Principles Of Managerial Finance Warm Up Exercises Answers

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Capital Structure 826 Long-Term Debt 827

in practice Global Focus: Take an Overseas Assignment to Take a Step Up the Corporate Ladder 828

Equity Capital 829

Review Questions 830

18.5 Short-Term Financial Decisions 831

Cash Management 832 Credit and Inventory

Management 835 Review Questions 836

18.6 Mergers and Joint Ventures 836

Review Question 837

Summary 838

Self-Test Problem 840

Warm-Up Exercises 840

Problems 841

Chapter 18 Case: Assessing a Direct Investment in Chile by U.S. Computer Corporation 843

Spreadsheet Exercise 844

Group Exercise 845

Web Exercise 845

Integrative Case 6: Organic Solutions 846


A Financial Tables A-l

B Solutions to Self-Test Problems B-1

C Answers to Selected End-of-Chapter Problems C-l

Web Chapter: Financial Markets and Institutions on the book's Companion Website

Glossary G-l Index 1-1

Preface he desire to write Principles of Managerial Finance came out of my experience teaching the introductory managerial finance course early in my career. I was not very far removed from my own undergraduate studies and therefore could appreciate the difficulties some of my students were having with the textbook we used. They wanted a book that spoke to them, in plain English. They wanted a book that tied concepts to reality. And they wanted not just description, but demonstration of concepts, tools, and techniques. Recognizing that, I decided to write an introductory finance text that would effectively resolve these concerns.

Courses and students have changed since that initial book, but the goals of the text have not changed. The conversational tone and wide use of examples set off in the text still characterize Principles of Managerial Finance. Building on those strengths, over 11 editions, numerous translations, and well over half a million U.S. users, I've continued to listen carefully to feedback from both instructors and students, from adopters, nonadopters, and practitioners.

Like the first edition, the twelfth edition still uses plain English, ties concepts to reality, and demonstrates concepts, tools, and techniques. It incorporates a proven learning system, which integrates pedagogy with concepts and practical applications. It concentrates on the knowledge that is needed to make keen financial decisions in an increasingly competitive business environment. The strong pedagogy and generous use of examples—including, new in this edition, personal finance examples—make the text an easily accessible resource for long-distance learning, online courses, and self-study programs. The book also has been well received in the core MBA course and in management development and executive training programs.


The text's organization, described in detail in the following pages, conceptually links the firm's actions and its value as determined in the securities market. Each major decision area is presented in terms of both risk and return factors and their potential impact on owners' wealth. A Focus on Value element at the end of each chapter helps reinforce the student's understanding of the link between the financial manager's actions and the firm's share value.

In organizing each chapter, I have adhered to a managerial decision-making perspective, relating decisions to the firm's overall goal of wealth maximization. Once a particular concept has been developed, its application is illustrated by an example—a hallmark feature of this book. These examples demonstrate, and solidify in the student's thought, financial decision-making considerations and their consequences. As described next, this edition expands this feature with the addition of examples related to personal finance.

The Twelfth Edition

International Considerations

We live in a world where international considerations cannot be divorced from the study of business in general and finance in particular. As in prior editions, discussions of international dimensions of chapter topics are integrated throughout the book. A marginal icon of a globe highlights these discussions, and international material is integrated into learning goals and end-of-chapter materials. In addition, for those who want to spend more time addressing the topic, a separate chapter on international managerial finance concludes the book.

Personal Finance Linkages

The twelfth edition has responded to reviewers' requests for more personal finance linkages and to calls for educators to help improve the financial literacy of young people. At the start of each chapter the feature titled Why This Chapter Matters to You helps motivate student interest by discussing how the topic of the chapter relates to the concerns of other major business disciplines and to personal finance. Within the chapter^ Personal Finance Examples explicitly link the concepts, tools, and techniques of each chapter to personal finance applications. In the homework material, the book has more than 75 personal finance problems. The purpose of these personal finance materials is to demonstrate to students the usefulness of managerial finance knowledge in both business and personal financial dealings.

