Solutions Manual Fundamentals of Corporate Finance
13th Edition Ross, Westerfield, and Jordan
Chapters 1 - 27
,CHAPTER 1: Introduction to Corporate Finance
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CHAPTER 2: Financial Statements, Taxes, And Cash Flow
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CHAPTER 3: Working with Financial Statements
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CHAPTER 4: Long-Term Financial Planning and Growth
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CHAPTER 5: Introduction to Valuation: The Time Value of Money
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CHAPTER 6: Discounted Cash Flow Valuation
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CHAPTER 7: Interest Rates and Bond Valuation
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CHAPTER 8: Stock Valuation
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CHAPTER 9: Net Present Value and Other Investment Criteria
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CHAPTER 10: Making Capital Investment Decisions
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CHAPTER 11: Project Analysis and Evaluation
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CHAPTER 12: Some Lessons from Capital Market History
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CHAPTER 13: Return, Risk, And the Security Market Line
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CHAPTER 14: Cost of Capital
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CHAPTER 15: Raising Capital
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CHAPTER 16: Financial Leverage and Capital Structure Policy
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CHAPTER 17: Dividends and Payout Policy
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CHAPTER 18: Short-Term Finance and Planning
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CHAPTER 19: Cash and Liquidity Management
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CHAPTER 20: Credit and Inventory Management
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CHAPTER 21: International Corporate Finance
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CHAPTER 22: Behavioral Finance: Implications for Financial Manage
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CHAPTER 23: Enterprise Risk Management
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CHAPTER 24:Options and Corporate Finance
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CHAPTER 25: Option Valuation
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CHAPTER 26: Mergers and Acquisitions
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CHAPTER 27: Leasing
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,CHAPTER 1 yb
INTRODUCTION TO CORPORATE yb yb b
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FINANCE
Answers to Concepts Review and Critical Thinking Questions
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1. Capital budgeting (deciding whether to expand a manufacturing plant), capital structure (deciding w
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hether to issue new equity and use the proceeds to retire outstanding debt), and working capital man
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agement (modifying the firm’s credit collection policy with its customers).
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2. Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, hard to raise cap
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ital funds. Some advantages: simpler, less regulation, the owners are also the managers, sometimes
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personal tax rates are better than corporate tax rates.
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3. The primary disadvantage of the corporate form is the double taxation to shareholders of distributed
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earnings and dividends. Some advantages include: limited liability, ease of transferability, ability to
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raise capital, unlimited life, and so forth.
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4. In response to Sarbanes-
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Oxley, small firms have elected to go dark because of the costs of compliance. The costs to comply
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with Sarbox can be several million dollars, which can be a large percentage of a small firms profi
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ts. A major cost of going dark is less access to capital. Since thefirm is no longer publicly tra
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ded, it can no longer raise money in the public market. Although the company will still have access
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to bank loans and the private equity market, the costs associated with raising funds in these markets
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are usually higher than the costs of raising funds in the public market.
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5. The treasurer’s office and the controller’s office are the two primary organizational grou
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ps thatreport directly to the chief financial officer. The controller’s office handles cost and financia
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laccounting, tax management, and management information systems, while the treasurer’s office is r
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esponsible for cash and credit management, capital budgeting, and financial planning. Theref
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ore,the study of corporate finance is concentrated within the treasury group’s functions.
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6. To maximize the current market value (share price) of the equity of the firm (whether it’s publicly-
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traded or not).
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7. In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders el
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ect the directors of the corporation, who in turn appoint the firm’s management. This separation of o
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wnership from control in the corporate form of organization is what causes agency problems to exist
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. Management may act in its own or someone else’s best interests, rather than those of the sharehold
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ers. If such events occur, they may contradict the goal of maximizing the share price of the equity o
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f the firm.
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8. A primary market transaction.
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, B-2 SOLUTIONS
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9. In auction markets like the NYSE, brokers and agents meet at a physical location (the exchange) to
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match buyers and sellers of assets. Dealer markets like NASDAQ consist of dealers operating at dis
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persed locales who buy and sell assets themselves, communicating with other dealers either electron
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ically or literally over-the-counter.
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10. Such organizations frequently pursue social or political missions, so many different goals are concei
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vable. One goal that is often cited is revenue minimization; i.e., provide whatever goods and service
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s are offered at the lowest possible cost to society. A better approach might be to observe that even
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a not-for- yb
profit business has equity. Thus, one answer is that the appropriate goal is to maximize the value o
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f the equity.
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11. Presumably, the current stock value reflects the risk, timing, and magnitude of all future cash flows,
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both short-term and long-term. If this is correct, then the statement is false.
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12. An argument can be made either way. At the one extreme, we could argue that in a market economy
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,all of these things are priced. There is thus an optimal level of, for example, ethical and/or illegal b
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ehavior, and the framework of stock valuation explicitly includes these. At the other extreme, we co
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uld argue that these are non-
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economic phenomena and are best handled through the political process. A classic (and highly relev
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ant) thought question that illustrates this debate goes something like this: “A firm has estimated that
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the cost of improving the safety of one of its products is $30 million. However, the firm believes th
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at improving the safety of the product will only save $20 million in product liability claims. What s
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hould the firm do?” yb yb yb
13. The goal will be the same, but the best course of action toward that goal may be different because o
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f differing social, political, and economic institutions.
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14. The goal of management should be to maximize the share price for the current shareholders. If man
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agement believes that it can improve the profitability of the firm so that the share price will exceed
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$35, then they should fight the offer from the outside company. If management believes that this bid
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der or other unidentified bidders will actually pay more than $35 per share to acquire the company, t
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hen they should still fight the offer. However, if the current management cannot increase the value o
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f the firm beyond the bid price, and no other higher bids come in, then management is not acting in
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the interests of the shareholders by fighting the offer. Since current managers often lose their jobs w
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hen the corporation is acquired, poorly monitored managers have an incentive to fight corporate tak
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eovers in situations such as this. yb yb yb yb yb
15. We would expect agency problems to be less severe in other countries, primarily due to the relativel
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ysmall percentage of individual ownership. Fewer individual owners should reduce the number of di
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verse opinions concerning corporate goals. The high percentage of institutional ownership might lea
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d to a higher degree of agreement between owners and managers on decisions concerning risky proj
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ects. In addition, institutions may be better able to implement effective monitoring mechanisms on
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managers than can individual owners, based on the institutions’ deeper resources and experiences w
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ith their own management. The increase in institutional ownership of stock in the United States andt
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he growing activism of these large shareholder groups may lead to a reduction in agency problems f
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or U.S. corporations and a more efficient market for corporate control.
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