are interchangeable in the question.
Est time: 01-05
2.
A trademark, a factory, undeveloped land, and your work force (c, d, e, and g) are all real assets. Real assets are
identifiable as items with intrinsic value. The others in the list are financial assets, that is, these assets derive
value because of a contractual claim.
Est time: 01-05
3.
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.
b.
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 publicly traded and are held by a small
group of private 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.
Est time: 01-05
4.
Items c and d apply to corporations. Because corporations have perpetual life, ownership can be transferred
without affecting operations, and managers can be fired with no effect on ownership. Other forms of business
may have unlimited liability and limited life.
Est time: 01-05
5.
Separation of ownership and management typically leads to agency problems,
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
where managers prefer to consume private perks or make other decisions for their private benefit—
rather than maximize shareholder wealth.
Est time: 01-05
7.
Shareholders will only vote to maximize shareholder wealth. Shareholders can modify their pattern of
consumption through borrowing and lending, match risk preferences, and hopefully balance their own
checkbooks (or hire a qualified professional to help them with these tasks).
Est time: 01-05
10.
Managers would act in shareholders’ interests because they have a legal duty to act in their interests. Managers
may also receive compensation, either bonuses or stock and option payouts whose value is tied (roughly) to firm
performance. Managers may fear personal reputational damage that would result from not acting in
shareholders’ interests. And managers can be fired by the board of directors, which in turn is elected by
shareholders. If managers still fail to act in shareholders’ interests, shareholders may sell their shares, lowering
the stock price and potentially creating the possibility of a takeover, which can again lead to changes in the board
of directors and senior management.
Est time: 01-05
12.
Answers will vary. The principles of good corporate governance discussed in the chapter should apply.
Est time: 06-10
CHAPTER 12
Agency Problems, Compensation,
and Performance Measurement
+ Câu hỏi lý thuyết cuối chương 12: 1-4,9-12
+ Bài tập cuối chương 12: 13,15,17,21
Answers to Problem Sets
1.
a.
True
b.
True
c.
False. Stock options give managers the right (but not the obligation) to
buy their company’s shares in the future at a fixed price.
d.
True
Est. Time: 01- 05
2.
a.
Agency costs. Value lost when managers do not act to maximize value.
This includes costs of monitoring and control.
b.
Private benefits: perks or other advantages enjoyed by managers.
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
c.
Empire building: investing for size, not NPV.
d.
Entrenching investment: managers choose or design investment
projects that increase the managers’ value to the firm.
e.
Delegated monitoring: monitoring on behalf of principals. For example,
the board of directors monitors management performance on behalf of
stockholders.
Est. Time: 01- 05
3.
Monitoring is costly and encounters diminishing returns. Also, completely
effective monitoring would require perfect information.
Est. Time: 01- 05
4.
a.
Dollar amount
b.
EVA = Income earned – (cost of capital × investment).
c.
They are essentially the same.
d.
EVA makes the cost of capital visible to managers. Compensation
based on EVA encourages them to dispose of unnecessary assets and
to forego investment unless it earns more than the cost of capital.
e.
Yes, applying EVA requires adjustments to the financial statements.
Est. Time: 01- 05
5.
ROI = income / net assets
ROI = $1.6m / $20m
ROI = .08, or 8%
Net return = 8% – 11.5%
Net return = –3.5%
EVA = income earned – cost of capital × investment
EVA = $1.6m – (.115 × $20m)
EVA = –$.7 million
Est. Time: 01- 05
9.
a.
When paid a fixed salary without incentives to act in shareholders’ best
interest, managers often act suboptimally.
1.
They may reduce their efforts to find and implement projects that
add value.
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
2.
3.
4.
5.
b.
They may extract benefits-in-kind from the corporation in the form
of a more lavish office, tickets to social events, overspending on
expense accounts, etc.
They may expand the size of the operation just for the prestige of
running a larger company.
They may choose second-best investments in order to reward
existing employees, rather than the alternative that requires
outside personnel but has a higher NPV.
In order to maintain their comfortable jobs, managers may invest in
safer rather than riskier projects.
Tying the manager’s compensation to EVA attempts to ensure that
assets are deployed efficiently and that earned returns exceed the cost
of capital. Hence, actions taken by the manager to shirk the duty of
maximizing shareholder wealth generally result in a return that does
not exceed the minimum required rate of return (cost of capital). The
more the manager works in the interests of shareholders, the greater
the EVA.
Est. Time: 06- 10
10.
Shareholders are ultimately responsible for monitoring top management of
public U.S. corporations. However, unless there is a dominant
shareholder (or a few major shareholders), monitoring is generally
delegated to the board of directors elected by the shareholders. The
board of directors of a large public company also retains an independent
accounting firm to audit the company’s financial statements. In addition,
lenders often monitor the company’s management in order to protect
lenders’ interests in the loans they have extended; in the process,
monitoring by lenders can also protect stockholders’ interests.
Est. Time: 01- 05
11.
Since management effort is not observable, management compensation must
in practice rely on results. The major problem introduced by rewarding results
rather than effort is the fact that, in the corporate setting, results are a
consequence of numerous factors, including the manager’s efforts. It is
generally very difficult, if not impossible, to precisely identify the extent to
which a manager’s efforts contributed to a particular outcome. Therefore, it is
difficult to create the kinds of incentives that are most likely to reward the
manager for her contribution, and therefore appropriately motivate the
manager.
Est. Time: 01- 05
12.
a.
If a firm announces the hiring of a new manager who is expected to
increase the firm’s value, this information should be immediately
reflected in the stock price. If the manager then performs as expected,
there should not be much change in the share price since this
performance has already been incorporated in the stock value.
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McGraw-Hill Education.
Chapter 12 - Agency Problems, Compensation, and Performance Measurement
b.
This could potentially be a very serious problem since the manager
could lose money for reasons out of her control. One solution might be
to index the price changes and then compare the actual raw material
price paid with the indexed value. Another alternative would be to
compare the performance with the performance of competitive firms.
c.
It is not necessarily an advantage to have a compensation scheme tied
to stock returns. For example, in addition to the problem of
expectations discussed in Part a, there are numerous factors outside
the manager’s control, such as federal monetary policy or new
environmental regulations. However, the stock price does tend to
increase or decrease depending on whether the firm does or does not
exceed the required cost of capital. To this extent, it is a measure of
performance.
Est. Time: 06- 10
13.
Answers may vary. The issue to consider is which plan creates the most
appropriate incentive structure in terms of aligning the CEO’s motivations
and compensation with those of the shareholders. In this regard, both plans
have advantages and disadvantages. With stock-option package (a), the
CEO will be compensated if the price of Androscoggin stock increases,
regardless of whether the increase is a result of the CEO’s actions or a
consequence of a situation which is beyond the CEO’s control (such as an
increase in copper prices). On the other hand, with package (b), the CEO
would be compensated if his actions lead to the result that Androscoggin
stock outperforms the portfolio of copper-mining company shares; however,
the Androscoggin CEO could also be rewarded if the CEOs of the other
copper-mining companies performed poorly leading to the result that
Androscoggin stock performs better than the lackluster average generated
by the CEOs of the other companies.
Est. Time: 06- 10
14.
a.
EVA = income earned – cost of capital × investment
EVA = $8.03m – .09 × $55.40m
EVA = $3.04 million
b.
EVA = $8.03m – .09 × $95m
EVA = –$.52 million
The market value of the assets should be used to capture the true
opportunity cost of capital.
Est. Time: 01- 05
15.
EVA = income earned – cost of capital × investment
EVA = $1.2m – [.15 x ($4m + 2m + 8m)]
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
EVA = –$.9 million
17.
Net cash flow
PV at start of year
PV at end of year
Change in value (economic
depreciation)
Expected economic income
1
0.00
100.00
120.00
Period
2
78.55
120.00
65.45
3
78.55
65.45
0.00
20.00
–54.55
–65.45
20.00
24.00
13.10
Est. Time: 06- 10
21.
a.
Using the depreciation amounts stated in the problem, the NPV is $4,200 as shown
here:
Investment
Book value end of period
Net revenues
Depreciation
Pretax profit
Tax at 35%
Net profit
Cash flow
NPV
b.
Cash flow
PV start of year
PV end of year
Change in PV
Economic depreciation
Economic income
ROI
Year 0
-30,800
30,800
Year 1
Year 2
16,940
23,337
13,860
9,477
3,317
6,160
0
22,152
16,940
5,212
1,824
3,388
-30,800
$4,200
20,020
20,328
-30,800
20,020
35,000
18,480
-16,520
16,520
$3,500
20,328
18,480
0
-18,480
18,480
$1,848
10%
10%
c.
EVA declines because of the increased depreciation in year 2 which
lowers the taxes but increases the cash flows. Thus, the decrease in
the PV of the cash flows in year 2 exceeds the decrease in year 1. The
ROI remains constant because it also accounts for the offsetting
changes in the book value.
d.
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
PV of EVA
$4,709
Using the depreciation values stated in the problem, the PV of the EVA exceeds the
NPV of $4,200.
e.
Using straight-line depreciation:
Investment
Book value end of period
Net revenues
Depreciation
Pretax profit
Tax at 35%
Net profit
Year 0
-30,800
30,800
Year 1
Year 2
15,400
23,337
15,400
7,937
2,778
5,159
0
22,152
15,400
6,752
2,363
4,389
Cash flow
NPV
-30,800
$4,244
20,559
19,789
Cash flow
PV start of year
PV end of year
Change in PV
Economic depreciation
Economic income
-30,800
20,559
35,044
17,990
-17,055
17,055
$3,504
19,789
17,990
0
-17,990
17,990
$1,799
10%
10%
ROI
Given straight-line depreciation, the ROI is still10%, which equals the cost of capital.
The depreciation values originally provided are probably more representative of
economic depreciation than are the values derived using the straight-line method.
Economic depreciation would provide the better measure of a project’s performance.
