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Solution Manual Corporate Finance 11th Edition Stephen RossComplete downloadable file at:TestbankHelp/Solution-Manual-Corporate-Finance-11th-Edition-Stephen-RossCase SolutionsCorporate FinanceRoss, Westerfield, Jaffe, and Jordan11thedition10/20/Prepared by:Brad JordanUniversity of KentuckyJoe Smolir...

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Solution Manual Corporate Finance 11th Edition Stephen Ross Complete downloadable file at: https://TestbankHelp.eu/Solution-Manual-Corporate-Finance-11th-Edition-Stephen-Ross

Case Solutions Corporate Finance Ross, Westerfield, Jaffe, and Jordan 11th edition 10/20/2015 Prepared by: Brad Jordan University of Kentucky Joe Smolira Belmont University

CHAPTER 2 CASH FLOWS AT WARF COMPUTERS The operating cash flow for the company is: (NOTE: All numbers are in thousands of dollars) OCF = EBIT + Depreciation – Current taxes OCF = $2,080 + 248 – 605 OCF = $1,723 To calculate the cash flow from assets, we need to find the capital spending and change in net working capital. The capital spending for the year was: Capital spending Ending net fixed assets – Beginning net fixed assets + Depreciation Net capital spending

$3,601 2,796 248 $1,053

And the change in net working capital was: Change in net working capital Ending NWC – Beginning NWC Change in NWC

$1,135 914 $221

So, the cash flow from assets was: Cash flow from assets Operating cash flow – Net capital spending – Change in NWC Cash flow from assets

$1,723 1,053 221 $449

The cash flow to creditors was: Cash flow to creditors Interest paid – Net New Borrowing Cash flow to Creditors

$137 31 $106

C-2 CASE SOLUTIONS The cash flow to stockholders was: Cash flow to stockholders Dividends paid – Net new equity raised Cash flow to Stockholders

$292 – (–51) $343

The accounting cash flow statement of cash flows for the year was: Statement of Cash Flows Operations Net income Depreciation Deferred taxes Changes in assets and liabilities Accounts receivable Inventories Accounts payable Accrued expenses Other Total cash flow from operations

$1,167 248 171 (48) 22 34 (154) (14) $1,426

Investing activities Acquisition of fixed assets Sale of fixed assets Total cash flow from investing activities

$(1,482) 429 $(1,053)

Financing activities Retirement of debt Proceeds of long-term debt Dividends Repurchase of stock Proceeds from new stock issues Total cash flow from financing activities

$(197) 228 (292) (66) 15 $(312)

Change in cash (on balance sheet)

$61

C-3 CASE SOLUTIONS Answers to questions 1. The firm had positive earnings in an accounting sense (NI > 0) and had positive cash flow from operations and a positive cash flow from assets. The firm invested $221 in new net working capital and $1,053 in new fixed assets. The firm was able to return $343 to its stockholders and $106 to creditors. 2. The financial cash flows present a more accurate picture of the company since it accurately reflects interest cash flows as a financing decision rather than an operating decision. 3. The expansion plans look like they are probably a good idea. The company was able to return a significant amount of cash to its shareholders during the year, but a better use of these cash flows may have been to retain them for the expansion. This decision will be discussed in more detail later in the book.

CHAPTER 3 RATIOS AND FINANCIAL PLANNING AT EAST COAST YACHTS 1.

