Type:
Solution Manual
Resource:
Introduction to Corporate Finance
Edition:
5th Edition
Author(s):
Laurence Booth Sean Cleary Ian Rakita
Chapter 1 Lecture Topics 1. What is finance? Finance in its broadest terms is the study of how and under what terms savings (money) are allocated between lenders and borrowers. The key phrase in the above definition is allocated, and some will recognize the similarity with economics, which studies how scarce resources are allocated in an economy. This similarity is not an accident, since finance in many ways is closely related to economics. However, finance is distinct from economics, since it is not just about how resources are allocated, but also under what terms and through what channels.
2. Financial system. In Canada, the household sector is the primary provider of funds to business and government, with the non-resident sector traditionally being net providers of funds, despite the fact that all three domestic sectors do invest outside of Canada. The basic financial flow is “intermediated” through the financial system, which is comprised of: (1) financial intermediaries (hard box), who transform the nature of the securities they issue versus what they invest in; and, (2) market intermediaries, who simply make the markets work better. The whole package of institutions is the Canadian financial system.
3. Financial instruments, financial markets and global financial markets. Financial assets are formal legal documents that set out the rights and obligations of all of the parties involved. The two major categories of financial securities are debt instruments and equity instruments. Financial markets permit the issuing and trading of these financial instruments, which include primary markets and secondary markets. In addition to the domestic financial markets discussed above, global financial markets represent important sources of funds for borrowers, and provide investors with important alternatives.
Chapter 2 Lecture Topics 1. The four major forms of business organizations are sole proprietorships, partnerships, trusts and corporation. The big advantage of a sole proprietorship is that setting one up is easy, however, the critical thing is unlimited liability. The two main partnership forms are limited liability partnerships (LLP) and limited and general partnerships. Limited and general partnerships are generally used for tax reasons.
2. The Role of Management and Agency Issues. The costs associated with agency problems are referred to as agency costs. There are two major types of agency costs: (1) direct costs (2) indirect costs
3. What is Corporate Finance? Corporate Finance is the financial management of assets and corporate financing decisions represent the area of corporate finance.
4. In 2007, Michael Lazaridis received $79.17 million dollars in compensation as the co-CEO of RIM. However, not all of this compensation is bourne by the shareholders. Both co-CEOs, Lazaridis and Balsille received $.63 million in salary and the balance of their compensation came from shares/options on RIM—Balsille received $38.48 million and Lazardidis received $78.54 million. The idea of using shares and options is to align the best interests of the CEO and senior management with the interests of the shareholders.
Chapter 3 Lecture Topics 1. Accounting principles. In Canada, generally accepted accounting principles (GAAP) are contained in the Handbook of the Canadian Institute of Chartered Accountants (CICA). The Handbook has the force of law in Canada in that statements have to be prepared in accordance with these principles when the firm raises money from Canadian investors. Since 2011, the Canadian GAAP is aligned to the International Financial Reporting Standards (IFRS), now the primary standards for publicly accountable enterprises. In addition to IRFS, Canadian GAAP also include standards for private firms and for not-for-profit organizations. In the U.S., GAAP consists of the principles of the Financial Accounting Standards Board (FASB). Japan and China have yet to adopt IFRS standards.
2. Balance sheet, income statement, and cash flow statement. Balance sheet is simply a snapshot of the financial position of the firm. Income statement is a firm’s financial statement showing the sales, expenses and net profit for a given period. The net income figure increases when a firm’s accountants make more aggressive accounting assumptions. However, cash flow statements alleviate the impact of most major accounting assumptions.
3. Canadian corporate taxes. Canada’s corporate tax system has a unique feature, which applies cost of capital allowance (CCA) in depreciation. CCA is usually the beginning-of-year UCC multiplied by the CCA rate. In year 1, the beginning-of-year UCC is half the assets. The beginning-of-year UCC is the endof-prior-year UCC. Since 2018 the new Accelerated Investment Incentive (AII) program changed the CCA rules over the period 2018-2027, such as charging CCA on an amount equal to the net acquisition cost plus 50 percent, or writing off assets entirely upon acquisition, for classes 53, 43.1, 43.2. The program has two phases, 2018-2023 and 2024-2027. When an asset is sold, there is either a CCA recapture or a terminal loss, depending on the salvage value and the remaining UCC.
Lecture Topics Chapter 4 1. Du Pont decomposition. ROE is a critical measure of the performance of a firm and overall performance analysis is enhanced by the DuPont decomposition where: ROE = Net Income x Sales
Sales x Total Assets Total Assets Shareholders’ Equity
(ROE = Net Profit Margin x Asset Turnover x Leverage)
2. Liquidity ratios measure the ability of a firm to meet its financial obligations from its current assets. The current ratio and quick ratio measure a firm’s liquidity.
3. Financial forecasting is the use of a firm’s financial statements to project future financing needs if sales increase by projected percentages. The percentage of sales method is used to project a firm’s external financing requirements (EFR). The EFR can also be computed mathematically using a formula that relates EFR to sales growth rates, the firm’s retention rate, profitability, and the invested capital requirement. The sustainable growth rate can be derived from this formula.
Lecture Topics Chapter 5 Lecture Topics 1. Simple interest rates and compound interest rates. Simple interest arises when interest is paid or received based “only” on the initial investment (or principal). Compound interest refers to a process whereby interest is earned on the principal amount invested and on any accrued interest. It can result in dramatic growth in the value of an investment over time.
2. Future value and present value. The values at the current time period are present values and the values in the future are future values. The present value and the future value can be converted into each other with FVn = PV0 (1 + k)n.
3. Valuation of future cash flows, such as annuities, perpetuities, loans, and mortgages. An annuity is a series of payments or receipts, which we will simply call cash flows, over some period that are for the same amount, and paid over the same time interval, that is, for example, they are paid annually, monthly, or weekly. Sometimes annuities are structured so that the cash flows are paid at the beginning of a period, rather than at the end. Perpetuities are special annuities in that they go on forever so n goes to infinity in the annuity equation. Mortgages and loans involve “blended” payments for equal amounts that include both an interest and principal repayment component.
Chapter 6
Lecture Topics 1. Bond valuation. The price of a bond equals the present value of the future payments on the bond, which is the present value of the interest payments and the par value repaid at maturity.
2. Determinations of the discount rate or yield. The discount rate used to evaluate bonds is referred to as the yield to maturity (YTM). Technically, it is the yield that an investor would realize if they bought the bond at the current price, held it to maturity, received all the promised payments on their scheduled dates, and reinvested all the cash flows received at the YTM.
3. Determinations of interest rate. Important topics include the difference between nominal rates and real rates, the causes of the different interest rate across countries, term structure of interest rate, and corporate spreads.