Ethical Issues

The need for ethics in business remains as important as ever. Students need to understand the ethical issues that financial managers face as they attempt to maximize shareholder value and to solve business problems. Thus, every chapter includes an In Practice box that focuses on ethical issues. Half of these ethics boxes are new in this edition, and those that are not new have been updated.

Homework Opportunities

Of course, practice is essential for students' learning of managerial finance concepts, tools, and techniques. To meet that need, the book offers a rich and varied menu of homework assignments: short, numerical Warm-Up Exercises; a comprehensive set of Problems, including more than one problem for each important concept or technique and now also including personal finance problems; an Ethics Problem for each chapter; a Chapter Case; a Spreadsheet Exercise; a Group Exercise; an online Web Exercise; and at the end of each part of the book, an Integrative Case. In addition, most of the end-of-chapter problems are available in algorithmic form in ^myfaancelab]. These materials (see pages xi through xii for detailed descriptions) offer students solid learning opportunities, and they offer instructors opportunities to expand and enrich the classroom environment.

From classroom to boardroom, the twelfth edition of Principles of Managerial Finance can help users get to where they want to be. I believe that it is the best edition yet—more relevant, more accurate, and more effective than ever. I hope you agree that Principles of Managerial Finance, Twelfth Edition, is the most effective introductory managerial finance text for your students.

Lawrence /. Gitman La Jolla, California

Revised Content

As we made plans to publish the twelfth edition, we carefully assessed market feedback about content changes that would better meet the needs of instructors teaching the course.

The chapter sequence remains the same as in the prior edition. Although the text content is sequential, instructors can assign almost any chapter as a self-contained unit, enabling instructors to customize the text to various teaching strategies and course lengths. For those instructors who want to assign an entire chapter on financial institutions and markets as a foundational chapter in the managerial finance course, a complete chapter on institutions and markets is available online at the book's Companion Website,

A number of new topics have been added at appropriate places, and existing discussions have been updated and/or smoothed. In Chapter 5 and beyond, we have changed the notation for returns from to "r" to improve familiarity with notational use in other courses. In addition, as the detailed list shows, the chapter-opening vignettes and boxes have been heavily revised: For example, three-quarters of the chapter-opening vignettes are new, focusing on companies such as Google, Apple, and Crocs that have student appeal, and half of the Focus on Ethics boxes are new.

The following list details the chapter-by-chapter content changes in the twelfth edition.

Chapter 1 The Role and Environment of Managerial Finance

• Revised opening vignette (Starbucks' growth)

• Revised discussion of the role of business ethics

• Significantly revised and restructured presentation of "Securities Exchanges," now labeled "Broker Markets and Dealer Markets"

• Added one new Personal Finance Example

• Revised Focus on Ethics box (ethics at Hewlett-Packard)

• Revised Focus on Practice box (Warren Buffett's leadership at Berkshire Hathaway)

• Added one new Personal Finance Problem

Chapter 2 Financial Statements and Analysis

• New opening vignette (financial results, NetfUx)

• Added three new Personal Finance Examples

• Revised Focus on Ethics box (courses on business ethics)

• New Focus on Practice box evaluating the effects of the Sarbanes-Oxley Act

• Added three new Personal Finance Problems

Chapter 3 Cash Flow and Financial Planning

• New opening vignette (use of cash by Google)

• Added two new Personal Finance Examples

• New Focus on Practice box (free cash flow at eBay)

• New Focus on Ethics box (Bob Nardelli at Home Depot)

• Added one new Personal Finance Problem

• Revised Spreadsheet Exercise and Group Exercise

• Added to Companion Website detailed discussion of developing the statement of cash flows

Chapter 4 Time Value of Money

• Revised opening vignette (research and development costs at Eii Lilly)

• Shifted computational emphasis to calculator and spreadsheet use, de-emphasizing the use of financial tables

• Re-labeled 22 existing Examples as Personal Finance Examples

• Revised Focus on Practice box {subprime mortgages)

• Revised Focus on Ethics box (payday loans)

