Solutions Manual
Fundamentals of Corporate Finance
13th Edition Ross, Westerfield and Jordan
All Chapters 1-27
,CHAPTERU1:UIntroductionUtoUCorporateUFinance
CHAPTERU2:UFinancialUStatements,UTaxes,UAndUCashUFlow
CHAPTERU3:UWorkingUwithUFinancialUStatements
CHAPTERU4:ULong-TermUFinancialUPlanningUandUGrowth
CHAPTERU5:UIntroductionUtoUValuation:UTheUTimeUValueUofUMoney
CHAPTERU6:UDiscountedUCashUFlowUValuation
CHAPTERU7:UInterestURatesUandUBondUValuation
CHAPTERU8:UStockUValuation
CHAPTERU9:UNetUPresentUValueUandUOtherUInvestmentUCriteria
CHAPTERU10:UMakingUCapitalUInvestmentUDecisions
CHAPTERU11:UProjectUAnalysisUandUEvaluation
CHAPTERU12:USomeULessonsUfromUCapitalUMarketUHistory
CHAPTERU13:UReturn,URisk,UAndUtheUSecurityUMarketULine
CHAPTERU14:UCostUofUCapital
CHAPTERU15:URaisingUCapital
CHAPTERU16:UFinancialULeverageUandUCapitalUStructureUPolicy
CHAPTERU17:UDividendsUandUPayoutUPolicy
CHAPTERU18:UShort-TermUFinanceUandUPlanning
CHAPTERU19:UCashUandULiquidityUManagement
CHAPTERU20:UCreditUandUInventoryUManagement
CHAPTERU21:UInternationalUCorporateUFinance
CHAPTERU22:UBehavioralUFinance:UImplicationsUforUFinancialUManage
CHAPTERU23:UEnterpriseURiskUManagement
CHAPTERU24:OptionsUandUCorporateUFinance
CHAPTERU25:UOptionUValuation
CHAPTERU26:UMergersUandUAcquisitions
,CHAPTERU27:ULeasing
CHAPTER 1 U
INTRODUCTION TO CORPORATEFINA U U U
NCE
AnswersUtoUConceptsUReviewUandUCriticalUThinkingUQuestions
1. CapitalUbudgetingU(decidingUwhetherUtoUexpandUaUmanufacturingUplant),UcapitalUstructureU(decidin
gUwhetherUtoUissueUnewUequityUandUuseUtheUproceedsUtoUretireUoutstandingUdebt),UandUworkingUca
pitalUmanagementU(modifyingUtheUfirm’sUcreditUcollectionUpolicyUwithUitsUcustomers).
2. Disadvantages:UunlimitedUliability,UlimitedUlife,UdifficultyUinUtransferringUownership,UhardUtoUraiseUca
pitalUfunds.USomeUadvantages:Usimpler,UlessUregulation,UtheUownersUareUalsoUtheUmanagers,Usome
timesUpersonalUtaxUratesUareUbetterUthanUcorporateUtaxUrates.
3. TheUprimaryUdisadvantageUofUtheUcorporateUformUisUtheUdoubleUtaxationUtoUshareholdersUofUdistrib
utedUearningsUandUdividends.USomeUadvantagesUinclude:UlimitedUliability,UeaseUofUtransferability,Ua
bilityUtoUraiseUcapital,UunlimitedUlife,UandUsoUforth.
4. InUresponseUtoUSarbanes-
Oxley,UsmallUfirmsUhaveUelectedUtoUgoUdarkUbecauseUofUtheUcostsUofUcompliance.UTheUcostsUtoUco
mplyUwithUSarboxUcanUbeUseveralUmillionUdollars,UwhichUcanUbeUaUlargeUpercentageU ofU aU smallU fir
msU profits.U AU majorU costU ofU goingU darkU isU lessU accessU toU capital.U SinceU theUfirmUisUnoUlongerUp
ubliclyUtraded,UitUcanUnoUlongerUraiseUmoneyUinUtheUpublicUmarket.UAlthoughUtheUcompanyUwillUstill
UhaveUaccessUtoUbankUloansUandUtheUprivateUequityUmarket,UtheUcostsUassociatedUwithUraisingUfun
dsUinUtheseUmarketsUareUusuallyUhigherUthanUtheUcostsUofUraisingUfundsUinUtheUpublicUmarket.
5. TheU treasurer’sU officeU andU theU controller’sU officeU areU theU twoU primaryU organizationalU groupsU
thatUreportUdirectlyUtoUtheUchiefUfinancialUofficer.UTheUcontroller’sUofficeUhandlesUcostUandUfinancial
Uaccounting,UtaxUmanagement,UandUmanagementUinformationUsystems,UwhileUtheUtreasurer’sUoffice
UisUresponsibleU forU cashU andU creditU management,U capitalU budgeting,U andU financialU planning.U Th
erefore,UtheUstudyUofUcorporateUfinanceUisUconcentratedUwithinUtheUtreasuryUgroup’sUfunctions.
6. ToUmaximizeUtheUcurrentUmarketUvalueU(shareUprice)UofUtheUequityUofUtheUfirmU(whetherUit’sUpublicl
y-UtradedUorUnot).
7. InUtheUcorporateUformUofUownership,UtheUshareholdersUareUtheUownersUofUtheUfirm.UTheUsharehold
ersUelectUtheUdirectorsUofUtheUcorporation,UwhoUinUturnUappointUtheUfirm’sUmanagement.UThisUsepa
rationUofUownershipUfromUcontrolUinUtheUcorporateUformUofUorganizationUisUwhatUcausesUagencyUpr
oblemsUtoUexist.UManagementUmayUactUinUitsUownUorUsomeoneUelse’sUbestUinterests,UratherUthanUt
hoseUofUtheUshareholders.UIfUsuchUeventsUoccur,UtheyUmayUcontradictUtheUgoalUofUmaximizingUtheU
shareUpriceUofUtheUequityUofUtheUfirm.
