Fundamentals of Corporate Finance Standard Edition (Mcgraw-Hill/Irwin Series in Finance, Insurance, and Real Estate) 10th edition (Ross, Westerfield, Jordan) solutions manual and test bank
Book Description
The best-selling Fundamentals of Corporate Finance (FCF) has three basic themes that are the central focus of the book:
1) An emphasis on intuition—the authors separate and explain the principles at work on a common sense, intuitive level before launching into any specifics.
2) A unified valuation approach—net present value (NPV) is treated as the basic concept underlying corporate finance.
3) A managerial focus—the authors emphasize the role of the financial manager as decision maker, and they stress the need for managerial input and judgment.The Tenth Edition continues the tradition of excellence that has earned Fundamentals of Corporate Finance its status as market leader. Every chapter has been updated to provide the most current examples that reflect corporate finance in today’s world. The supplements package has been updated and improved, and with the enhanced Connect Finance and Excel Master, student and instructor support has never been stronger.
1) An emphasis on intuition—the authors separate and explain the principles at work on a common sense, intuitive level before launching into any specifics.
2) A unified valuation approach—net present value (NPV) is treated as the basic concept underlying corporate finance.
3) A managerial focus—the authors emphasize the role of the financial manager as decision maker, and they stress the need for managerial input and judgment.The Tenth Edition continues the tradition of excellence that has earned Fundamentals of Corporate Finance its status as market leader. Every chapter has been updated to provide the most current examples that reflect corporate finance in today’s world. The supplements package has been updated and improved, and with the enhanced Connect Finance and Excel Master, student and instructor support has never been stronger.
Feel free to contact us: ggsmtb@gmail.com , I have the Book Resources for the above textbook. all the Book Resources is in pdf or doc files.
Solutions manual
CHAPTER
2
FINANCIAL STATEMENTS, TAXES, AND CASH
FLOW
Answers to Concepts Review and Critical Thinking Questions
1. Liquidity measures how
quickly and easily an asset can be converted to cash without significant loss
in value. It’s desirable for firms to have high liquidity so that they have a
large factor of safety in meeting short-term creditor demands. However, since
liquidity also has an opportunity cost associated with it—namely that higher
returns can generally be found by investing the cash into productive assets—low
liquidity levels are also desirable to the firm. It’s up to the firm’s
financial management staff to find a reasonable compromise between these
opposing needs.
2. The recognition and matching principles in
financial accounting call for revenues, and the costs associated with producing
those revenues, to be “booked” when the revenue process is essentially
complete, not necessarily when the cash is collected or bills are paid. Note
that this way is not necessarily correct; it’s the way accountants have chosen
to do it.
3. Historical costs can be objectively and
precisely measured whereas market values can be difficult to estimate, and
different analysts would come up with different numbers. Thus, there is a
trade-off between relevance (market values) and objectivity (book values).
4. Depreciation
is a noncash deduction that reflects adjustments made in asset book values in
accordance with the matching principle in financial accounting. Interest
expense is a cash outlay, but it’s a financing cost, not an operating cost.
5. Market values can never be negative.
Imagine a share of stock selling for –$20. This would mean that if you placed
an order for 100 shares, you would get the stock along with a check for $2,000.
How many shares do you want to buy? More generally, because of corporate and
individual bankruptcy laws, net worth for a person or a corporation cannot be
negative, implying that liabilities cannot exceed assets in market value.
6. For a successful company that is rapidly
expanding, for example, capital outlays will be large, possibly leading to
negative cash flow from assets. In general, what matters is whether the money
is spent wisely, not whether cash flow from assets is positive or negative.
7. It’s probably not a good sign for an
established company, but it would be fairly ordinary for a start-up, so it
depends.
8.
For example,
if a company were to become more efficient in inventory management, the amount
of inventory needed would decline. The same might be true if it becomes better
at collecting its receivables. In general, anything that leads to a decline in
ending NWC relative to beginning would have this effect. Negative net capital
spending would mean more long-lived assets were liquidated than purchased.
9. If a company raises more money from selling
stock than it pays in dividends in a particular period, its cash flow to
stockholders will be negative. If a company borrows more than it pays in
interest, its cash flow to creditors will be negative.
10. The adjustments discussed were purely accounting changes; they had
no cash flow or market value consequences unless the new accounting information
caused stockholders to revalue the derivatives.
11. Enterprise Enterprise
12. In
general, it appears that investors prefer companies that have a steady earnings
stream. If true, this encourages companies to manage earnings. Under GAAP,
there are numerous choices for the way a company reports its financial
statements. Although not the reason for the choices under GAAP, one outcome is
the ability of a company to manage earnings, which is not an ethical decision.
Even though earnings and cash flow are often related, earnings management
should have little effect on cash flow (except for tax implications). If the
market is “fooled” and prefers steady earnings, shareholder wealth can be
increased, at least temporarily. However, given the questionable ethics of this
practice, the company (and shareholders) will lose value if the practice is
discovered.
Solutions
to Questions and Problems
NOTE: All end of chapter
problems were solved using a spreadsheet. Many problems require multiple steps.
Due to space and readability constraints, when these intermediate steps are
included in this solutions manual, rounding may appear to have occurred.
However, the final answer for each problem is found without rounding during any
step in the problem.
