Multinational Business Finance 10th Edition Solution Manual
Chapter # 1 “Financial Goals & Corporate Governance”
Problem # 1.1: Shareholder returns.
Solution: What are the shareholder's returns?
Assumptions Value Part (a) Value Part (b)
Share price, P1 $ 16.00 $ 16.00
Share price, P2 $ 18.00 $ 18.00
Dividend paid, D2 $ ---- $ 1.00
a. If the company paid no dividend (plugging zero in for the dividend):
Return = (P2 - P1 + D2) / (P1)
Return = $18.00 - $ 16.00 / $16.00 = $2.00 / $16.00
Return = 12.50%
b. Total shareholder return, including dividends, is:
Return = (P2 - P1 + D2) / (P1)
Return = (P2 - P1 + D2) / (P1)
Return = $18.00 - $ 16.00 + $1.00 / $16.00 = $2.00 / $16.00
Return = 18.75%
Problem # 1.2: Shareholder choices.
Solution:
Assumptions Value
Share price, P1 $ 62.00
Share price, P2 $ 74.00
Dividend paid, D2 $ 2.25
Return = (P2 - P1 + D2) / (P1)
Return = $74.00 - $ 62.00 + 2.25 / $62.00 = $14.25.00 / $62.00
Return = 22.98%
IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 9
, Multinational Business Finance 10th Edition Solution Manual
The share's expected return of 22.98% far exceeds the required return by Mr. Fong of
12%. He should therefore make the investment.
Problem # 1.3: Microsoft's dividend.
Solution: What would the return have been on Microsoft shares if it had paid a constant
dividend in the recent past?
Shareholder Shareholder
Closing If Return Return
Share Dividend (without (with
Assumptions Price Paid Dividend ) Dividend)
1998 (January 2) $131.13
1999 (January 4) $141.00 $0.16 7.53% 7.65%
2000 (January 3) $116.56 $0.16 -17.33% -17.22%
2001 (January 2) $ 43.38 $0.16 -62.78% -62.65%
2002 (January 2) $ 67.04 $0.16 54.54% 54.91%
2003 (January 2) $ 53.72 $0.16 -19.87% -19.63%
a. Average shareholder return for the period :
Return = (P2 - P1 + D2) / (P1)
Return = $74.00 - $ 62.00 + 0 / $62.00 = $14.25.00 / $62.00
Return = -7.58%
b. Total shareholder return if Microsoft had paid a constant dividend:
Return = (P2 - P1 + D2) / (P1)
Return = $74.00 - $ 62.00 + 0 / $62.00 = $14.25.00 / $62.00
Return = -7.39%
Problem # 1.4: Dual Classes of Common Stock.
Solution:
What are the implications for the distribution of voting rights and dividend
distributions for Powlitz?
Local Votes
Currency per Total
Powlitz Manufacturing (millions) share Votes
Long-term debt 200 0 0
Retained earnings 300 0 0
Paid-in common stock: 1 million A-shares 100 10 *1,000
Paid-in common stock: 4 million B-shares 400 1 ** 400
IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 10
, Multinational Business Finance 10th Edition Solution Manual
Total long-term capital 1,000 --- 1,400
Notes: *100 x 10 = 1,000 votes
** 400 x 1 = 400 votes
a. What proportion of the total long-term capital has been raised by A-shares?
A-shares / Total long-term capital = ,000 = 10.00%
b. What proportion of voting rights is represented by A-shares?
A-share total votes / Total Votes = 1,,400 = 71.43%
c. What proportion of the dividends should the A-shares receive?
A-shares in local currency / Total equity shares in local currency
= 100 / (100 + 400) = 20.00%
Problem # 1.5: Corporate Governance: Minority Shareholder Control
Solution: Distribution of profits versus distribution of voting rights and power.