Est. Time: 11- 15
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
CHAPTER 6
Making Investment Decisions with
the Net Present Value Rule
+ Câu hỏi lý thuyết cuối chương 6: 1,3,4
+ Bài tập cuối chương 6: 5,8,9,11,12,13,15,17
Answers to Problem Sets
1.
The incremental cash flows are a, b, d, g, and h. Item c is a sunk cost; e is an overhead cost;
f is a non-cash expense; and i is a sunk cost.
Est. Time: 01 - 05
3.
a.
rate.
False. A project’s annual tax shield is equal to the depreciation amount times the tax
b.
False. Financing and investment decisions are kept separate.
c.
False. One set of books is kept for stockholders using straight-line depreciation.
Another
set of books is kept for tax purposes using accelerated depreciation.
d.
False. Depreciation does not directly affect cash flows. However, an increase in
depreciation in the earlier years will increase the present value of the depreciation tax
shield and thus increase the NPV of the project.
Est. Time: 01 - 05
5.
2016
2017
2018
2019
Net working
$50,000
$230,000
$305,000
$250,000
capital
Cash flows
–50,000
– 180,000
–75,000
55,000
Net working capital = accounts receivable + inventory – accounts payable
Cash flows = change in net working capital
2020
$
0
250,000
Est. Time: 01 - 05
8.
a.
NPVA = –$100,000 + $110,000 / (1 + .10) + $121,000 / (1 + .10) 2
NPVA = $100,000
NPVB = –$120,000 + $110,000 / (1 + .10) + $121,000 / (1 + .10) 2 + $133,000 / (1 +
.10)
3
NPVB = $179,925
b.
EACFA = $100,000 / ((1 / .10) – {1 / [.10(1 + .10)2]})
EACFA = $57,619
EACFB = $179,925 / ((1 / .10) – {1 / [.10(1 + .10)3]})
EACFB = $72,350
c.
Select Machine B because it has the higher equivalent annual cash flow.
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McGraw-Hill Education.
Chapter 12 - Agency Problems, Compensation, and Performance Measurement
Est. Time: 01 - 05
9.
NPVB = –$120,000 + $110,000 / (1 + .10) + $121,000 / (1 + .10) 2 + $133,000 / (1 + .10)3
NPVB = $179,925
EACFB = $179,925 / ((1 / .10) – {1 / [.10(1 + .10)3]})
EACFB = $72,350
In this problem, we must ignore the sunk costs and past real cash flows and focus on
future cash flows.
Machine C is expected to last another five years and produces a real annual cash flow of
$80,000.
Since Machine C’s real annual cash flow exceeds Machine B’s equivalent annual cash flow,
the company should wait and replace Machine C at the end of five years.
Est. Time: 01 - 05
11.
Nominal rate = 15%
Inflation rate = 10%
Rreal = [(1 + .15) / (1 + .10)] – 1
Rreal = .045455, or 4.5455%
(figures in $)
Year:
1
2
3
4
5
Revenues
200,000
220,000
242,000
266,200
292,820
Costs
100,000
110,000
121,000
133,100
146,410
Depreciation
100,000
100,000
100,000
100,000
100,000
Pretax profit
0
10,000
21,000
33,100
46,410
Taxes at 35%
0
3,500
7,350
11,585
16,244
Aftertax profit
0
6,500
13,650
21,515
30,167
44,000
48,400
53,240
58,564
0
100,000
106,500
113,650
121,515
130,167
Working capital
0
40,000
Operating cash flow
Change in working capital
-40,000
-4,000
-4,400
-4,840
-5,324
58,564
Capital investment
-500,000
0
0
0
0
0
Net cash flows (nominal)
–540,000
96,000
102,100
108,810
116,191
188,731
NPV (nominal) at 15%
–147,510
87,273
84,380
81,751
79,360
117,187
Net cash flows (real)
(10% inflation)*
NPV (real) at 4.5455%
–540,000
–147,510
* Real cash flowT = Nominal cash flowT / (1 + inflation rate)T
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McGraw-Hill Education.
Chapter 12 - Agency Problems, Compensation, and Performance Measurement
12.
No, this is not the correct procedure. The opportunity cost of the land is its value in its best
use, so Mr. North should consider the $45,000 value of the land as an outlay in his NPV
analysis of the funeral home.
Est. Time: 01 - 05
13.
a.
Investment in net working capital arises as a forecasting issue only because accrual
accounting recognizes sales when made, not when cash is received, and costs when
incurred, not when cash payment is made.
b.
need
If cash flow forecasts recognize the exact timing of the cash flows, then there is no
to also include investment in net working capital.
Est. Time: 01 - 05
15.
The $3 million initial research costs are sunk costs so are excluded from the NPV calculation.
The
following spreadsheet calculates a project NPV of −$465,000.
(Figures in 000's)
Year:
Capital investment and disposal
Working capital
0
1
2
3
4
–6,000
200
5
500
240
400
400
240
0
Unit sales
500
600
1,000
1,000
600
Revenues
2,000
2,400
4,000
4,000
2,400
Costs
750
900
1,500
1,500
900
Depreciation
1,200
1,200
1,200
1,200
1,200
Pretax profit
50
300
1,300
1,300
300
Taxes at 35%
18
105
455
455
105
Aftertax profit
33
195
845
845
195
1,233
1,395
2,045
2,045
1,395
–40
–160
0
160
240
Cash flow from operations
–200
Change in working capital
Capital investment and aftertax
recovery
–6,000
Net cash flows
–6,200
1,193
1,235
2,045
2,205
1,960
Present value @ 12%
–6,200
1,065
985
1,456
1,401
1,112
325
–181
NPV
Est. Time: 11 - 15
17.
a.
TABLE 6.5 Tax Payments on IM&C’s Guano Project ($thousands)
No. of Years Depreciation
Tax Rate (percent)
7
35
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McGraw-Hill Education.
Chapter 12 - Agency Problems, Compensation, and Performance Measurement
Period
0
1.
2.
3.
4.
5.
6.
MACRS %
Tax Depreciation
(MACRS% x depreciable investment)
Sales
Cost of Goods Sold
Other Costs
4,000
Tax Depreciation
Pretax Profits
-4,000
Tax
-1,400
a. Includes $1,949 of salvage value
1
2
3
4
5
6
7
14.29
1,429
24.49
2,449
17.49
1,749
12.49
1,249
8.93
893
8.92
892
13.39
1,339
523
837
2,200
1,429
-3,943
-1,380
12,887
7,729
1,210
2,449
1,499
525
32,610
19,552
1,331
1,749
9,978
3,492
48,901
29,345
1,464
1,249
16,843
5,895
35,834
21,492
1,611
893
11,838
4,143
19,717
11,830
1,772
892
5,223
1,828
1,339
610a
214
TABLE 6.6 IM&C’s Guano Project—Revised Cash Flow Analysis with MACRS Depreciation ($thousands)
Period
0
1.
2.
3.
4.
5.
6.
7.
8.
9.
Sales
Cost of Goods Sold
Other Costs
Tax
Cash Flow from Operations
Change in Working Capital
Capital Investment and Disposal
Net Cash Flow (5+6+7)
Present Value at 20%
Net Present Value =
4,000
-1,400
-2,600
-10,000
-12,600
-12,600
1
2
3
4
5
6
523
837
2,200
-1,380
-1,134
-550
12,887
7,729
1,210
525
3,423
-739
32,610
19,552
1,331
3,492
8,235
-1,972
48,901
29,345
1,464
5,895
12,197
-1,629
35,834
21,492
1,611
4,143
8,588
1,307
19,717
11,830
1,772
1,828
4,287
1,581
-1,684
-1,403
2,684
1,864
6,263
3,624
10,568
5,096
9,895
3,977
5,868
1,965
5
6
7
214
-214
2,002
1,949
3,737
1,043
3,566
b.
TABLE 6.1 IM&C’s Guano Project—Projections ($thousands)
Reflecting Inflation and Straight-Line Depreciation
Period
0
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Capital Investment
Accumulated Depn.
Year-End Book Value
Working Capital
Total Book Value (3 + 4)
Sales
Cost of Goods Sold
Other Costs
Depreciation
Pretax Profit
Tax
Profit after Tax (10 – 11)
Notes:
No. of Years Depreciation
Assumed Salvage Value in
Depreciation Calculation
Tax Rate (percent)
1
2
3
4
15,000
15,000
4,000
-4,000
-1,400
-2,600
7
-1,949
2,417
12,583
550
13,133
523
837
2,200
2,417
-4,931
-1,726
-3,205
4,833
10,167
1,289
11,456
12,887
7,729
1,210
2,417
1,531
536
995
7,250
7,750
3,261
11,011
32,610
19,552
1,331
2,417
9,310
3,259
6,052
9,667
5,333
4,890
10,223
48,901
29,345
1,464
2,417
15,675
5,486
10,189
12,083
2,917
3,583
6,500
35,834
21,492
1,611
2,417
10,314
3,610
6,704
6
500
35
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McGraw-Hill Education.
14,500
500
2,002
2,502
19,717
11,830
1,772
2,417
3,698
1,294
2,404
1,449
507
942
Chapter 12 - Agency Problems, Compensation, and Performance Measurement
TABLE 6.2 IM&C’s Guano Project—Initial Cash Flow Analysis with Straight-Line Depreciation
($thousands)
Period
0
1
2
3
4
5
6
7
8
9
Sales
Cost of Goods Sold
Other Costs
Tax
Cash Flow from Operations
Change in Working Capital
Capital Investment and Disposal
Net Cash Flow (5+6+7)
Present Value
Net Present Value =
Cost of Capital (percent)
4,000
-1,400
-2,600
-15,000
-17,600
-17,600
1
2
3
4
5
6
523
837
2,200
-1,726
-788
-550
12,887
7,729
1,210
536
3,412
-739
32,610
19,552
1,331
3,259
8,468
-1,972
48,901
29,345
1,464
5,486
12,606
-1,629
35,834
21,492
1,611
3,610
9,121
1,307
19,717
11,830
1,772
1,294
4,821
1,581
-1,338
-1,206
2,673
2,169
6,496
4,750
10,977
7,231
10,428
6,189
6,402
3,423
6,614
11
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McGraw-Hill Education.
