Chapter Solutions for Corporate Finance 4th Edition

Chapter 2 Solutions

3. To find the book value of current assets, we use the NWC equation, that is:

NWC = CA – CL

Rearranging to solve for current assets, we get:

CA = NWC + CL

CA = $320,000 + 1,400,000

CA = $1,720,000

So, the book value balance sheet will be:

Book Value Balance Sheet

Current assets $1,720,000

Fixed assets 4,200,000

Total assets $5,920,000

The market value of current assets is given, so the market value balance sheet is:

Market Value Balance Sheet

Current assets $1,710,000

Fixed assets 5,600,000

Total assets $7,310,000

5. To calculate OCF, we first need the income statement:

  | Income Statement |

  | Sales | $29,200 |

  | Costs | 10,400 |

  | Depreciation expense | 1,800 |

  | EBIT | $17,000 |

  | Interest expense | 1,050 |

  | EBT | $15,950 |

  | Taxes (40%) | 6,380 |

  | Net income | $ 9,570 |

Using the equation for OCF, we get:

OCF = EBIT + Depreciation – Taxes

OCF = $17,000 + 1,800 – 6,380

OCF = $12,420

19. a. Taxes Growth = .15($50,000) + .25($25,000) + .34($8,000) = $16,470

Taxes Income = .15($50,000) + .25($25,000) + .34($25,000) + .39($235,000)

+ .34($8,300,000 – 335,000)

= $2,822,000

b. Each firm has a marginal tax rate of 34 percent on the next $10,000 of taxable income, despite their different average tax rates, so both firms will pay an additional $3,400 in taxes.

chapter 3 Solutions

1. Using the DuPont identity, the ROE is:

ROE = (PM)(TAT)(EM)

ROE = (.058)(1.65)(1.75)

ROE = .1675, or 16.75%

6. We need to calculate the retention ratio to calculate the sustainable growth rate. The retention ratio is:

b = 1 – .25

b = .75

Now we can use the sustainable growth rate equation to get:

Sustainable growth rate = (ROE × b) / [1 – (ROE × b)]

Sustainable...