Finance for Executives (8th Edition) – Solutions Manual
Answers to Review Problems | Complete Step-by-Step Solutions
Based on:
Finance for Executives: Managing for Value Creation (8th Edition)
Gabriel Hawawini & Claude Viallet
ISBN: 9781473795570
Key Topics:
Financial Analysis • Capital Budgeting • Value Creation • Corporate
Finance
Ideal for:
Exam Preparation • Assignments • Practice
, Table of Contents
Chapter 1: Financial Management and Value Creation: An Overview
Chapter 2: The Time Value of Money
Chapter 3: The Time Value of Money
Chapter 4: Interpreting Financial Statements
Chapter 5: Analyzing Operational Efficiency and Liquidity
Chapter 6: Analyzing Profitability, Risk, and Growth
Chapter 7: Using the Net Present Value Rule to Make Value-Creating
Investment Decisions
Chapter 8: Alternatives to the Net Present Value Rule
Chapter 9: Identifying and Estimating a Project’s Cash Flows
Chapter 10: Valuing Bonds and Stocks
Chapter 11: Raising Capital and Paying Out Cash
Chapter 12: Estimating the Cost of Capital
Chapter 13: Designing a Capital Structure
Chapter 14: Valuing and Acquiring a Business
Chapter 15: Managing Corporate Risk
Chapter 16: Understanding Forward, Futures, and Option Contracts and Their
Contribution to Corporate Finance
Chapter 17: Making International Business Decisions
Chapter 18: Sustainability and Corporate Finance
Chapter 19: Managing for Value Creation
Chapter 1: Financial Management and Value Creation: An Overview
Answers to Review Problems Not Available
,Chapter No. 2: The Time Value of Money
Answers to Review Problems
1. Finding the implicit interest rate
If indifferent then the present values of the alternatives should be the same, that is,
$1,000 $1,180 $1,180
1+k
= (1+k)3 , and thus (1 + k)2 = $1,000 = 1.180 from which we get k = 8.63%.
2. APR versus effective interest rate
APR 12
Using equation 2.4 we can write: 1 + k eff = 1.0617 = �1 + 12
� , thus:
1
APR
(1.0617)12 = 1.0050 = 1 + 12
from which we get APR = 6%.
With a financial calculator, enter N=12, PV=1, PMT=0, FV= −1.0617 and press I/YR. you
will find a monthly APR of 0.5% which multiplied by 12 gives you 6%.
3. Compounded value and compounded rate
a.
(1 + 3%) × (1 + 5%) × (1 + 6%) = $1.1464.
b.
(1 + k)3 = 1.1464 from which we get k = 4.66%.
4. Alternative financing plans
PV(Plan 1) = $12,400 + $400 × ADF(T=35; k=6%/12) = $12,400 + $400 × 32.0354 = $25,214.
PV(Plan 2) = $492 × ADF(T=60; k=6%/12) = $492 × 51.7256 = $25,449.
The first plan is preferable because it is less expensive because it has a lower present value.
, 5. Annuity versus perpetuity
The future value of the $100 a year for the next 10 years (refer to formula 2.13 for the future
value of an annuity) at the rate ‘k’ must be equal to the present value, at the end of 10, of a
$100 perpetuity at the same rate ‘k’, hence we have:
$100 $100
[(1 + k)10 − 1] = , and thus [(1 + k)10 − 1] = 1, from which we get (1 + k)10 = 2.
k k
Using a financial calculator we find k = 7.18%. (Enter N=10, PV=1, PMT=0, FV=−2 and
press I/YR. you will find 7.18%.)
6. Valuing a loan
a.
The loan will generate fixed interest income of $800,000 (8% of $10 million) every year over
the next 4 years plus $10 million at the end of the fourth year. Its value is thus the sum of the
present value of 4-year, $800,000 annuity at 7 percent (the prevailing market rate) and the
present value of $10 million to be received in 4 years at 7 percent:
Value of loan = [$800,000 × ADF(T=4; k=7%)] + [$10,000,000 × DF(T=4; k=7%)]
Value of loan = [$800,000 × 3.3872] + [$10,000,000 × 0.7629] = $10,338,760.
b.
Value of loan = [$400,000 × ADF(T=8; k=3.5%)] + [$10,000,000 × DF(T=8; k=3.5%)]
Value of loan = [$400,000 × 6.8740] + [$10,000,000 × 0.7594] = $10,343,600.
7. Perpetual cash flows
a.
If the current membership is renewed every year in perpetuity with fees growing at 3 percent
$2,000(1+3%) $2,060
annually, its the present value at 6 percent is PV = 6%−3%
= 0.03
= $68,667. This is a
higher amount than the proposed price of $65,000 for life-long family membership. The life-
long family membership is thus a better deal.