7
507
-507
2,002
1,949
3,444
1,659
Chapter 12 - Agency Problems, Compensation, and Performance Measurement
CHAPTER 10
Project Analysis
+ Câu hỏi lý thuyết cuối chương 10: 1,2,3,4,6,21
+ Bài tập cuối chương 10: 10,,11,12,14,19,22
Answers to Problem Sets
1.
a.
Most
False; The capital budget is not the final sign-off for specific projects.
companies require individual project appropriation requests, which
include
more detailed analysis.
b.
True; Strategic planning requires consideration of alternatives.
c.
True; Cash flow forecasts are regularly overstated.
Est. Time: 01 - 05
2.
a.
Overoptimism generally leads to overstated cash flow forecasts.
b.
Inconsistent forecasts can cause both acceptance/rejection decision
errors as well as ranking order errors as individual project cash flows
are based on differing assumptions.
c.
A purely bottom-up process may not consider strategic alternatives.
Est. Time: 01 - 05
3.
a.
analysis of how a single input affects a project’s NPV
b.
projection of a limited number of NPV values based on changes to
multiple inputs
c.
determination of the future sales needed to obtain either project
profitability or NPV values of zero
d.
process that explores all possible outcomes and weights each by its
probability of occurrence
e.
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.
additional present value created by the option to bail out of a project
early
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
h.
additional present value created by the option to invest more and
expand output
Est. Time: 06 - 10
4.
False; Sensitivity analysis may show where additional information
a.
would be most useful.
True; The variables that cause the greatest change in NPV per each
b.
unit change in the variable are the most crucial to project success.
True; Sensitivity analysis becomes scenario analysis when there in
c.
only one uncertain variable.
d.
True; NPV considers the opportunity cost of capital while accounting
income does not.
False; A business with high fixed costs has high operating leverage
e.
which increases risk.
f.
True; Monte Carlo simulation can forecast cash flows by estimating all
of the variables which create those flows.
Est. Time: 01 - 05
True; Decision trees can incorporate real options such as expansion
6.
a.
and abandonment.
b.
True; Having the ability to expand a successful operation increases the
present value of the project.
False. Just as the option to expand has value, the option to terminate
c.
also raises the present value of the project.
d.
False. The optimal date to undertake an investment is the one that
maximizes its contribution to the firm today.
Est. Time: 01 - 05
21.
a.
timing option
b.
expansion option
c.
abandonment option
d.
production option
Est. Time: 01 - 05
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
10.
(in billions)
Year 0
Investment
Revenue
Variable cost
Fixed cost
Depreciation
Pretax profit
Tax @ 50%
Net profit
Operating cash flow
–¥15
Net cash flow
–¥15
Years 1–10
¥44.000
39.600
2.000
1.500
¥ .900
.450
¥ .450
¥ 1.950
¥ 1.950
NPV = –¥15B + ¥1.950B × ((1 / .10) – {1 / [.10(1 + .10)10]})
NPV = –¥3.018B
Est. Time: 06 –10
12.
a.
(in billions)
Year 0
Investment
Revenue
Variable cost
Fixed cost
Depreciation
Pretax profit
Tax @ 50%
Net profit
Operating cash flow
–¥30
Net cash flow
–¥30
Years 1–10
¥37.500
26.000
3.000
3.000
¥ 5.500
2.750
¥ 2.750
¥ 5.750
¥ 5.750
NPV = –¥30B + ¥5.750B × ((1 / .10) – {1 / [.10(1 + .10)10]})
NPV = ¥5.331B
b.
The break-even point can be found algebraically as follows:
NPV = –investment + [(t  depreciation) × (PVIFA10%, 10) +
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
[Q  (price – variable cost) – fixed cost]  (1 – t)  (PVIFA10%,10)
Setting NPV equal to 0 and solving for Q:
0 = –¥30b + [(.50 × ¥3b) × ((1 / .10) – {1 / [.10(1 + .10)10]})] + {[Q ×
(¥375,000 –
260,000)] – ¥3b} × (1 – .5) × ((1 / .10) – {1 / [.10(1 + .10)10]})
Q = 84,911 units
PV (Billions of Yen)
Break-Even
500
450
400
350
300
250
200
150
100
50
0
PV Inflows
PV Outflows
Break-Even
NPV = 0

100
200
Units
(000's)
c.
The break-even point is the point where the present value of the cash
flows, including the opportunity cost of capital, yields a zero NPV.
d.
To find the level of costs at which the project would earn zero profit,
write the equation for net profit, set net profit equal to zero, and solve
for variable costs:
Net profit = [(r – vc – fc – d)  (1 – t)] × 1,000,000 / (market size ×
market share)
0 = [(¥37.5 – vc – 3.0 – 1.5)  .50] × 1,000,000 / (1,000,000 × .10)
vc = ¥330,000
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
This will yield zero profit.
Next, find the level of costs at which the project would have zero
NPV. Based on the original project, the equivalent annual cash flow
yielding a zero NPV would be:
¥15B / PVIFA10%, 10 = ¥2.4412 billion
If we rewrite the cash flow equation and solve for the variable cost:
NCF = ({[(r – vc – fc – d)  (1 – t)] + d] × (1 – t) + d} × 1,000,000) /
(market size × market share)
¥2.4412 = ({[(¥37.5 – vc – 3.0 – 1.5)  .50] + 1.5} × 1,000,000 /
(1,000,000
× .10)
vc = ¥311,176
This will yield NPV = 0, assuming the tax credits can be used
elsewhere in the company.
e.
DOL = 1 + (fixed costs / profit).
DOL = 1 + (3 + 3) / 5.5
DOL = 2.09
Est. Time: 16 – 20
14.
If Rustic replaces now rather than in one year, several things happen:
i. It incurs the equivalent annual cost of the $9 million capital investment.
ii. It reduces manufacturing costs.
For example, for the expected case for sales:
The economic life of the new machine is expected to be 10 years, so the
equivalent annual cost of the new machine is:
EAC = $9 million / ((1 .12) – {1 / [.12(1 + .12)10]})
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
EAC = $1,592,857
The reduction in manufacturing costs is:
Cost reduction = .5 million × ($8 – 4) = $2 million
Thus, the annual cost savings is:
EAC savings = $2,000,000 – 1,592,857
EAC savings= $407,143, or $.41 million
Continuing the analysis for the other cases, we find:
Equivalent Annual Cost Savings (Millions)
Pessimisti
Expected
Optimistic
c
Sales
.01
.41
1.21
Manufacturing
Cost
Economic Life
–.59
.41
.91
.03
.41
.60
Est. Time: 11 – 15
19.
PROJECT DATA
Inputs Formula
15 million barrels probability
50% (given)
5 million barrels probability
50% (given)
15 million barrel PV t=1
8,000,000 (given)
5 million barrel PV t=1
2,000,000 (given)
Investment in well
3,000,000 (given)
Seismic test cost
100,000 (given)
Value w/o seismic testing
2,000,000 = [ 50% * (8,000,000 - 3,000,000)] + [ 50% * (2,000,000 - 3,000,000)]
Value with seismic testing
2,400,000 = [ 50% * (8,000,000 - 3,000,000)] + [ 50% * (0)] - 100,000
Seismic test intrinsic value
400,000 = 2,400,000 - 2,000,000
15 million
barrels
(50%
probability)
Invest in full-scale production:
NPV = -3,000,000 + 8,000,000
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Seismic
test
Chapter 12 - Agency Problems, Compensation, and Performance Measurement
Oil Well
Survey
22.
Working from right to left, the following spreadsheet calculates a weighted
average NPV of 119 at the start of Phase 3 trials.
Weighte
d NPV
39
59
21
0
0
Probabilit
y of
Outcome
5%
20%
40%
25%
10%
NPV with
Abandonmen
t
781
295
52
0
0
Resulting
NPV with
130
Investment
; r = 9.6%
781
295
52
-69
-106
Phase III
Results
Blockbuster
Above average
Average
Below Average
Dog
PV if
Successfu
l
1500
700
300
100
40
Probabilit
y of Phase
III Success
80%
80%
80%
80%
80%
119
We can calculate the NPV at the initial investment decision as follows:
NPV  18  .44 
119
 $25.6 million
(1.096) 2
So the investment remains positive.
Est. Time: 06 - 10
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
CHAPTER 11
Investment, Strategy, and Economic Rents
+ Câu hỏi lý thuyết cuối chương 11: 1,3,5
+ Bài tập cuối chương 11: 2,4,8,10
1.
a.
capital.
False. Economic rents are profits that more than cover the cost of
b.
True
c.
True
d.
False. Economic rents are earned when a firm has a special advantage
over its competitors.
Est. Time: 01- 05
3.
Most projects, if discounted at the appropriate risk-adjusted discount rate, will
tend to be zero NPV projects unless there is something specific the market
cannot duplicate. Thus, a large positive NPV result needs to be thoroughly
reviewed.
If you have not already done so, you should seek professional opinions on the
real estate outlook as you may be overly optimistic. You might also check with
the appropriate individuals to determine if any future highway or development
projects are anticipated that could affect this property. Also evaluate the
project based on renting the building to determine if that would also result in a
positive NPV. Identify the key variables in each option that result in the positive
NPV. Are those variable forecasts reasonable; what if they are not? Once you
have done this, then consider whether buying or renting is your best
alternative.
Est. Time: 01- 05
The secondhand market value of older planes may be low enough to make up
5.
for the plane’s higher fuel consumption. Also, the older planes can used on
routes where fuel efficiency is relatively less important.
Est. Time: 01- 05
2.
At $5:
NPV of operating cash flow = [($5 – 5) × 500,000]) / .10
NPV of operating cash flow = $0
At this price the operating cash flows are insufficient to justify the initial cost.
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
At $10:
NPV of operating cash flow = [($10 – 5) × 500,000]) / .10
NPV of operating cash flow = $25 million
At this price the operating cash flows are still insufficient to justify the initial
cost.
