Solutions Manual Fundamentals of Corporate Finance
13th Edition Ross, Westerfield, and Jordan
Chapters 1 - 27
,CHAPTERe1:eIntroductionetoeCorporateeFinance
CHAPTERe2:eFinancialeStatements,eTaxes,eAndeCasheFlow
CHAPTERe3:eWorkingewitheFinancialeStatements
CHAPTERe4:eLong-TermeFinancialePlanningeandeGrowth
CHAPTERe5:eIntroductionetoeValuation:eTheeTimeeValueeofeMoney
CHAPTERe6:eDiscountedeCasheFloweValuation
CHAPTERe7:eInteresteRateseandeBondeValuation
CHAPTERe8:eStockeValuation
CHAPTERe9:eNetePresenteValueeandeOthereInvestmenteCriteria
CHAPTERe10:eMakingeCapitaleInvestmenteDecisions
CHAPTERe11:eProjecteAnalysiseandeEvaluation
CHAPTERe12:eSomeeLessonsefromeCapitaleMarketeHistory
CHAPTERe13:eReturn,eRisk,eAndetheeSecurityeMarketeLine
CHAPTERe14:eCosteofeCapital
CHAPTERe15:eRaisingeCapital
CHAPTERe16:eFinancialeLeverageeandeCapitaleStructureePolicy
CHAPTERe17:eDividendseandePayoutePolicy
CHAPTERe18:eShort-TermeFinanceeandePlanning
CHAPTERe19:eCasheandeLiquidityeManagement
CHAPTERe20:eCrediteandeInventoryeManagement
CHAPTERe21:eInternationaleCorporateeFinance
CHAPTERe22:eBehavioraleFinance:eImplicationseforeFinancialeManage
CHAPTERe23:eEnterpriseeRiskeManagement
CHAPTERe24:OptionseandeCorporateeFinance
CHAPTERe25:eOptioneValuation
CHAPTERe26:eMergerseandeAcquisitions
CHAPTERe27:eLeasing
,CHAPTER 1 e
INTRODUCTION TO CORPORATE e e e
FINANCE
AnswersetoeConceptseRevieweandeCriticaleThinkingeQuestions
1. Capitalebudgetinge(decidingewhetheretoeexpandeaemanufacturingeplant),ecapitalestructuree(decidingewh
etheretoeissueeneweequityeandeuseetheeproceedsetoeretireeoutstandingedebt),eandeworkingecapitalemanag
emente(modifyingetheefirm’secreditecollectionepolicyewitheitsecustomers).
2. Disadvantages:eunlimitedeliability,elimitedelife,edifficultyeinetransferringeownership,ehardetoeraiseecapi
talefunds.eSomeeadvantages:esimpler,elesseregulation,etheeownerseareealsoetheemanagers,esometimesepe
rsonaletaxerateseareebetterethanecorporateetaxerates.
3. Theeprimaryedisadvantageeofetheecorporateeformeisetheedoubleetaxationetoeshareholderseofedistributedee
arningseandedividends.eSomeeadvantageseinclude:elimitedeliability,eeaseeofetransferability,eabilityetoera
iseecapital,eunlimitedelife,eandesoeforth.
4. IneresponseetoeSarbanes-
Oxley,esmallefirmsehaveeelectedetoegoedarkebecauseeofetheecostseofecompliance.eTheecostsetoecomplye
witheSarboxecanebeeseveralemillionedollars,ewhichecanebeeaelargeepercentagee ofe ae smalle firmse profits.
e Ae majore coste ofe goinge darke ise lesse accesse toe capital.e Sincee theefirmeisenoelongerepubliclyetraded,eitec
anenoelongereraiseemoneyeinetheepublicemarket.eAlthoughetheecompanyewillestillehaveeaccessetoebankel
oanseandetheeprivateeequityemarket,etheecostseassociatedewitheraisingefundseinetheseemarketseareeusuall
yehigherethanetheecostseoferaisingefundseinetheepublicemarket.
5. Thee treasurer’se officee ande thee controller’se officee aree thee twoe primarye organizationale groupse thate
reportedirectlyetoetheechiefefinancialeofficer.eTheecontroller’seofficeehandlesecosteandefinancialeaccounti
ng,etaxemanagement,eandemanagementeinformationesystems,ewhileetheetreasurer’seofficeeiseresponsibl
ee fore cashe ande credite management,e capitale budgeting,e ande financiale planning.e Therefore,etheestudye
ofecorporateefinanceeiseconcentratedewithinetheetreasuryegroup’sefunctions.
6. Toemaximizeetheecurrentemarketevaluee(shareeprice)eofetheeequityeofetheefirme(whethereit’sepublicly-
etradedeorenot).