The calculations for the ratios listed are: Current ratio = $15,823,700 / $21,320,300 Current ratio = .74 times Quick ratio = ($15,823,700 – 6,627,300) / $21,320,300 Quick ratio = .43 times Total asset turnover = $210,900,000 / $117,304,900 Total asset turnover = 1.80 times Inventory turnover = $148,600,000 / $6,627,300 Inventory turnover = 22.42 times Receivables turnover = $210,900,000 / $5,910,800 Receivables turnover = 35.68 times Total debt ratio = ($117,304,900 – 59,584,600) / $117,304,900 Total debt ratio = .49 times Debt–equity ratio = ($21,320,300 + 36,400,000) / $59,584,600 Debt–equity ratio = .97 times Equity multiplier = $117,304,900 / $59,584,600 Equity multiplier = 1.97 times Interest coverage = $30,229,000 / $3,791,000 Interest coverage = 7.97 times Profit margin = $15,862,800 / $210,900,000 Profit margin = .0752, or 7.52% Return on assets = $15,862,800 / $117,304,900 Return on assets = .1352, or 13.52% Return on equity = $15,862,800 / $59,584,600 Return on equity = .2662, or 26.62%

CHAPTER 3 CASE C-5 2.

Regarding the liquidity ratios, East Coast Yachts current ratio is below the median industry ratio. This implies the company has less liquidity than the industry in general. However, the current ratio is above the lower quartile, so there are companies in the industry with lower liquidity than East Coast Yachts. The company may have more predictable cash flows, or more access to short-term borrowing. The turnover ratios are all higher than the industry median; in fact, all three turnover ratios are above the upper quartile. This may mean that East Coast Yachts is more efficient than the industry in using its assets to generate sales. The financial leverage ratios are all below the industry median, but above the lower quartile. East Coast Yachts generally has less debt than comparable companies, but is still within the normal range. The profit margin for the company is about the same as the industry median, the ROA is slightly higher than the industry median, and the ROE is well above the industry median. East Coast Yachts seems to be performing well in the profitability area. Overall, East Coast Yachts’ performance seems good, although the liquidity ratios indicate that a closer look may be needed in this area.

C-6 CASE SOLUTIONS Below is a list of possible reasons it may be good or bad that each ratio is higher or lower than the industry. Note that the list is not exhaustive, but merely one possible explanation for each ratio. Ratio Current ratio Quick ratio Total asset turnover Inventory turnover Receivables turnover

Good Better at managing current accounts. Better at managing current accounts. Better at utilizing assets. Better at inventory management, possibly due to better procedures. Better at collecting receivables.

Total debt ratio

Less debt than industry median means the company is less likely to experience credit problems.

Debt-equity ratio

Less debt than industry median means the company is less likely to experience credit problems.

Equity multiplier

Less debt than industry median means the company is less likely to experience credit problems.

Interest coverage

Less debt than industry median means the company is less likely to experience credit problems.

Profit margin

The PM is slightly above the industry median, so it is performing better than many peers. Company is performing above many of its peers. Company is performing above many of its peers.

ROA ROE

Bad May be having liquidity problems. May be having liquidity problems. Assets may be older and depreciated, requiring extensive investment soon. Could be experiencing inventory shortages. May have credit terms that are too strict. Decreasing receivables turnover may increase sales. Increasing the amount of debt can increase shareholder returns. Especially notice that it will increase ROE. Increasing the amount of debt can increase shareholder returns. Especially notice that it will increase ROE. Increasing the amount of debt can increase shareholder returns. Especially notice that it will increase ROE. Increasing the amount of debt can increase shareholder returns. Especially notice that it will increase ROE. May be able to better control costs. Assets may be old and depreciated relative to industry. Profit margin and EM could still be increased, which would further increase ROE.

If you created an Inventory / Current liabilities ratio, East Coast Yachts would have a ratio that is lower than the industry median. The current ratio is below the industry median, while the quick ratio is above the industry median. This implies that East Coast Yachts has less inventory to current liabilities than the industry median. Because the cash ratio is lower than the industry median, East Coast Yachts has less inventory than the industry median, but more accounts receivable.

CHAPTER 3 CASE C-7 3.

