Solutions Manual

Corporate Finance:
A Focused Approach
Third Edition
Michael C. Ehrhardt
University of Tennessee
Eugene F. Brigham
University of Florida
Australia Brazil Canada Mexico inga!ore !ain United "ingdom United tates
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PREFACE
This !reface contains a descri!tion of ho# #e and others have used Corporate Finance (CF).
Additionally$ it gives some suggestions on ho# the instructional aids contained in this manual or
availa%le se!arately from outh&'estern College (u%lishers can %e used to enhance the course.
Course Format
There is no single %est #ay to teach a finance class)the o!timal course structure varies #ith
students* %ac+grounds$ instructors, interests$ the num%er of class contact hours$ and the !lace of
the course in the overall curriculum. Further$ %ecause these factors change over time$ most of us
vary our a!!roaches from year to year. till$ it may %e useful to some instructors to learn ho#
#e use CF.
'e designed CF !rimarily for use in the introductory MBA cor!orate finance course$ %ut it
can also %e used at the undergraduate level #hen the students are very good. 'e #rote CF
%ecause #e #anted a text%oo+ that could %e covered in a single semester$ %ut that still covered all
the im!ortant cor!orate finance to!ics in de!th.
CF !rovides a discussion of %oth the theories %ehind financial decision&ma+ing and -nuts and
%olts- information a%out ho# to im!lement the theory. .t is useful %oth for !rimary learning and
as a reference %oo+)students find the text useful in follo#&u! case courses as #ell as after
graduation$ #hen they must a!!ly the material in a real&#orld setting.
'e %elieve that a fe# cases are necessary to give the course a real&#orld flavor. Further$ #e
li+e to use cases and !ro%lems that re/uire the use of s!readsheets and .nternet data$ and a large
set of cases are availa%le from outh&'estern College (u%lishers. Most MBA !rograms re/uire
that students are familiar #ith s!readsheets !rior to ta+ing the finance course$ %ut many students
have only a rudimentary +no#ledge. Thus$ the first finance course should give students the
o!!ortunity to learn more a%out s!readsheets$ es!ecially ho# they can %e used to assist in
financial decision&ma+ing.
End-of-Chapter Materials
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A section at the end of each cha!ter contains 0uestions$ elf&Test (ro%lems$ (ro%lems$ and a
Mini Case. This Solutions Guide !rovides ans#ers and #or+ed&out solutions to the 0uestions$
(ro%lems$ and Mini Cases 1the solutions to the elf&Test (ro%lems are in the text%oo+*s
A!!endix A2.
(erha!s the most im!ortant !edagogic aid in CF is the relatively long -Mini Case- at the end
of the !ro%lem set for each cha!ter. 'e noticed a difference in students, interest and attention on
our -lecture days- as o!!osed to our -case days.- 3enerally$ case days #ere much livelier. That
made us #onder if #e could ma+e our lectures more li+e the cases. Then$ for several years$ #e
ex!erimented #ith #riting u! some short cases 1Mini Cases2 for use as a %asis for our lectures.
The Mini Cases covered the +ey elements of the cha!ters$ and the solutions #ere set u! in a
lecture format$ #ith more detail than our normal end&of&cha!ter !ro%lem solutions. 4ater$ #e
created trans!arencies$ and then (o#er(oint slides$ to enhance the solutions. The results #ere so
successful that #e ended u! scra!!ing our old lecture notes and instead used the Mini Cases and
(o#er(oint slides for our lectures. 'e also have Excel #or+sheets that corres!ond to the Mini
Cases. .n addition to containing s!readsheet solutions to the Mini Case$ the Excel #or+sheets
allo# us to do some real&time #hat&if analysis. 'e often visit relevant 'e% sites #hen #e are in
a net#or+ed classroom. For exam!le$ #hen teaching %ond !ricing$ #e %egin #ith the
(o#er(oint sho#$ #hich ex!lains the %asic conce!ts such as the relationshi! %et#een %ond !rice
and mar+et interest rates for %onds of different maturities. 'e then 5toggle6 to the Excel
#or+sheet and do some 5#hat&if6 analysis #ith a gra!h that sho#s the change in %ond !rices as
#e change the in!ut$ the mar+et interest rate. 'hen time !ermits$ #e use the 'e% lin+s at the
text%oo+*s 'e% site. For exam!le$ #e go to a 'e% site that has current actual %ond !rices$ and
#e com!are the actual relationshi!s #ith those that #e discussed in class.
Acknowledgments
'e #ould li+e to than+ Amelia Bell and te!hanie 7odge for all their hel! on this edition. 'e
also #ant to than+ 4ou 3a!ens+i$ 8ana Clar+$ usan 'hitman$ and Tina 3oforth for their #or+
in the !ast.
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Conclusions
'e have tried to ma+e this Solutions Manual as clear and error&free as !ossi%le9 ho#ever$ there
are almost certainly some mista+es and unclear sections. Any suggestions for im!roving the
manual #ould %e greatly a!!reciated$ and should %e addressed to Mi+e Ehrhardt at the e&mail
address given %elo#.
Eugene F. Brigham Michael C. Ehrhardt
University of Florida University of Tennessee
gene.%righam:c%a.ufl.edu ehrhardt:ut+.edu
March ;<<=
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TA!E "F C"#TE#TS
Cha!ter > An ?vervie# of Cor!orate Finance and the Financial Environment........................>&>
Cha!ter ; Time @alue of Money..............................................................................................;&>
Cha!ter A Financial tatements$ Cash Flo#$ and Taxes...........................................................A&>
Cha!ter B Analysis of Financial tatements.............................................................................B&>
Cha!ter C Dis+ and Deturn......................................................................................................C&>
Cha!ter E Bonds$ Bond @aluation$ and .nterest Dates..............................................................E&>
Cha!ter F toc+s$ toc+ @aluation$ and toc+ Mar+et E/ui%i%rium.........................................F&>
Cha!ter = Financial ?!tions and A!!lications in Cor!orate Finance.......................................=&>
Cha!ter G The Cost of Ca!ital.................................................................................................G&>
Cha!ter >< Basics of Ca!ital BudgetingH Evaluating Cash Flo#s...........................................><&>
Cha!ter >> Cash Flo# Estimation and Dis+ Analysis..............................................................>>&>
Cha!ter >; Financial (lanning and Forecasting Financial tatements......................................>;&>
Cha!ter >A Cor!orate @aluation$ @alue&Based Management$ and Cor!orate 3overnance........>A&>
Cha!ter >B Ca!ital tructure 8ecisions...................................................................................>B&>
Cha!ter >C 8istri%utions to hareholdersH 8ividends and De!urchases..................................>C&>
Cha!ter >E 'or+ing Ca!ital Management...............................................................................>E&>
Cha!ter >F Multinational Financial Management....................................................................>F&>
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