Answers to Review Problems | Complete Step-by-Step Solutions
Based on:
Finance for Executives: Managing for Value Creation (8th Edition)
Gabriel Hawawini & Claude Viallet
ISBN: 9781473795570
Key Topics:
Financial Analysis • Capital Budgeting • Value Creation • Corporate
Finance
Ideal for:
Exam Preparation • Assignments • Practice
, Table of Contents
Chapter 1: Financial Management and Value Creation: An Overview
Chapter 2: The Time Value of Money
Chapter 3: The Time Value of Money
Chapter 4: Interpreting Financial Statements
Chapter 5: Analyzing Operational Efficiency and Liquidity
Chapter 6: Analyzing Profitability, Risk, and Growth
Chapter 7: Using the Net Present Value Rule to Make Value-Creating
Investment Decisions
Chapter 8: Alternatives to the Net Present Value Rule
Chapter 9: Identifying and Estimating a Project’s Cash Flows
Chapter 10: Valuing Bonds and Stocks
Chapter 11: Raising Capital and Paying Out Cash
Chapter 12: Estimating the Cost of Capital
Chapter 13: Designing a Capital Structure
Chapter 14: Valuing and Acquiring a Business
Chapter 15: Managing Corporate Risk
Chapter 16: Understanding Forward, Futures, and Option Contracts and Their
Contribution to Corporate Finance
Chapter 17: Making International Business Decisions
Chapter 18: Sustainability and Corporate Finance
Chapter 19: Managing for Value Creation
Chapter 1: Financial Management and Value Creation: An Overview
Answers to Review Problems Not Available
,Chapter No. 2: The Time Value of Money
Answers to Review Problems
1. Finding the implicit interest rate
If indifferent then the present values of the alternatives should be the same, that is,
$1,000 $1,180 $1,180
1+k
= (1+k)3 , and thus (1 + k)2 = $1,000 = 1.180 from which we get k = 8.63%.
2. APR versus effective interest rate
APR 12
Using equation 2.4 we can write: 1 + k eff = 1.0617 = �1 + 12
� , thus:
1
APR
(1.0617)12 = 1.0050 = 1 + 12
from which we get APR = 6%.
With a financial calculator, enter N=12, PV=1, PMT=0, FV= −1.0617 and press I/YR. you
will find a monthly APR of 0.5% which multiplied by 12 gives you 6%.
3. Compounded value and compounded rate
a.
(1 + 3%) × (1 + 5%) × (1 + 6%) = $1.1464.
b.
(1 + k)3 = 1.1464 from which we get k = 4.66%.
4. Alternative financing plans
PV(Plan 1) = $12,400 + $400 × ADF(T=35; k=6%/12) = $12,400 + $400 × 32.0354 = $25,214.
PV(Plan 2) = $492 × ADF(T=60; k=6%/12) = $492 × 51.7256 = $25,449.
The first plan is preferable because it is less expensive because it has a lower present value.
, 5. Annuity versus perpetuity
The future value of the $100 a year for the next 10 years (refer to formula 2.13 for the future
value of an annuity) at the rate ‘k’ must be equal to the present value, at the end of 10, of a
$100 perpetuity at the same rate ‘k’, hence we have:
$100 $100
[(1 + k)10 − 1] = , and thus [(1 + k)10 − 1] = 1, from which we get (1 + k)10 = 2.
k k
Using a financial calculator we find k = 7.18%. (Enter N=10, PV=1, PMT=0, FV=−2 and
press I/YR. you will find 7.18%.)
6. Valuing a loan
a.
The loan will generate fixed interest income of $800,000 (8% of $10 million) every year over
the next 4 years plus $10 million at the end of the fourth year. Its value is thus the sum of the
present value of 4-year, $800,000 annuity at 7 percent (the prevailing market rate) and the
present value of $10 million to be received in 4 years at 7 percent:
Value of loan = [$800,000 × ADF(T=4; k=7%)] + [$10,000,000 × DF(T=4; k=7%)]
Value of loan = [$800,000 × 3.3872] + [$10,000,000 × 0.7629] = $10,338,760.
b.
Value of loan = [$400,000 × ADF(T=8; k=3.5%)] + [$10,000,000 × DF(T=8; k=3.5%)]
Value of loan = [$400,000 × 6.8740] + [$10,000,000 × 0.7594] = $10,343,600.
7. Perpetual cash flows
a.
If the current membership is renewed every year in perpetuity with fees growing at 3 percent
$2,000(1+3%) $2,060
annually, its the present value at 6 percent is PV = 6%−3%
= 0.03
= $68,667. This is a
higher amount than the proposed price of $65,000 for life-long family membership. The life-
long family membership is thus a better deal.
