Chapter 1

CHAPTER 1: An Overview of Financial Management

-> A firm’s intrinsic value is an estimate of a stock’s “true” value based on accurate risk
and return data. It can be estimated but not measured precisely. A stock’s current price is
its market price-the value based on perceived but possibly incorrect information as seen by
the marginal investor. From these definitions, you can see that a stock’s “true” long-run
value is more closely related to its intrinsic value rather than its current price.

-> A stock is said to be equilibrium when it equals to its “true” or intrinsic value. A stock at
any point in time might not be in equilibrium because of its different perceptions of the
market of the firm’s value.

→ The analyst’s estimate is the most credible

because it balances expertise with
independence, whereas the CFO faces conflicts of interest and the roommate lacks valuation
skills.

1.​ Expertise and Experience​

The professional analyst has specialized training, access to analytical tools, industry
data, valuation models, and years of experience evaluating companies. Their job is to
estimate intrinsic values objectively and accurately.
2.​ Independence and Fewer Conflicts of Interest
Your roommate likely lacks professional expertise and may rely on limited or anecdotal
information. The CFO of Company X , although knowledgeable about the firm, has strong
incentives and biases(e.g., promoting the stock price, maintaining investor confidence, or
emphasizing positive expectations). Their estimate may be overly optimistic or aligned with
corporate messaging.

3.​ Reputation and Accountability​

A reputable Wall Street analyst is evaluated based on accuracy, professionalism,
and credibility. Their incentives are aligned with providing the most reliable and
objective estimate.
It is better for a firm’s actual stock price in the market to be equal to its intrinsic value
because the stock is in equilibrium which means there is no need for buying or selling.
From the standpoints of stockholders in general, it is better for a firm’s actual stock price
in the market to be under its intrinsic value because it gives the chance for the stock price
to go higher in the future. This happens because the market price and intrinsic value
equals or crosses each other in the long run. From the standpoints of a CEO who is about
to exercise a million dollars in options and then retire, it is better for a firm’s actual stock
price in the market to be higher than its intrinsic value because it is the current price that
they will be receiving when exercising the stock options.

The board of directors should set CEO compensation dependent on how well the firm
performs. The compensation package should be sufficient to attract and retain the CEO but
not go beyond what is needed. Compensation should be structured so that the CEO is
rewarded on the basis of the stock’s performance over the long run, not the stock’s price on
an option exercise date. This means that options (or direct stock awards) should be phased
in over a number of years so the CEO will have an incentive to keep the stock price high over
time. If the intrinsic value could be measured in an objective and verifiable manner, then
performance pay could be based on changes in intrinsic value. However, it is easier to
measure the growth rate in reported profits than the intrinsic value, although reported
profits can be manipulated through aggressive accounting procedures and intrinsic value
cannot be manipulated. Since intrinsic value is not observable, compensation must be
based on the stock’s market price—but the price used should be an average over time rather
than on a specific date.

The various forms of business organization are proprietorship, partnership, corporation,

and LLC&LLP. An advantage of a proprietorship would be that it doesn’t pay corporate
income tax while a disadvantage would be that it if difficult to raise capital. In a
partnership, an advantage would be that it is ease and inexpensive and a disadvantage
would be that it had unlimited personal liability. In a corporation, an advantage would be
it has limited liability and a disadvantage would be that it doubles on taxation. In the
LLC&LLP, an advantage would be that it has limited liability and a disadvantage would
be it has a complicated structure and set-up.
 1.​ Action A:
$20 → $25 in 6 months

$25 → $30 in 5 years​

→ Total long-term value after 5 years = $30
2.​ Action B:
Stock stays at $20 for several years

$20 → $40 in 5 years​

→ Total long-term value after 5 years = $40
-> Action B is better, even though it does not increase the stock price in the short term.
Because the primary goal is maximizing long-term stockholder wealth, the action that
yields the higher future value ($40 vs. $30) better serves shareholders.

-> long-term wealth maximization is preferred due to:

-​ Short-term increases may be driven by accounting choices, financial manipulation,
or cost-cutting that harms future performance.
-​ Long-term strategies build sustainable competitive advantages, improve risk
management, and strengthen cash flow generation.
-​ Stockholders who invest for long periods benefit more from stable growth, not
temporary price jumps.

-> Actions that often raise stock prices in the short term but hurt long-term value
-​ Excessive cost-cutting (e.g., cutting R&D or employee development).
-​ Aggressive share repurchases funded by debt.
-​ Earnings management to meet quarterly expectations.
-​ Selling valuable assets to boost short-term profit.
-​ Underinvesting in maintenance or innovation.
→ These actions may push the stock from $20 $25, but limit future growth potential,
→
leading to only modest long-term gains
(like $30).

Actions that may depress stock prices in the short term but maximize long-term value
-​ Heavy investment in R&D, technology, or innovation.
-​ Entering new high-growth markets where profits come later.
-​ Building new production capacity or distribution networks.
-​ Acquiring strategic firms (which may increase debt temporarily).
-​ Restructuring or taking one-time losses to fix long-term issues.

→ These decisions may keep the price at $20 for a while, but can unlock much higher
long-term value (like $40).

-> Stockholder wealth maximization is fundamentally a long-term objective .​

Even if short-term prices remain unchanged, the best corporate action is the one that leads
tohigher long-term intrinsic value $40
, just like the option that reaches after 5 years.

-> Stockholders can align interests by creating incentives monitoring mechanisms

, , and
disciplinary forces that encourage managers to act in the best long-term interests of the
firm and its owners.