At $15:
NPV of operating cash flow = [($15 – 5) × 500,000]) / .10
NPV of operating cash flow = $50 million
At a competitive price of $15, the NPV of the OCF matches the initial cost so
the project breaks even on a financial basis.
Thus, $15 is the competitive price.
Est. Time: 01- 05
4.
a.
Since the copper can be sold forward through the futures contract we
discount at the risk-free interest rate:
PV = (100,000 × $5,500) / (1 + .005)
PV = $547.26 million
b-1.
E(r) = rf + β(rm – rf)
E(r) = .005 + 1.2(.08 – .005)
E(r) = .095, or 9.5%
Eprice = Current price × 1 + E(r)
Eprice = $5,500 / 1.005 × (1 + .095)
Eprice = $5,992.54 per ton
b-2.
The certainty-equivalent end-of-year price is the 1-year futures price of
$5,500 per ton.
Est. Time: 01- 05
8.
The price of $1,200 per ounce represents the discounted value of expected
future gold prices. Hence, the present value of 1 million ounces produced 8
years from now should be:
PV = $1,200  1 million = $1.2 billion
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
Est. Time: 01- 05
9.
Interstate rail lines can be expected to generate economic rents when they
have excess capacity that allows them to accommodate increased demand at
low cost. For example, an economic expansion accompanied by high fuel
costs would result in economic rents for interstate rail lines. Trucking
companies have the flexibility to expand capacity relatively quickly, but
high fuel costs could tend to limit the ability of trucking companies to
compete effectively with interstate rail lines that are relatively more fuel
efficient.
Est. Time: 01- 05
10.
First, consider the sequence of events:




At t = 0, the investment of $25 million is made.
At t = 1, production begins, so the first year of revenue and expenses is
recorded at t = 2.
At t = 6, the patent expires and competition may enter. Since it takes one
year to achieve full production, competition is not a factor until t = 7. (This
assumes the competition does not begin construction until the patent
expires.)
After t = 7, full competition will exist and thus any new entrant into the
market for BGs will earn the 9 percent cost of capital.
Next, calculate the cash flows:



t0 = –$25 million
t1 = $0
t2-6 = 200,000 × ($100 – 65) = $7 million
After t6, the NPV of new investment must be zero. Hence, to find the
selling price per unit (P) solve the following for P:
0 = –$25,000,000 + [200,000 × (P – $65)] / 1.092 + … + [200,000 × (P –
$65)] / 1.0912
P = $85.02

t7-12 = 200,000 × ($85.02 – 65) = $4.004 million
Finally, compute the net present value (in millions):
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
NPV = –$25 + $7 / 1.092 + $7 / 1.093 + … + $7 / 1.096 + $4.004 / 1.097+ … +
$4.004 / 1.0912
NPV = $10.69 million
Est. Time: 06- 10
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
CHAPTER 13
Efficient Markets and Behavioral Finance
+ Câu hỏi lý thuyết cuối chương 13: 1-4; 8,11,12
+ Bài tập cuối chương 13: 3,4,5,6,7
1.
c; Price changes are independent of one another and follow a “random walk”. Efficient
markets dictate that stock price changes must be random and unpredictable.
Est. Time: 01 - 05
2.
Weak, semistrong, strong, strong, weak
Est. Time: 01 - 05
3.
False. The efficient market hypothesis recognizes investors read
a.
financial
statements and understand the impact of taxes.
b.
False. The principles of arbitrage dictate that there is no such thing as
perfect foresight.
c.
True.
d.
False. Many investors are affected by their attitudes toward risk and
their beliefs about probabilities as found in behavioral finance studies,
but arbitrage eliminates any profit opportunities.
False. Transaction costs are often quite high. For example, some
e.
trading
costs are very high and some trades are difficult to execute.
f.
True
Est. Time: 01 - 05
4.
a.
False. Financing decisions do not have the same degree of finality as
investment decisions and are therefore more easily reversed.
b.
False. Tests have shown that there is essentially no correlation
between stock price changes.
c.
True
False. An individual stock’s return is dependent on the stock’s market
risk as measured by beta.
Est. Time: 01 – 05
d.
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
8.
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.
A financial manager evaluating the creditworthiness of a large
c.
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.
The company should not seek diversification just to reduce risk.
Investors
can diversify on their own.
e.
Stock issues do not depress price if investors believe the issuer has no
private information.
Est. Time: 06 - 10
11.
a.
There is risk in almost everything you do in daily life. You could lose
your job or your spouse, or suffer damage to your house from a storm.
That doesn’t necessarily mean you should quit your job, get a divorce,
or sell your house. If we accept that our world is risky, then we must
accept that asset values fluctuate as new information emerges.
Moreover, if capital markets are functioning properly, then stock price
changes will follow a random walk. The random walk of values is the
result of rational investors coping with an uncertain world.
b.
To make the example clearer, assume that everyone believes in the
same chart. What happens when the chart shows a downward
movement? Are investors going to be willing to hold the stock when it
has an expected loss? Of course not. They start selling, and the price
will decline until the stock is expected to give a positive return. The
trend will “self-destruct.”
c.
Random-walk theory as applied to efficient markets means that
fluctuations from the expected outcome are random. Suppose there is
an 80% chance of rain tomorrow (because it rained today). Then the
local umbrella store’s stock price will respond today to the prospect of
high sales tomorrow. The store’s sales will not follow a random walk,
but its stock price will because each day the stock price reflects all that
investors know about future weather and future sales.
Est. Time: 06 - 10
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McGraw-Hill Education.
Chapter 12 - Agency Problems, Compensation, and Performance Measurement
12.
One of the ways to think about market inefficiency is that it implies
there is easy money to be made. The following appear to suggest
market inefficiency:
(b) Strong form. The strong form says that prices reflect all
information available about a company; even what is known by
management.
(d) Weak form. The weak form dictates that it is impossible to make
consistently superior profits by studying past returns.
(f) Semistrong form. In the semistrong form, stock prices will adjust
immediately to new information, such as earnings
announcements.
Est. Time: 06 - 10
5.
Abnormal stock return = Actual stock return – Expected stock return
Abnormal stock return = Actual stock return – (α + β × Return on market
index)
Abnormal stock return = .06 – (–.002 + 1.45 × .05)
Abnormal stock return = –.0105, or –1.05%
Est. Time: 01 - 05
6.
a.
True. Overconfidence is a systematic bias.
b.
False. Once investors have incurred a loss, they are often even more
concerned about future losses.
c.
True.
d.
False. There are limits on the ability of the rational investors to exploit
market inefficiencies. These limits include things such as trading costs
and the availability of shares to borrow.
Est. Time: 01 - 05
7.
Decrease. The stock price already reflects an expected 25% increase. The
20% increase conveys bad news relative to expectations.
Est. Time: 01 - 05
9.
a.
There is evidence that two securities with identical cash flows (e.g.,
Royal Dutch Shell and Shell Transport & Trading) sold at different prices.
b.
Small-cap stocks appear to have provided above-average returns for
their level of risk in some historical time periods.
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McGraw-Hill Education.
Chapter 12 - Agency Problems, Compensation, and Performance Measurement
c.
Evidence seems to indicate that some IPOs provide relatively low
returns after their first few days of trading.
CHAPTER 14
+ Câu hỏi lý thuyết cuối chương 14: 1-5; 7,9,10
1.
a.
False. Net equity issues have been negative, meaning that share
repurchases have been larger than share issues.
b.
True
c.
True
Est. Time: 01 – 05
2.
a.
Straight voting is a separate election for each candidate. Thus the
most votes a shareholder can cast for any one candidate equals the
number of shares owned by that shareholder, assuming one vote is
received for each share owned.
Maximum votes for any one candidate = 1 × 80 shares × 1 vote per
share = 80 votes
b.
Cumulative voting is a combined election where a shareholder can cast
all of their votes (for all positions) for a single candidate. The maximum
votes a shareholder can cast for a single candidate equals:
Maximum votes for any one candidate = 10 open positions × 80 shares
× 1 vote per share
Maximum votes for any one candidate = 800
Est. Time: 01 – 05
3.
a.
subordinated
b.
floating rate
c.
convertible
d.
warrant
e.
common stock; preferred stock
Est. Time: 01 – 05
4.
a.
False. Almost half of all U.S. common stock is held by financial
institutions, such as mutual funds, pension funds, and insurance
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
companies.
b.
True
c.
False. An investor can buy and sell units of a partnership.
Est. Time: 01 – 05
5.
One would expect the voting shares to have a higher price because they have
an added benefit/responsibility that has value.
Est. Time: 01 – 05
7.
a.
Reduce value. The borrower would probably only exercise this option
when it is beneficial for them to do so. Options that provide a benefit to
one party (borrower) do so at the expense of the other party (lender).
Thus, this option will tend to reduce a bond’s value.
b.
Increase value. If the share price goes down, the bondholder is under
no obligation to convert the bond to shares, thereby protecting the
investment. However, if the company’s share price rises, the
bondholder can exchange the bond for the more valuable shares. This
option adds value.
c.
Increase value. Collateral provides extra protection for the lender.
d.
Reduce value. In a bankruptcy, subordinated debt is only paid after the
senior debt obligations have been paid in full. The subordinated lender
therefore has more risk.
Est. Time: 01 – 05
9.
Answers will differ. Some purported causes of the financial crisis include:







Long periods of very low interest rates leading to easy credit conditions
High leverage ratios
The bursting of the U.S. housing market bubble
High rates of default on subprime mortgages
Massive losses on investments in mortgage-backed securities
Opaque derivative markets and amplified losses through credit default swaps
High rates of unemployment and job losses
Est. Time: 16 – 20
10.
a.
Majority voting:
Number of shares needed = (Number of shares outstanding / 2) + 1
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McGraw-Hill Education.
Chapter 12 - Agency Problems, Compensation, and Performance Measurement
Number of shares needed = 200,000 / 2 + 1
Number of shares needed = 100,001
b.
