金融学 课后答案Bodie2_IM_Ch16.pdf

CHAPTER 16 Financial Structure of the Firm End of Chapter Problems 1 Considering your family as the limiting boundary what are examples of both internal and external financing options available to enroll in summer school to make up the elementary corporate finance course you failed last semester Solution Answers will vary but some examples would be Internal financing i accounts payable enroll in summer school and wait as long as possible to pay the tuition bill or rather than pay the balance on your credit card use the cash to pay your tuition charges ii accrued wages rather than pay your brother back the money you owe him for painting your apartment use the cash to pay your tuition iii take the money from your wages or profit share from the family owned restaurant and pay your tuition External financing i debt financing increase your student loan borrowing to pay the tuition ii equity human capital financing get the tuition money from your neighbor in exchange for the promise to help him with his income tax preparation for the next ten years 2 Plentilease and Nolease are virtually identical corporations The only difference between them is that Plentilease leases most of its plant and equipment whereas Nolease buys its plant and equipment and finances it by borrowing Compare and contrast their market value balance sheets Solution Market Value Balance Sheets of Nolease and Plentilease Corporations a Nolease Corporation AssetsLiabilities and Shareholders Equity Plant and equipmentBonds Other assetsEquity TotalTotal b Plentilease Corporation AssetsLiabilities and Shareholders Equity Plant and equipmentLease Other assetsEquity TotalTotal The main difference between the bonds and the lease as a form of debt financing is who bears the risk associated with the residual market value of the leased asset at the end of the term of the lease Since Nolease Corporation has bought its equipment it bears this risk In Plentilease s case however it is the lessor that bears this residual value risk Chapter 16 1 Copyright 2009 Pearson Education Inc Publishing as Prentice Hall Financial EconomicsSolutions Manual 3 Hanna Charles Company needs to add a new fleet of vehicles for their sales force The purchasing manager has been working with a local car dealership to get the best value for the company dollar After some negotiations a local dealer has offered Hanna Charles two options 1 a three year lease on the fleet of cars or 2 15 off the top to purchase outright Option 1 would cost Hanna Charles company an estimated 5 less as an all in cost over the three years a What are the advantages and disadvantages of leasing b Which option should the purchasing manager at Hanna Charles pursue and why Solution a Advantages The lessor bears all the residual value risk Tax Benefits No disposal concerns or resale when life of equipment is expended Disadvantages No ownership while maintaining maintenance responsibility b Lease or Buy Hanna Charles company should lease Not only will they spend less with the lease they do not bear the residual value risk 4 Europens and Asiapens are virtually identical corporations The only difference between them is that Europens has a completely unfunded pension plan and Asiapens has a fully funded pension plan Compare and contrast their market value balance sheets What difference does the funding status of the pension plan make to the stakeholders of these two corporations Solution Balance Sheets of Asiapens and Europens Corporations Asiapens Balance Sheet TotalTotal Shareholders equity Pension liability Pension assets stocks bonds etc Bonds Operating assets plant and equipment etc Liabilities and Shareholders EquityAssets Europens Balance Sheet TotalTotal Shareholders equity Pension liability BondsOperating assets plant and equipment etc Liabilities and Shareholders EquityAssets Chapter 16 2 Copyright 2009 Pearson Education Inc Publishing as Prentice Hall Financial EconomicsSolutions Manual Asiapens has funded its pension plan by issuing bonds and investing the funds raised in a segregated pool of pension fund assets These pension assets take the form of a diversified portfolio of stocks and bonds issued by other companies and serve as collateral for the pension benefits promised by Asiapens to its employees In the case of Europens there is no segregated pool of pension assets The pension promises of Europens are backed by the assets of the company itself Therefore the employees of Asiapens are more secure about receiving their promised pension benefits since the benefits are collateralized by a more diversified portfolio of assets In the case of both companies however any unfunded pension liability reduces shareholders equity 5 Divido Corporation is an all equity financed firm with a total market value of 100 million The company holds 10 million in cash equivalents and has 90 million in other assets There are 1 000 000 shares of Divido common stock outstanding each with a market price of 100 Divido Corporation has decided to issue 20 million of bonds and to repurchase 20 million worth of its stock a What will be the impact on the price of its shares and on the wealth of its shareholders Why b Assume that Divido s EBIT has an equal probability of being 20 million or 12 million or 4 million Show the impact of the financial restructuring on the probability distribution of earnings per share in the absence of taxes Why does the fact that the equity becomes riskier not necessarily affect shareholder wealth Solution a In an M the rest must be equity This new equity can be in the form of preferred stock which would be risk free just like the debt Thus both the debt and preferred stock would carry a risk free interest rate of 10 The interest payments on the debt would be tax deductible but the dividend on the preferred stock would not be tax deductible Hint Fill in the table below using the left column for the case where 100 of bonds and 50 of preferred stock are issued Remember these figures are one period ahead Determine the present value of the existing owner s equity and the weighted average cost of capital WACC i e what is the after tax weighted average cost of financing the 150 investment by issuing the 100 of debt and 50 of preferred stock If the company could increase its debt equity ratio say by issuing 150 of debt to finance the project see the right column of the table below would anyone benefit If so who by how much and why Payment to common stock 0Payment to preferred stock 55 Residual for equity 150 Repayment of bond face 100 Earnings after tax Taxes 40 435EBT 440 15 Interest 10 450EBIT 450 Solution The M M model says that debt has an advantage from its tax shield and in this case issuing the 100 of debt results in non risky debt so bankruptcy effects do not exist for this level of debt The value of the debt is 100 today and 110 next period The original equity holders will thus be entitled to the residual of 109 111Payment to common stock 109 0Payment to preferred stock 55 111Residual for equity 164 150 Repayment of bond face 100 261Earnings after tax 264 174 Taxes 40 176 435EBT 440 15 Interest 10 450EBIT 450 The value of the existing owner s equity is the discounted present value of the 109 where a 10 risk free discount rate is used to yield a value of 99 10 Thus the total equity value of the firm today is the 99 10 plus the 50 of new equity for a total of 149 10 The marginal weighted average cost of capital which gives the after tax cost of capital for the 150 of new capital raised is given by WACC10 50 100 10 100 150 140 WACC 9 If the firm increased its debt equity ratio by funding the project entirely with the issuance of debt the WACC would be 6 The original stockholders would be better off as is shown in the table above last column The extra 2 of future value to original stockholders comes from the extra 2 tax savings from the issuance of debt rather than equity The present value would increase by 2 1 1 1 82 Can you link this value increase to the amount borrowed and the original and new weighted average cost of capital Chapter 16 20 Copyright 2009 Pearson Education Inc Publishing as Prentice Hall Financial Economics Solutions Manual Objectives To understand how a firm can create value through its financing decisions To show how to take account of a firm s financing mix in evaluating investment decisions Contents 16 1 Internal versus External Financing 16 2 Equity Financing 16 3 Debt Financing 16 4 The Irrelevance of Capital Structure in a Frictionless Environment 16 5 Creating Value through Financing Decisions 16 6 Reducing Costs 16 7 Dealing with Conflicts of Interest 16 8 Creating New Opportunities for Stakeholders 16 9 Financing Decisions in Practice 16 10 How to Evaluate Levered Investments Summary External financing subjects a corporation s investment plans more directly to the discipline of the capital market than internal financing does Debt financing in its broadest sense includes loans and debt securities such as bonds and mortgages as well as other promises of future payment by the corporation such as accounts payable leases and pensions In a frictionless financial environment in which there are no taxes or transaction costs and contracts are costless to make