Solution Manual for Principles of Corporate Finance
14th Edition by Richard Brealey
Complete Chapters
©bMcGrawbHillbLLC.bAllbrightsbreserved.bNobreproductionborbdistributionbwithoutbthebpriorbwrittenbconsentbofbMcGrawbHillbLL
C.
,Thebvaluesbshownbinbthebsolutionsbmaybbebroundedbforbdisplaybpurposes.bHowever,bthebanswers
bwerebderivedbusingbabspreadsheetbwithoutbanybintermediatebrounding.
Chapter 1
AnswersbtobProblembSets
1. a. real
b. executivebairplanes
c. brandbnames
d. financial
e. bonds
*f. investmentborbcapitalbexpenditure
*g. capitalbbudgetingborbinvestment
h. financing
*Notebthatbfbandbgbarebinterchangeablebinbthebquestion.
Estbtime:b01-05
2. Abtrademark,babfactory,bundevelopedbland,bandbyourbworkbforceb(c,bd,be,bandbg)
bareballbrealbassets.bRealbassetsbarebidentifiablebasbitemsbwithbintrinsicbvalue.bTheb
othersbinbtheblistbarebfinancialbassets,bthatbis,bthesebassetsbderivebvaluebbecausebof
babcontractualbclaim.
Estbtime:b01-05
3. a.
Financialbassets,bsuchbasbstocksborbbankbloans,barebclaimsbheldbbybinve
stors.bCorporationsbsellbfinancialbassetsbtobraisebthebcashbtobinvestbinbrealb
assetsbsuchbasbplantbandbequipment.bSomebrealbassetsbarebintangible.
b. Capitalbexpenditurebmeansbinvestmentbinbrealbassets.bFinancingbmeansbraisi
ngbthebcashbforbthisbinvestment.
c. Thebsharesbofbpublicbcorporationsbarebtradedbonbstockbexchangesbandbcan
bbebpurchasedbbybabwidebrangebofbinvestors.bThebsharesbofbcloselybheldb
corporationsbarebnotbpubliclybtradedbandbarebheldbbybabsmallbgroupbofb
privatebinvestors.
d. Unlimitedbliability:bInvestorsbarebresponsiblebforballbthebfirm‘sbdebts.bAbsole
bproprietorbhasbunlimitedbliability.bInvestorsbinbcorporationsbhaveblimitedblia
©bMcGrawbHillbLLC.bAllbrightsbreserved.bNobreproductionborbdistributionbwithoutbthebpriorbwrittenbconsentbofbMcGrawbHillbLL
C.
, bility.b Theybcanblosebtheirbinvestment,bbutbnobmore.
Estbtime:b01-05
©bMcGrawbHillbLLC.bAllbrightsbreserved.bNobreproductionborbdistributionbwithoutbthebpriorbwrittenbconsentbofbMcGrawbHillbLL
C.
, 4. Itemsbcbandbdbapplybtobcorporations.b Becausebcorporationsbhavebperpetualblife,bo
wnershipbcanbbebtransferredbwithoutbaffectingboperations,bandbmanagersbcanbbebfi
redbwithbnobeffectbonbownership.bOtherbformsbofbbusinessbmaybhavebunlimitedbliab
ilitybandblimitedblife.
Estbtime:b01-05
5. Separationbofbownershipbfacilitatesbthebkeybattributesbofbabcorporation,bincludingbli
mitedbliabilitybforbinvestors,btransferabilitybofbownership,babseparateblegalbpersonal
itybofbthebcorporation,bandbdelegatedbcentralizedbmanagement.b Thesebfourbattribu
tesbprovidebsubstantialbbenefitbforbinvestors,bincludingbthebabilitybtobdiversifybtheirb
investmentbamongbmanybuncorrelatedbreturns—
abverybvaluablebtoolbexploredbinblaterbchapters.b Also,bthesebattributesballowbinves
torsbtobquicklybexit,benter,borbshortbsellbanbinvestment,btherebybgeneratingbanbactiv
ebliquidbmarketbforbcorporations.
However,bthesebpositivebaspectsbalsobintroducebsubstantialbnegativebexternalitiesbas
bwell.b Thebseparationbofbownershipbfrombmanagementbtypicallybleadsbtobagencyb
problems,bwherebmanagersbpreferbtobconsumebprivatebperksborbmakebotherbdecisio
nsbforbtheirbprivatebbenefit—
ratherbthanbmaximizebshareholderbwealth.b Shareholdersbtendbtobexerciseblessbovers
ightbofbeachbindividualbinvestmentbasbtheirbdiversificationbincreases.b Finally,bthebcor
poration‘sbseparateblegalbpersonalitybmakesbitbdifficultbtobenforcebaccountabilitybifb
theybexternalizebcostsbontobsociety.
Estbtime:b01-05
6. Shareholdersbwillbonlybvotebtobmaximizebshareholderbwealth.b Shareholdersbcanb
modifybtheirbpatternbofbconsumptionbthroughbborrowingbandblending,bmatchbrisk
bpreferences,bandbhopefullybbalancebtheirbownbcheckbooksb(orbhirebabqualified
bprofessionalbtobhelpbthembwithbthesebtasks).
Estbtime:b01-05
7. Ifbthebinvestmentbincreasesbthebfirm‘sbwealth,bitbincreasesbthebfirm‘sbsharebvalue.
b Ms.bEspinozabcouldbthenbsellbsomeborballbthesebmorebvaluablebsharesbtobprovi
debforbherbretirementbincome.
Estbtime:b01-05
8. a.
Assumingbthatbthebencabulatorbmarketbisbrisky,banb8%bexp
ectedbreturnbonbthebF&Hbencabulatorbinvestmentsbmaybbebinfe
riorbtobab4%breturnbonbU.S.
governmentbsecurities,bdependingbonbthebrelativebriskbbetweenbthebtwobassets.
b. UnlessbthebfinancialbassetsbarebasbsafebasbU.S.bgovernmentbsecurities,btheirbc
©bMcGrawbHillbLLC.bAllbrightsbreserved.bNobreproductionborbdistributionbwithoutbthebpriorbwrittenbconsentbofbMcGrawbHillbLL
C.