Cumulative voting:
Number of shares needed = [Number of shares outstanding /
(Number of open seats + 1)] + 1
Number of shares needed = [200,000 / (5 + 1)] + 1
Number of shares needed = 33,334
Est. Time: 11 – 15
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McGraw-Hill Education.
Chapter 12 - Agency Problems, Compensation, and Performance Measurement
CHAPTER 15
+ Câu hỏi lý thuyết cuối chương 15: 1-5, 8-12
+ Bài tập cuối chương 15: 6,7,13-16
1.
a.
Further sale of an already publicly traded stock
b.
U.S. bond issue by foreign corporation
c.
Bond issue by industrial company
d.
Bond issue by large industrial company
Est. Time: 01 – 05
2.
a.
sell
B; best efforts occur when the underwriter promises “only to try” and
the issue.
b.
A; bookbuilding is the effort of the underwriter to determine interest in
the sale.
c.
D; a shelf registration sets up later sales, or tranches, under the same
registration document.
d.
C; Rule 144A sales are not registered.
Est. Time: 01 – 05
3.
a.
Financing of start-up companies
b.
Underwriters gather nonbinding indications of demand for a new issue.
c.
The difference between the offer price and the price paid to the issuer
d.
Description of a security offering filed with the SEC
e.
Winning bidders for a new issue tend to overpay.
Est. Time: 01 – 05
4.
a.
A large issue
b.
A bond issue
c.
Subsequent issue of stock
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McGraw-Hill Education.
Chapter 12 - Agency Problems, Compensation, and Performance Measurement
d.
A small private placement of bonds
Est. Time: 01 – 05
5.
a.
bank
False. First stage financing is normally provided by family funds and
loans. Second, stage financing is sometimes provided by angel
investors or venture capital firms, but venture capital firms rarely
provide funding for all development expenses up front. Rather, they
provide funding on a stage-by-stage basis. Very few companies will
continue on to the phase of issuing an IPO to raise funds.
b.
False. Underpricing can happen for various reasons. First, it is very
difficult to judge how much investors will be willing to pay for a stock.
Second, some investment bankers say that underpricing raises the
price when it is subsequently traded on the market, thereby making it
easier for the firm to raise further capital. Third, is the concept of the
winner’s curse—the knowledge on the part of the highest bidder that he
or she may have overpaid and adjusts his or her price down
correspondingly.
c.
True
Est. Time: 01 – 05
6.
a.
Net proceeds of public issue = [$10,000,000 × (1 – .015)] – 80,000
Net proceeds of public issue = $9,770,000
Net proceeds of private placement = $10,000,000 – 30,000
Net proceeds of private placement = $9,970,000
b.
To answer this question, we must now take into account the differing
interest rates. To do this, calculate the PV of the extra interest on the
private placement:
PV = C × ((1 / r) – {1 / [r(1 + r)t]})
PV = ((.09 – .085) × $10,000,000) × ((1 / .085) – {1 / [.085(1 + .085)10]})
PV = $328,067
The extra cost of the higher interest on the private placement more
than outweighs the savings of $200,000 in issue costs, ignoring taxes.
c.
Private placement debt can be custom tailored and the terms more
easily renegotiated than public debt.
Est. Time: 06 – 10
7.
a.
Number of new shares = existing shares / number of new shares per
existing share
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
Number of new shares = 100,000 / 2
Number of new shares = 50,000
b.
New investment = number of new shares × offer price per share
New investment = 50,000 × $10
New investment = $500,000
c.
After-issue company value = existing value + new investment
After-issue company value = (100,000 × $40) + $500,000)
After-issue company value = $4,500,000
d.
After-issue number of shares = existing shares + new shares
After-issue number of shares = 100,000 + 50,000
After-issue number of shares = 150,000
After-issue stock price = after-issue company value / after-issue
e.
number of
shares
After-issue stock price = $4,500,000 / 150,000
After-issue stock price = $30
This answer can also be computed as follows:
After-issue stock price = [(number of shares required to obtain one
right ×
stock price) + offer price per one new share] /
after-issue number of shares
After-issue stock price = [(2 × $40) + $10] / 3
After-issue stock price = $30
f.
Opportunity value = $30 − 10
Opportunity value = $20
Est. Time: 06 – 10
8.
a.
Zero-stage financing represents the savings and personal loans
the company’s principals raise to start a firm. First-stage and
second-stage financing comes from funds provided by others
(often venture capitalists) to supplement the founders’
investment.
b.
Carried interest is the name for the investment profits paid to a
private equity or venture capitalist partnership.
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
c.
A rights issue is a sale of additional securities to existing
investors; it can be contrasted with an at-large issuance (which is
made to all interested investors).
d.
A road show is a presentation about the firm given to potential
investors in order to gauge their reactions to a stock issue and to
estimate the demand for the new shares.
e.
A best efforts offer is an underwriter’s promise to sell as much
as possible of a security issue.
f.
A qualified institutional buyer is a large financial institution
which, under SEC Rule 144A, is allowed to trade unregistered
securities with other qualified institutional buyers.
g.
Blue-sky laws are state laws governing the sale of securities
within the state.
h.
A greenshoe option in an underwriting agreement gives the
underwriter the option to increase the number of shares the
underwriter buys from the issuing company.
Est. Time: 06 – 10
9.
a.
Management’s willingness to invest in Marvin’s equity was a credible
signal because the management team stood to lose everything if the
new venture failed, and thus they signaled their seriousness. By
accepting only part of the venture capital that would be needed,
management was increasing its own risk and reducing that of First
Meriam. This decision would be costly and foolish if Marvin’s
management team lacked confidence that the project would get past
the first stage.
b.
Marvin’s management agreed not to accept lavish salaries. The cost
of management perks comes out of the shareholders’ pockets. In
Marvin’s case, the managers are the shareholders.
Est. Time: 01 – 05
10.
If he is bidding on underpriced stocks, he will receive only a portion of the
shares he applies for. If he bids on undersubscribed stocks, he will receive
his full allotment of shares, which no one else is willing to buy. Hence, on
average, the stocks may be underpriced but once the weighting of all stocks
is considered, it may not be profitable. This is known as the winner’s curse.
Est. Time: 01 – 05
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
11.
There are several possible reasons why the issue costs for debt are lower
than those of equity, among them:
 The cost of complying with government regulations may be lower for
debt.
 The risk of the security is less for debt and hence the price is less
volatile. This decreases the probability that the issue will be mispriced
and therefore decreases the underwriter’s risk.
Est. Time: 01 – 05
12.
a.
Inelastic demand implies that a large price reduction is needed in order
to sell additional shares. This would be the case only if investors
believe that a stock has no close substitutes (i.e., they value the stock
for its unique properties).
b.
Price pressure may be inconsistent with market efficiency. It implies
that the stock price falls when new stock is issued and subsequently
recovers.
c.
If a company’s stock is undervalued, managers will be reluctant to sell
new stock, even if it means forgoing a good investment opportunity.
The converse is true if the stock is overvalued. Investors know this
and, therefore, mark down the price when companies issue stock. (Of
course, managers of a company with undervalued stock become even
more reluctant to issue stock because their actions can be
misinterpreted.)
If (b) is the reason for the price fall, there should be a subsequent price
recovery. If (a) is the reason, we would not expect a price recovery,
but the fall should be greater for large issues. If (c) is the reason, the
price fall will depend only on issue size (assuming the information is
correlated with issue size).
Est. Time: 06 – 10
13.
a.
Example: Before issue, there are 100 shares outstanding at $10 per
share. The company sells 20 shares for cash at $5 per share.
Company value increases by: (20 x $5) = $100. Thus, after issue,
each share is worth:
[(100 × $10) + $100] / (100 + 20) = $9.17
New shareholders gain = 20  $4.17 = $83
Old shareholders loss = 100  $.83 = $83
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
b.
Example: Before issue, there are 100 shares outstanding at $10 per
share. The company makes a rights issue of 20 shares at $5 per share.
Each right is worth:
Value of one right = (rights on price – issue price) / (N + 1)
Value of one right = ($10 – 5) / (5 + 1)
Value of one right = $.83
Shareholder value = stock value + right value
Shareholder value = $9.17 + .83
Shareholder value = $10
The shareholder’s total wealth is unaffected as the right can be sold for
$.83, in which case the shareholder will own a stock worth $9.17 and
have $.83 in cash. Thus, the shareholder will still have a value of $10.
.
Est. Time: 06 – 10
14.
a.
Number of new shares = existing shares / number of new shares per
existing share
Number of new shares = 10,000,000 / 4
Number of new shares = 2,500,000
New investment = number of new shares × offer price per share
New investment = 2,500,000 × €5
New investment = €12,500,000
b.
Opportunity value = (rights on price – issue price) / (N + 1)
Opportunity value = €6 – 5) / (4 + 1)
Opportunity value = €.20
c.
After-issue stock price = after- issue company value / after-issue
shares
After-issue stock price = [(10,000,000 × €6) + €12,500,000] /
(10,000,000
+ 2,500,000)
After-issue stock price = €5.80
A stockholder who previously owned four shares had stocks with a
value of: (4  €6) = €24. This stockholder has now paid €5 for a fifth
share so that the total value is: (€24 + €5) = €29. This stockholder
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
now owns five shares with a value of: (5  €5.80) = €29, so that she is
no better or worse off than she was before.
d.
The share price would have to fall to the issue price per share, or €5
per share. Firm value would then be:
Firm value = 10 million  €5
Firm value = €50.00 million
Est. Time: 11 – 15
15.
See problem 14 for the €5 issue price calculations.
At the €4 issue price, the number of shares needed to raise the same amount
of funds is:
a.
Number of shares needed = amount needed / issue price
Number of new shares = €12,500,000 / €4
Number of new shares = 3,125,000
b.
Shares per right = 10,000,000 / 3,125,000
Shares per right = 3.2
Opportunity value = (rights on price – issue price) / (N + 1)
Opportunity value = €6 – 4) / (3.2 + 1)
Opportunity value = €.48
c.
