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 qs
INTRODUCTION TO qs
CORPORATEFINANCE
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Answers to Concepts Review and Critical Thinking Questions
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1. Capital budgeting (deciding whether to expand a manufacturing plant), capital structure
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(deciding whether to issue new equity and use the proceeds to retire outstanding debt), and
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working capital management (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
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capital funds. Some advantages: simpler, less regulation, the owners are also the managers,
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sometimes 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
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distributed earnings and dividends. Some advantages include: limited liability, ease of
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transferability, ability to raise capital, unlimited life, and so forth.
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4. In response to Sarbanes-Oxley, small firms have elected to go dark because of the costs of
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compliance. The costs to comply with Sarbox can be several million dollars, which can be a
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large percentage of a small firms profits. A major cost of going dark is less access
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qsto capital. Since the firm is no longer publicly traded, it can no longer raise money in the
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public market. Although the company will still have access to bank loans and the private
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equity market, the costs associated with raising funds in these markets are usually higher than
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the costs of raising funds in the public market.
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5. The treasurer’s office
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organizational groups that report directly to the chief financial officer. The controller’s
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office handles cost and financial accounting, tax management, and management information
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systems, while the treasurer’s office is responsible for cash and credit management,
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qscapital budgeting, and financial planning. Therefore, the study of corporate finance is
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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
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publicly- traded or not).
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7. In the corporate form of ownership, the shareholders are the owners of the firm. The
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shareholders elect the directors of the corporation, who in turn appoint the firm’s management.
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This separation of ownership from control in the corporate form of organization is what causes
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agency problems to exist. Management may act in its own or someone else’s best interests,
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rather than those of the shareholders. If such events occur, they may contradict the goal of
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maximizing the share price of the equity of the firm.
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8. A primary market transaction.
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, B-2 q s SOLUTIONS
9. In auction markets like the NYSE, brokers and agents meet at a physical location (the
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exchange) to match buyers and sellers of assets. Dealer markets like NASDAQ consist of
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dealers operating at dispersed locales who buy and sell assets themselves, communicating with
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other dealers either electronically or literally over-the-counter.
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10. Such organizations frequently pursue social or political missions, so many different goals are
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conceivable. One goal that is often cited is revenue minimization; i.e., provide whatever goods
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and services are offered at the lowest possible cost to society. A better approach might be to
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observe that even a not-for-profit business has equity. Thus, one answer is that the appropriate
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goal is to maximize the value of the equity.
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11. Presumably, the current stock value reflects the risk, timing, and magnitude of all future cash
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flows, 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
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economy, all of these things are priced. There is thus an optimal level of, for example, ethical
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and/or illegal behavior, and the framework of stock valuation explicitly includes these. At the
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other extreme, we could argue that these are non-economic phenomena and are best handled
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through the political process. A classic (and highly relevant) thought question that illustrates
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this debate goes something like this: “A firm has estimated that the cost of improving the
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safety of one of its products is $30 million. However, the firm believes that improving the
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safety of the product will only save $20 million in product liability claims. What should the
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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
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because of 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
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management believes that it can improve the profitability of the firm so that the share price
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will exceed $35, then they should fight the offer from the outside company. If management
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believes that this bidder or other unidentified bidders will actually pay more than $35 per
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share to acquire the company, then they should still fight the offer. However, if the current
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management cannot increase the value of the firm beyond the bid price, and no other higher
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bids come in, then management is not acting in the interests of the shareholders by fighting
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the offer. Since current managers often lose their jobs when the corporation is acquired, poorly
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monitored managers have an incentive to fight corporate takeovers in situations such as this.
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15. We would expect agency problems to be less severe in other countries, primarily due to the
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relatively small percentage of individual ownership. Fewer individual owners should reduce the
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number of diverse opinions concerning corporate goals. The high percentage of institutional
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ownership might lead to a higher degree of agreement between owners and managers on
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decisions concerning risky projects. In addition, institutions may be better able to implement
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effective monitoring mechanisms on managers than can individual owners, based on the
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institutions’ deeper resources and experiences with their own management. The increase in
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institutional ownership of stock in the United States and the growing activism of these large
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shareholder groups may lead to a reduction in agency problems for U.S. corporations and a
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more efficient market for corporate control.
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