Solpart Particpacoes
Voting Preferred Total
a) Investor Group Shares Shares Shares
Telecom Italia 38.00% 38.00% 38.00%
Pension Funds
32% of Techold Particpacoes shares 3.52% 19.84% 10.88%
(0.32 (11%); 0.32 (62%); and 0.32 (34%)
Combined Telecom Italia & Pension Funds 41.52% 57.84% 48.88%
Opportunity
100% of Timepart Particpacoes shares 51.00% 0.00% 28.00%
68% of Techold Particpacoes shares 7.48% 42.16% 23.12%
Combined Opportunity 58.48% 42.16% 51.12%
Total Shares 100.00% 100.00% 100.00%
b) Opportunity would continue to control the voting rights of SolPart, which in turn
continues to own 58.48% of the voting shares in Brasil Telecom Participacoes,
IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 11
, Multinational Business Finance 10th Edition Solution Manual
which in turn owns 93.6% of the voting shares in Brasil Telecom. Thus
Opportunity is able to use its control of holding companies to control Brasil
Telecom.
Problem # 1.6: Price/Earnings Ratios and Acquisitions
Solution:
Market
value Total
P/E Number per Market
Company Ratio of shares share Earnings EPS Value
10,000,0
Pharm-Italy 20 00 $20.00 $10,000,000 $1.00 $200,000,000
10,000,0
Pharm-USA 40 00 $40.00 $10,000,000 $1.00 $400,000,000
Rate of exchange: Pharm-USA shares per Pharm-Italy share = 5,500,000
a. How many shares would Pharm-USA have outstanding after the acquisition
of Pharm-Italy?
$10,000,000 + 5,500,000 = 15,500,000
Because Pharm-Italy shares are worth $20 per share, they are only worth one-half
the value per share of Pharm-USA's $40 per share. So, on a straight exchange, 1
Pharm-USA share is worth 2 Pharm-Italy shares. But, Pharm-USA also needs to pay
a premium for gaining control of Pharm-Italy, so it pays an additional 10% over
market. So, Pharm-USA pays:
10 million / 2 x (1 + 10% premium) =
b. What would be the consolidated earnings of the combined Pharm-USA and
Pharm-Italy?
Pharm-Italy earnings + Pharm-USA earnings = $20,000,000
c. Assuming the market continues to capitalize Pharm-USA's earnings at a P/E
ratio of 40, what would be;
IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 12
Chapter # 1 “Financial Goals & Corporate Governance”
Problem # 1.1: Shareholder returns.
Solution: What are the shareholder's returns?
Assumptions Value Part (a) Value Part (b)
Share price, P1 $ 16.00 $ 16.00
Share price, P2 $ 18.00 $ 18.00
Dividend paid, D2 $ ---- $ 1.00
a. If the company paid no dividend (plugging zero in for the dividend):
Return = (P2 - P1 + D2) / (P1)
Return = $18.00 - $ 16.00 / $16.00 = $2.00 / $16.00
Return = 12.50%
b. Total shareholder return, including dividends, is:
Return = (P2 - P1 + D2) / (P1)
Return = (P2 - P1 + D2) / (P1)
Return = $18.00 - $ 16.00 + $1.00 / $16.00 = $2.00 / $16.00
Return = 18.75%
Problem # 1.2: Shareholder choices.
Solution:
Assumptions Value
Share price, P1 $ 62.00
Share price, P2 $ 74.00
Dividend paid, D2 $ 2.25
Return = (P2 - P1 + D2) / (P1)
Return = $74.00 - $ 62.00 + 2.25 / $62.00 = $14.25.00 / $62.00
Return = 22.98%
IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 9
, Multinational Business Finance 10th Edition Solution Manual
The share's expected return of 22.98% far exceeds the required return by Mr. Fong of
12%. He should therefore make the investment.
Problem # 1.3: Microsoft's dividend.
Solution: What would the return have been on Microsoft shares if it had paid a constant
dividend in the recent past?
Shareholder Shareholder
Closing If Return Return
Share Dividend (without (with
Assumptions Price Paid Dividend ) Dividend)
1998 (January 2) $131.13
1999 (January 4) $141.00 $0.16 7.53% 7.65%
2000 (January 3) $116.56 $0.16 -17.33% -17.22%
2001 (January 2) $ 43.38 $0.16 -62.78% -62.65%
2002 (January 2) $ 67.04 $0.16 54.54% 54.91%
2003 (January 2) $ 53.72 $0.16 -19.87% -19.63%
a. Average shareholder return for the period :
Return = (P2 - P1 + D2) / (P1)
Return = $74.00 - $ 62.00 + 0 / $62.00 = $14.25.00 / $62.00
Return = -7.58%
b. Total shareholder return if Microsoft had paid a constant dividend:
Return = (P2 - P1 + D2) / (P1)
Return = $74.00 - $ 62.00 + 0 / $62.00 = $14.25.00 / $62.00
Return = -7.39%
Problem # 1.4: Dual Classes of Common Stock.