After-issue stock price = after- issue company value / after-issue
shares
= [(10,000,000 × €6) + €12,500,000] /
(10,000,000
+ 3,125,000)
After-issue stock price = €5.52
A stockholder who previously owned 3.2 shares had stocks with a
value of: (3.2  €6) = €19.20. This stockholder has now paid €4 for
one additional share so that the total value is: (€19.20 + €4) = €23.20.
This stockholder now owns 4.2 shares with a value of: (4.2  €5.52) =
€23.20, so that she is no better or worse off than she was before.
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
Thus, the shareholder is the same position regardless of the issue
price.
d.
The share price would have to fall to the issue price per share, or €4
per share. Firm value would then be:
Firm value = 10 million  €4
Firm value = €40 million
Est. Time: 06 – 10
16.
Before the general cash offer, the value of the firm’s equity is:
Pre-offer equity = 10,000,000 × €6 = €60,000,000
New financing raised (from Problem 15) is €12,500,000
Total equity after general cash offer = €60,000,000 + 12,500,000 = €72,500,000
Total new shares = €12,500,000 / €4 = 3,125,000
Total shares after general cash offer = 10,000,000 + 3,125,000 = 13,125,000
Price per share after general cash offer = €72,500,000 / 13,125,000 =
€5.5238
Existing shareholders have lost = €6.00 – 5.5238 = €.4762 per share
Total loss for existing shareholders = €0.4762 × 10,000,000 = €4,762,000
New shareholders have gained = €5.5238 – 4.00 = €1.5238 per share
Total gain for new shareholders = €1.5238 × 3,125,000 = €4,761,875
Except for the rounding error, we see that the gain for the new shareholders
comes at the expense of the existing shareholders.
Est. Time: 11 – 15
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
CHAPTER 17
Does Debt Policy Matter?
+ Câu hỏi lý thuyết cuối chương 17: 5,7,15
+ Bài tập cuối chương 17: 1-4,6; 8,9,11,12
1.
Note that the market value of Copperhead is far in excess of its book value.
Ownership percent = shares owned / total shares
Ownership percent = 50,000 / 8m
Ownership percent = .00625, or .625%
Borrow = ownership percent × firm’s debt reduction
Borrow = .625% × $1m
Borrow = $6,250
Ms. Kraft owns .625% of the firm, which proposes to increase common stock
to $17 million and cut short-term debt by $1 million. Ms. Kraft can offset the
firm’s change in capital structure by borrowing $6,250 and buying that much
more Copperhead stock.
Est. Time: 01 - 05
2.
a.
Given a 12.5 percent cost of equity before debt we find the expected
return on equity:
rA = rD(D / V) + rE(E / V)
.125 = .05(.50) + rE(.50)
rE = .20, or 20%
b.
The overall cost of capital will remain unchanged at 12.5 percent.
c.
Maintaining the perpetual stream of earnings and dividends, the E/P
must now be 20 percent, which implies a P/E ratio of 5.
d.
Assuming MM are correct, the stock price remains at $50.
e.
Since the debt is risk free, its beta is zero; the beta of the stock is found
as:
βA = βD(D / V) + βE(E / V)
1.0 = .0(.50) + βE(.50)
βE = 2.0
Est. Time: 06 - 10
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
3.
Assuming the company’s risk of debt is not affected and there are no
taxes, the expected return on assets will not change. The expected return on
assets is:
rA = rD(D / V) + rE(E / V)
rA =.08(30 / 80) + .16(50 / 80)
rA =.13, or 13%
Holding rA constant, the new return on equity will be:
rA = rD(D / V) + rE(E / V)
.13 =.08(20 / 80) + rE (60 / 80)
rE =.1467, or 14.67%
Est. Time: 01 - 05
4.
a.
Share price = $10; Shares outstanding = 750
Operating income ($)
Interest ($)
Equity earnings ($)
Earnings per share ($)
Return on shares (%)
b.
500
250
250
.33
3.33
1,000
250
750
1.00
10.00
1,500
250
1,250
1.67
16.67
2,000
250
1,750
2.33
23.33
New capital structure:
Debt = $2,500
Equity = $10,000 – 2,500
Equity = $7,500
D/E = .33
βA = βD(D / V) + βE(E / V)
.8 = .0($2,500 / $10,000) + βE($7,500 / $10,000)
βE = 1.07
Est. Time: 06 - 10
5.
a.
True
b.
True (as long as the return earned by the company is greater than the
interest payment, earnings per share increase, but the P/E falls to
reflect the higher risk).
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
c.
False (the cost of equity increases with the ratio D/E).
d.
False (the formula rE = rA + (D/E)(rA - rD) does not require rD to be
constant).
e.
False (debt amplifies variations in equity income).
f.
False (value increases only if clientele is not satisfied).
Est. Time: 01 - 05
6.
a.
Debt = $5,000
Equity = $10,000 – 5,000
Equity = $5,000
Total = $10,000
The return on assets will remain constant at 15 percent.
rA = rD(D / V) + rE(E / V)
.15 =.125(.50) + rE (.50)
rE =.1750, or 17.50%
b.
The beta of the assets is unchanged; β A= .6.
βA = βD(D / V) + βE(E / V)
.6 = .50βD + .50βE
To solve for two unknowns, you need two formulas:
The second formula requires the risk-free rate, which is:
Risk-free rate = 12.5% – 2.5
Risk-free rate = 10%
We know the risk premium per unit of beta must be constant, therefore:
Risk premiumD / βD= Risk premiumE / βE
(.125 – .100) / βD = (.175 – .100) / βE
βE = 3βD
Substituting back into our original formula we have:
.6 = .50βD + .50(3βD)
βD = .3
Given the value of βD:
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
βE = 3βD
βE = 3(.3)
βE = .9
Est. Time: 01 - 05
7.
See Figure 17.3.
Est. Time: 01 - 05
8.
rE = rA + (rA – rD)(D/E)
rE = .14 + (.14 – .095) × (45 / 55)
rE = .1768, or 17.68%
After-tax WACC = rD(1 –Tc)(D/V) + rE(D/E)
After-tax WACC = .095 × (1 – .40) × .45 + .1768 × .55
After-tax WACC = .1229, or 12.29%
Est. Time: 01 - 05
9.
a.
The two firms have equal value; let V represent the total value of the
firm. Rosencrantz could buy 1% of Company B’s equity and borrow an
amount equal to:
0.01  (DA - DB) = 0.002V
This investment requires a net cash outlay of (0.007V) and provides a
net cash return of:
(0.01  profits) – (0.003  rf  V)
where rf is the risk-free rate of interest on debt. Thus, the two
investments are identical.
b.
Guildenstern could buy 2% of Company A’s equity and lend an amount
equal to:
0.02  (DA - DB) = 0.004V
This investment requires a net cash outlay of (0.018V) and provides a
net cash return of:
(0.02  profits) – (0.002  rf  V)
Thus the two investments are identical.
c.
The expected dollar return to Rosencrantz’ original investment in A is:
(0.01  C) – (0.003  rf  VA)
where C is the expected profit (cash flow) generated by the firm’s
assets. Since the firms are the same except for capital structure, C
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
must also be the expected cash flow for Firm B. The dollar return to
Rosencrantz’ alternative strategy is:
(0.01  C) – (0.003  rf  VB)
Also, the cost of the original strategy is (0.007VA) while the cost of the
alternative strategy is (0.007VB).
If VA is less than VB, then the original strategy of investing in Company
A would provide a larger dollar return at the same time that it would
cost less than the alternative. Thus, no rational investor would invest in
Company B if the value of Company A were less than that of Company
B.
Est. Time: 06 - 10
10.
When a firm issues debt, it shifts its cash flow into two streams. MM’s
Proposition I states that this does not affect firm value if the investor can
reconstitute a firm’s cash flow stream by creating personal leverage or by
undoing the effect of the firm’s leverage by investing in both debt and equity.
It is similar with Carruther’s cows. If the cream and skim milk go into the
same pail, the cows have no special value. (If an investor holds both the debt
and equity, the firm does not add value by splitting the cash flows into the two
streams.) In the same vein, the cows have no special value if a dairy can
costlessly split up whole milk into cream and skim milk. (Firm borrowing does
not add value if investors can borrow on their own account.) Carruther’s cows
will have extra value if consumers want cream and skim milk and if the dairy
cannot split up whole milk or if it is costly to do so.
Est. Time: 06 - 10
11.
a.
The market price of the stock is not affected by the announcement.
b.
Shares repurchased = repurchase amount / share price
Shares repurchased = $160m / $10
Shares repurchased = 16 million
c.
Market value = debt + equity
Market value = $160m + [(25m – 16m)  $10]
Market value = $250 million
The market value of the firm is unchanged.
d.
Debt ratio = debt / (debt + equity)
Debt ratio = $160m / $250m
Debt ratio = .64
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
e.
No one gains or loses.
Est. Time: 06 - 10
12.
a.
The market value of the firm’s equity increases by $30 million, the
amount of the decrease in the market value of the firm’s existing debt.
Therefore, the price of the stock increases to:
Stock price = equity market value / shares
Stock price = [(15m × $10) + $30m] / 15m
Stock price = $12
b.
Shares repurchased = repurchase amount / stock price
Shares repurchased = $60m / $12
Shares repurchased = 5 million
c.
Market value = debt + equity
Market value = ($70m + 60m) + [(15m – 5 m)  $12)
Market value = $250 million
The market value of the firm is unchanged.
d.
Debt ratio = debt / (debt + equity)
Debt ratio = $130m / $250m
Debt ratio = .52
e.
The investors in the existing debt lose $30 million while the
shareholders gain this $30 million. The value of each share increases
by:
Stock price gain = total gain / shares
Stock price gain = $30m / 15m
Stock price gain = $2
Est. Time: 06 - 10
15.
a.
Under Proposition I, the firm’s cost of capital (rA) is not affected by the
choice of capital structure. The reason the quoted statement seems to
be true is that it does not account for the changing proportions of the
firm financed by debt and equity. As the debt-equity ratio increases, it
is true that both the cost of equity and the cost of debt increase, but a
smaller proportion of the firm is financed by equity. The overall effect is
to leave the firm’s cost of capital unchanged.
