Solutions
Manual
Solutions Manual A
Corporate Finance A
Ross, Westerfield, and Jaffe
A A A
10th edition A A
Prepared Aby:
Joe ASmolira
ABelmont
AUniversity
1
© A2013 Aby AMcGraw-Hill AEducation. AThis Ais Aproprietary Amaterial Asolely Afor Aauthorized Ainstructor Ause. ANot
Aauthorized Afor Asale Aor A distribution Ain Aany Amanner. AThis Adocument Amay Anot Abe Acopied, Ascanned, Aduplicated,
Aforwarded, Adistributed, Aor Aposted Aon Aa Awebsite, Ain A whole Aor Apart.
,Solutions
Manual
CHAPTER 1 A
INTRODUCTION TO CORPORATE A A
FINANCE
A
Answers Ato AConcept AQuestions
1. In Athe Acorporate Aform Aof Aownership, Athe Ashareholders Aare Athe Aowners Aof Athe Afirm. AThe
Ashareholders Aelect Athe Adirectors Aof Athe Acorporation, Awho Ain Aturn Aappoint Athe Afirm‘s
Amanagement. AThis Aseparation Aof Aownership Afrom Acontrol Ain Athe Acorporate Aform Aof Aorganization
Ais Awhat Acauses Aagency Aproblems Ato Aexist. AManagement Amay Aact Ain Aits Aown Aor Asomeone Aelse‘s
Abest Ainterests, Arather Athan Athose Aof Athe Ashareholders. AIf Asuch Aevents Aoccur, Athey Amay
Acontradict Athe Agoal Aof Amaximizing Athe Ashare Aprice Aof Athe Aequity Aof Athe Afirm.
2. Such Aorganizations Afrequently Apursue Asocial Aor Apolitical Amissions, Aso Amany Adifferent Agoals
Aare Aconceivable. AOne Agoal Athat Ais Aoften Acited Ais Arevenue Aminimization; Ai.e., Aprovide
Awhatever Agoods Aand Aservices Aare Aoffered Aat Athe Alowest Apossible Acost Ato Asociety. AA Abetter
Aapproach Amight Abe Ato Aobserve Athat Aeven Aa Anot-for-profit Abusiness Ahas Aequity. AThus, Aone
Aanswer Ais Athat Athe Aappropriate Agoal Ais Ato Amaximize Athe Avalue Aof Athe Aequity.
3. Presumably, Athe Acurrent Astock Avalue Areflects Athe Arisk, Atiming, Aand Amagnitude Aof Aall Afuture
Acash Aflows, Aboth Ashort-term Aand Along-term. AIf Athis Ais Acorrect, Athen Athe Astatement Ais Afalse.
4. An Aargument Acan Abe Amade Aeither Away. AAt Athe Aone Aextreme, Awe Acould Aargue Athat Ain Aa
Amarket Aeconomy, Aall Aof Athese Athings Aare Apriced. AThere Ais Athus Aan Aoptimal Alevel Aof, Afor
Aexample, Aethical Aand/or Aillegal Abehavior, Aand Athe Aframework Aof Astock Avaluation Aexplicitly
Aincludes Athese. AAt Athe Aother Aextreme, Awe Acould Aargue Athat Athese Aare Anon-economic Aphenomena
Aand Aare Abest Ahandled Athrough Athe Apolitical Aprocess. AA Aclassic A(and Ahighly Arelevant) Athought
Aquestion Athat Aillustrates Athis Adebate Agoes Asomething Alike Athis: A―A Afirm Ahas Aestimated Athat
Athe Acost Aof Aimproving Athe Asafety Aof Aone Aof Aits Aproducts Ais A$30 Amillion. AHowever, Athe Afirm
Abelieves Athat Aimproving Athe Asafety Aof Athe Aproduct Awill Aonly Asave A$20 Amillion Ain Aproduct
Aliability Aclaims. AWhat Ashould Athe Afirm Ado?‖
5. The Agoal Awill Abe Athe Asame, Abut Athe Abest Acourse Aof Aaction Atoward Athat Agoal Amay Abe
Adifferent Abecause Aof Adiffering Asocial, Apolitical, Aand Aeconomic Ainstitutions.
6. The Agoal Aof Amanagement Ashould Abe Ato Amaximize Athe Ashare Aprice Afor Athe Acurrent
Ashareholders. AIf Amanagement Abelieves Athat Ait Acan Aimprove Athe Aprofitability Aof Athe Afirm Aso Athat
Athe Ashare Aprice Awill Aexceed
$35, Athen Athey Ashould Afight Athe Aoffer Afrom Athe Aoutside Acompany. AIf Amanagement Abelieves Athat Athis
Abidder Aor Aother Aunidentified Abidders Awill Aactually Apay Amore Athan A$35 Aper Ashare Ato Aacquire
Athe Acompany, Athen Athey Ashould Astill Afight Athe Aoffer. AHowever, Aif Athe Acurrent Amanagement
Acannot Aincrease Athe Avalue Aof Athe Afirm Abeyond Athe Abid Aprice, Aand Ano Aother Ahigher Abids
2
© A2013 Aby AMcGraw-Hill AEducation. AThis Ais Aproprietary Amaterial Asolely Afor Aauthorized Ainstructor Ause. ANot Aauthorized Afor Asale
Aor Adistribution Ain Aany A manner. AThis Adocument Amay Anot Abe Acopied, Ascanned, Aduplicated, Aforwarded, Adistributed, Aor Aposted
on a website, in whole or part.