To calculate the internal growth rate, we first need to find the ROE and the retention ratio, so: ROE = Net income / Total equity ROE = $15,862,800 / $59,584,600 ROE = .2662, or 26.62% b = Addition to RE / Net income b = $11,103,499 / $15,862,800 b = .70, or 70% So, the sustainable growth rate is: Sustainable growth rate = (ROE × b) / [1 – (ROE × b)] Sustainable growth rate = [.2662(.70)] / [1 – .2662(.70)] Sustainable growth rate = .2290, or 22.90% The sustainable growth rate is the growth rate the company can achieve with no external financing while maintaining a constant debt–equity ratio. At the sustainable growth rate, the pro forma statements next year will be: Income statement Sales $259,201,872 COGS 182,633,467 Other expenses 30,961,657 Depreciation 6,879,000 EBIT $38,727,748 Interest 3,791,000 Taxable income $34,936,748 Taxes (40%) 13,974,699 Net income

$20,962,049

Dividends Add to RE

$6,289,224 14,672,825

C-8 CASE SOLUTIONS

Balance sheet Assets Current Assets Cash Accounts rec. Inventory Total CA

$4,038,092 7,264,535 8,145,133 $19,447,760

Liabilities & Equity Current Liabilities Accounts Payable $8,575,784 Notes Payable 17,627,448 Total CL $26,203,232 Long-term debt

$36,400,000

$5,580,000 68,677,425 $74,257,425

Fixed assets Net PP&E

$124,723,172

Shareholder Equity Common stock Retained earnings Total Equity

Total Assets

$144,170,933

Total L&E

So, the EFN is: EFN = Total assets – Total liabilities and equity EFN = $144,170,933 – 136,860,657 EFN = $7,310,276 The ratios with these pro forma statements are: Current ratio = $19,447,760 / $26,203,232 Current ratio = .74 times Quick ratio = ($19,447,760 – 8,145,133) / $26,203,232 Quick ratio = .43 times Total asset turnover = $259,201,872 / $144,170,933 Total asset turnover = 1.80 times Inventory turnover = $182,633,467 / $8,145,133 Inventory turnover = 22.42 times Receivables turnover = $259,201,872 / $7,264,535 Receivables turnover = 35.68 times Total debt ratio = ($144,170,933 – 74,257,425) / $144,170,933 Total debt ratio = .48 times Debt–equity ratio = ($26,203,232 + 36,400,000) / $74,257,425 Debt–equity ratio = .84 times

$136,860,657

CHAPTER 3 CASE C-9 Equity multiplier = $144,170,933 / $74,257,425 Equity multiplier = 1.94 times Interest coverage = $38,727,748 / $3,791,000 Interest coverage = 10.22 times Profit margin = $20,962,049 / $259,201,872 Profit margin = .0809, or 8.09% Return on assets = $20,962,049 / $144,170,933 Return on assets = .1454, or 14.54% Return on equity = $20,962,049 / $74,257,425 Return on equity = .2823, or 28.23% The only ratios that changed are the debt ratio, the interest coverage ratio, profit margin, return on assets, and return on equity. The debt ratio changes because long-term debt is assumed to remain fixed in the pro forma statements. The other ratios change slightly because interest and depreciation are also assumed to remain constant as well. 4.

Pro forma financial statements for next year at a 20 percent growth rate are: Income statement Sales COGS Other expenses Depreciation EBIT Interest Taxable income Taxes (40%) Net income Dividends Add to RE

$253,080,000 178,320,000 30,230,400 6,879,000 $37,650,600 3,791,000 $33,859,600 13,543,840 $20,315,760 $6,095,318 14,220,442

C-10 CASE SOLUTIONS

Balance sheet Assets Current Assets Cash Accounts rec. Inventory Total CA

$3,942,720 7,092,960 7,952,760 $18,988,440

Liabilities & Equity Current Liabilities Accounts Payable $8,373,240 Notes Payable 17,211,120 Total CL $25,584,360 Long-term debt

$36,400,000

$5,580,000 68,225,042 $73,805,042

Fixed assets Net PP&E

$121,777,440

Shareholder Equity Common stock Retained earnings Total Equity

Total Assets

$140,765,880

Total L&E

$135,789,402

So, the EFN is: EFN = Total assets – Total liabilities and equity EFN = $140,765,880 – 135,789,402 EFN = $4,976,478 5.

