Fundamentals of Corporate Finance 6th Canadian edition Richard Brealey, Stewart Myers, Alan Marcus, Devashis Mitra, Elizabeth Maynes, William Lim - Solutions

What are the key advantages of a defined contribution pension plan as a vehicle for retirement savings?
Why are mutual funds and exchange-traded funds called financial intermediaries? Why does it make sense for an individual to invest her savings in a mutual fund or ETF rather than directly in individual stocks and bonds?
Barclays Canada provides many of the exchange-traded funds listed on the TSX. Go to www.ishares.ca and explore 3 different ETFs. The list is found on the home page under "products." For each ETF, find out the name of the market index that the ETF is replicating. Note the EFT's top 5 holdings, past
Go to www.theglobeandmail.com/globe-investor/funds-and-etfs/fund-lookup, find "Fund Lookup." Next, click on "Fund Company." Select a fund company, then pick 3 funds operated by the fund company and get the fund profiles for each. Note the funds' investment objectives, top 5 holdings, risks, past
Sheryl's Shingles had sales of $10,000 in 2014. The cost of sales was $6,500, general and administrative expenses were $1,000, and interest expenses were $500. Net working capital increased $200 and capital expenditures were $900. Total depreciation expense included in the costs was $1,000. The
Can cash flow from operating activities be positive if profit before tax is negative? Can operating cash flow be negative if profit before tax is positive? Give examples.
Ponzi Products produced 100 chain letter kits in the first quarter, Q1, resulting in a Q1 total cash outlay of $10 per unit. It will sell 50 of the kits next quarter, Q2, at a price of $11, and the other 50 kits in Q3 at a price of $12. It takes a full quarter for it to collect its bills from its
A firm's income statement includes the following data. The firm's average tax rate was 20%. No depreciation is included in cost of goods sold or administrative expenses. Cost of goods sold......................$8,000 Income taxes..............................2,000 Administrative
In April, Candy Canes, Inc., buys $50,000 of raw materials, sugar and peppermint, and pays for them in May. In May it uses all of the raw materials to produces candy. Total cost of the candy is $ 100,000 and all costs are paid in May. All candy is sold to distributors in May for $150,000, but it
Interest expense for Rhodes Manufacturing was $500,000 in 2014. During 2014, $3.7 million in old debt was repaid and $2.0 million was raised through new borrowing. Dividends of $425,000 were paid and $1.75 million was raised through new share sales. a. Calculate the cash flow to bondholders. Treat
Here are incomplete 2014 and 2015 SFPs for Nobel Corp.a. What was shareholders' equity at the end of 2014 and 2015?b. If Nobel paid dividends of $100 in 2014, what must have been 2014 net income? Assume no shares were issued or repurchased and no other comprehensive income.c. If Nobel purchased
South Sea Baubles has the following incomplete balance sheet and income statement.a. What is shareholders' equity in 2014 and 2015?b. What is net working capital in 2014 and 2015?c. What is taxable income and taxes paid in 2015? Assume the firm pays taxes equal to 35% of taxable income.d. What is
The schedule of tax rates for individuals changes periodically. Find the latest schedules on www.cra-arc.gc.ca, click on "Individuals and families· and then "All rates." What is your marginal tax rate if you are single with a taxable income of $70,000? What is your average tax rate?
Construct an SFP for Fincorp for 2014 and 2015. What is shareholders' equity?Here are some data on Fincorp, Inc., Fincorp follows IFRS. The statement of financial position items correspond to values at year-end of 2014 and 2015, while the statement of comprehensive income items correspond to
What happened to net working capital during the year? What about noncash net working capital?Here are some data on Fincorp, Inc., that you should use for problems 23 to 32. Fincorp follows IFRS. The statement of financial position items correspond to values at year-end of 2014 and 2015, while the
Construct an income statement for Fincorp for 2014 and 2015. What was the addition to retained earnings for 20 15? How does that compare with the increase in shareholders' equity between the 2 years?Here are some data on Fincorp, Inc., that you should use for problems 23 to 32. Fincorp follows
Examine the values for depreciation in 2015 and the balance for property, plant, and equipment in 2011 and 2015. What was Fincorp's gross investment in property, plant, and equipment during 2015?Here are some data on Fincorp, Inc., that you should use. Fincorp follows IFRS. The statement of
Construct a statement of cash flows for Fincorp for 2015 using Table 3.4 as a guide. Treat interest as an operating expense and assume that interest paid is equal to finance expense for the year.Here are some data on Fincorp, Inc., that you should use. Fincorp follows IFRS. The statement of
Explain why profit (net earnings) generally differs from a firm's cash inflows.