,Solutions
Manual
Acome Ain, Athen Amanagement Ais Anot Aacting Ain Athe Ainterests Aof Athe Ashareholders Aby Afighting
Athe A offer. A Since A current A managers A often Alose A their Ajobs A when
3
© A2013 Aby AMcGraw-Hill AEducation. AThis Ais Aproprietary Amaterial Asolely Afor Aauthorized Ainstructor Ause. ANot Aauthorized Afor Asale
Aor Adistribution Ain Aany A manner. AThis Adocument Amay Anot Abe Acopied, Ascanned, Aduplicated, Aforwarded, Adistributed, Aor Aposted
on a website, in whole or part.
, the Acorporation Ais Aacquired, Apoorly Amonitored Amanagers Ahave Aan Aincentive Ato Afight Acorporate
Atakeovers Ain Asituations Asuch Aas Athis.
7. We Awould Aexpect Aagency Aproblems Ato Abe Aless Asevere Ain Aother Acountries, Aprimarily Adue Ato
Athe Arelatively Asmall Apercentage Aof Aindividual Aownership. AFewer Aindividual Aowners Ashould
Areduce Athe Anumber Aof Adiverse Aopinions Aconcerning Acorporate Agoals. AThe Ahigh Apercentage Aof
Ainstitutional Aownership Amight Alead Ato Aa Ahigher Adegree Aof Aagreement Abetween Aowners Aand
Amanagers Aon Adecisions Aconcerning Arisky Aprojects. AIn Aaddition, Ainstitutions Amay Abe Abetter
Aable Ato Aimplement Aeffective Amonitoring Amechanisms Aon Amanagers Athan Acan Aindividual
Aowners, Abased Aon Athe Ainstitutions‘ Adeeper Aresources Aand Aexperiences Awith Atheir Aown
Amanagement.
8. The Aincrease Ain Ainstitutional Aownership Aof Astock Ain Athe AUnited AStates Aand Athe Agrowing Aactivism
Aof Athese Alarge Ashareholder Agroups Amay Alead Ato Aa Areduction Ain Aagency Aproblems Afor AU.S.
Acorporations Aand Aa Amore Aefficient Amarket Afor Acorporate Acontrol. AHowever, Athis Amay Anot
Aalways Abe Athe Acase. AIf Athe Amanagers Aof Athe Amutual Afund Aor Apension Aplan Aare Anot
Aconcerned Awith Athe Ainterests Aof Athe Ainvestors, Athe Aagency Aproblem Acould Apotentially Aremain
Athe Asame, Aor Aeven Aincrease Asince Athere Ais Athe Apossibility Aof Aagency Aproblems Abetween Athe
Afund Aand Aits Ainvestors.
9. How Amuch Ais Atoo Amuch? AWho Ais Aworth Amore, ALarry AEllsion Aor ATiger AWoods? AThe
Asimplest Aanswer Ais Athat Athere Ais Aa Amarket Afor Aexecutives Ajust Aas Athere Ais Afor Aall Atypes Aof
Alabor. AExecutive Acompensation Ais Athe Aprice Athat Aclears Athe Amarket. AThe Asame Ais Atrue Afor
Aathletes Aand Aperformers. AHaving Asaid Athat, Aone Aaspect Aof Aexecutive Acompensation Adeserves
Acomment. AA Aprimary Areason Aexecutive Acompensation Ahas Agrown Aso Adramatically Ais Athat
Acompanies Ahave Aincreasingly Amoved Ato Astock-based Acompensation. ASuch Amovement Ais
Aobviously Aconsistent Awith Athe Aattempt Ato Abetter Aalign Astockholder Aand Amanagement Ainterests.
AIn Arecent Ayears, Astock Aprices Ahave Asoared, Aso Amanagement Ahas Acleaned Aup. AIt Ais Asometimes
Aargued Athat Amuch Aof Athis Areward Ais Asimply Adue Ato Arising Astock Aprices Ain Ageneral, Anot
Amanagerial Aperformance. APerhaps Ain Athe Afuture, Aexecutive Acompensation Awill Abe Adesigned Ato
Areward Aonly Adifferential Aperformance, Ai.e., Astock Aprice Aincreases Ain Aexcess Aof Ageneral Amarket
Aincreases.
10. Maximizing Athe Acurrent Ashare Aprice Ais Athe Asame Aas Amaximizing Athe Afuture Ashare Aprice Aat
Aany Afuture Aperiod. AThe Avalue Aof Aa Ashare Aof Astock Adepends Aon Aall Aof Athe Afuture Acash Aflows Aof
Acompany. AAnother Away Ato Alook Aat Athis Ais Athat, Abarring Alarge Acash Apayments Ato Ashareholders,
Athe Aexpected Aprice Aof Athe Astock Amust Abe Ahigher Ain Athe Afuture Athan Ait Ais Atoday. AWho Awould
Abuy Aa Astock Afor A$100 Atoday Awhen Athe Ashare Aprice Ain Aone Ayear Ais Aexpected Ato Abe A$80?
4
© A2013 Aby AMcGraw-Hill AEducation. AThis Ais Aproprietary Amaterial Asolely Afor Aauthorized Ainstructor Ause. ANot Aauthorized Afor Asale
Aor Adistribution Ain Aany A manner. AThis Adocument Amay Anot Abe Acopied, Ascanned, Aduplicated, Aforwarded, Adistributed, Aor Aposted
on a website, in whole or part.
