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 ∙ Singapore ∙ Spain ∙ United ∙ Kingdom ∙ United States

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 PREFACE

This preface contains a description of how we and others have used Corporate Finance (CF).
Additionally, it gives some suggestions on how the instructional aids contained in this manual or
available separately from South-Western College Publishers can be used to enhance the course.

Course Format

There is no single best way to teach a finance class—the optimal course structure varies with
students’ backgrounds, instructors' interests, the number of class contact hours, and the place of
the course in the overall curriculum. Further, because these factors change over time, most of us
vary our approaches from year to year. Still, it may be useful to some instructors to learn how
we use CF.

We designed CF primarily for use in the introductory MBA corporate finance course, but it
can also be used at the undergraduate level when the students are very good. We wrote CF be-
cause we wanted a textbook that could be covered in a single semester, but that still covered all
the important corporate finance topics in depth.

CF provides a discussion of both the theories behind financial decision-making and "nuts and
bolts" information about how to implement the theory. It is useful both for primary learning and
as a reference book—students find the text useful in follow-up case courses as well as after grad-
uation, when they must apply the material in a real-world setting.

We believe that a few cases are necessary to give the course a real-world flavor. Further, we
like to use cases and problems that require the use of spreadsheets and Internet data, and a large
set of cases are available from South-Western College Publishers. Most MBA programs require
that students are familiar with spreadsheets prior to taking the finance course, but many students
have only a rudimentary knowledge. Thus, the first finance course should give students the op-
portunity to learn more about spreadsheets, especially how they can be used to assist in financial
decision-making.

End-of-Chapter Materials

A section at the end of each chapter contains Questions, Self-Test Problems, Problems, and a
Mini Case. This Solutions Guide provides answers and worked-out solutions to the Questions,
Problems, and Mini Cases (the solutions to the Self-Test Problems are in the textbook’s Appen-
dix A).

Perhaps the most important pedagogic aid in CF is the relatively long "Mini Case" at the end
of the problem set for each chapter. We noticed a difference in students' interest and attention on
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our "lecture days" as opposed to our "case days." Generally, case days were much livelier. That
made us wonder if we could make our lectures more like the cases. Then, for several years, we
experimented with writing up some short cases (Mini Cases) for use as a basis for our lectures.
The Mini Cases covered the key elements of the chapters, and the solutions were set up in a lec-
ture format, with more detail than our normal end-of-chapter problem solutions. Later, we creat-
ed transparencies, and then PowerPoint slides, to enhance the solutions. The results were so suc-
cessful that we ended up scrapping our old lecture notes and instead used the Mini Cases and
PowerPoint slides for our lectures. We also have Excel worksheets that correspond to the Mini
Cases. In addition to containing spreadsheet solutions to the Mini Case, the Excel worksheets
allow us to do some real-time what-if analysis. We often visit relevant Web sites when we are in
a networked classroom. For example, when teaching bond pricing, we begin with the Power-
Point show, which explains the basic concepts such as the relationship between bond price and
market interest rates for bonds of different maturities. We then “toggle” to the Excel worksheet
and do some “what-if” analysis with a graph that shows the change in bond prices as we change
the input, the market interest rate. When time permits, we use the Web links at the textbook’s
Web site. For example, we go to a Web site that has current actual bond prices, and we compare
the actual relationships with those that we discussed in class.

Acknowledgments

We would like to thank Amelia Bell and Stephanie Hodge for all their help on this edition. We
also want to thank Lou Gapenski, Dana Clark, Susan Whitman, and Tina Goforth for their work
in the past.

Conclusions

We have tried to make this Solutions Manual as clear and error-free as possible; however, there
are almost certainly some mistakes and unclear sections. Any suggestions for improving the
manual would be greatly appreciated, and should be addressed to Mike Ehrhardt at the e-mail
address given below.

Eugene F. Brigham Michael C. Ehrhardt

University of Florida University of Tennessee
gene.brigham@cba.ufl.edu ehrhardt@utk.edu

March 2008

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 TABLE OF CONTENTS

Chapter 1 An Overview of Corporate Finance and the Financial Environment .........................1-1

Chapter 2 Time Value of Money .................................................................................................2-1
Chapter 3 Financial Statements, Cash Flow, and Taxes .............................................................3-1
Chapter 4 Analysis of Financial Statements ................................................................................4-1
Chapter 5 Risk and Return ...........................................................................................................5-1
Chapter 6 Bonds, Bond Valuation, and Interest Rates ................................................................6-1
Chapter 7 Stocks, Stock Valuation, and Stock Market Equibibrium ..........................................7-1
Chapter 8 Financial Options and Applications in Corporate Finance.........................................8-1
Chapter 9 The Cost of Capital .....................................................................................................9-1
Chapter 10 Basics of Capital Budgeting: Evaluating Cash Flows .............................................10-1
Chapter 11 Cash Flow Estimation and Risk Analysis.................................................................11-1
Chapter 12 Financial Planning and Forecasting Financial Statements .......................................12-1
Chapter 13 Corporate Valuation, Value-Based Management, and Corporate Governance .......13-1
Chapter 14 Capital Structure Decisions.......................................................................................14-1
Chapter 15 Distributions to Shareholders: Dividends and Repurchases....................................15-1
Chapter 16 Working Capital Management ..................................................................................16-1
Chapter 17 Multinational Financial Management .......................................................................17-1

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