Calculate Fincorp's operating cash flow starting with profit before taxes. Treat interest as a financing flow.Here are some data on Fincorp, Inc., that you should use. Fincorp follows IFRS. The statement of financial position items correspond to values at year-end of 2014 and 2015, while the
a. Using the data for Fincorp, determine the cash flow from assets, cash flow to bondholders, cash flow to shareholders, and financing flows. Treat interest as a financing flow.b. Assuming that Fincorp's tax rate is 28%, calculate its after-tax interest expense. Why is it appropriate to convert
Now suppose that the market value (in thousands of dollars) of Fincorp's fixed assets in 2015 is $6,000, and that the value of its long-term debt is only $2,400. In addition, the consensus among investors is that Fincorp's past investments in developing the skills of its employees are worth $2,900.
Using the financial statements for Small Time Products, calculate cash flow from assets and financing flow in 2015. Treat interest as a financing flow.2015 Income StatementRevenue............................................$ 1,301Cost of goods
Reconsider the data in problem 10. What are the total personal and corporate taxes if you pay yourself a salary of $50,000 and a dividend of $20,000?
For a wider choice of financial statements, you might go to www.annualreports.com. Browse through this site to see the wide range of companies, listed in different international stock exchanges, included here. How many stock exchanges are covered by this site? Select a large non-financial company
Using Table 3.7, calculate the combined federal and provincial marginal and average tax rates for both an Albertan and Newfoundlander with the following incomes:a. $20,000b. $60,000c. $ 100,000d. $3,000,000Table 3.7
John Flynn lives in Nova Scotia. In 2014 he earned $1,500 in interest income and $3,000 in dividend income, and realized a $2,000 capital gain. Calculate his after-tax income and tax rate for each type of income, assuming that his marginal federal tax rate was 26%, his marginal provincial tax rate
On the Brandex Inc. SFP as the year-end 2013 the share capital was $1,100,000, retained earnings were $3,000,000, accumulated other comprehensive income was $400,000, and total equity was $4,500,000. Year-end 2014 SFP retained earnings were $3,300,000. In 2014 net earnings were $900,000 and other
A firm uses $1 million in cash to purchase inventories. What will happen to its current ratio? Its quick ratio?
Chik"s Chickens has average trade receivables of $6.333. Sales for the year were $9,800. What is its average collection period?
Phone Corp. stock price was $84 at the end of the year. There were 205 million shares outstanding. What was the market capitalization and market value added? What was its market-to-book ratio and earnings per share?
Ink has spilled over some of the entries in the balance sheet and incomeLong-term debt ratio..................................0.4Times interest earned..................................6.5Current ratio............................................1.4Quick
Phone Corp's cost of capital was 8.3 %. Estimate the tax rate (taxes/ income before taxes) and calculated net operating profit after taxes. What was Phone Corp's economic value added?
Log on to sedar.com to find the latest simplified financial statements for Westjet. Recalculate Wj's financial ratios. What have been the main changes from those shown in these tables? If you owned some of Wj's debt, would these changes make you more or less happy?
a. What would happen to Air Canada's economic value added its cost of equity were 8% rather than the 6.7% value we assumed? b. Would this have any impact on its accounting profits? c. Which do you think is a better measure of the firm's performance?
Suppose the broad stock market falls 5% in one day and Air Canada's stock price also falls by 5%. (L01) Using stock prices as given on page 97: a. What will happen to our assessment of market value added? b. Should this decline affect our assessment of the performance of Air Canada's managers? c.
In Table 4.8, we report WestJet's sustainable growth rate as 13.62%.a. What would the sustainable growth rate be if Westjet's payout ratio increased to 70%?b. What would the sustainable growth rate be if Westjet's return on equity was 30%?Table 4.8
Use the data for the phone corporation from question 1 to confirm that ROA = asset turnover x operating profit margin.