• Re-labeled 32 existing Problems as Personal Finance Problems

• Added 14 Personal Finance "Warm-Up Exercises at Companion Website

Risk and Return

• New opening vignette (venture capital)

• Changed notation for returns from to "r" beginning in this chapter and throughout entire text to improve familiarity

• Switched emphasis from "Sensitivity Analysis" to "Scenario Analysis"

• Updated discussion of country risk in Venezuela

• Added one new Personal Finance Example

• Revised Global Focus box (international diversification)

• Revised Focus on Ethics box (moral risk)

• Added one new Personal Finance Problem

Chapter 6 Interest Rates and Bond Valuation

• Revised opening vignette (U.S. Treasury, public debt)

• Revised discussion of bond yields and bond prices

• Added footnotes on bond duration and bond yield to call

• Re-labeled five existing Examples as Personal Finance Examples

• Revised Focus on Practice box (adjustable-rate I-bonds)

• Revised Focus on Ethics box (new legislation affecting the credit-rating agencies)

• Re-labeled four Problems as Personal Finance Problems

Stock Valuation

• New opening vignette (Crocs Inc. IPO)

• Revised discussion of American depositary receipts and American depositary shares

• Revised discussion of interpreting stock quotations consistent with latest format of stock quotations

• Re-labeled three existing Examples as Personal Finance Examples

• New Focus on Practice box (behavioral finance)

• New Focus on Ethics box (additional costs of pre-earnings guidance)

• Re-labeled six Problems as Personal Finance Problems

Chapter 5

Chapter 7

Chapter 8 Capital Budgeting Cash Flows

• New opening vignette (project costs at ExxonMobil)

• Added two new Personal Finance Examples

• New Global Focus box (foreign direct investment in China)

• Revised Focus on Ethics box (accuracy of cash flow estimates)

• Added three new Personal Finance Problems

Chapter 9 Capital Budgeting Techniques

• New opening vignette (Apple's iPhone)

• Clarified tabular explanation of project preferences with extreme discount rates and dissimilar cash inflow patterns

• Added two new Personal Finance Examples

• Revised Focus on Practice box (limits of payback analysis)

• Revised Focus on Ethics box (nonfinancial considerations in project selection)

• Added three new Personal Finance Problems

Chapter 10 Risk and Refinements in Capital Budgeting

• New opening vignette (State Farm Insurance claims associated with Hurricane Katrina)

• Changed terminology and clarified discussion relating to scenario analysis

• Added two new Personal Finance Examples

• Revised Focus on Practice box (Monte Carlo simulation)

• New Focus on Ethics box (environmental compliance costs)

• Added three new Personal Finance Problems

• Added new Ethics Problem

Chapter 11 The Cost of Capital

• New opening vignette (capital needs of United Airlines)

• Moved text coverage of EVA® to Companion Website

• Added two new Personal Finance Examples

• New Focus on Ethics box (legal liabilities for asbestos claims)

• Added three new Personal Finance Problems

• Added new Ethics Problem

Chapter 12 Leverage and Capital Structure

• New opening vignette (capital structure of CVS/Caremark)

• Added three new Personal Finance Examples

• Revised Focus on Practice box (Adobe's operating leverage}

• Revised Focus on Ethics box (private-equity buyouts)

• Added three new Personal Finance Problems

Chapter 13 Dividend Policy

• Revised opening vignette (Microsoft's dividend payouts)

• Added two new Personal Finance Examples

• Revised Focus on Practice box (update on capital gains and dividend tax treatment)

• New Focus on Ethics box (motives for stock buybacks)

• Added one new Personal Finance Problem and re-iabeled three existing Problems as Personal Finance Problems

• Added new Ethics Problem

Chapter 14 Working Capital and Current Assets Management

• Revised opening vignette (AT&T's outsourcing of phone cards)

• Added new footnote demonstrating the derivation of the simple EOQ model

• Added two new Personal Finance Examples

• Revised Focus on Practice box (RFID)

• New Focus on Ethics box (stretching accounts payable)

