Chapter 3 CFIN6
Chapter 3 Solutions
3-1 Free and efficient financial markets allocate funds more efficiently than would occur without free
financial markets. As a result, the real output of the economy is increased with such financial markets;
that is, the net cost of funds is lower and the net returns investors earn are higher than they would be
otherwise. Stated differently, the more efficient the financial system, the lower the costs of
intermediation, the lower the costs to the borrower, and, hence, the lower the prices of goods and
services to consumers.
3-2 In economically efficient markets, funds are allocated to their optimal use at the lowest costs, which
means that funds are invested in the assets that yield the highest returns and the costs associated with
investing funds are lower than they would be in markets that are less economically efficient. In markets
that are informationally efficient, the prices of investments reflect existing information and they adjust
quickly when new information enters the markets.
3-3 Even when financial markets are informationally efficient, investors can earn abnormal returns. But,
such opportunities should be random, which means trading rules that permit investors to earn abnormal
returns on a consistent basis do not exist.
3-4 No, the real value of a security is determined by the equilibrium forces of an efficient market. Assuming
that the information provided on newly issued securities is accurate, the market will establish the value
of a security regardless of the opinions rendered by the SEC, or, for that matter, opinions offered by any
advisory service or analyst.
3-5 Financial intermediaries are business organizations that receive funds in one form and repackage them
for use by those who need funds. For example, a financial intermediary might bundle the savings of
many depositors to create mortgages for borrowers. Through financial intermediation, resources are
allocated more effectively, and the real output of the economy is thereby increased.
3-6 When financial catastrophes occur, such as the near collapse of the financial markets during the 2007
through 2009 period, Congress is quick to call for greater regulation of financial institutions and markets.
As a result, generally we see more regulation of the markets immediately following financial crises. On
the other hand, when the financial markets are performing well, as they did in the 1990s, Congress
favors deregulation.
3-7 The primary change that is evident from the deregulation of the financial services industry is that the
differences that previously existed among the various financial institutions are disappearing. Now
commercial banks offer mortgage loans and thrift institutions offer commercial loans. In addition,
intermediaries now are allowed to venture into areas of business that were previously “off limits” to
them, and they can conduct business nationally rather than just in their native state. If this trend
continues, there will be fewer, but larger financial intermediaries in the United States in the future.
3-8 Even with recent deregulation, the banking industry in the United States is very heavily regulated. U.S.
banks are prohibited from many activities that banks in other countries are not, such as owning the
stocks of corporations. In addition, U.S. banks are not as free as foreign banks to conduct business
nationally—banking in the United States is still mostly fragmented from state to state because, even
though regulations have been relaxed in the past few decades, limitations on interstate banking still
exist. For these reasons, there are many more (and much smaller) banks in the United States than in
other countries.
© 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
,Chapter 3 CFIN6
3-9 Net proceeds = Amount of issue x (1 – Flotation costs)
$141,000,000 = Amount of issue x (1 – 0.06)
Amount of issue = $141,000,000/0.94 = $150,000,000
Number of shares = $150,000,000/$80 = 1,875,000 shares
Check:
Total amount issued = $150,000,000 = $40 x 1,875,000
Flotation costs = $150,000,000 x 0.06 = $90,000,000
Net proceeds to Express Courier = $150,000,000 - $90,000,000 = $141,000,000
3-10 Net proceeds = Amount of issue x (1 – Flotation costs)
$240,000,000 = Amount of issue x (1 – 0.04)
Amount of issue = $240,000,000/0.96 = $250,000,000
Number of bonds = $150,000,000/$1,000 = 250,000 bonds
Check:
Total amount issued = $250,000,000 = $1,000 x 250,000
Flotation costs = $250,000,000 x 0.04 = $10,000,000
Net proceeds = $250,000,000 - $10,000,000 = $240,000,000
3-11 Net proceeds = Amount of issue x (1 – Flotation costs)
$115,000,000 = Amount of issue x (1 – 0.08)
Amount of issue = $115,000,000/0.92 = $125,000,000