Now we are assuming the company can only build in amounts of $25 million. We will assume that the company will go ahead with the fixed asset acquisition. In this case, the pro forma financial statement calculation will change slightly. To estimate the new depreciation charge, we will find the current depreciation as a percentage of fixed assets, then apply this percentage to the new fixed assets. The depreciation as a percentage of assets this year was: Depreciation percentage = $6,879,000 / $101,481,200 Depreciation percentage = .0678, or 6.78% The new level of fixed assets with the $25 million purchase will be: New fixed assets = $101,481,200 + 25,000,000 = $126,481,200 So, the pro forma depreciation as a percentage of sales will be: Pro forma depreciation = .0678($126,481,200) Pro forma depreciation = $8,573,649

CHAPTER 3 CASE C-11 We will use this amount in the pro forma income statement. So, the pro forma income statement will be: Income statement Sales COGS Other expenses Depreciation EBIT Interest Taxable income Taxes (40%) Net income

$253,080,000 178,320,000 30,230,400 8,573,649 $35,955,951 3,791,000 $32,164,951 12,865,980 $19,298,971

Dividends Add to RE

$5,790,252 13,508,719

The pro forma balance sheet will remain the same except for the fixed asset and equity accounts. The fixed asset account will increase by $25 million, rather than the growth rate of sales. Balance sheet Assets Current Assets Cash Accounts rec. Inventory Total CA

$3,942,720 7,092,960 7,952,760 $18,988,440

Liabilities & Equity Current Liabilities Accounts Payable $8,373,240 Notes Payable 17,211,120 Total CL $25,584,360 Long-term debt

$36,400,000

$5,580,000 67,513,319 $73,093,319

Fixed assets Net PP&E

$126,481,200

Shareholder Equity Common stock Retained earnings Total Equity

Total Assets

$145,469,640

Total L&E

$135,077,679

So, the EFN is: EFN = Total assets – Total liabilities and equity EFN = $145,469,640 – 135,077,679 EFN = $10,391,961 Since the fixed assets have increased at a faster percentage than sales, the capacity utilization for next year will decrease.

CHAPTER 4 THE MBA DECISION 1.

Age is obviously an important factor. The younger an individual is, the more time there is for the (hopefully) increased salary to offset the cost of the decision to return to school for an MBA. The cost includes both the explicit costs such as tuition, as well as the opportunity cost of the lost salary.

2.

Perhaps the most important nonquantifiable factors would be whether or not he is married and if he has any children. With a spouse and/or children, he may be less inclined to return for an MBA since his family may be less amenable to the time and money constraints imposed by classes. Other factors would include his willingness and desire to pursue an MBA, job satisfaction, and how important the prestige of a job is to him, regardless of the salary.

3.

He has three choices: remain at his current job, pursue a Wilton MBA, or pursue a Mt. Perry MBA. In this analysis, room and board costs are irrelevant since presumably they will be the same whether he attends college or keeps his current job. We need to find the aftertax value of each, so: Remain at current job: Aftertax salary = $65,000(1 – .26) Aftertax salary = $48,100 His salary will grow at 3 percent per year, so the present value of his aftertax salary is: PV = C {[1 / (r – g)] – [1 / (r – g)] × [(1 + g) / (1 + r)]t} PV = $48,100{[1 / (.063 – .03)] – [1 / (.063 – .03)] × [(1 + .03) / (1 + .063)]40} PV = $1,044,728.37 Wilton MBA: Costs: The direct costs will occur today and in one year, and include tuition, books and supplies, health insurance, and the room and board increase. So the total direct costs are: PV of direct expenses = ($70,000 + 3,000 + 3,000 + 2,000) + ($70,000 + 3,000 + 3,000 + 2,000) / 1.063 PV of direct expenses = $151,377.23