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
b.
Moderate borrowing does not significantly affect the probability of
financial distress, but it does increase the variability (and market risk)
borne by stockholders. This additional risk must be offset by a higher
average return to stockholders.
CHAPTER 25
Leasing
+ Câu hỏi lý thuyết cuối chương 25: 1-7
+ Bài tập cuối chương 25: 8-12
1.
The initial lease period is shorter than the economic life
of the asset.
The initial lease period is long enough for the lessor to
recover the cost of the asset.
The lessor provides maintenance and insurance.
The lessee provides maintenance and insurance.
The lessor buys the equipment from the manufacturer.
The lessor buys the equipment from the prospective
lessee.
The lessor finances the lease contract by issuing debt
and equity claims against it.
Operating
Financial
Full-service
Net
Direct
Sale and leaseback
Leveraged
Est. Time: 06 – 10
2.
The rational reasons for leasing are:
• The lessee’s need for the leased asset is only temporary.
• Specialized lessors are better able to bear the risk of obsolescence.
• Leasing allows firms with low marginal tax rates to “sell” depreciation tax
shields.
• Leasing reduces the transaction cost of obtaining external financing.
• Leasing can reduce the alternative minimum tax.
Est. Time: 06 – 10
3.
a.
The lessor must charge enough to cover the present value of the costs
of owning and operating the asset over its expected economic life. In a
competitive leasing market the present value of rentals cannot exceed
the present value of costs. The competitive rental payment ends up
equal to the lessor’s equivalent annual cost.
b.
The user’s equivalent annual cost is the annual cost to the user of
owning and operating the asset. If the operating lease rate is less than
this cost, it pays to lease.
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
Est. Time: 01 – 05
4.
a.
b.
c.
d.
e.
f.
g.
True
True
True, but compare after-tax rates
True
True
True
True
Est. Time: 06 – 10
5.
If the lease is affirmed, the lessee continues to use the leased asset and must
make the full lease payments. If the lease is rejected, the leased asset is
returned to the lessor. If the value of the returned asset is not enough to cover
the remaining lease payments, the lessor’s loss becomes an unsecured claim
on the bankrupt firm.
Est. Time: 01 – 05
6.
A leveraged lease is a three-way transaction among the lessor, the lessee,
and lenders. The lenders put up about 80% of the cost of the leased asset in
return for nonrecourse debt. The lenders have first claim on the lease
payments and the leased asset. The lessor gets interest and depreciation tax
shields. The lessor gets the asset at the end of the lease unless the lessee
exercises an option to buy the asset.
Est. Time: 01 – 05
7.
Lenders have no claim on the lessor if the lessee defaults. The lessor avoids
liability in this case. But lenders will demand better terms, for example, a higher
interest rate, as compensation for lack of recourse.
Est. Time: 01 – 05
8.
The present value of the costs and the present value of the lease payments
are shown in the following table:
t=0
Depreciation
t=1
600.00
t=2
960.00
t=3
576.00
t=4
345.60
t=5
345.60
t=6
172.80
Initial cost
Deprec tax shield
Aftertax adm costs
Total
PV(9%) = -$3,439.80
-3,000.00
-260.00
-3,260.00
210.00
-260.00
-50.00
336.00
-260.00
76.00
201.60
-260.00
-58.40
120.96
-260.00
-139.04
120.96
-260.00
-139.04
60.48
.00
60.48
Break-even rent
Tax
After-tax break-even rent
PV(9%) = -$3,439.80
1,082.29
378.80
703.49
1,082.29
-378.80
703.49
1,082.29
-378.80
703.49
1,082.29
-378.80
703.49
1,082.29
-378.80
703.49
1,082.29
-378.80
703.49
.00
.00
.00
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
Cash Flow
-2,556.51
653.49
779.49
645.09
564.45
564.45
60.48
The after-tax break-even lease rate is the payment for a six-year annuity due
whose present value is $3,439.80:
PV = C × ((1 / r) – {1 / [r(1 + r)t]}) × (1 + r)
$3,439.80 = C × ((1 / .09) – {1 / [.09(1.09)6]}) × 1.09
C = $703.49, which is the after-tax lease payment
Pre-tax lease payment = $703.49 / (1 – .35)
Pre-tax lease payment = $1,082.29
Est. Time: 06 – 10
9.
The pre-tax administrative costs are $200 per year, so the after-tax costs are
$130 at the beginning of each year. Administrative costs, the depreciation
tax shield, and the lease payments are largely fixed and can be discounted at
the after-tax interest rate of:
After-tax rate = .06 × (1 – .35)
After-tax rate = .0390, or 3.90%
t=0
Depreciation
Initial cost
Deprec tax shield
Aftertax adm costs
Total
PV(3.90%) = -$2,765.49
t=1
600.00
t=2
960.00
t=3
576.00
t=4
345.60
t=5
345.60
t=6
172.80
210.00
-130.00
80.00
336.00
-130.00
206.00
201.60
-130.00
71.60
120.96
-130.00
-9.04
120.96
-130.00
-9.04
60.48
0.00
60.48
-3,000.00
-130.00
-3,130.00
The lease payment is computed as:
PV = C × ((1 / r) – {1 / [r(1 + r)t]}) × (1 + r)
$2,765.49 = C × ((1 / .0390) – {1 / [.0390(1.0390)6]}) × 1.0390
C = $506.10, which is the after-tax lease payment
Pre-tax lease payment = $506.10 / (1 – .35)
Pre-tax lease payment = $778.61
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
Est. Time: 06 – 10
10. a.
costs
If the expected rate of inflation is 5% per year, then administrative
increase by 5% per year. We further assume that the lease payments
grow at the rate of inflation (i.e., the payments are indexed to
inflation). However, the depreciation tax shield amounts do not
change because depreciation is based on the initial cost of the desk.
The appropriate nominal discount rate is now:
Nominal discount rate = (1.05  1.09) – 1 = .1445, or 14.45%
These changes yield the following, indicating that the initial lease payment
has
increased from $1,082 to about $1,113:
t=0
Depreciation
t=1
600.00
t=2
960.00
t=3
576.00
t=4
345.60
t=5
345.60
t=6
172.80
Initial cost
-3,000.00
Deprec tax shield
Aftertax adm costs
Total
PV(14.45%) = –$3,537.83
-260.00
-3,260.00
210.00
-273.00
-63.00
336.00
-286.65
49.35
201.60
-300.98
-99.38
120.96
-316.03
-195.07
120.96
-331.83
-210.87
60.48
.00
60.48
Break-even rent
Tax
After-tax break-even rent
PV(14.45%) = –$3,537.83
1,113.13
-389.60
723.53
1,168.79
-409.08
759.71
1,227.23
-429.53
797.70
1,288.59
-451.01
837.58
1,353.02
-473.56
879.46
1,420.67
-497.23
923.43
.00
.00
.00
Cash flow
-2,536.47
696.71
847.05
738.20
684.39
712.56
60.48
Here, we solve for the break-even lease payments by first solving for the
after-tax payment that provides a present value, discounted at 9%, equal to
the present value of the costs, keeping in mind that the annuity begins
immediately. We use the 9% discount rate in order to find the real value of
the payments (i.e., $723.53). Then each of the subsequent payments reflects
the 5% inflation rate. Solve for the break-even rent as follows:
Break-even rent = $723.53 / (1 – .35) = $1,113.13
b.
With a reduction in real lease rates of 10% each year, the nominal
lease amount will decrease by 5.5% each year. That is, the nominal
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
lease rate is multiplied by a factor of (1.05  .9) = .945 each year.
Thus, we have:
t=0
Depreciation
t=1
600.00
t=2
960.00
t=3
576.00
t=4
345.60
t=5
345.60
t=6
172.80
Initial cost
-3,000.00
Deprec tax shield
Aftertax adm costs
Total
PV(14.45%) = –$3,537.83
-260.00
-3,260.00
210.00
-273.00
-63.00
336.00
-286.65
49.35
201.60
-300.98
-99.38
120.96
-316.03
-195.07
120.96
-331.83
-210.87
60.48
.00
60.48
Break-even rent
Tax
After-tax break-even rent
PV(14.45%) = –$3,537.83
1,388.82
-486.09
902.73
1,312.44
-459.35
853.08
1,240.25
-434.09
806.16
1,172.04
-410.21
761.83
1,107.58
-387.65
719.92
1,046.66
-366.33
680.33
.00
.00
.00
Cash flow
-2,357.27
790.08
855.51
662.44
524.85
469.46
60.48
Here, when we solve for the first after-tax payment, use a discount rate of:
(1.09 / .9) – 1 = .2111, or 21.11%
Est. Time: 11– 15
11. If the cost of new limos decreases by 5% per year, then the lease payments
also decrease by 5% per year. In terms of Table 25.1, the only change is in the
break-even rent.
t=0
-82.80
t=1
-2.55
t=2
.60
t=3
-2.76
t=4
-4.78
t=5
-4.78
t=6
-6.29
Break-even rent
Tax
After-tax break-even rent
29.97
-10.49
19.48
28.47
-9.96
18.51
27.04
-9.47
17.58
25.69
-8.99
16.70
24.41
-8.54
15.87
23.19
-8.12
15.07
22.03
-7.71
14.32
Cash flow
-63.32
15.96
18.18
13.94
11.09
10.29
8.03
Total
PV (7%) = -98.15
Here, when we solve for the first after-tax payment, use a discount rate of:
(1.07 / .95) – 1 = .1263, or 12.63%
Est. Time: 06 – 10
12.
a.
Discount rate = .10 × (1 - .35)
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
Discount rate = .065, or 6.50%
The present value of the lease payments is:
PV = (–$26,800 / 1.065) + (–$22,200 / 1.0652) + (–$17,600 /
1.0653)
PV = –$59,307.30
This present value is the value of the equivalent loan.
b.
Lease value = $62,000 – 59,307.30
Lease value = $2,692.70.
c.