Number of shares = $125,000,000/$40 = 3,125,000 shares
Check:
Total amount issued = $125,000,000 = $40 x 3,125,000
Flotation costs = $125,000,000 x 0.08 = $10,000,000
Net proceeds = $125,000,000 - $10,000,000 = $115,000,000
3-12 Net proceeds = Amount of issue x (1 – Flotation costs)
$600,000,000 = Amount of issue x (1 – 0.04)
Amount of issue = $600,000,000/0.96 = $625,000,000
Number of shares = $625,000,000/$125 = 5,000,000 shares
Check:
Total amount issued = $625,000,000 = $125 x 5,000,000
Flotation costs = $625,000,000 x 0.04 = $25,000,000
Net proceeds = $625,000,000 - $25,000,000 = $600,000,000
3-13 Net proceeds = Amount of issue x (1 – Flotation costs)
$95,000,000 = Amount of issue x (1 – 0.05)
Amount of issue = $95,000,000/0.95 = $100,000,000
Number of bonds = $100,000,000/$1,000 = 100,000 bonds
If 100,000 bonds are issued:
Total amount issued = $100,000,000 = $1,000 x 100,000
Flotation costs = $100,000,000 x 0.05 = $5,000,000
Net proceeds = $100,000,000 - $5,000,000 = $95,000,000
© 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
,Chapter 3 CFIN6
3-14 Net proceeds = Amount of issue x (1 – Flotation costs)
$345,000,000 = Amount of issue x (1 – 0.08)
Amount of issue = $345,000,000/0.92 = $375,000,000
Number of bonds = $375,000,000/$1,000 = 375,000 bonds
If 375,000 bonds are issued:
Total amount issued = $375,000,000 = $1,000 x 375,000
Flotation costs = $375,000,000 x 0.08 = $30,000,000
Net proceeds = $375,000,000 - $30,000,000 = $345,000,000
3-15 Net proceeds = Amount of issue x (1 – Flotation costs)
$225,000,000 = Amount of issue x (1 – 0.10)
Amount of issue = $225,000,000/0.90 = $250,000,000
Number of shares = $250,000,000/$160 = 1,562,500 shares
If 1,562,500 shares are issued:
Total amount issued = $250,000,000 = $160 x 1,562,500
Flotation costs = $250,000,000 x 0.10 = $25,000,000
Net proceeds = $250,000,000 - $25,000,000 = $225,000,000
3-16 Net proceeds = Amount of issue – Flotation costs
$345,000,000 = Amount of issue x (1 – 0.065) – $576,000
Amount of issue = ($345,000,000 + $576,000)/0.935 = $369,600,000
Number of shares = $369,600,000/$55 = 6,720,000
If 6,720,000 shares are issued:
Total amount issued = $369,600,000 = $55 x 6,720,000
Flotation costs = ($369,600,000 x 0.065) + $576,000 = $24,600,000
Net proceeds = $369,600,000 – $24,600,000 = $345,000,000
3-17 Net proceeds = Amount of issue – Flotation costs
$84,000,000 = Amount of issue x (1 – 0.03) – $487,000
Amount of issue = ($84,000,000 + $487,000)/0.97 = $87,100,000
Number of bonds = $87,100,000/$1,000 = 87,100 bonds
Check:
Total amount issued = $87,100,000 = $1,000 x 87,100
Flotation costs = ($87,100,000 x 0.03) + $487,000 = $3,100,000
Net proceeds = $87,100,000 – $3,100,000 = $84,000,000
3-18 Net proceeds = Amount of issue – Flotation costs)
$360,000,000 = Amount of issue x (1 – 0.04) – $288,000
Amount of issue = ($360,000,000 + $288,000)/0.96 = $375,300,000
Number of shares = $375,300,000/$60 = 6,255,000 shares
© 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
, Chapter 3 CFIN6
If 6,255,000 shares are issued:
Total amount issued = $375,300,000 = $60 x 6,255,000
Flotation costs = $375,300,000 x 0.04 = $15,012,000
Other costs = $288,000
Net proceeds = $375,300,000 – ($15,012,000 + $288,000) = $360,000,000
3-19 Net proceeds = Amount of issue – Flotation costs
$175,000,000 = Amount of issue x (1 – 0.025) – $500,000
Amount of issue = ($175,000,000 + $500,000)/0.975 = $180,000,000
Number of bonds = $180,000,000/$1,000 = 180,000 bonds
If 180,000 bonds are issued at $1,000each:
Total amount issued = $180,000,000 = $1,000 x 180,000
Flotation costs = ($180,000,000 x 0.025) + $500,000 = $5,000,000
Net proceeds = $180,000,000 – $5,000,000 = $175,000,000
3-20 Net proceeds = Amount of issue – Flotation costs
$192,000,000 = Amount of issue x (1 – 0.08) – $280,000
Amount of issue = ($192,000,000 + $280,000)/0.92 = $209,000,000
Number of shares = $209,000,000/$25 = 8,360,000
If 8,360,000 shares are issued:
Total amount issued = $209,000,000 = $25 x 8,360,000
Flotation costs = ($209,000,000 x 0.08) + $280,000 = $17,000,000
Net proceeds = $209,000,000 – $17,000,000 = $192,000,000
© 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Chapter 3 Solutions
3-1 Free and efficient financial markets allocate funds more efficiently than would occur without free
financial markets. As a result, the real output of the economy is increased with such financial markets;
that is, the net cost of funds is lower and the net returns investors earn are higher than they would be
otherwise. Stated differently, the more efficient the financial system, the lower the costs of
intermediation, the lower the costs to the borrower, and, hence, the lower the prices of goods and
services to consumers.