Method How It Helps Align Interests

Stock-based compensation Makes managers think like owners

Long-term bonus plans Reduces short-term manipulation

Board oversight Provides ongoing monitoring

Firing underperforming managers Creates accountability

 Threat of takeover Market discipline forces efficiency

Activist investor involvement External pressure for value creation

Transparency & audits Reduces informational advantage of managers

Institutional investor monitoring Continuous governance pressure

a) Corporate philanthropy is always a sticky issue, but it can be justified in terms of

helping to create a more attractive community that will make it easier to hire a productive
work force. This corporate philanthropy could be received by stockholders negatively,
especially those stockholders not living in its headquarters city. Stockholders are interested
in actions that maximize share price, and if competing firms are not making similar
contributions, the "cost" of this philanthropy has to be borne by someone the stockholders.
Thus, stock prices could decrease.

b) Companies must make investments in the current period in order to generate future cash
flows. Stockholders should be aware of this, and assuming a correct analysis has been
performed, they should react positively to the decision. The Chinese plant is in this category.
Assuming that the correct capital budgeting analysis has been made, the stock price
should increase in the future.
c) U.S. Treasury bonds are considered safe investments, while common stocks are far more
risky. If the company were to switch the emergency funds from Treasury bonds to stocks,
stockholders should see this as increasing the firm's risk because stock returns are not
guaranteed sometimes they increase and sometimes they decline. The firm might need the
funds when the prices of their investments were low and not have the needed emergency
funds. Consequently, the firm's stock price would probably fall.

a) No, TIAA-CREF is not an ordinary shareholder. Because it is one of the largest institutional
shareholders in the United States and it owns large blocks of stocks in many companies; and
therefore its voice carries a lot of weight. This "shareholder" in effect consists of many individual
shareholders whose savings are invested with this group.

b) For TIAA-CREF to be effective in wielding its weight, it must act as a coordinated unit. In order
to do this, the fund's managers should solicit from the individual shareholders their "votes" on the
fund's practices and from those "votes" act on the majority's wishes. In doing so, the individuals
whose savings are invested in the fund have, in effect, determined the fund's voting practices.

The shares' earnings will decrease. The profits of a corporation decrease as its expenses rise.
Although the corporation just spent a sizable sum of money to modernize its systems,
dividends are distributed as a percentage of benefits. The funds used in this situation may
have come from prior gains or from a loan. The proceeds from this endeavor will be used to
pay back the borrowed funds or to use them as intended. Since a substantial sum of money
was invested, there won't be much left over to distribute as dividends to owners, therefore
the benefits would be limited. The value of the company and the price of the shares will rise
over time. The stockholders' perception of the future will improve as a result of the shift in
technology. There will be more demand for the stocks if the shareholders have a favorable
opinion of the company. The price of stocks rises as demand rises. A higher stock price
boosts the company's cash flow, which raises the firm's intrinsic worth.

The performance of the company must be taken into account when determining the
CEO's salary. This component has to do with how well the CEO performs, what they can
give that is competitive, and how well they accomplish the company's objectives. A fixed
monetary salary plus performance-based stock options should be the foundation of the
CEO's compensation. This is due to the fact that including stock options that depend on a
company's performance in the CEO's compensation package will incentivize the CEO to
make decisions that will improve performance over the long term and will also motivate
the CEO to perform better in order to increase the market price and exercise such options. If
performance is to be taken into account, it should be determined utilizing the company's
long-term, years-long success as opposed to at a certain point in time. This is because
measuring over a brief time frame could result in a collapse caused by dangers that are not
immediately apparent.
There may be variances in compensation as an outside CEO would seek to favor a greater
compensation package, the nature of the company, its size, and atmosphere. As a result,
actions will differ depending on whether you are vice president of company X or CEO of
another company. I will respond differently as a result of these circumstances,
which will influence my decision-making.

No, there are major differences between manager compensation standards and CEO compensation
standards. This is because these three divisions all function independently, which implies that both
their long-term and short-term objectives, profits and potential outcomes differ from one another.
As a result, the salary for the division managers would vary.

On the other hand, a division manager's pay is more likely to be determined by how well
the division is doing. As a result, a CEO's pay is determined by how well the company as a
whole performs and achieves, which takes into account all three choices
A.
The expected payoff to debtholders is $77 million. The expected payoff to stockholders is
(0.5 × $13 million + 0.5 × $53 million) = $33 million. If management selects Project L,
then the firm will have enough cash flow to fully pay debtholders the promised $77 million,
regardless of the state of the economy. The stockholders receive the cash flows that are
available after the debtholders have been paid.
B.
The expected payoff to debtholders is (0.5 × $50 million + 0.5 ×$77 million) = $63.5
million. The expected payoff to stockholders is (0.5 × 0+ 0.5 × $93) = $46.5 million. If
management selects Project H and the economy is weak, then the company will not have
enough cash to fully pay off its debts. In this case, the debtholders would receive all of the
available cash ($50 million) and there will be nothing left over for the stockholders. If the
economy is strong, there will be enough cash to fully pay off the debtholders and the
stockholders will receive all the remaining cash ($170 million - $77 million = $93 million)
C.
The bondholders would surely prefer that the firm select Project L because it
would give them a higher cash flow and lesser risk.
D.
Project H modifies how the company distributes the cash flow payoffs to stockholders
rather than debt holders, despite the fact that Project L and Project H have the same overall
expected payment. Because Project H has a far larger expected return, stockholders
frequently choose it even if the risk is higher.
E.
Bondholders attempt to protect themselves by including covenants in the bond agreements
that limit the use of additional debt by firms and managers as well as other acts (such as
starting risky initiatives at the expense of investors)
Chapter 3
a. Total debt
Debt = Notes payable + Long-term debt