Solution:
What are the implications for the distribution of voting rights and dividend
distributions for Powlitz?
Local Votes
Currency per Total
Powlitz Manufacturing (millions) share Votes
Long-term debt 200 0 0
Retained earnings 300 0 0
Paid-in common stock: 1 million A-shares 100 10 *1,000
Paid-in common stock: 4 million B-shares 400 1 ** 400
IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 10
, Multinational Business Finance 10th Edition Solution Manual
Total long-term capital 1,000 --- 1,400
Notes: *100 x 10 = 1,000 votes
** 400 x 1 = 400 votes
a. What proportion of the total long-term capital has been raised by A-shares?
A-shares / Total long-term capital = ,000 = 10.00%
b. What proportion of voting rights is represented by A-shares?
A-share total votes / Total Votes = 1,,400 = 71.43%
c. What proportion of the dividends should the A-shares receive?
A-shares in local currency / Total equity shares in local currency
= 100 / (100 + 400) = 20.00%
Problem # 1.5: Corporate Governance: Minority Shareholder Control
Solution: Distribution of profits versus distribution of voting rights and power.
Solpart Particpacoes
Voting Preferred Total
a) Investor Group Shares Shares Shares
Telecom Italia 38.00% 38.00% 38.00%
Pension Funds
32% of Techold Particpacoes shares 3.52% 19.84% 10.88%
(0.32 (11%); 0.32 (62%); and 0.32 (34%)
Combined Telecom Italia & Pension Funds 41.52% 57.84% 48.88%
Opportunity
100% of Timepart Particpacoes shares 51.00% 0.00% 28.00%
68% of Techold Particpacoes shares 7.48% 42.16% 23.12%
Combined Opportunity 58.48% 42.16% 51.12%
Total Shares 100.00% 100.00% 100.00%
b) Opportunity would continue to control the voting rights of SolPart, which in turn
continues to own 58.48% of the voting shares in Brasil Telecom Participacoes,
IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 11
, Multinational Business Finance 10th Edition Solution Manual
which in turn owns 93.6% of the voting shares in Brasil Telecom. Thus
Opportunity is able to use its control of holding companies to control Brasil
Telecom.
Problem # 1.6: Price/Earnings Ratios and Acquisitions
Solution:
Market
value Total
P/E Number per Market
Company Ratio of shares share Earnings EPS Value
10,000,0
Pharm-Italy 20 00 $20.00 $10,000,000 $1.00 $200,000,000
10,000,0
Pharm-USA 40 00 $40.00 $10,000,000 $1.00 $400,000,000
Rate of exchange: Pharm-USA shares per Pharm-Italy share = 5,500,000
a. How many shares would Pharm-USA have outstanding after the acquisition
of Pharm-Italy?
$10,000,000 + 5,500,000 = 15,500,000
Because Pharm-Italy shares are worth $20 per share, they are only worth one-half
the value per share of Pharm-USA's $40 per share. So, on a straight exchange, 1
Pharm-USA share is worth 2 Pharm-Italy shares. But, Pharm-USA also needs to pay
a premium for gaining control of Pharm-Italy, so it pays an additional 10% over
market. So, Pharm-USA pays:
10 million / 2 x (1 + 10% premium) =
b. What would be the consolidated earnings of the combined Pharm-USA and
Pharm-Italy?
Pharm-Italy earnings + Pharm-USA earnings = $20,000,000
c. Assuming the market continues to capitalize Pharm-USA's earnings at a P/E
ratio of 40, what would be;
IM Science, KUST, Solution Manual of MBF 10tth Edition Prepared By Wasim Uddin Orakzai 12