• Added two new Personal Finance Problems

• Added new Ethics Problem

Chapter 15 Current Liabilities Management

• New opening vignette {reducing accounts payable expenses at Memorial Sloan-Kettering)

• Added two new Personal Finance Examples

• Revised Focus on Practice box (commercial paper)

• New Focus on Ethics box (loan fraud)

• Added two new Personal Finance Problems

Hybrid and Derivative Securities

• New opening vignette (Boeing's 787 Dreamliner)

• Added one new Personal Finance Problem

• New Focus on Practice box (leveraged leases at Disney)

• New Focus on Ethics box (options backdating)

• Re-labeled three existing Problems as Personal Finance Problems

Chapter 17 Mergers, LBOs, Divestitures, and Business Failure

• New opening vignette (Sprint Nextel merger)

• Added two new Personal Finance Examples

• New Global Focus box (News Corp acquisitions)

• Revised Focus on Ethics box (ethics of bankruptcy)

• Added two new Personal Finance Problems

International Managerial Finance

• Significantly revised and updated the entire chapter to describe today's global financial marketplace and include the latest data

• Revised opening vignette (GE's business in China)

• Added new section on subsidiary characterization and functional currency in financial statements, including a short section on the temporal method

• Added two new Personal Finance Examples

• Revised Global Focus box (overseas assignments)

• New Focus on Ethics box (antibribery laws)

• Added two new Personal Finance Problems

Chapter 16

Chapter 18

Supplements to the Twelfth Edition

The PMF Teaching/Learning System includes a variety of useful supplements for teachers and for students.

Teaching Tools for Instructors

The key teaching tools available to instructors are the Instructors Manual, testing materials, and PowerPoint Lecture Presentations.

Ifistructor's Manual Revised by Thomas Krueger, University of Wisconsin at La Crosse. This comprehensive resource pulls together the teaching tools so that instructors can use the textbook easily and effectively in the classroom. Each chapter provides an overview of key topics and detailed answers and solutions to all review questions, Warm-Up Exercises, end-of-chapter problems, and chapter cases, plus suggested answers to all critical thinking questions in chapter openers and boxes, Ethics Problems, Group Exercises, and Web Exercises. At the end of the manual are practice quizzes and solutions. The complete Instructor's Manual, including Spreadsheet Exercises, is available online at the Instructor's Resource Center ( and on the Instructor's Resource CD-ROM.

Test Bank Created by Daniel J. Borgia, Florida Gulf Coast University. Thoroughly revised to accommodate changes in the text, the Test Bank consists of a mix of true/false, multiple-choice, and essay questions. Each test question includes identifiers for type of question, skill tested by learning goal, level of difficulty, and key topic tested plus, where appropriate, the formula(s) or equation^) used in deriving the answer. The Test Bank is available in both printed and electronic formats, including Windows or Macintosh TestGen files and Microsoft Word files. The Test Bank and TestGen are available online at the Instructor's Resource Center ( and on the Instructor's Resource CD-ROM.

Instructors can download the TestGen version of the Test Bank into QuizMaster, an online testing program for Windows and Macintosh that enables users to conduct timed or untimed exams at computer workstations. After completing tests, students can see their scores and view or print a diagnostic report of those topics or objectives requiring more attention. When installed on a local area network, QuizMaster allows instructors to save the scores on disk, print study diagnoses, and monitor progress of students individually or by class section and by all sections of the course.

PowerPoint Lecture Presentation Created by Daniel /. Borgia, Florida Gulf Coast University,. This presentation combines lecture notes with all of the art from the textbook. The PowerPoint Lecture Presentation is available online at the

Instructor's Resource Center ( and on the Instructor's Resource CD-ROM.

Instructor's Resource CD-ROM Electronic files of the Instructor's Manual', Test Bank, Computerized Test Bank, and PowerPoint Lecture Presentations are available on one convenient CD-ROM, compatible with both Windows and Macintosh computers. The electronic versions allow instructors to customize the support materials to their individual classroom needs. All the resources on the Instructor's Resource CD-ROM are also available online at the Instructor's Resource Center (

Learning Tools for Students

Beyond the book itself, students have access to several resources for success in this course: MyFinanceLab, Study Guide, and the Principles of Managerial Finance, Twelfth Edition Companion Website.