Burchetts Green had enjoyed the bank training course, but it was good to be starting his first real job in the corporate lending group. Earlier that morning the boss had handed him a set of financial statements for The Hobby Horse Company, Inc. (HH). "Hobby Horse," she said, "has a $45 million
Compute the future value of a $100 annual annuity for the same combination of rates and time periods as in problem l. a. r = 8%, t = 10 years b. r = 8%, t = 20 years c. r = 4%, t = 10 years d. r = 4%, t = 20 years
If you earn 8% per year on your bank account, how long will it take an account with $ 100 to double to $200?
Suppose you can borrow money at 8.5% per year (APR), compounded semi-annually or 8.4% per year (APR) compounded monthly. Which is the better deal?
Investments in the stock market have increased at an average compound rate of about 5% per year since 1900. a. If you invested $ 1,000 in the stock market in 1900, how much would that investment be worth in 2011? b. If your investment in 1900 has grown to $1 million in 2011, how much did you invest
Old Time Savings Bank pays 5% interest on its savings accounts. If you deposit $ 1,000 in the bank and leave it there, how much interest will you earn in the first year? The second year? The 10th year?
In a discount interest loan, you pay the interest payment up front. For example, if a 1 year loan is stated as $10,000 and the interest rate is 10%, the borrower "pays" .10 × $10,000 = $1,000 immediately, thereby receiving net funds of $9,000 and repaying $10,000 in a year. (L06)a. What is the
You need a $10,000 car loan and are talking to two different banks. a. Big Bank offers you a $10,000 auto loan requiring 48 monthly payments of $275, paid at the end of each month. What is the APR of the loan? What is the effective annual rate? b. Little Bank's loan has 4 annual year-end
You deposit $1,000 into your bank account. If the bank pays 4% simple interest, how much will you accumulate in your account after 10 years? If the bank pays compound interest, how much of your earnings will be interest on interest?
You take out a $175,000 Canadian mortgage with a 25·year amortization period, a 5-year term, and a 6% posted mortgage interest rate. What is your monthly mortgage payment? When the mortgage expires in 5 years, what is the unpaid balance?
You are arranging a $350,000 Canadian mortgage with a 25·year amortization period and a 7% posted interest rate. What is the monthly mortgage payment? Suppose the bank offers you the opportunity to pay your monthly payments in two equal installments (pay one-half of the monthly payment every 2
You invest $1,000 at 6% compounded monthly. How much will you have in 1 year? In 1.5 years?
You can buy a car advertised for $12,000 on the following terms: (a) Pay $12,000 and receive a $1,000 rebate from the manufacturer or (b) Pay $250 a month for 4 years, for total payments of $12,000, implying 0% financing. Which is the better deal if the interest rate is 1% per month?
What is the effective annual rate on a 1-year loan with an interest rate quoted on a discount basis of 20%?
A top-ranked quarterback just signed a 5-year contract, providing $3 million per year, payable at the end of each month. A hockey superstar accepts a 5-year contract, with a $4 million signing bonus, payable immediately and $2.1 million per year, payable at the end of each month. The quarterback
Bill needs a new car and can afford monthly car payments of $400. The interest rate on new car loans is 7%, APR and payments are made at month-end. Bill wonders whether to arrange a 48- or 60-month loan. With either loan, Bill will borrow the maximum amount and buy the most expensive car possible.
A factory costs $400,000. You forecast that it will produce cash inflows of $ 120,000 in year 1, $180,000 in year 2, and $300,000 in year 3. The discount rate is 12%. Is the factory a good investment? Explain.
You invest $1,000 today and expect to sell your investment for $2,000 in 10 years. a. Is this a good deal if the discount rate is 5%? b. What if the discount rate is 10%?
How much would you need in the previous problem if you believe that you will inherit $100,000 in 10 years?
You believe you will spend $40,000 per year for 20 years once you retire in 40 years. If the interest rate is 5% per year, how much must you save each year until retirement to meet your retirement goal?
Acme needs a new $20,000 copier machine and must decide whether to lease or buy it. If the company buys the copier, they expect to sell it for $5,000 in 5 years. The bank has offered a 5-year amortizing loan of $20,000 at 8%, compounded monthly. Loan payments will be due at the end of each month.
