Type:
Instructor Manual
Resource:
Corporate Finance
Edition:
5th Edition
Author(s):
Jonathan Berk Peter DeMarzo David A. Stangeland
Instructor’s Resource Manual (IRM) Therese Trainor
Corporate Finance Fifth Canadian Edition Jonathan Berk Stanford University
Peter DeMarzo Stanford University
David Stangeland University of Manitoba
Contents Preface
iii
Part I: Introduction Chapter 1 Chapter 2
The Corporation and Financial Markets Introduction to Financial Statement Analysis
1-1 2-1
Part II: Tools Chapter 3 Chapter 4 Chapter 5
Arbitrage and Financial Decision Making The Time Value of Money Interest Rates
3-1 4-1 5-1
Part III: Basic Valuation Chapter 6 Valuing Bonds Chapter 7 Valuing Stocks Chapter 8 Investment Decision Rules Chapter 9 Fundamentals of Capital Budgeting
6-1 7-1 8-1 9-1
Part IV: Risk and Return Chapter 10 Capital Markets and the Pricing of Risk Chapter 11 Optimal Portfolio Choice and the Capital Asset Pricing Model Chapter 12 Estimating the Cost of Capital Chapter 13 Investor Behaviour and Capital Market Efficiency
10-1 11-1 12-1 13-1
Part V: Options Chapter 14 Chapter 15 Chapter 16
14-1 15-1 16-1
Financial Options Option Valuation Real Options
Part VI: Capital Structure and Dividend Policy Chapter 17 Capital Structure in a Perfect Market Chapter 18 Debt and Taxes Chapter 19 Financial Distress, Managerial Incentives, and Information Chapter 20 Payout Policy
17-1 18-1 19-1 20-1
Part VII: Valuation Chapter 21 Chapter 22
21-1 22-1
Capital Budgeting and Valuation with Leverage Valuation and Financial Modelling: A Case Study
Part VIII: Long-Term Financing Chapter 23 The Mechanics of Raising Equity Capital Chapter 24 Debt Financing Chapter 25 Leasing
23-1 24-1 25-1
Part IX: Short-Term Financing Chapter 26 Working Capital Management Chapter 27 Short-Term Financial Planning
26-1 27-1
Part X: Special Topics Chapter 28 Chapter 29 Chapter 30 Chapter 31
28-1 29-1 30-1 31-1
Mergers and Acquisitions Corporate Governance Risk Management International Corporate Finance .
Preface The instructor’s resource manual (IRM) is designed to aid instructors in their course delivery preparation. Each IRM chapter contains a list of that chapter’s learning objectives, a summary of the chapter’s salient topics, a grid highlighting the MyLab Finance (MLF) questions sorted by chapter section and objective, and a reference to the Excel spreadsheet solutions for that end-ofchapter’s Excel problems and data case. The Excel spreadsheet solutions can be downloaded from the Instructor’s Resources area of the MyLab Finance. Every problem in the textbook has been recreated as a MyLab Finance (MLF) problem. To arrive at an acceptable MLF answer, you have a choice of methods: (1) Each MFL question contains specific rounding instructions within it to guide student and instructor alike in calculating the exact MFL solution shown. Following these instructions precisely requires you round interim calculations to a set number of decimal places. Doing so will propagate the rounding error, but the arrived at solution will match the MFL calculation shown. (2) ALTERNATIVELY, each MFL problem will also accept the most accurate solution – that which uses a very large number of decimal places for each interim calculation (such as found in software programs like Microsoft’s Excel). These solutions can be replicated by setting a hand-held financial calculator’s decimal places to free floating, or the largest number permitted by the manufacturer which is usually 9 places. Instructions for changing decimal place settings can be found in the calculator’s manual. MFL will accept an answer based on either of the above methods. However, the solution shown throughout the MFL question will always match the one obtained by following the rounding instructions provided within that question. When no rounding instructions are provided, it is presumed at least four decimal places will be used. The MFL questions have been restructured to provide students with help as needed. For each question that requires calculations, a guided solution as well as a sample problem has been created to support the original question. The guided solution breaks the original question into smaller parts and provides detailed supporting feedback for each step, whereas the sample problem resolves the original question using different numbers while showing supporting calculations. Instructors will welcome the addition of more data cases to many chapters. These practical aids provide students with real world practice because they require in-depth analysis to solve business problems, some in real time. Each case contains questions, to guide the student through the analysis. Many cases utilize the internet, forcing the student to understand from where data comes. Doing so ensures the student’s readiness to enter the business world. Therese Trainor Providence Bay, Ontario
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Chapter 1 The Corporation and Financial Markets I. Learning Objectives 1-1 List and define the three major types of firms in Canada by considering the major characteristics of each type, including the means for distributing income to owners. 1-2 Distinguish between limited and unlimited liability and list firm types that are subject to each type of liability. 1-3 Describe taxation consequences for corporations, income and other trusts. 1-4 Discuss the division of corporate ownership into shares of stock; evaluate the implications of that division for corporate decision making including the firm’s role within society. 1-5 Explain how corporate bankruptcy can be viewed as a change in firm ownership. 1-6 Compare and contrast the characteristics of shares that are publically traded and those that are not. 1-7 Describe the major changes that stock markets have gone through in the last decade. 1-8 Differentiate between trading on an exchange and trading in a dark pool. 1-9 Describe the impact of various types of Fintech, such as telecommunications, security, automation and big data on the field of finance. 1-A Calculate the taxes owed on Canadian investment income.
II. Chapter Overview Chapter 1 begins by discussing the “birth” of the modern corporation. The chapter examines important characteristics of the three major types of firms in Canada with an emphasis on the corporation. Section 1.2 defines the agency relationships that sometimes occur within a corporation. Section 1.3 focuses on the stock market and its advantages in raising capital while Section 1.4 explores finance and technology. 1.1 The Three Types of Firms The three major types of firm in Canada are the sole proprietorship, the partnership (including limited liability partnerships), and the corporation. The section begins by defining each type then highlights the differences among them. Particular emphasis is placed on the following areas that distinguish the three types: 1. Ease of formation; 2. Separation between the firm and the owner from the perspective of the owner’s personal liability; 3. Lifespan of the firm; 4. Ease of transference of ownership. The text emphasizes the corporate form. In this chapter, the authors focus on the fact that, although corporations take a great deal of effort to form, they have some distinct advantages: the life of the firm is not limited by the life of any particular individual, ownership in the corporation is very easy to transfer via purchase or sale of shares of stock and corporations often can raise substantial amounts of capital from anonymous outside investors. However there are some disadvantages as well: Each shareholder is likely to own only a small percentage of total shares and agency problems can be pretty serious. Corporations are taxed in a very different way than other firm types. Example 1.1 shows the double taxation of corporate earnings by considering dividends paid and shares held both inside and .
1