3-2 In economically efficient markets, funds are allocated to their optimal use at the lowest costs, which
means that funds are invested in the assets that yield the highest returns and the costs associated with
investing funds are lower than they would be in markets that are less economically efficient. In markets
that are informationally efficient, the prices of investments reflect existing information and they adjust
quickly when new information enters the markets.
3-3 Even when financial markets are informationally efficient, investors can earn abnormal returns. But,
such opportunities should be random, which means trading rules that permit investors to earn abnormal
returns on a consistent basis do not exist.
3-4 No, the real value of a security is determined by the equilibrium forces of an efficient market. Assuming
that the information provided on newly issued securities is accurate, the market will establish the value
of a security regardless of the opinions rendered by the SEC, or, for that matter, opinions offered by any
advisory service or analyst.
3-5 Financial intermediaries are business organizations that receive funds in one form and repackage them
for use by those who need funds. For example, a financial intermediary might bundle the savings of
many depositors to create mortgages for borrowers. Through financial intermediation, resources are
allocated more effectively, and the real output of the economy is thereby increased.
3-6 When financial catastrophes occur, such as the near collapse of the financial markets during the 2007
through 2009 period, Congress is quick to call for greater regulation of financial institutions and markets.
As a result, generally we see more regulation of the markets immediately following financial crises. On
the other hand, when the financial markets are performing well, as they did in the 1990s, Congress
favors deregulation.
3-7 The primary change that is evident from the deregulation of the financial services industry is that the
differences that previously existed among the various financial institutions are disappearing. Now
commercial banks offer mortgage loans and thrift institutions offer commercial loans. In addition,
intermediaries now are allowed to venture into areas of business that were previously “off limits” to
them, and they can conduct business nationally rather than just in their native state. If this trend
continues, there will be fewer, but larger financial intermediaries in the United States in the future.
3-8 Even with recent deregulation, the banking industry in the United States is very heavily regulated. U.S.
banks are prohibited from many activities that banks in other countries are not, such as owning the
stocks of corporations. In addition, U.S. banks are not as free as foreign banks to conduct business
nationally—banking in the United States is still mostly fragmented from state to state because, even
though regulations have been relaxed in the past few decades, limitations on interstate banking still
exist. For these reasons, there are many more (and much smaller) banks in the United States than in
other countries.
© 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
,Chapter 3 CFIN6
3-9 Net proceeds = Amount of issue x (1 – Flotation costs)
$141,000,000 = Amount of issue x (1 – 0.06)
Amount of issue = $141,000,000/0.94 = $150,000,000
Number of shares = $150,000,000/$80 = 1,875,000 shares
Check:
Total amount issued = $150,000,000 = $40 x 1,875,000
Flotation costs = $150,000,000 x 0.06 = $90,000,000
Net proceeds to Express Courier = $150,000,000 - $90,000,000 = $141,000,000
3-10 Net proceeds = Amount of issue x (1 – Flotation costs)
$240,000,000 = Amount of issue x (1 – 0.04)
Amount of issue = $240,000,000/0.96 = $250,000,000
Number of bonds = $150,000,000/$1,000 = 250,000 bonds
Check:
Total amount issued = $250,000,000 = $1,000 x 250,000
Flotation costs = $250,000,000 x 0.04 = $10,000,000
Net proceeds = $250,000,000 - $10,000,000 = $240,000,000
3-11 Net proceeds = Amount of issue x (1 – Flotation costs)
$115,000,000 = Amount of issue x (1 – 0.08)
Amount of issue = $115,000,000/0.92 = $125,000,000