7. Inetheecorporateeformeofeownership,etheeshareholderseareetheeownerseofetheefirm.eTheeshareholderseele
ctetheedirectorseofetheecorporation,ewhoeineturneappointetheefirm’semanagement.eThiseseparationeofeow
nershipefromecontroleinetheecorporateeformeofeorganizationeisewhatecauseseagencyeproblemsetoeexist.e
Managementemayeacteineitseowneoresomeoneeelse’sebesteinterests,eratherethanethoseeofetheeshareholders
.eIfesucheeventseoccur,etheyemayecontradictetheegoaleofemaximizingetheeshareepriceeofetheeequityeofethee
firm.
8. Aeprimaryemarketetransaction.
, B-2e SOLUTIONS
9. IneauctionemarketselikeetheeNYSE,ebrokerseandeagentsemeeteateaephysicalelocatione(theeexchange)etoem
atchebuyerseandesellerseofeassets.eDealeremarketselikeeNASDAQeconsisteofedealerseoperatingeatedisper
sedelocalesewhoebuyeandeselleassetsethemselves,ecommunicatingewitheotheredealerseeithereelectronicall
yeoreliterallyeover-the-counter.
10. Sucheorganizationsefrequentlyepursueesocialeorepoliticalemissions,esoemanyedifferentegoalseareeconceiv
able.eOneegoalethateiseoftenecitedeiserevenueeminimization;ei.e.,eprovideewhateveregoodseandeservicesea
reeofferedeatetheelowestepossibleecostetoesociety.eAebettereapproachemightebeetoeobserveethateeveneaenot
-for-
profitebusinessehaseequity.eThus,eoneeanswereisethatetheeappropriateegoaleise toemaximizeetheevalueeofet
heeequity.
11. Presumably,etheecurrentestockevalueereflectsetheerisk,etiming,eandemagnitudeeofeallefutureecasheflows,e
botheshort-termeandelong-term.eIfethiseisecorrect,ethenetheestatementeisefalse.
12. Aneargumentecanebeemadeeeithereway.eAtetheeoneeextreme,eweecouldeargueethateineaemarketeeconomy,e
alleofetheseethingseareepriced.eThereeisethuseaneoptimaleleveleof,eforeexample,eethicaleand/oreillegalebeh
avior,eandetheeframeworkeofestockevaluationeexplicitlyeincludesethese.eAtetheeothereextreme,eweecoulde
argueethatetheseeareenon-
economicephenomenaeandeareebestehandledethroughetheepoliticaleprocess.eAeclassice(andehighlyereleva
nt)ethoughtequestionethateillustratesethisedebateegoesesomethingelikeethis:e“Aefirmehaseestimatedethateth
eecosteofeimprovingetheesafetyeofeoneeofeitseproductseise$30emillion.eHowever,etheefirmebelievesethatei
mprovingetheesafetyeofetheeproductewilleonlyesavee$20emillioneineproducteliabilityeclaims.eWhateshoul
detheefirmedo?”
13. Theegoalewillebeetheesame,ebutetheebestecourseeofeactionetowardethategoalemayebeedifferentebecauseeofe
differingesocial,epolitical,eandeeconomiceinstitutions.
14. Theegoaleofemanagementeshouldebeetoemaximizeetheeshareepriceeforetheecurrenteshareholders.eIfemana
gementebelievesethateitecaneimproveetheeprofitabilityeofetheefirmesoethatetheeshareepriceewilleexceede$3
5,ethenetheyeshouldefightetheeofferefrometheeoutsideecompany.eIfemanagementebelievesethatethisebiddere
oreothereunidentifiedebiddersewilleactuallyepayemoreethane$35epereshareetoeacquireetheecompany,ethenet
heyeshouldestillefightetheeoffer.eHowever,eifetheecurrentemanagementecannoteincreaseetheevalueeofetheef
irmebeyondetheebideprice,eandenoeotherehigherebidsecomeein,ethenemanagementeisenoteactingeinetheeinte
restseofetheeshareholdersebyefightingetheeoffer.eSinceecurrentemanagerseofteneloseetheirejobsewhenetheec
orporationeiseacquired,epoorlyemonitoredemanagersehaveeaneincentiveetoefightecorporateetakeoverseines
ituationsesucheasethis.
15. Weewouldeexpecteagencyeproblemsetoebeelessesevereeineotherecountries,eprimarilyedueetoetheerelativelye
smallepercentageeofeindividualeownership.eFewereindividualeownerseshouldereduceetheenumbereofedive
rseeopinionseconcerningecorporateegoals.eTheehighepercentageeofeinstitutionaleownershipemighteleadeto
eaehigheredegreeeofeagreementebetweeneownerseandemanagerseonedecisionseconcerningeriskyeprojects.e
Ineaddition,einstitutionsemayebeebettereableetoeimplementeeffectiveemonitoringemechanismseonemanag
ersethanecaneindividualeowners,ebasedeonetheeinstitutions’edeepereresourceseandeexperiencesewithetheir
eownemanagement.eTheeincreaseeineinstitutionaleownershipeofestockeinetheeUnitedeStateseandetheegrowi
ngeactivismeofetheseelargeeshareholderegroupsemayeleadetoeaereductioneineagencyeproblemseforeU.S.eco
rporationseandeaemoreeefficientemarketeforecorporateecontrol.