Basic
1. To find owner’s
equity, we must construct a balance sheet as follows:
Balance
Sheet
CA $
4,800 CL $
4,200
NFA
27,500 LTD 10,500
OE ??
TA $32,300 TL & OE $32,300
We know that total liabilities
and owner’s equity (TL & OE) must equal total assets of $32,300. We also
know that TL & OE is equal to current liabilities plus long-term debt plus
owner’s equity, so owner’s equity is:
OE
= $32,300 – 10,500 – 4,200 = $17,600
NWC
= CA – CL = $4,800 – 4,200 = $600
2. The income statement for the company is:
Income
Statement
Sales $734,000
Costs 315,000
Depreciation 48,000
EBIT $371,000
Interest 35,000
EBT $336,000
Taxes (35%) 117,600
Net income $218,400
3. One
equation for net income is:
Net income = Dividends + Addition to retained
earnings
Rearranging, we get:
Addition to
retained earnings = Net income – Dividends = $218,400 – 85,000 = $133,400
4. EPS = Net income / Shares = $218,400 / 110,000 = $1.99
per share
DPS = Dividends / Shares = $85,000 / 110,000 =
$0.77 per share
5. To find the book value
of current assets, we use: NWC = CA – CL. Rearranging to solve for current
assets, we get:
CA = NWC + CL = $215,000 + 900,000 =
$1,115,000
The market value of current assets
and fixed assets is given, so:
Book value NFA = $3,200,000 Market value NFA = $5,300,000
Book value assets = $4,315,000
Market value
assets =
$6,550,000
6. Taxes = 0.15($50,000) +
0.25($25,000) + 0.34($25,000) + 0.39($255,000 – 100,000) = $82,700
7. The average tax rate is the
total tax paid divided by net income, so:
Average tax rate = $82,700 / $255,000 =
.3243, or 32.43%
The marginal tax rate is the tax rate on
the next $1 of earnings, so the marginal tax rate = 39%.
test bank
ch2
1.
|
Which one of
the following is the financial statement that shows the accounting value of a
firm's equity as of a particular date?
Refer to
section 2.1
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-01 The difference between accounting value (or "book" value) and market value. Ross - Chapter 02 #1 Section: 2.1 Topic: Balance sheet |
2.
|
Net working
capital is defined as:
Refer to section
2.1
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-01 The difference between accounting value (or "book" value) and market value. Ross - Chapter 02 #2 Section: 2.1 Topic: Net working capital |
3.
|
The common
set of standards and procedures by which audited financial statements are
prepared is known as the:
Refer to
section 2.1
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-01 The difference between accounting value (or "book" value) and market value. Ross - Chapter 02 #3 Section: 2.1 Topic: GAAP |
4.
|
Which one of
the following is the financial statement that summarizes a firm's revenue and
expenses over a period of time?
Refer to
section 2.2
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-02 The difference between accounting income and cash flow. Ross - Chapter 02 #4 Section: 2.2 Topic: Income statement |
5.
|
Noncash items
refer to:
Refer to
section 2.2
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-02 The difference between accounting income and cash flow. Ross - Chapter 02 #5 Section: 2.2 Topic: Noncash items |
6.
|
The
percentage of the next dollar you earn that must be paid in taxes is referred
to as the _____ tax rate.
Refer to
section 2.3
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-03 The difference between average and marginal tax rates. Ross - Chapter 02 #6 Section: 2.3 Topic: Marginal tax rate |
7.
|
The _____ tax
rate is equal to total taxes divided by total taxable income.
Refer to
section 2.3
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-03 The difference between average and marginal tax rates. Ross - Chapter 02 #7 Section: 2.3 Topic: Average tax rate |
8.
|
The cash flow
of a firm which is available for distribution to the firm's creditors and
stockholders is called the:
Refer to
section 2.4
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-04 How to determine a firms cash flow from its financial statements. Ross - Chapter 02 #8 Section: 2.4 Topic: Cash flow from assets |
9.
|
Which term
relates to the cash flow which results from a firm's ongoing, normal business
activities?
Refer to
section 2.4
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-04 How to determine a firms cash flow from its financial statements. Ross - Chapter 02 #9 Section: 2.4 Topic: Operating cash flow |
10.
|
Cash flow
from assets is also known as the firm's:
Refer to
section 2.4
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-04 How to determine a firms cash flow from its financial statements. Ross - Chapter 02 #10 Section: 2.4 Topic: Free cash flow |
11.
|
The cash flow
related to interest payments less any net new borrowing is called the:
Refer to
section 2.4
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-04 How to determine a firms cash flow from its financial statements. Ross - Chapter 02 #11 Section: 2.4 Topic: Cash flow to creditors |
12.
|
Cash flow to
stockholders is defined as:
Refer to
section 2.4
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-04 How to determine a firms cash flow from its financial statements. Ross - Chapter 02 #12 Section: 2.4 Topic: Cash flow to stockholders |
13.
|
Which one of
the following is classified as an intangible fixed asset?
Refer to
section 2.1
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-01 The difference between accounting value (or "book" value) and market value. Ross - Chapter 02 #13 Section: 2.1 Topic: Intangible fixed asset |
14.
|
Which of the
following are current assets?
I. patent II. inventory III. accounts payable IV. cash
Refer to
section 2.1
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-01 The difference between accounting value (or "book" value) and market value. Ross - Chapter 02 #14 Section: 2.1 Topic: Current assets |
No comments:
Post a Comment