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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INTRODUCTION TO CORPORATE HF HF H
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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 wh
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ether to issue new equity and use the proceeds to retire outstanding debt), and working capital manag
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ement (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 capit
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al funds. Some advantages: simpler, less regulation, the owners are also the managers, sometimes per
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sonal 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 e
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arnings and dividends. Some advantages include: limited liability, ease of transferability, ability to rai
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se 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 w
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ith Sarbox can be several million dollars, which can be a large percentage of a small firms profits.
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A major cost of going dark is less access to capital. Since thefirm is no longer publicly traded, it
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can no longer raise money in the public market. Although the company will still have access to bank
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loans and the private equity market, the costs associated with raising funds in these markets are usuall
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y 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 groups
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H thatreport directly to the chief financial officer. The controller’s office handles cost and financialacc
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ounting, tax management, and management information systems, while the treasurer’s office is respo
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nsible for cash and credit management, capital budgeting, and financial planning. Therefore,th
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e 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 ele
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ct the directors of the corporation, who in turn appoint the firm’s management. This separation of ow
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nership 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 shareholders
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. If such events occur, they may contradict the goal of maximizing the share price of the equity of the
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firm.
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 m
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atch buyers and sellers of assets. Dealer markets like NASDAQ consist of dealers operating at dispers
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ed locales who buy and sell assets themselves, communicating with other dealers either electronically
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or literally over-the-counter.
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10. Such organizations frequently pursue social or political missions, so many different goals are conceiv
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able. One goal that is often cited is revenue minimization; i.e., provide whatever goods and services a
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re offered at the lowest possible cost to society. A better approach might be to observe that even a not
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-for-
profit business has equity. Thus, one answer is that the appropriate goal is to maximize the value of t
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he equity. HF
11. Presumably, the current stock value reflects the risk, timing, and magnitude of all future cash flows, b
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oth 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,a
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ll of these things are priced. There is thus an optimal level of, for example, ethical and/or illegal beha
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vior, and the framework of stock valuation explicitly includes these. At the other extreme, we could a
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rgue that these are non- HF HF HF HF
economic phenomena and are best handled through the political process. A classic (and highly releva
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nt) thought question that illustrates this debate goes something like this: “A firm has estimated that th
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e cost of improving the safety of one of its products is $30 million. However, the firm believes that i
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mproving the safety of the product will only save $20 million in product liability claims. What should
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the firm do?”
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13. The goal will be the same, but the best course of action toward that goal may be different because of d
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iffering social, political, and economic institutions. HF HF HF HF HF
14. The goal of management should be to maximize the share price for the current shareholders. If manag
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ement believes that it can improve the profitability of the firm so that the share price will exceed $35,
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then they should fight the offer from the outside company. If management believes that this bidder or
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other unidentified bidders will actually pay more than $35 per share to acquire the company, then the
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y should still fight the offer. However, if the current management cannot increase the value of the fir
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m beyond the bid price, and no other higher bids come in, then management is not acting in the intere
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sts of the shareholders by fighting the offer. Since current managers often lose their jobs when the cor
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poration is acquired, poorly monitored managers have an incentive to fight corporate takeovers in situ
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ations such as this. HF HF HF
15. We would expect agency problems to be less severe in other countries, primarily due to the relatively
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small percentage of individual ownership. Fewer individual owners should reduce the number of dive
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rse opinions concerning corporate goals. The high percentage of institutional ownership might lead to
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a higher degree of agreement between owners and managers on decisions concerning risky projects. I
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n addition, institutions may be better able to implement effective monitoring mechanisms on manager
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s than can individual owners, based on the institutions’ deeper resources and experiences with their o
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wn management. The increase in institutional ownership of stock in the United States andthe growing
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activism of these large shareholder groups may lead to a reduction in agency problems for U.S. corpo
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rations and a more efficient market for corporate control.
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