Solutions Manual

Financial Management:
Theory and Practice
Thirteenth Edition

Eugene F. Brigham
University of Florida

Michael C. Ehrhardt
University of Tennessee
 PREFACE

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

Alternative Course Formats

There is no single best way to teach a finance classthe 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
FM has been used by us and by others.

We designed FM primarily for use in the introductory MBA financial management course,
but it can also be used at the undergraduate level when the students are very good or when the
course is taught over two terms.

Two approaches may be taken when using FM: (1) The survey approach, in which one co-
vers most of the book in one term, perhaps using two or three cases to summarize major topic
areas and to provide additional insights into the complexities of the decisions facing practicing
financial managers. When the survey approach is used, it is important to recognize that students
simply cannot learn all of the material in depth. However, nonfinance business students will be
exposed to the full range of financial decisions, and those students majoring in finance will have
the opportunity to gain the required depth in later courses. (2) The in-depth approach, in which
only a portion of the book is covered in the introductory course, but the material that is assigned
is covered in more depth. With this approach, more cases can be used, and outside readings and
perhaps a written report can be assigned. If the introductory course is taught over two terms,
then both depth and breadth of coverage can be emphasized, and quite a few cases and/or outside
readings and reports can be assigned.

FM 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 bookstudents find the text useful in follow-up case courses as well as after
graduation, when they must apply the material in a real-world setting.

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,

ii
Problems, and Mini Cases (the solutions to the Self-Test Problems are in the textbooks Appen-
dix A).

Perhaps the most important pedagogic aid in FM 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
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 in at the textbooks
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.

As we noted earlier, we prepared the Mini Cases for use in either a survey course or an in-
depth course. Thus, there are enough slides in the PowerPoint show to provide in-depth cover-
age of each chapter. Therefore, when we teach a survey course, we often delete some of the
slides, and cover only those issues that are critical for a survey course. Sometimes we also add
some slides that highlight some current event. We encourage you to modify the slides in the
manner that best fits your course.

Acknowledgments

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

iii
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

April 2010

iv
TABLE OF CONTENTS FOR ANSWERS AND SOLUTIONS TO END-OF-
CHAPTER QUESTIONS, PROBLEMS, AND MINI CASES

Chapter 1 An Overview of Financial Management and the Financial Environment..................1-1

Chapter 2 Financial Statements, Cash Flow, and Taxes .............................................................2-1
Chapter 3 Analysis of Financial Statements ................................................................................3-1
Chapter 4 Time Value of Money .................................................................................................4-1
Chapter 5 Bonds, Bond Valuation, and Interest Rates ................................................................5-1
Chapter 6 Risk, Return, and the Capital Asset Pricing Model ....................................................6-1
Chapter 7 Stocks, Stock Valuation, and Stock Market Equilibrium ...........................................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 Distributions to Shareholders: Dividends and Repurchases....................................14-1
Chapter 15 Capital Structure Decisions.......................................................................................15-1
Chapter 16 Working Capital Management ..................................................................................16-1
Chapter 17 Multinational Financial Management .......................................................................17-1
Chapter 18 Lease Financing ........................................................................................................18-1
Chapter 19 Hybrid Financing: Preferred Stock, Warrants, and Convertibles.............................19-1
Chapter 20 Initial Public Offerings, Investment Banking, and Financial Restructuring ............20-1
Chapter 21 Mergers, LBOs, Divestitures, and Holding Companies ...........................................21-1
Chapter 22 Bankruptcy, Reorganization, and Liquidation ..........................................................22-1
Chapter 23 Derivatives and Risk Management ...........................................................................23-1
Chapter 24 Portfolio Theory, Asset Pricing Models, and Behavioral Finance ...........................24-1
Chapter 25 Real Options ..............................................................................................................25-1
Chapter 26 Analysis of Capital Structure Theory .......................................................................26-1