Number of shares = $125,000,000/$40 = 3,125,000 shares
Check:
Total amount issued = $125,000,000 = $40 x 3,125,000
Flotation costs = $125,000,000 x 0.08 = $10,000,000
Net proceeds = $125,000,000 - $10,000,000 = $115,000,000
3-12 Net proceeds = Amount of issue x (1 – Flotation costs)
$600,000,000 = Amount of issue x (1 – 0.04)
Amount of issue = $600,000,000/0.96 = $625,000,000
Number of shares = $625,000,000/$125 = 5,000,000 shares
Check:
Total amount issued = $625,000,000 = $125 x 5,000,000
Flotation costs = $625,000,000 x 0.04 = $25,000,000
Net proceeds = $625,000,000 - $25,000,000 = $600,000,000
3-13 Net proceeds = Amount of issue x (1 – Flotation costs)
$95,000,000 = Amount of issue x (1 – 0.05)
Amount of issue = $95,000,000/0.95 = $100,000,000
Number of bonds = $100,000,000/$1,000 = 100,000 bonds
If 100,000 bonds are issued:
Total amount issued = $100,000,000 = $1,000 x 100,000
Flotation costs = $100,000,000 x 0.05 = $5,000,000
Net proceeds = $100,000,000 - $5,000,000 = $95,000,000
© 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
,Chapter 3 CFIN6
3-14 Net proceeds = Amount of issue x (1 – Flotation costs)
$345,000,000 = Amount of issue x (1 – 0.08)
Amount of issue = $345,000,000/0.92 = $375,000,000
Number of bonds = $375,000,000/$1,000 = 375,000 bonds
If 375,000 bonds are issued:
Total amount issued = $375,000,000 = $1,000 x 375,000
Flotation costs = $375,000,000 x 0.08 = $30,000,000
Net proceeds = $375,000,000 - $30,000,000 = $345,000,000
3-15 Net proceeds = Amount of issue x (1 – Flotation costs)
$225,000,000 = Amount of issue x (1 – 0.10)
Amount of issue = $225,000,000/0.90 = $250,000,000
Number of shares = $250,000,000/$160 = 1,562,500 shares
If 1,562,500 shares are issued:
Total amount issued = $250,000,000 = $160 x 1,562,500
Flotation costs = $250,000,000 x 0.10 = $25,000,000
Net proceeds = $250,000,000 - $25,000,000 = $225,000,000
3-16 Net proceeds = Amount of issue – Flotation costs
$345,000,000 = Amount of issue x (1 – 0.065) – $576,000
Amount of issue = ($345,000,000 + $576,000)/0.935 = $369,600,000
Number of shares = $369,600,000/$55 = 6,720,000
If 6,720,000 shares are issued:
Total amount issued = $369,600,000 = $55 x 6,720,000
Flotation costs = ($369,600,000 x 0.065) + $576,000 = $24,600,000
Net proceeds = $369,600,000 – $24,600,000 = $345,000,000
3-17 Net proceeds = Amount of issue – Flotation costs
$84,000,000 = Amount of issue x (1 – 0.03) – $487,000
Amount of issue = ($84,000,000 + $487,000)/0.97 = $87,100,000
Number of bonds = $87,100,000/$1,000 = 87,100 bonds
Check:
Total amount issued = $87,100,000 = $1,000 x 87,100
Flotation costs = ($87,100,000 x 0.03) + $487,000 = $3,100,000
Net proceeds = $87,100,000 – $3,100,000 = $84,000,000
3-18 Net proceeds = Amount of issue – Flotation costs)
$360,000,000 = Amount of issue x (1 – 0.04) – $288,000
Amount of issue = ($360,000,000 + $288,000)/0.96 = $375,300,000
Number of shares = $375,300,000/$60 = 6,255,000 shares
© 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
, Chapter 3 CFIN6
If 6,255,000 shares are issued:
Total amount issued = $375,300,000 = $60 x 6,255,000
Flotation costs = $375,300,000 x 0.04 = $15,012,000
Other costs = $288,000
Net proceeds = $375,300,000 – ($15,012,000 + $288,000) = $360,000,000
3-19 Net proceeds = Amount of issue – Flotation costs
$175,000,000 = Amount of issue x (1 – 0.025) – $500,000
Amount of issue = ($175,000,000 + $500,000)/0.975 = $180,000,000
Number of bonds = $180,000,000/$1,000 = 180,000 bonds
If 180,000 bonds are issued at $1,000each:
Total amount issued = $180,000,000 = $1,000 x 180,000
Flotation costs = ($180,000,000 x 0.025) + $500,000 = $5,000,000
Net proceeds = $180,000,000 – $5,000,000 = $175,000,000
3-20 Net proceeds = Amount of issue – Flotation costs
$192,000,000 = Amount of issue x (1 – 0.08) – $280,000
Amount of issue = ($192,000,000 + $280,000)/0.92 = $209,000,000
Number of shares = $209,000,000/$25 = 8,360,000
If 8,360,000 shares are issued:
Total amount issued = $209,000,000 = $25 x 8,360,000
Flotation costs = ($209,000,000 x 0.08) + $280,000 = $17,000,000
Net proceeds = $209,000,000 – $17,000,000 = $192,000,000
© 2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