CHAPTER 4 CASE C-13 The financial benefits are the bonus to be paid in 2 years and the future salary. PV of aftertax bonus paid in 2 years = $20,000(1 – .31) / 1.0632 PV of aftertax bonus paid in 2 years = $12,212.72 Aftertax salary = $110,000(1 – .31) Aftertax salary = $75,900 His salary will grow at 4 percent per year. We must also remember that he will now only work for 38 years, so the present value of his aftertax salary is: PV = C {[1 / (r – g)] – [1 / (r – g)] × [(1 + g) / (1 + r)]t} PV = $75,900{[1 / (.063 – .04)] – [1 / (.063 – .04)] × [(1 + .04) / (1 + .063)]38} PV = $1,862,801.41 Since the first salary payment will be received three years from today, so we need to discount this for two years to find the value today, which will be: PV = $1,862,801.41 / 1.0632 PV = $1,648,542.05 So, the total value of a Wilton MBA is: Value = –$151,377.23 + 12,212.72 + 1,648,542.05 Value = $1,509,377.54 Mount Perry MBA: The direct costs will occur today and include tuition, books and supplies, health insurance, and the room and board increase. So the total direct costs are: Total direct costs = $85,000 + 4,500 + 3,000 + 2,000 Total direct costs = $94,500 Note, this is also the PV of the direct costs since they are all paid today. The financial benefits are the bonus to be paid in 1 year and the future salary. PV of aftertax bonus paid in 1 year = $18,000(1 – .29) / 1.063 PV of aftertax bonus paid in 1 year = $12,022.58 His aftertax salary at his new job will be: Aftertax salary = $92,000(1 – .29) Aftertax salary = $65,320

C-14 CASE SOLUTIONS His salary will grow at 3.5 percent per year. We must also remember that he will now only work for 39 years, so the present value of his aftertax salary is: PV = C {[1 / (r – g)] – [1 / (r – g)] × [(1 + g) / (1 + r)]t} PV = $65,320{[1 / (.063 – .035)] – [1 / (.063 – .035)] × [(1 + .035) / (1 + .063)]39} PV = $1,509,165.86 Since the first salary payment will be received two years from today, we need to discount this for one year to find the value today, which will be: PV = $1,509,165.86 / 1.063 PV = $1,419,723.29 So, the total value of a Mount Perry MBA is: Value = –$94,500 + 12,022.58 + 1,419,723.29 Value = $1,337,245.87 4.

He is somewhat correct. Calculating the future value of each decision will result in the option with the highest present value having the highest future value. Thus, a future value analysis will result in the same decision. However, his statement that a future value analysis is the correct method is wrong since a present value analysis will give the correct answer as well.

5.

To find the salary offer he would need to make the Wilton MBA as financially attractive as the as the current job, we need to take the PV of his current job, add the costs of attending Wilton, and the PV of the bonus on an aftertax basis. Note, this assumes that the singing bonus is constant. So, the necessary PV to make the Wilton MBA the same as his current job will be: PV = $1,044,728.37 + 151,377.23 – 12,212.72 PV = $1,183,892.88 This PV will make his current job exactly equal to the Wilton MBA on a financial basis. Since the salary will not start for 3 years, we need to find the value in 2 years so that it is the present value of growing annuity. So: Value in 2 years = $1,183,892.88(1.0652) Value in 2 years = $1,337,762.25 Since his salary will still be a growing annuity, the aftertax salary needed is: PV = C {[1 / (r – g)] – [1 / (r – g)] × [(1 + g) / (1 + r)]t} $1,337,762.25 = C {[1 / (.063 – .04)] – [1 / (.063 – .04)] × [(1 + .04) / (1 + .063)]38} C = $54,507.24 This is the aftertax salary. So, the pretax salary must...