SOLUTION MANUAL FOR ANALYSIS FOR FINANCIAL MANAGEMENT 13TH EDITION BY ROBERT C.HIGGINS

FINANCIAL MANAGEMENT Block, Hirt, and Danielsen Foundations of Financial Management Eighteenth Edition Brealey, Myers, and Allen Principles of Corporate Finance Fourteenth Edition Brealey, Myers, and Marcus Fundamentals of Corporate Finance Eleventh Edition Brooks FinGame Online 5.0 Bruner, Eades, and Schill Case Studies in Finance: Managing for Corporate Value Creation Eighth Edition Cornett, Adair, and Nofsinger Finance: Applications and Theory Sixth Edition Cornett, Adair, and Nofsinger M: Finance Fifth Edition DeMello Cases in Finance Third Edition Higgins, Koski, and Mitton Analysis for Financial Management Thirteenth Edition Ross, Westerfield, Jaffe, and Jordan Corporate Finance Twelfth Edition Ross, Westerfield, Jaffe, and Jordan Corporate Finance: Core Principles and Applications Sixth Edition Ross, Westerfield, and Jordan Essentials of Corporate Finance Eleventh Edition Ross, Westerfield, and Jordan Fundamentals of Corporate Finance Thirteenth Edition Shefrin Behavioral Corporate Finance: Decisions that Create Value Second Edition INVESTMENTS Bodie, Kane, and Marcus Essentials of Investments Twelfth Edition Bodie, Kane, and Marcus Investments Twelfth Edition Hirt and Block Fundamentals of Investment Management Tenth Edition Jordan, Miller, and Dolvin Fundamentals of Investments: Valuation and Management Ninth Edition Sundaram and Das Derivatives: Principles and Practice Second Edition FINANCIAL INSTITUTIONS AND MARKETS Rose and Hudgins Bank Management and Financial Services Ninth Edition Rose and Marquis Financial Institutions and Markets Eleventh Edition Saunders and Cornett Financial Institutions Management: A Risk Management Approach Tenth Edition Saunders and Cornett Financial Markets and Institutions Eighth Edition INTERNATIONAL FINANCE Eun and Resnick International Financial Management Ninth Edition REAL ESTATE Brueggeman and Fisher Real Estate Finance and Investments Seventeenth Edition Ling and Archer Real Estate Principles: A Value Approach Sixth Edition FINANCIAL PLANNING AND INSURANCE Allen, Melone, Rosenbloom, and Mahoney Retirement Plans: 401(k)s, IRAs, and Other Deferred Compensation Approaches Twelfth Edition Altfest Personal Financial Planning Second Edition Harrington and Niehaus Risk Management and Insurance Second Edition Kapoor, Dlabay, Hughes, and Hart Focus on Personal Finance: An active approach to help you achieve financial literacy Seventh Edition Kapoor, Dlabay, Hughes, and Hart Personal Finance Fourteenth Edition Walker and Walker Personal Finance: Building Your Future Second Edition The McGraw-Hill Education Series in Finance, Insurance, and Real EstateAnalysis for Financial Management Thirteenth Edition ROBERT C. HIGGINS Marguerite Reimers Emeritus Professor of Finance The University of Washington with JENNIFER L. KOSKI Associate Dean for Academic and Faculty Affairs Kirby L. Cramer Endowed Chair in Finance The University of Washington and TODD MITTON Ned C. Hill Professor of Finance Brigham Young U ANALYSIS FOR FINANCIAL MANAGEMENT Published by McGraw Hill LLC, 1325 Avenue of the Americas, New York, NY 10019. Copyright ©2023 by McGraw Hill LLC. All rights reserved. Printed in the United States of America. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw Hill LLC, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 LCR 22 ISBN 978-1-265-04263-9 MHID 1-265-04263-2 Cover Image: Dave Allen Photography/Shutterstock All credits appearing on page or at the end of the book are considered to be an extension of the copyright page. The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw Hill LLC, and McGraw Hill LLC does not guarantee the accuracy of the information presented at these sites.In memory of our sons STEVEN HIGGINS 1970–2007 ALEXANDER MITTON 1997–2014Preface xii PART ONE Assessing the Financial Health of the Firm 1 1 Interpreting Financial Statements 3 2 Evaluating Financial Performance 37 PART TWO Planning Future Financial Performance 77 3 Financial Forecasting 79 4 Managing Growth 111 PART THREE Financing Operations 139 5 Financial Instruments and Markets 141 6 The Financing Decision 193 PART FOUR Evaluating Investment Opportunities 235 7 Discounted Cash Flow Techniques 237 8 Risk Analysis in Investment Decisions 285 9 Business Valuation and Corporate Restructuring 335 GLOSSARY 385 SUGGESTED ANSWERS TO  ODD-NUMBERED  PROBLEMS 397 INDEX 429 Brief Contentsviii Contents Preface xii PART ONE ASSESSING THE FINANCIAL HEALTH OF THE FIRM 1 Chapter 1 Interpreting Financial Statements 3 The Cash Flow Cycle 3 Overview of Financial Statements 6 The Balance Sheet 9 Current Assets and Liabilities 10 Shareholders’ Equity 11 The Income Statement 11 Measuring Earnings 12 Sources and Uses Statements 16 The Two-Finger Approach 17 The Cash Flow Statement 18 Financial Statements and the Value Problem 22 Market Value vs. Book Value 22 Economic Income vs. Accounting Income 26 Imputed Costs 27 Summary 30 Additional Resources 31 Problems 32 Chapter 2 Evaluating Financial Performance 37 The Levers of Financial Performance 37 Return on Equity 38 The Three Determinants of ROE 38 The Profit Margin 40 Asset Turnover 42 Financial Leverage 48 Is ROE a Reliable Financial Yardstick? 53 The Timing Problem 54 The Risk Problem 54 The Value Problem 56 ROE or Market Price? 58 Ratio Analysis 60 Using Ratios Effectively 61 Ratio Analysis of Polaris Inc. 62 Summary 69 Additional Resources 70 Problems 71 PART TWO PLANNING FUTURE FINANCIAL PERFORMANCE 77 Chapter 3 Financial Forecasting 79 Pro Forma Statements 79 Percent-of-Sales Forecasting 80 Interest Expense 86 Seasonality 86 Pro Forma Statements and Financial Planning 87 Forecasting with Spreadsheets 89 Coping with Uncertainty 92 Sensitivity Analysis 92 Scenario Analysis 93 Simulation 93 Cash Flow Forecasts 95 Cash Budgets 96 The Techniques Compared 100 Summary 101 Additional Resources 102 Problems 103 Chapter 4 Managing Growth 111 Sustainable Growth 112 The Sustainable Growth Equation 112Contents  ix Too Much Growth 114 Balanced Growth 115 DLH Holdings’ Sustainable Growth Rate 116 “What If” Questions 118 What to Do When Actual Growth Exceeds Sustainable Growth 118 Sell New Equity 119 Increase Leverage 121 Reduce the Payout Ratio 121 Profitable Pruning 122 Outsourcing 122 Pricing 123 Is Merger the Answer? 123 Too Little Growth 123 What to Do When Sustainable Growth Exceeds Actual Growth 124 Ignore the Problem 125 Return the Money to Shareholders 126 Buy Growth 127 Sustainable Growth and Pro Forma Forecasts 127 New Equity Financing 128 Why Don’t U.S. Corporations Issue More Equity? 131 Summary 132 Additional Resources 133 Problems 134 PART THREE FINANCING OPERATIONS 139 Chapter 5 Financial Instruments and Markets 141 Financial Instruments 142 Bonds 143 Common Stock 149 Preferred Stock 153 Financial Markets 155 Venture Capital Financing 155 Private Equity 157 Initial Public Offerings 158 Seasoned Issues 160 Issue Costs 164 Efficient Markets 166 What Is an Efficient Market? 