TitmanFinMan12e_Chapter 15_Study Question Solutions

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1、15-6Titman/Keown/Martin•FinancialManagement,TwelfthEditionChapter15SolutionstoStudyQuestions15-1.ThedominantformofretirementprogramintheU.S.involveswhatisknownasadefinedcontributionprogram.Thismeansthatyouremployeragreestoprovideyouwithaspecifiedsumofmoney(usuallyapercentofyourpaycheck)thati

2、sdepositedintoyourretirementfund.Theinvestmentofthisfundthenisdirectedbyyoutodifferenttypesofinvestmentfunds.ItisatthispointthatthefailuresofGMandLehmanBrothersmightimpactyoupersonallysincethemajorityofthesefirm’ssharesisheldinvariousmutualfunds.15-2.Afirm’scapitalstructureconsistsofowner’se

3、quityanditsinterest-bearingdebt,includingshort-termbankloans.YoumayrecallfromChapter14thatthefirm’scapitalstructuredoesnotincludeeverythinglistedontheliabilitiesandowners’equitysideofthebalancesheet.Wecallthecombinationofcapitalstructureplusthefirm’snon-interestbearingliabilitiessuchasaccoun

4、tspayableandaccruedexpensesasthefirm’sfinancialstructure.15-3.Non-interestbearingliabilitiesareliabilitiesincurredbyafirmforwhichnoexplicitinterestpaymentisspecified.Anexampleisaccountspayablewhichisincurredbythefirmwhenitpurchasesnewitemsofinventory.Althoughthereisacostofmoneyincludedinsuch

5、liabilities,itisimplicitorhiddeninthecostoftheitemsbeingpurchased.Sotoincludeaccountspayable(oranynon-interestbearingliability)inthefirm’scapitalstructurewouldresultindoublecountingtheimplicitinterestwhichisalreadyinthecomputationoffirmcashflows.15-4.Thetermfinancialleverageisoftenusedtodesc

6、ribeafirm’scapitalstructure.Thisterminologyarisesfromthefactthatborrowingaportionofthefirm’scapitalatafixedrateofinterestprovidesthefirmanopportunityto“leverage”therateofreturnitearnsonitstotalcapitalintoanevenhigherrateofreturnonthefirm’sequity.Wewilllookintothisphenomenonmuchcloserinthefin

7、alsection,however,itshouldbenotedthatifthefirmisearning15%onitsinvestmentsandpayingonly9%onborrowedmoney,the6%differentialgoestothefirm’sowners.Asaresult,thefirm’sreturnonequitywillbemuchhigherthan15%.Thisiswhatisknownasfavorablefinancialleverage.I