National Waferonics should not invest. The lease’s value of
+$2,692.70 does not offset the machine’s negative NPV. On
the other hand, the company would be happy to sign the same
lease on a more attractive asset.
Est. Time: 06 – 10
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
CHAPTER 29
Financial Planning
+ Câu hỏi lý thuyết cuối chương 29 & Bài tập cuối chương 29: 1-12
1.
Inventory period = $15,547 / ($41,454 / 365) = 136.89 days
Accounts receivable period = $20,113 / ($55,656 / 365) = 131.90 days
Accounts payable period = $14,969 / ($41,454 / 365) = 131.80 days
Cash cycle = 136.89 + 131.90 – 131.80 = 136.99 days
Est. Time: 01 – 05
2.
a.
which
b.
period
c.
d.
inventory
e.
A decrease in the inventory turnover increases the inventory period
increases the cash cycle. (Note: The decrease is from 80 to 60 times.)
An increase in the cash discount reduces the accounts receivable
which reduces the cash cycle.
Assuming the reduction in accounts payable is the result of paying
suppliers sooner, the accounts payable period will decrease which
increases the cash cycle.
By producing for orders rather than for inventory, decreases the
period which decreases the cash cycle.
An increase in the inventory level, increases the inventory period which
increases the cash cycle.
Est. Time: 01 – 05
3.
a.
b.
c.
d.
e.
f.
affect
A cash dividend decreases both cash and working capital.
Collecting an account receivable increases cash but does not affect
working capital as current assets are unchanged.
Paying a supplier decreases cash but does not affect working capital
because accounts payable also decreases.
A long-term loan to purchase inventory does not affect cash but does
increase working capital as current assets increase.
A short-term loan to purchase inventory does not affect either cash or
working capital because current assets and current liabilities increase
equally.
Selling marketable securities for cash increases cash but does not
working capital as current assets are unchanged.
Est. Time: 01 – 05
4.
a.
Use; inventory increases, cash decreases (once suppliers have been
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McGraw-Hill Education.
Chapter 12 - Agency Problems, Compensation, and Performance Measurement
paid)
b.
Use; accounts receivable increase while cash decreases
c.
No change: inventory is recorded at cost, not market value
d.
(by
Source; long-term assets decrease, cash increases, equity decreases
the after-tax capital loss)
e.
Use; treasury stock increases and cash decreases
f.
Use; retained earnings decrease and cash decreases
g.
No change; short-term debt decreases and long-term debt increases
Est. Time: 01 – 05
5. Collections = current month cash sales + .50 × current month credit sales + .30 ×
prior month credit sales + (1 – .50 – .30) × 2-month’s prior credit sales
Month 3 collections = 18 + .50(90) + .30(120) + .20(100)
Month 3 collections = $119,000
Month 4 collections = 14 + .50(70) + .30(90) + .20(120)
Month 4 collections = $100,000
Est. Time: 01 – 05
6.
a.
The payables balance at the end of each month will equal (1 – .40), or
60% of that month’s purchases:
January A/P = .60(32) = 19.2
February A/P = .60(28) = 16.8
March A/P = .60(25) = 15.0
April A/P
= .60(22) = 13.2
May A/P
= .60(20) = 12.0
June A/P
= .60(20) = 12.0
b.
The payables payment policy changes effective January 1. As a result,
the payables at the end of each month will be:
January A/P = (.40 + .20)(January sales)
January A/P = (.40 + .20)(32)
January A/P = 19.2
The payables for the following months will be:
A/P = (.40 + .20)(current month’s purchases) + .20(prior month’s
purchases)
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
February A/P = (.40 + .20)(28) + .20(32) = 23.2
March A/P = (.40 + .20)(25) + .20(28) = 20.6
April A/P
= (.40 + .20)(22) + .20(25) = 18.2
May A/P
= (.40 + .20)(20) + .20(22) = 16.4
June A/P
= (.40 + .20)(20) + .20(20) = 16.0
Est. Time: 06 – 10
7.
a.
In Table 29.2, cash = 40; total current assets = 340; bank loans = 15;
current liabilities = 150; total assets = total liabilities and net worth =
590
In Table 29.3, increase (decrease) in short-term debt = −10; net cash
flow from financing activities = −35; and increase in cash balance =
20
b.
(Ignoring the change in depreciation) In Table 29.2, cash = 40;
current assets = 340; gross investment = 375; net fixed assets = 275;
long-term debt = 130; total assets = total liabilities and net worth =
615
(Ignoring the change in depreciation) In Table 29.3, investment in
fixed assets = −55; increase (decrease) in long-term debt =70; net
cash flow from financing activities = −10; and increase in cash
balance = 20
Any depreciation of the new warehouse during the year will increase
cash (by the amount of the additional depreciation tax shield);
increase accumulated depreciation; and reduce net fixed assets, net
worth, total assets and total liabilities and owners’ equity on the
balance sheet.
On the statement of cash flows, any increase in depreciation will
reduce net income by the after-tax amount of the additional
depreciation; increase depreciation, and increase cash by the
amount of the additional depreciation tax shield).
c.
In Table 29.1, cost of goods sold = 1,480; other expenses = 370; EBIT
= 330; pretax income = 325; taxes = 163; net income = 163; earnings
retained in the business = 133
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
In Table 29.2, assuming inventories are unchanged, cash = 128;
current assets = 428; net worth = 453; total assets = total liabilities
and net worth = 678
In Table 29.3, net income = 163; net cash flow from operating
activities = 188; and increase (decrease) in cash balance = 108
d.
Table 29.5 changes are as follows:
Receivables at start of period
Sales
Collections:
Sales in current period (90%)
Sales in last period (10%)
Total collections
Receivables at end of period
Q3
181.6
742.0
Q4
105.2
836.0
667.8
150.6
818.4
105.2
752.4
74.2
826.6
114.6
Table 29.6 changes are as follows:
Collections on accounts receivable
Total sources
Sources minus uses
Cash at start of period
Change in cash balance
Cash at end of period
Cumulative financing required
e.
Q3
818.4
895.4
268.4
-188.6
268.4
79.8
-54.8
Q4
826.6
826.6
189.1
79.8
189.1
268.9
–243.9
Table 29.6 changes are as follows:
Labor and other expenses
Total uses
Sources minus uses
Cash at start of period
Change in cash balance
Cash at end of period
Cumulative financing required
Q1
116.0
632.0
–121.0
25.0
–121.0
–96.0
121.0
Q2
116.0
572.0
–52.6
–96.0
–52.6
–148.6
173.6
Q3
116.0
607.0
140.0
–148.6
140.0
–8.6
33.6
Q4
116.0
617.5
190.3
–8.6
190.3
181.7
–156.7
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
f.
Table 29.6 changes are as follows:
Other
Total sources
Sources minus uses
Cash at start of period
Change in cash balance
Cash at end of period
Cumulative financing required
g.
Q2
50.0
569.4
–22.6
–116.0
-22.6
–138.6
163.6
Q3
77.0
747.0
120.0
–138.6
120
–18.6
43.6
Q4
0.0
807.8
170.3
–18.6
170.3
151.7
–126.7
Table 29.6 changes are as follows:
Minimum operating balance
Cumulative Financing Required
Q1
10.0
126.0
Q2
10.0
198.6
Q3
10.0
78.6
Q4
10.0
–91.7
Est. Time: 11 – 15
8.
a.
False; financial planning is a process of deciding which risks to take.
b.
False; financial planning is concerned with possible surprises as well
as
expected outcomes.
c.
True; financial planning considers both investing and financing
decisions.
d.
False; a typical horizon for long-term planning is five years.
e.
True; perfect accuracy is unlikely to be obtainable, but the firm needs
to
produce the best possible consistent forecasts.
f.
False; excessive detail distracts attention from the crucial decisions.
Est. Time: 01 – 05
9.
a.
Sales increase by 10%, so:
2018 sales = 1.1 × $1,000,000 = $1,100,000
Sales equal 40% of average assets, so average assets must be:
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
Average assets = $1,100,000 / .40 = $2,750,000
Given the beginning and the average assets, ending assets must be:
Ending assets = (average assets × 2) – beginning assets
Ending assets = ($2,750,000 × 2) – $2,600,000
Ending assets = $2,900,000
b.
2018 Income Statement
(in thousands)
Sales
Costs
Interest*
Pretax profit
Tax
Net income
Dividends
Addition to retained earnings
*Assumes debt remains constant
Net assets
Total
Balance Sheet
(in thousands)
$2,900
Debt
Equity
$2,900
Total
$1,100
825
25
$ 250
100
$ 150
75
$ 75
$ 500
2,175
$2,675
External financing need = $2,900,000 – 2,675,000 = $225,000
c.
Debt ratio = ($500,000 + 225,000) / $2,900,000 = .25, or 25%
Est. Time: 06 – 10
10.
Addition to retained earnings = growth rate × (assets – liabilities)
Addition to retained earnings = .10($3,200 – 1,200)
Addition to retained earnings = $200
Residual income = net income – addition to retained earnings
Residual income = (1 + .10)($500) – $200
Residual income = $350
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Chapter 12 - Agency Problems, Compensation, and Performance Measurement
Est. Time: 01 – 05
11.
a.
Internal growth rate = [(1 – payout ratio) × net income] / beginning
net
assets
Internal growth rate = {(1 – .50) × [(1 + .10) × $500]} / $3,200
Internal growth rate = .0859, or 8.59%
b.
Sustainable growth rate = [(1 – payout ratio) × net income] /
Beginning
equity
Sustainable growth rate = {(1 – .50) × [(1 + .10) × $500]} / $2,000
Sustainable growth rate = .1375, or 13.75%
Est. Time: 01 – 05
12.
Inventory period = $100,000 / [(.80 × $8,000,000) / 365] = 5.70 days
Receivables period = $650,000 / ($8,000,000 / 365) = 29.66 days
Payables period = $350,000 / [(.80 × $8,000,000) / 365] = 19.96 days
Change in cash cycle = 5.70 + 29.66 – 19.96 = 15.40 days
Est. Time: 01 – 05
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McGraw-Hill Education.