166 Implications of Efficiency 169 Appendix Using Derivatives to Manage Risks 170 Forward Markets 172 Hedging with Forward Contracts 172 Hedging with Futures Contracts 173 Types of Forwards and Futures 174 Hedging with Swaps 175 Interest Rate Swaps 176 Currency Swaps 177 Hedging with Options 178 Limitations of Financial Market Hedging 181 Valuing Options 182 Summary 185 Additional Resources 187 Problems 188 Chapter 6 The Financing Decision 193 Financial Leverage 195 Measuring the Effects of Leverage on a Business 199 Leverage and Risk 201 Leverage and Earnings 203 How Much to Borrow 206 Irrelevance 206 Tax Benefits 208 Distress Costs 208 Flexibility 213 Market Signaling 216 Management Incentives 219 The Financing Decision and Growth 219 Selecting a Maturity Structure 222 Inflation and Financing Strategy 223 Appendix The Irrelevance Proposition 223 No Taxes 224 Taxes 226 Summary 227 Additional Resources 228 Problems 230x  Contents PART FOUR EVALUATING INVESTMENT OPPORTUNITIES 235 Chapter 7 Discounted Cash Flow Techniques 237 Figures of Merit 238 The Payback Period and the Accounting Rate of Return 239 The Time Value of Money 240 Equivalence 245 The Net Present Value 246 The Benefit-Cost Ratio 248 The Internal Rate of Return 248 Uneven Cash Flows 252 A Few Applications and Extensions 253 Mutually Exclusive Alternatives and Capital Rationing 256 The IRR in Perspective 257 Determining the Relevant Cash Flows 258 Depreciation 260 Working Capital and Spontaneous Sources 262 Sunk Costs 263 Allocated Costs 264 Cannibalization 265 Excess Capacity 266 Financing Costs 267 Appendix Mutually Exclusive Alternatives and Capital Rationing 269 What Happened to the Other $578,000? 270 Unequal Lives 271 Capital Rationing 274 The Problem of Future Opportunities 275 A Decision Tree 276 Summary 277 Additional Resources 278 Problems 278 Chapter 8 Risk Analysis in Investment Decisions 285 Risk Defined 287 Risk and Diversification 289 Estimating Investment Risk 291 Three Techniques for Estimating Investment Risk 292 Including Risk in Investment Evaluation 293 Risk-Adjusted Discount Rates 293 The Cost of Capital 294 The Cost of Capital Defined 295 The Cost of Capital for Polaris 296 The Cost of Capital in Investment Appraisal 304 Multiple Hurdle Rates 304 Four Pitfalls in the Use of Discounted Cash Flow Techniques 307 The Enterprise Perspective vs. the Equity Perspective 307 Inflation 310 Real Options 311 Excessive Risk Adjustment 316 A Cautionary Note 318 Appendix Asset Beta and Adjusted Present Value 318 Calculating Asset Beta 319 Using Asset Beta to Estimate Equity Beta 320 Asset Beta and Adjusted Present Value 321 Summary 325 Additional Resources 326 Problems 327 Chapter 9 Business Valuation and Corporate Restructuring 335 Valuing a Business 337 Assets or Equity? 338 Dead or Alive? 338 Minority Interest or Control? 340 Discounted Cash Flow Valuation 341 Free Cash Flow 342 The Terminal Value 343 A Numerical Example 346 Problems with Present Value Approaches to Valuation 348Contents  xi Valuation Based on Comparable Trades 349 Lack of Marketability 353 The Market for Control 354 The Premium for Control 354 Financial Reasons for Restructuring 357 The Empirical Evidence 364 The LinkedIn Buyout 366 Appendix The Venture Capital Method of Valuation 368 The Venture Capital Method—One Financing Round 369 The Venture Capital Method—Multiple Financing Rounds 372 Why Do Venture Capitalists Demand Such High Returns? 374 Summary 375 Additional Resources 376 Problems 378 Glossary 385 Suggested Answers to Odd-Numbered P