MyFinanceLab Packaged with new copies of this text, the Student Access Kit for MyFinanceLab opens the door to a powerful Web-based diagnostic testing and tutorial system designed specifically for the Gitman, Principles of Managerial Finance textbooks. With MyFinanceLab, instructors can create, edit, and assign online homework, and test and track ali student work in the online gradebook. MyFinanceLab allows students to take practice tests correlated to the textbook and receive a customized study plan based on the test results. Most end-of-chapter problems are available in MyFinanceLab, and because the problems have algorithmically generated values, no student will have the same homework as another and there is an unlimited opportunity for practice and testing. Students get the help they need, when they need it, from the robust tutorial options, including "View an Example" and "Help Me Solve This," which breaks the problem into its steps and links to the relevant textbook page.

Students can use MyFinanceLab with no instructor intervention. However, to take advantage of the full capabilities of MyFinanceLab, including assigning homework and tracking student progress in the automated gradebook, instructors will want to set up their class. To view a demo of MyFinanceLab or to request instructor access go to

Study Guide Updated by Thorns Kreuger, University of Wisconsin at La Crosse. The Study Guide is an integral component of the PMF Learning System. It offers many tools for studying finance. Each chapter contains the following features: chapter summary enumerated by learning goals; topical chapter outline, also broken down by learning goals for quick review; sample problem solutions; study tips and a full sample exam with the answers at the end of the chapter. A financial dictionary of key terms is located at the end of the Study Guide, along with an appendix with tips on using financial calculators.

Principles of Managerial Finance, Twelfth Edition Website The website to accompany this textbook, located at, contains many additional resources. For each chapter on the website you will find

• Web Cases, which ask students to use the Web to find information and solve finance problems

• Web Exercises

' • Self-Assessment Quizzes

• Case Studies in Finance, updated by Michael Sezler of Hawaii Pacific University

In addition to the chapter resources, you will find

• A Web chapter "Financial Markets and Institutions," from the text Introduction to Finance by Lawrence J. Gitman and Jeff Madura

• An online glossary, both as review flashcards and as a quick-reference document

• Spreadsheet examples from the textbook

• A Financial Calculator Guide

• Our Online Career Center

In addition to the Companion Website, the course content is available in Blackboard and WebCT. Please contact your local sales representative for more information on obtaining course content in these various formats.


To My Colleagues, Friends, and Family

No textbook can consistently meet market needs without continual feedback from colleagues, students, practitioners, and members of the publishing team. Once again, I invite colleagues to relate their classroom experiences using this book and its package to me in care of the Acquisitions Editor in Finance, Prentice Hall Publishing Company, 75 Arlington Street, Suite 300, Boston, Massachusetts 02116. Your constructive criticism will help me to continue to improve the textbook and its Teaching/Learning System still further.

Prentice Hall and former publisher HarperCollins sought the advice of a great many excellent reviewers, all of whom strongly influenced various aspects of this book. The following individuals provided extremely thoughtful and useful comments for the preparation of the twelfth edition:

Omar Benkato, Ball State University

Boyd D. Collier; Tarleton State University

Michael Giulkno, University of Maryland-Asia Division

John E. Harper, Texas A&M at Commerce

Raj K. Kohli, Indiana University-South Bend

Inayat Mangla, Western Michigan University

Bala Maniam, Sam Houston State University

Brian Maris, Northern Arizona University

Lee McClain, Western Washington University

Mukunthan Santhanakrishnan, Idaho State University

Tom Schmidt, Simpson College

Sandeep Singh, SUNY Brockport

Gordon M. Stringer; University of Colorado-Colorado Springs Faye (Hefei) Wang, University of Illinois-Chicago

My special thanks go to the following individuals who analyzed the manu-

script in previous editions:

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