Total debt=150,000+750,000=900,000

b. Total liabilities and equity on the balance sheet

Total liabilities + equity= Total assets=2,500,000

c. Current assets
Current assets=Total assets−Net plant & equipment =2,500,000−2,000,000=500,000

d. Current liabilities
Total liabilities = current liabilities + long-term debt

1,000,000=Current liabilities+750,000

Current liabilities=250,000

e. Accounts payable + accruals

Current liabilities=Accounts payable and accruals + notes payable

Accounts payable =250,000 -150,000 -> Accounts payable=100,000

f. Net working capital (NWC)
NWC=Current assets−Current liabilities=500,000−250,000=250,000​

g. Net operating working capital (NOWC)

NOWC excludes notes payable (a financing item):

NOWC=Current assets−(AP + Accruals) 500,000−100,000=400,000​

h. Explanation of difference between NWC and NOWC

NWC subtracts all current liabilities, including notes payable.
NOWC subtracts only operating current liabilities (AP + accruals), because it measures
capital tied up in operations, not in financing.

-> Difference: 400,000−250,000=150,000

which equals notes payable. -> Thus the difference is that NWC includes notes payable
while NOWC excludes it.

𝑁𝐸𝑇 𝐼𝑁𝐶𝑂𝑀𝐸 13
EBT = 1−𝑇
= 0.65
= $20 Million
EBIT−Interest expense=EBT
20.8−Interest expense=20
Interest expense=20.8−20= $0.8 million

Net income = EBT × (1 – Tax rate)

EBT = {Net income/[1 - T ] = 2.1/0.7= 3.0

EBT = 3.0 million

EBT = EBIT – Interest expense

EBIT = EBT +Interest expense= 3.0 + 2.0 = 5.0​
EBIT} = 5.0 million

EBITDA = EBIT + Depreciation & Amortization

Depreciation & Amortization = EBITDA -EBIT = 7.5 - 5.0 = 2.5​

Depreciation & Amortization = 2.5 million

Answer: $2.5 million

Ending RE= Beginning RE+ Net Income - Dividends​

Dividends = Beginning RE + Net Income- Ending RE

Dividends= 784 + 75 - 825 = 859 - 825 = 34

Dividends paid to shareholders = $34 million

(Common shares + MVA)/Stock price = Outstanding Common Share

($900,000,000+ $50,000,000)/$80 =$11,875,000.00

MVA = Market Value of Equity -Capital Contributed by Shareholders

Market Value of Equity = Current stock price × Number of shares outstanding

Capital Contributed = Money invested by shareholders + retained earnings
Market Value of Equity = 2,000,000 x 28 = 56,000,000

MVA = 56,000,000 - 34,000,000 = 22,000,000​

Masterson’s Market Value Added (MVA) = $22,000,000
EVA = NOPAT - Annual Dollar Cost of Capital
NOPAT = EBIT (1-Tax Rate)
Annual Dollar Cost of Capital = Total interested capital x After tax percentage capital
NOPAT= ($3,500,000 (1-36%)=$2,240,000.00
Annual Dollar Cost of Capital = $20,000,000 x 8% = $1,600,000.00
EVA = $2,240,000 - $1,600,000 = $640,000.00
Chapter 4
DSO = Accounts Receivable/Average Daily Sales

Accounts Receivable= DSO x Average Daily Sales

Average Daily Sales} =Annual Sales/365​

Average Daily Sales} = 3,650,003/365 = 10,000

Accounts Receivable = 23 x 10,000​

Accounts Receivable = 230,000​
Baxley Brothers’ Accounts Receivable balance = $230,000
4.2

Stock price = $12​

Shares outstanding = 4.8 million> Equity = 12 x 4.8 = 57.6million​
​
Book value of equity = 57.6 million​
Total capital = $110 million​
debt + equity
Since the firm uses only :

Debt = 110 - 57.6 = 52.4million​

Debt-to-capital = 52.4/110 = 0.476 = 47.6%

4.3

We have:

𝐸𝑞𝑢𝑖𝑡𝑦 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 =𝑅𝑂𝐸/𝑅𝑂𝐴=23%/11% = 2.09

ROE = profit margin x total assets Turnover x equity multiplier

23% = 6% × 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 × 2.09 → 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =1.83

4,4
𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒=𝐶𝑜𝑚𝑚𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦/ 𝑆ℎ𝑎𝑟𝑒𝑑 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
$5,100,000,000=300,000,000=$17
𝑀𝑎𝑟𝑘𝑒𝑡/𝐵𝑜𝑜𝑘 (𝑀/𝐵) 𝑟𝑎𝑡𝑖𝑜
=𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒/𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
$20=$17= 1.18
𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑣𝑎𝑙𝑢𝑒 =𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓𝑒𝑞𝑢𝑖𝑡𝑦 + 𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡 + 𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓
𝑜𝑡ℎ𝑒𝑟 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑐𝑙𝑎𝑖𝑚𝑠 − 𝐶𝑎𝑠ℎ 𝑎𝑛𝑑 𝑐𝑎𝑠ℎ 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡
𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 = $20 × 300,000,000 = $6,000,000,000
𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡 =$10,200,000,000 + $1,000,000,000 = $11,200,000,000
𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑣𝑎𝑙𝑢𝑒 =$6,000,000,000+ $11,200,000,000 − $100,000,000 =
$17,100,000,000
𝐸𝑉/𝐸𝐵𝐼𝑇𝐷𝐴 =𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑣𝑎𝑙𝑢𝑒 𝐸𝐵𝐼𝑇𝐷𝐴 $17,100,000,000=$1,368,000,000= 12.5