8. AUprimaryUmarketUtransaction.
, B-2U SOLUTIONS
9. InUauctionUmarketsUlikeUtheUNYSE,UbrokersUandUagentsUmeetUatUaUphysicalUlocationU(theUexchange
)UtoUmatchUbuyersUandUsellersUofUassets.UDealerUmarketsUlikeUNASDAQUconsistUofUdealersUoperati
ngUatUdispersedUlocalesUwhoUbuyUandUsellUassetsUthemselves,UcommunicatingUwithUotherUdealersU
eitherUelectronicallyUorUliterallyUover-the-counter.
10. SuchUorganizationsUfrequentlyUpursueUsocialUorUpoliticalUmissions,UsoUmanyUdifferentUgoalsUareUco
nceivable.UOneUgoalUthatUisUoftenUcitedUisUrevenueUminimization;Ui.e.,UprovideUwhateverUgoodsUand
UservicesUareUofferedUatUtheUlowestUpossibleUcostUtoUsociety.UAUbetterUapproachUmightUbeUtoUobse
rveUthatUevenUaUnot-for-
profitUbusinessUhasUequity.UThus,UoneUanswerUisUthatUtheUappropriateUgoalUisU toUmaximizeUtheUval
ueUofUtheUequity.
11. Presumably,UtheUcurrentUstockUvalueUreflectsUtheUrisk,Utiming,UandUmagnitudeUofUallUfutureUcashUfl
ows,UbothUshort-termUandUlong-term.UIfUthisUisUcorrect,UthenUtheUstatementUisUfalse.
12. AnUargumentUcanUbeUmadeUeitherUway.UAtUtheUoneUextreme,UweUcouldUargueUthatUinUaUmarketUeco
nomy,UallUofUtheseUthingsUareUpriced.UThereUisUthusUanUoptimalUlevelUof,UforUexample,UethicalUand/o
rUillegalUbehavior,UandUtheUframeworkUofUstockUvaluationUexplicitlyUincludesUthese.UAtUtheUotherUex
treme,UweUcouldUargueUthatUtheseUareUnon-
economicUphenomenaUandUareUbestUhandledUthroughUtheUpoliticalUprocess.UAUclassicU(andUhighlyU
relevant)UthoughtUquestionUthatUillustratesUthisUdebateUgoesUsomethingUlikeUthis:U“AUfirmUhasUesti
matedUthatUtheUcostUofUimprovingUtheUsafetyUofUoneUofUitsUproductsUisU$30Umillion.UHowever,UtheUf
irmUbelievesUthatUimprovingUtheUsafetyUofUtheUproductUwillUonlyUsaveU$20UmillionUinUproductUliabilit
yUclaims.UWhatUshouldUtheUfirmUdo?”
13. TheUgoalUwillUbeUtheUsame,UbutUtheUbestUcourseUofUactionUtowardUthatUgoalUmayUbeUdifferentUbeca
useUofUdifferingUsocial,Upolitical,UandUeconomicUinstitutions.
14. TheUgoalUofUmanagementUshouldUbeUtoUmaximizeUtheUshareUpriceUforUtheUcurrentUshareholders.UIfU
managementUbelievesUthatUitUcanUimproveUtheUprofitabilityUofUtheUfirmUsoUthatUtheUshareUpriceUwill
UexceedU$35,UthenUtheyUshouldUfightUtheUofferUfromUtheUoutsideUcompany.UIfUmanagementUbelieve
sUthatUthisUbidderUorUotherUunidentifiedUbiddersUwillUactuallyUpayUmoreUthanU$35UperUshareUtoUacq
uireUtheUcompany,UthenUtheyUshouldUstillUfightUtheUoffer.UHowever,UifUtheUcurrentUmanagementUcan
notUincreaseUtheUvalueUofUtheUfirmUbeyondUtheUbidUprice,UandUnoUotherUhigherUbidsUcomeUin,UthenU
managementUisUnotUactingUinUtheUinterestsUofUtheUshareholdersUbyUfightingUtheUoffer.USinceUcurrent
UmanagersUoftenUloseUtheirUjobsUwhenUtheUcorporationUisUacquired,UpoorlyUmonitoredUmanagersUh
aveUanUincentiveUtoUfightUcorporateUtakeoversUinUsituationsUsuchUasUthis.
15. WeUwouldUexpectUagencyUproblemsUtoUbeUlessUsevereUinUotherUcountries,UprimarilyUdueUtoUtheUrel
ativelyUsmallUpercentageUofUindividualUownership.UFewerUindividualUownersUshouldUreduceUtheUnum
berUofUdiverseUopinionsUconcerningUcorporateUgoals.UTheUhighUpercentageUofUinstitutionalUownershi
pUmightUleadUtoUaUhigherUdegreeUofUagreementUbetweenUownersUandUmanagersUonUdecisionsUconc
erningUriskyUprojects.UInUaddition,UinstitutionsUmayUbeUbetterUableUtoUimplementUeffectiveUmonitori
ngUmechanismsUonUmanagersUthanUcanUindividualUowners,UbasedUonUtheUinstitutions’UdeeperUreso
urcesUandUexperiencesUwithUtheirUownUmanagement.UTheUincreaseUinUinstitutionalUownershipUofUst
ockUinUtheUUnitedUStatesUandUtheUgrowingUactivismUofUtheseUlargeUshareholderUgroupsUmayUleadUto
UaUreductionUinUagencyUproblemsUforUU.S.UcorporationsUandUaUmoreUefficientUmarketUforUcorporate
Ucontrol.