If investors are to earn a real interest rate at 4%, what nominal interest rate must they earn if the inflation rate is a. 0% b. 4% c. 6%
If investors receive an 8% interest rate on their bank deposits, what real interest rate will they earn if the inflation rate over the year is a. 0% b. 3% c. 6%
Go to the Yahoo Finance site (ca.finance.yahoo.com) and look up Thomson Reuters Corp. (TRI). Briefly describe its main business activities. Using its annual income statement, calculate the compound annual growth rate over the past 3 years for sales and net income. Convert these results into real
Using the Bank of Canada inflation calculator, www.bankofcanada.ca/enlinflation_calc.htm, answer the following questions:a. What annual salary in 2010 was equivalent to $5,000 a year in 1940?b. Find the average annual inflation rate from 1914 to the current year.Now access the investment calculator
Your consulting firm will produce cash flows of $ 100,000 this year, and you expect cash flow to keep pace with any increase in the general level of prices. The interest rate currently is 8%, and you anticipate inflation of about 3%.a. What is the present value of your firm's cash flows for years 1
Use the Rule of 72 to figure out how long it will take for your money to quadruple in value if the interest rate is 8% per year.
There are dozens of Web sites that provide calculators to help with personal finance decisions. Two good examples are www.quicken.com and www.financialpost.com. Log on to the Financial Post site, and click on "Personal Finance" to find a nice savings calculator. Suppose that you invest $1,000
You would like to travel around the world in a sailboat for 2 years, leaving 5 years from now. One year before you leave, you will purchase the sailboat at an expected cost of $ 150,000. During the pre-trip year, you will learn how to sail the boat. Once the trip is under way, you forecast that
You are thinking of buying a used car for $4,000 for driving to school. Your parents are willing to lend you the $4,000 and charge only 2.4% APR. They want the loan repaid equally in 48 monthly payments, with the first payment due at the end of the month in which you buy the car. You estimate that
You and your friend are avid snowboarders and bike racers. Nearly every other weekend you travel to a race in a rented van. Now that both of you have full-time jobs, your friend is pressuring you to purchase a van. Here's how the conversation goes: Friend: "just think of how much we will save on
You are working as a financial planner. A couple has asked you to put together an investment plan for the education of their daughter. She is a bright 7-year-old (her birthday is today), and everyone hopes she will go to university after high school in 10 years, on her 17th birthday. You estimate
A cottage is for sale for $580,000. Currently it generates annual cash flows, net of all expenses and taxes, of $35,000. If the cottage lasts forever, what rate of growth of the annual cash flows will be necessary for you to earn an 8% annual rate of return on your investment?
A real estate appraiser is assessing the value of a piece of land in Vancouver. Currently the land is unoccupied but is zoned for commercial use. Plans have been approved to build a five-storey office building. Construction is expected to start in 1 year and will take 2 years to complete, at a
The Smiths are planning to retire in 35 years. They want an annual real income of $45,000, paid at the end of each month of their expected 20-year retirement and to bequeath $500,000, in real dollars, to their son at the end of their retirement. In addition, their son's 4-year university education,
Many banks provide mortgage calculators. a. For example, go to the HSBC Bank of Canada Web site at www.hsbc.ca and select "Borrowing: Loans and Mortgages," then "Mortgage Calculator." For a $200,000 mortgage, at annual interest of 6% and 25-year amortization, compare the payments if you pay
Compute the present value of a $ 100 annual annuity for the same combination of rates and time periods as in problem l. a. r = 8%, t = 10 years b. r = 8%, t = 20 years c. r = 4%, t = 10 years d. r = 4%, t = 20 years
Alfred Road has reached his 70th birthday and is ready to retire. Mr. Road has no formal training in finance but has saved his money and invested carefully.Mr. Road owns his home- the mortgage is paid off and does not want to move. He is a widower, and he wants to bequeath the house and any
Five years ago you purchased an 8% coupon bond for $975. Today you sold the bond for $1,000. What is your rate of return on the bond in each of the following situations? a. All coupons were immediately spent when received. b. All coupons were reinvested in your bank account, which pays 1% interest
Looking back at the previous question, use the yield-to-maturity method to compute the rate of return on your bond investment.
Are the following statements true or false? Provide simple examples to support your assessment. a. If interest rates rise, bond prices rise. b. If the bond's yield to maturity is greater than its coupon rate, the price is greater than the bond's face value. c. High-coupon bonds of a given maturity
Use historical yield-to-maturity data from the Bank of Canada Web site at www.bankofcanada.ca to look at bonds of different types. Go to www.bankofcanada.ca/rates/interest-rates/lookup· bond-yields and follow the instructions. Download 60 months of yield-to-maturity data for long-term corporate
The following table shows the prices of strips of Canada bonds in November 2012. Each strip makes a single payment of $100 at maturity. a. Calculate the annually compounded, yield to maturity (spot interest rate) for each bond. b. Is the term structure upward- or downward-sloping? Maturity Price
Diamond Corporation is planning a bond issue with an escalating coupon rate. The annual co upon rate will be 4% for the first 3 years, 5% for the subsequent 3 years, and 6% for the final 3 years. If bonds of t his risk are yielding 5%, estimate t he bond's current price.