4.5

Price = Market/Book x Book value per share​

Price = 2.73 x 21.84 = 59.62​
​
P/E = Price/EPS = 59.62/2.40} -> 24.84​
P/E ≈ 24.8
4.6
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =𝑆𝑎𝑙𝑒𝑠/ 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠-> $150,000,000=$60,000,000=2.5 𝑡𝑖𝑚𝑒𝑠
𝑅𝑂𝐸 = 𝑃𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 × 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 × 𝐸𝑞𝑢𝑖𝑡𝑦 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟
= 3% × 2.5 × 1.9 = 0.1425= 14.25%

4.7
𝑅𝑂𝐸 = 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 /𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 $24,000=$250,000= 0.096 = 9.6%
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 = (𝐸𝐵𝐼𝑇 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒)−[(𝐸𝐵𝐼𝑇 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒)× 40%]
↔ $24,000 =(𝐸𝐵𝐼𝑇 − $5,000)−[(𝐸𝐵𝐼𝑇 − $5,000)× 40%] ↔ 𝐸𝐵𝐼𝑇 = $45,000
𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 = 𝑁𝑜𝑡𝑒𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 + 𝐿𝑜𝑛𝑔 − 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 +𝐶𝑜𝑚𝑚𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦= $27,000 +
$75,000 + $250,000 = $352,000

4.8
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝑆𝑎𝑙𝑒𝑠/ 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠↔ 3.23 = $17,000,000/ 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
↔ 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 =$5,230,769.231
𝐶𝑜𝑚𝑚𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦 = $5,230,769.231 × 50% = $2,615,384.62
𝑅𝑂𝐸 = 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒/ 𝑆𝑎𝑙𝑒𝑠 × 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 ×𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠/ 𝐶𝑜𝑚𝑚𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦 ↔
17% = 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 $17,000,000×3.23 ×$5,230,769.231 /$2,615,384.62
↔ 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 = $447,368.42

4.9

ROA = Net Income / Total Assets

Total Assets = Net Income / ROA​

Total Assets = 615,000 / 0.10 = 6,150,000

Calculate Basic Earning Power (BEP)

BEP = EBIT / Total Assets

Net Income formula:​

NI = (EBIT - Interest) × (1 - Tax)

615,000 = (EBIT - 202,950) × (1 - 0.30)​

615,000 = (EBIT - 202,950) × 0.7​
EBIT - 202,950 = 615,000 / 0.7 = 878,571.43​
EBIT = 878,571.43 + 202,950 = 1,081,521.43

BEP = 1,081,521.43 / 6,150,000 ≈ 0.1757 ≈ 17.6%

Calculate Return on Equity (ROE)

ROE = Net Income / Equity

Equity = 60% of Total Assets = 6,150,000 × 0.60 = 3,690,000

ROE = 615,000 / 3,690,000 ≈ 0.1667 ≈ 16.7%

Calculate Return on Invested Capital (ROIC)

ROIC = EBIT × (1 - Tax) / (Debt + Equity)

ROIC = 1,081,521.43 × (1 - 0.3) / 6,150,000​

ROIC = 757,065 / 6,150,000 ≈ 0.123 ≈ 12.3%

4.10

We are given Market/Book ratio = 2.0, and Book Equity = 6.5 billion, so:
Market Value of Equity = Book Value × Market/Book​
Market Value of Equity = 6.5 × 2 = 13 billion

Calculate Price per Share

Price per share = Market Value of Equity / Number of Shares​
Price per share = 13,000,000,000 / 180,000,000

13,000,000,000 ÷ 180,000,000 = 72.22

Price per share ≈ $72.22

Calculate Enterprise Value (EV)
Enterprise Value formula:

EV = Market Value of Equity + Market Value of Debt − Cash

EV = 13 billion + 7 billion − 0.25 billion​
EV = 19.75 billion

Calculate EV/EBITDA
EV/EBITDA = Enterprise Value / EBITDA

EV/EBITDA = 19.75 / 2 ≈ 9.875

EV/EBITDA ≈ 9.88
4.11

ROA is related to Profit Margin and Asset Turnover:

ROA = Profit Margin × Asset Turnover

Profit Margin = ROA / Asset Turnover

Profit Margin = 0.04 / 1.33 ≈ 0.0301 ≈ 3.01%

Debt-to-Capital Ratio
ROE is related to ROA and financial leverage:

ROE = ROA × (Total Assets / Equity)

Total Assets / Equity = ROE / ROA = 0.08 / 0.04 = 2

Since Total Assets = Debt + Equity:

Debt-to-Equity ratio = Total Assets / Equity − 1 = 2 − 1 = 1

Debt-to-Capital ratio = Debt / (Debt + Equity) = 1 / (1 + 1) = 0.5

4.14

NI = (EBIT − Interest) × (1 − Tax)

NI = (1,258,000 − 561,000) × (1 − 0.35)​

NI = 697,000 × 0.65​
NI = 453,050

Projected Net Income = $453,050

Debt-to-capital ratio = 40% → Equity = 60% of total assets

Total Assets = Sales / Total Asset Turnover​

Total Assets = 17,000,000 / 2.1 ≈ 8,095,238
Equity = 0.60 × 8,095,238 ≈ 4,857,143

Calculate ROE
ROE = Net Income / Equity

ROE = 453,050 / 4,857,143 ≈ 0.0933

Projected ROE ≈ 9.33%

4.16

BEP = EBIT / Total Assets

EBIT = BEP × Total Assets​

EBIT = 0.35 × 3,000,000 = 1,050,000

ROE if financed entirely with equity

No debt → no interest expense

Net Income (NI) = EBIT × (1 − Tax)​

NI = 1,050,000 × (1 − 0.4) = 1,050,000 × 0.6 = 630,000

Equity = Total Assets = 3,000,000

ROE (all equity) = NI / Equity = 630,000 / 3,000,000 = 0.21 = 21%

ROE if financed with 30% debt

Debt = 30% × 3,000,000 = 900,000​
Equity = 70% × 3,000,000 = 2,100,000​
Interest Expense = Debt × Interest Rate = 900,000 × 0.08 = 72,000

Net Income = (EBIT − Interest) × (1 − Tax)​

NI = (1,050,000 − 72,000) × 0.6 = 978,000 × 0.6 = 586,800

ROE (with debt) = NI / Equity = 586,800 / 2,100,000 ≈ 0.2794 = 27.94%

Difference in ROE
ΔROE = ROE (with debt) − ROE (all equity)​
ΔROE = 27.94% − 21% ≈ 6.94%

​
ROE (all equity) = 21%​
ROE (30% debt) ≈ 27.94%​
Difference in ROE ≈ 6.94%
4.19

Current Ratio (CR) = Current Assets / Current Liabilities

After issuing new short-term debt (ΔN) and using it to buy inventory, both current assets
and current liabilities increase by ΔN:

New Current Assets = 2,392,500 + ΔN​

New Current Liabilities = 1,076,625 + ΔN

(2,392,500 + ΔN) / (1,076,625 + ΔN) ≥ 2.0

Set the equation equal to 2.0 (maximum allowed):

(2,392,500 + ΔN) / (1,076,625 + ΔN) = 2

Multiply both sides:

2,392,500 + ΔN = 2 × (1,076,625 + ΔN)​

2,392,500 + ΔN = 2,153,250 + 2 ΔN

Subtract 2,153,250 from both sides:

2,392,500 − 2,153,250 = 2 ΔN − ΔN

239,250 = ΔN

The short-term debt (notes payable) can increase by:

ΔN = 239,250

4.20

DSO = Accounts Receivable / Average Daily Sales

Accounts Receivable = DSO × Average Daily Sales

Step 2: Calculate current average daily sales

Average Daily Sales = AR / DSO-> Average Daily Sales = 205,000 / 71 ≈ 2,887.32

Annual Sales = Average Daily Sales × 365 -> Annual Sales = 2,887.32 × 365 ≈ 1,053,872

Current Annual Sales ≈ $1,053,872

Adjust sales for 15% decrease
New Annual Sales = 0.85 × Current Annual Sales

-> New Annual Sales = 0.85 × 1,053,872 ≈ 895,791

Average Daily Sales after change = New Annual Sales / 365 ≈ 2,454.6

Calculate new Accounts Receivable

AR_new = DSO_new × Average Daily Sales_new -> AR_new = 20 × 2,454.6 ≈ 49,092

4.21

P/E = Price per Share / Earnings per Share (EPS)

Current EPS = Net Income / Shares​

EPS = 8,000,000 / 540,000 ≈ 14.8148

P/E = 21 / 14.8148 ≈ 1.417

Current P/E ≈ 1.417

Calculate projected EPS next year

Projected EPS = Projected Net Income / Projected Shares​
EPS_next = 13,200,000 / 621,000 ≈ 21.25

Calculate projected stock price

Price_next = P/E × EPS_next​
Price_next = 1.417 × 21.25 ≈ 30.1
Chapter 5
5-1
Formula:​
FV = PV × (1 + r)^t

Calculation:​
FV = 2,000 × (1 + 0.06)^5​
FV = 2,000 × 1.338225 ≈ 2,676.45​
FV ≈ $2,676.45

5-2
Formula:​
PV = FV / (1 + r)^t

Calculation:​
PV = 29,000 / (1 + 0.05)^20​
PV = 29,000 / 2.6533 ≈ 10,931.86​
PV ≈ $10,931.86

5-3
Formula:​
FV = PV × (1 + r)^t → solve for r:​
r = (FV / PV)^(1/t) − 1

Calculation:​
r = (800,000 / 350,000)^(1/19) − 1​
r = (2.2857)^(0.05263) − 1 ≈ 0.0433

5-4
FV = PV × (1 + r)^t → t = ln(FV / PV) / ln(1 + r)​
t = ln(2) / ln(1.04) ≈ 0.6931 / 0.03922 ≈ 17.68​
t ≈ 17.68 years
5-5 Formula for future value of ordinary annuity + lump sum:​
FV = PV × (1 + r)^t + PMT × [((1 + r)^t − 1) / r]​
220,000 = 33,556.25 × (1.12)^t + 5,000 × [((1.12)^t − 1)/0.12]

t ≈ 18 years

5-6
Future value of ordinary annuity:​
FV_ordinary = PMT × [((1 + r)^t − 1) / r]​
FV_ordinary = 800 × [(1.05^5 − 1)/0.05]​
FV_ordinary = 800 × (0.2763/0.05) ≈ 800 × 5.526 ≈ 4,420.80

Future value of annuity due:​

FV_due = FV_ordinary × (1 + r)​
FV_due ≈ 4,420.80 × 1.05 ≈ 4,641.84

Answer:​
FV (ordinary) ≈ $4,420.80​
FV (annuity due) ≈ $4,641.84

5-7 ​
PV = Σ [CF_t / (1 + r)^t]​
PV = 150/(1.11)^1 + 150/(1.11)^2 + 150/(1.11)^3 + 250/(1.11)^4 + 300/(1.11)^5 +
500/(1.11)^6

Step by step:​
150/1.11 ≈ 135.14​
150/1.2321 ≈ 121.85​
150/1.3676 ≈ 109.69​
250/1.518 ≈ 164.60​
300/1.685 ≈ 178.05​
500/1.870 ≈ 267.38