Free online yield-to-maturity and credit spread data for Canadian corporate bonds with different debt ratings is not available. However, old U.S. data is available at www.bondsonline.com/Todays.Market/Corporate.Bond.Spreads.php. You will see a table showing credit sp reads for corporate bonds of
From www.globeinvestor.com;Servlet/Page/document/v5/data!bonds, find five different corporate bonds and find Government of Canada bonds with similar terms to maturity. Look up their ratings at e it her www.dbrs .com or www .standardandpoors.com. Compare the bonds' yields to maturity to
You have been told that the yield to maturity on 3-month treasury bills is 4% and t he current inflation rate is 2%. Estimate the real rate of interest.
A 6.25% 15-year bond, paying interest annually, can be called at 110% of par value in 10 years. The bond currently sells for $1,048. a. What is the yield to maturity? b. What is the yield to call?
A 7% corporate bond with 6 years to maturity has a Canada call. The bond's yield to maturity is 4.8%. The call price must offer an equivalent yield to a Canada bond plus .35%. Currently, 6-year Government of Canada bonds are yielding 4%. Assume coupons are paid annually. a. What is t he current
When ABC Company originally issued its callable 5.5%, 10-year bond, it was rated AA and priced to sell at par. The bond is callable at t he price that offers an equivalent yield to a Canada bond plus .15%. At that time, the credit spread over 10-year Canada bonds was .25%. The bond pays interest
Using the information in problem 26, calculate your after-tax rate of return on your bond investment assuming that your marginal tax rate is 35%. You pay tax on the interest when it is received. a. All coupons were immediately spent when received. b. All coupons were reinvested in your bank
Big Time Company is planning to raise $15 million by selling 10-year bonds. The bond rating agency has advised the company that the bonds will have an A rating. Currently, the difference between the yield to maturity of A-rated corporate bonds over similar-maturity Government of Canada bonds is 150
Go to www.dbrs.com and find the bond rating of BCE (BCE) and Agrium (AGU). Which has the higher bond rating (that is, DBRS Issuer Credit Rating)? Then go to finance.yahoo.com to learn about the main business activities of each of these companies. Compare their ability to pay their interest
ABCE bond has 10 years until maturity and a coupon rate of 8% payable annually, and sells for $1,100. a. What is the current yield on the bond? b. What is the yield to maturity?
General Matter's outstanding bond issue has a coupon rate of 7% and a current yield of 7.6%, and it sells at a yield to maturity of 9.25%. The firm wishes to issue additional bonds to the public at par value. What coupon rate must the new bonds offer in order to sell at par?
Turn back to Table 6.1. What is the current bid yield of the Canada 3.5%, June 1, 2020, maturity? What price would you have had to pay to buy the bond that day?
You bought a 10-year, 5% coupon bond for $ 1,000 and sold it 1 year later for $1,100. What is the rate of return on your investment if the bond pays interest annually?
The following are the yields to maturity on Canada strip bonds with various years to maturity.Years to Maturity Yield to
Refer back to question 6A.l. Years to Maturity Yield to
Suppose that in June 2013 the Canada June 2014 strip was selling for $988.53, the Canada June 2015 strip was selling for $969.15, and the Canada June 2016 strip was selling for $945.51. Each strip pays $1,000 at maturity. a. Calculate the yield to maturity for each bond. b. Calculate annually
Assume that the term structure is upward-sloping. How would you respond to the following statement? Given the current yield curve, a company should borrow short-term rather than long-term. It will be cheaper."
A 30·year Canada bond is issued with par value of $1,000, paying interest of $60 per year. lf market yields increase shortly after the bond is issued, what happens to the bond's a. Coupon rate b. Price c. Yield to maturity d. Current yield

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Fundamentals of Corporate Finance 6th Canadian edition Richard Brealey, Stewart Myers, Alan Marcus, Devashis Mitra, Elizabeth Maynes, William Lim - Solutions

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