PV ≈ 135.14 + 121.85 + 109.69 + 164.60 + 178.05 + 267.38 ≈ 976.71

Future Value formula:​

FV = Σ [CF_t × (1 + r)^(n − t)] where n = last year (6)

Step by step:​
150 × (1.11)^5 ≈ 150 × 1.685 ≈ 252.75​
150 × (1.11)^4 ≈ 150 × 1.518 ≈ 227.70​
150 × (1.11)^3 ≈ 150 × 1.3676 ≈ 205.14​
250 × (1.11)^2 ≈ 250 × 1.2321 ≈ 308.03​
300 × (1.11)^1 ≈ 300 × 1.11 ≈ 333.00​
500 × (1.11)^0 = 500

FV ≈ 252.75 + 227.70 + 205.14 + 308.03 + 333.00 + 500 ≈ 1,826.62

5-8​
Loan Amount (PV) = $40,000​
Nominal annual rate = 8%​
Term = 5 years → 60 months​
Monthly interest = 8% / 12 = 0.0066667

Monthly Payment Formula:​

PMT = PV × [r × (1 + r)^n] / [(1 + r)^n − 1]

Calculation:​
PMT = 40,000 × [0.0066667 × (1.0066667)^60] / [(1.0066667^60) − 1] ≈ 811.27

EAR Formula:​
EAR = (1 + r_m)^12 − 1 = (1 + 0.08/12)^12 − 1 ≈ 0.083 ≈ 8.3%

Answer:
●​ Monthly Payment ≈ $811.27
●​ EAR ≈ 8.3%

5-9 PRESENT AND FUTURE VALUES FOR DIFFERENT PERIODS

a. FV of $600 for 1 year at 6%:​
FV = 600 × (1 + 0.06)^1 = 636

b. FV of $600 for 2 years at 6%:​

FV = 600 × (1.06)^2 = 600 × 1.1236 ≈ 674.16

c. PV of $600 due in 1 year at 6%:​

PV = 600 / (1.06)^1 ≈ 566.04

d. PV of $600 due in 2 years at 6%:​

PV = 600 / (1.06)^2 ≈ 533.84
5-10
a. FV of $200 compounded for 10 years at 4%:​
FV = 200 × (1.04)^10 ≈ 296.64

b. FV of $200 compounded for 10 years at 8%:​

FV = 200 × (1.08)^10 ≈ 430.05

c. PV of $200 due in 10 years at 4%:​

PV = 200 / (1.04)^10 ≈ 135.03

d. PV of $1,870 due in 10 years:

●​ at 8%: PV = 1,870 / (1.08)^10 ≈ 867.92
●​ at 4%: PV = 1,870 / (1.04)^10 ≈ 1,260.45

e. Present value definition:​

PV = today’s value of a future cash flow discounted at the interest rate.​
Time line:
​
Year 0 → PV​
Year 10 → FV = 1,870​
PV decreases as interest rate increases.

5-11
Given:​
Sales 2012 = 2.5 million, Sales 2017 = 5 million, n = 5 years

a. Growth rate formula:​

g = (Ending / Beginning)^(1/n) − 1

g = (5 / 2.5)^(1/5) − 1 = 2^(0.2) − 1 ≈ 0.1487 ≈ 14.87% per year

b. Statement about 100% ÷ 5 = 20% is incorrect.​

Growth is compounded, so cannot divide linearly. Correct annual growth ≈ 14.87%.

5-12
Formula:​
r = (FV / PV)^(1/n) − 1
a. Borrow $720 → pay $792 in 1 year:​
r = (792 / 720) − 1 = 0.10 → 10%

b. Lend $720 → receive $792 in 1 year:​

r = (792 / 720) − 1 = 10%

c. Borrow $65,000 → pay $98,319 in 14 years:​

r = (98,319 / 65,000)^(1/14) − 1 ≈ 0.032 ≈ 3.2%

d. Borrow $15,000, pay $4,058.60 per year for 5 years (ordinary annuity):​
Use annuity PV formula:​
PV = PMT × [1 − (1 + r)^−n] / r → solve for r numerically ≈ 8%

5-13
Formula: t = ln(2) / ln(1 + r)
a. r = 6%: t = ln(2)/ln(1.06) ≈ 11.90 years​
b. r = 13%: t ≈ 5.53 years​
c. r = 21%: t ≈ 3.53 years​
d. r = 100%: t ≈ 1 year
5-14
FV ordinary annuity: FV = PMT × [(1 + r)^n − 1] / r​
FV annuity due: FV_due = FV × (1 + r)
a. $500/year, 8 years, 14%:​
FV_ordinary = 500 × [(1.14^8 − 1)/0.14] ≈ 500 × 13.019 ≈ 6,509.5​
FV_due = 6,509.5 × 1.14 ≈ 7,421

b. $250/year, 4 years, 7%:​

FV_ordinary = 250 × [(1.07^4 − 1)/0.07] ≈ 250 × 4.310 ≈ 1,077.5​
FV_due = 1,077.5 × 1.07 ≈ 1,153.3

c. $700/year, 4 years, 0%:​

FV_ordinary = 700 × 4 = 2,800​
FV_due = 2,800 × 1 = 2,800

5-15
PV ordinary annuity: PV = PMT × [1 − (1 + r)^−n] / r​
PV annuity due: PV_due = PV × (1 + r)
a. $600/year, 12 years, 8%:​
PV_ordinary = 600 × [1 − 1/1.08^12]/0.08 ≈ 600 × 7.536 ≈ 4,521.6​
PV_due = 4,521.6 × 1.08 ≈ 4,883.3

b. $300/year, 6 years, 4%:​

PV_ordinary = 300 × [1 − 1/1.04^6]/0.04 ≈ 300 × 5.242 ≈ 1,572.6​
PV_due = 1,572.6 × 1.04 ≈ 1,635.5

c. $500/year, 6 years, 0%:​

PV_ordinary = 500 × 6 = 3,000​
PV_due = 3,000 × 1 = 3,000

5-16 PRESENT VALUE OF A PERPETUITY

Given:​
CF = $600, r = 5%

Formula for perpetuity PV:​

PV = CF / r

Calculation:​
PV = 600 / 0.05 = 12,000

If interest rate doubles to 10%:​

PV = 600 / 0.10 = 6,000

Answer:
●​ PV at 5% = $12,000
●​ PV at 10% = $6,000

5-17 EFFECTIVE INTEREST RATE

Given:​
Loan = $230,000​
Annual Payment = $20,430.31​
Term = 30 years
Formula (PV of ordinary annuity):​
PV = PMT × [1 − (1 + r)^−n] / r

Solve for r numerically (trial-and-error or financial calculator).​

Approximate solution: r ≈ 6%

5-18 UNEVEN CASH FLOW STREAM

Given:​
Cash flows:

Stream A: 0, 0, 150, 250, 450, 450, 450, 450, 450, 450, 250, 150​
Stream B: 0, 0, 150, 250, 450, 450, 450, 450, 450, 450, 250, 150
PV formula for uneven cash flows:​
PV = Σ [CF_t / (1 + r)^t]

a. At 5% discount rate:​
Calculate PV for each CF and sum → PV_A ≈ 2,928.5, PV_B ≈ same (if streams
identical)

b. At 0% discount rate:​
PV = sum of all CFs = 3,650

5-19 FUTURE VALUE OF AN ANNUITY

Given:​
Annual saving = $8,000​
Return = 10%​
Start age = 26​
Retirement age 65 → n = 65 − 26 = 39 years

FV formula for ordinary annuity:​

FV = PMT × [(1 + r)^n − 1] / r

a. FV at 65:​
FV = 8,000 × [(1.10^39 − 1)/0.10] ≈ 8,000 × 513.61 ≈ 4,108,880

b. FV at 70:​
n = 44 years​
FV = 8,000 × [(1.10^44 − 1)/0.10] ≈ 8,000 × 923.75 ≈ 7,390,000
c. Annual withdrawals:​
Use PV of annuity formula reversed:​
Withdrawal = FV × [r / (1 − (1 + r)^−t)]

●​ For 65 → t = 20 years:​
Withdrawal ≈ 4,108,880 × [0.10 / (1 − 1.10^−20)] ≈ 535,000 per year
●​ For 70 → t = 15 years:​
Withdrawal ≈ 7,390,000 × [0.10 / (1 − 1.10^−15)] ≈ 863,000 per year

5-20 PV OF A CASH FLOW STREAM

Given:​
Interest rate = 7%

Contract cash flows:

●​ Contract 1: 3,000,000, 5,500,000, 1,000,000, 3,000,000
●​ Contract 2: 3,000,000, 4,500,000, 1,000,000, 2,000,000
●​ Contract 3: 3,000,000, 3,000,000, 1,000,000, 7,000,000

PV formula:​
PV = Σ [CF_t / (1 + r)^t]

Calculation:
●​ Contract 1 PV ≈ 10,321,000
●​ Contract 2 PV ≈ 9,720,000
●​ Contract 3 PV ≈ 10,180,000

Recommendation: Contract 1 has highest PV → choose Contract 1

5-21 EVALUATING LUMP SUMS AND ANNUITIES

Given:
PV of annuity formula:​
PV = PMT × [1 − (1 + r)^−n] / r

Calculations:
7%:​
10-year: PV ≈ 9,500,000 × 7.0236 ≈ 66,724,200 → better than lump sum​
30-year: PV ≈ 5,600,000 × 12.409 ≈ 69,510,400 → best

8%:​
10-year: PV ≈ 9,500,000 × 6.710 ≈ 63,745,000​
30-year: PV ≈ 5,600,000 × 11.257 ≈ 63,039,000 → 10-year annuity better

9%:​
10-year: PV ≈ 9,500,000 × 6.418 ≈ 60,971,000 → best​

Interest rate influence:​

Higher rates → lump sums or shorter annuities more valuable because future payments
discounted more.

5-22 LOAN AMORTIZATION

Given:​
Mortgage = 10,000​
Term = 10 years​
Nominal interest = 10%​
Semiannual payments = 2 per year → n = 20 periods, r = 10% / 2 = 5%

a. Payment formula:​
PMT = PV × [r × (1 + r)^n] / [(1 + r)^n − 1]​
PMT = 10,000 × [0.05 × (1.05)^20] / [(1.05^20) − 1] ≈ 659.96

b. Interest and principal portions (first payment):​

Interest = PV × r = 10,000 × 0.05 = 500​
Principal = PMT − Interest = 659.96 − 500 ≈ 159.96

Second payment:​
New PV = 10,000 − 159.96 = 9,840.04​
Interest = 9,840.04 × 0.05 ≈ 492​
Principal = 659.96 − 492 ≈ 167.96

c. Interest reported first year:​

Sum of two semiannual interests = 500 + 492 ≈ 992​
Next year interest smaller because principal reduced.
d. Constant payments → interest declines, principal increases over time because each
payment applies to smaller remaining balance.
Chapter 7
7.1

Given:
Par value (FV) = $1,000

Coupon rate = 9% → Annual coupon (C) = 0.09 × 1,000 = $90

Years to maturity (n) = 23

Yield to maturity (YTM) = 11% → r = 0.11

Annual payments

Bond price formula:​

P = C x {1 - (1+r)^{-n}}{r}\right] + FV \times (1+r)^{-n}

Step 1: Present value of coupons (annuity)

[ 1.11^{23} \approx 10.892[ (1.11)^{-23} = 1 / 10.892 \approx 0.0918​
PV_coupons = 90 x{1 - 0.0918}{0.11} = 90x 8.256 -> 743.04​
PV_par = 1,000 / 10.892 \approx 91.8

P = PV_coupons + PV_par ->a 743.04 + 91.8 -> 834.84

Answer: Bond price ≈ $835

7-2 Yield to Maturity and Future Price

Given:​
Par = 1,000​
Coupon = 8% annual = 80​
Maturity = 12 years​
Current price = 980

a. YTM
Solve for r in:​
980 = 80 \cdot PVIFA(r,12) + 1000 \cdot PVIF(r,12)

YTM ≈ 8.25%
b. Price in 3 years (YTM stays 8.25%)
Remaining maturity = 12 – 3 = 9 years
​
P_3 = 80 \cdot PVIFA(8.25%,9) + 1000 \cdot PVIF(8.25%,9)

Result:

Price in 3 years ≈ $985.15

7-3 Bond Valuation
Given:​
Par = 1,000​
Coupon = 8% semiannual → 40 every 6 months​
YTM = 11% nominal → 11/2 = 5.5% per period
​
Maturity = 14 years → 28 periods
​
P = 40 \cdot PVIFA(5.5%,28) + 1000 \cdot PVIF(5.5%,28)

Result:

Price ≈ $804.63
7-4 YTM and YTC
Given:​
Par = 1,000​
Coupon = 11% semiannual → 55 per period​
Current price = 1,283.09​
Maturity = 8 years → 16 periods​
Call price = 1,154​
Callable in 4 yrs → 8 periods

Nominal YTM
Solve for i in:​
1283.09 = 55 \cdot PVIFA(i,16) + 1000 \cdot PVIF(i,16)

Result:

YTM (nominal) ≈ 7.75%

(semiannual rate ≈ 3.875%)

Nominal YTC
Solve for i:​
1283.09 = 55 \cdot PVIFA(i,8) + 1154 \cdot PVIF(i,8)

Result:

YTC (nominal) ≈ 6.54%

(semiannual ≈ 3.27%)

Return investors expect

above par, it will most likely be called.
Because the bond sells

➡ Expected return = YTC ≈ 6.54%

7-5 Bond Valuation

Both bonds:​
Par = 1,000​
Coupon = 11% annual = 110

Bond L maturity = 12 yrs​

Bond S maturity = 1 yr

a. Price at different interest rates

If r = 6%
Bond L:​
P_L = 110 \cdot PVIFA(6%,12) + 1000 \cdot PVIF(6%,12)​
→ ≈ $1,355.99
Bond S:​
P_S = {110+1000}/{1.06}​
→ ≈ $1,056.60
If r = 8%
Bond L ≈ 1,190.33​
Bond S ≈ 1,018.52
If r = 12%
Bond L ≈ 1,000.00​
Bond S ≈ 991.07

b. Why long-term bond price changes more

Because longer maturities have higher duration, meaning more cash flows come far in the
future.​
Future cash flows aremore sensitive to discount-rate changes → large price swings.
Therefore, Bond L varies more than Bond S.

7-15
Given​
Par F=$1,000

Annual coupon rate = 8% → C=0.08×1000=$80 (paid annually)​

Original maturity = 20 years​
You will hold for 5 years.​
Your required return today = r0=9%=0.09​
15-year
You expect that in 5 years the YTM on a similar-risk bond will be r5=7.5%=0.075

Compute expected price at t = 5 (call it P5P_5P5​)

Formula:

P5=80⋅PVIFA(r5,15)+1000⋅(1+r5)−15,

where PVIFA(r,n)=1−(1+r)−nr\text{PVIFA}(r,n)=\dfrac{1-(1+r)^{-n}}{r}PVIFA(r,n)=r1−(1+r)−n​.

Compute intermediate values:

1.​ (1+r5)−15=(1+0.075)−15(1+r_5)^{-15} = (1+0.075)^{-15}(1+r5​)−15=(1+0.075)−15.​

(1.075)−15≈0.33796601912224844(1.075)^{-15} \approx
0.33796601912224844(1.075)−15≈0.33796601912224844
 2.​ PVIFA(0.075,15)=1−0.337966019122248440.075\text{PVIFA}(0.075,15) =
\dfrac{1-0.33796601912224844}{0.075}PVIFA(0.075,15)=0.0751−0.33796601912224844​.​
PVIFA(0.075,15)≈0.66203398087775160.075≈8.827119745036689\text{PVIFA}(0.075,15)
\approx \frac{0.6620339808777516}{0.075} \approx
8.827119745036689PVIFA(0.075,15)≈0.0750.6620339808777516​≈8.827119745036689
3.​ Now P5P_5P5​:​
P5=80×8.827119745036689+1000×0.33796601912224844P_5 = 80\times 8.827119745036689
+ 1000\times 0.33796601912224844P5​=80×8.827119745036689+1000×0.33796601912224844
P5≈706.1695796029351+337.96601912224844=1044.1355987251836P_5 \approx
706.1695796029351 + 337.96601912224844 =
1044.1355987251836P5​≈706.1695796029351+337.96601912224844=1044.1355987251836

So,

P5≈$1,044.14\boxed{P_5 \approx \$1{,}044.14}P5​≈$1,044.14​

Thẻ 6