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(decidingE
whetherEtoEissueEnewEequityEandEuseEtheEproceedsEtoEretireEoutstandingEdebt),EandEworkingEcapitalE
managementE(modifyingEtheEfirm‘sEcreditEcollectionEpolicyEwithEitsEcustomers).
2. Disadvantages:EunlimitedEliability,ElimitedElife,EdifficultyEinEtransferringEownership,EhardEtoEraiseEc
apitalEfunds.ESomeEadvantages:Esimpler,ElessEregulation,EtheEownersEareEalsoEtheEmanagers,Esometi
mesEpersonalEtaxEratesEareEbetterEthanEcorporateEtaxErates.
3. TheEprimaryEdisadvantageEofEtheEcorporateEformEisEtheEdoubleEtaxationEtoEshareholdersEofEdistribut
edEearningsEandEdividends.ESomeEadvantagesEinclude:ElimitedEliability,EeaseEofEtransferability,Eabilit
yEtoEraiseEcapital,EunlimitedElife,EandEsoEforth.
4. InEresponseEtoESarbanes-
Oxley,EsmallEfirmsEhaveEelectedEtoEgoEdarkEbecauseEofEtheEcostsEofEcompliance.ETheEcostsEtoEcomp
lyEwithESarboxEcanEbeEseveralEmillionEdollars,EwhichEcanEbeEaElargeEpercentageE ofE aE smallE firmsE p
rofits.E AE majorE costE ofE goingE darkE isE lessE accessE toE capital.E SinceE theEfirmEisEnoElongerEpubliclyE
traded,EitEcanEnoElongerEraiseEmoneyEinEtheEpublicEmarket.EAlthoughEtheEcompanyEwillEstillEhaveEac
cessEtoEbankEloansEandEtheEprivateEequityEmarket,EtheEcostsEassociatedEwithEraisingEfundsEinEtheseE
marketsEareEusuallyEhigherEthanEtheEcostsEofEraisingEfundsEinEtheEpublicEmarket.
5. TheE treasurer‘sE officeE andE theE controller‘sE officeE areE theE twoE primaryE organizationalE groupsE t
hatEreportEdirectlyEtoEtheEchiefEfinancialEofficer.ETheEcontroller‘sEofficeEhandlesEcostEandEfinancialEa
ccounting,EtaxEmanagement,EandEmanagementEinformationEsystems,EwhileEtheEtreasurer‘sEofficeEisEr
esponsibleE forE cashE andE creditE management,E capitalE budgeting,E andE financialE planning.E Therefor
e,EtheEstudyEofEcorporateEfinanceEisEconcentratedEwithinEtheEtreasuryEgroup‘sEfunctions.
6. ToEmaximizeEtheEcurrentEmarketEvalueE(shareEprice)EofEtheEequityEofEtheEfirmE(whetherEit‘sEpublicl
y-EtradedEorEnot).
7. InEtheEcorporateEformEofEownership,EtheEshareholdersEareEtheEownersEofEtheEfirm.ETheEshareholders
EelectEtheEdirectorsEofEtheEcorporation,EwhoEinEturnEappointEtheEfirm‘sEmanagement.EThisEseparation
EofEownershipEfromEcontrolEinEtheEcorporateEformEofEorganizationEisEwhatEcausesEagencyEproblemsE
toEexist.EManagementEmayEactEinEitsEownEorEsomeoneEelse‘sEbestEinterests,EratherEthanEthoseEofEtheE
shareholders.EIfEsuchEeventsEoccur,EtheyEmayEcontradictEtheEgoalEofEmaximizingEtheEshareEpriceEofE
theEequityEofEtheEfirm.
8. AEprimaryEmarketEtransaction.
, B-2E SOLUTIONS
9. InEauctionEmarketsElikeEtheENYSE,EbrokersEandEagentsEmeetEatEaEphysicalElocationE(theEexchange)Et
oEmatchEbuyersEandEsellersEofEassets.EDealerEmarketsElikeENASDAQEconsistEofEdealersEoperatingEat
EdispersedElocalesEwhoEbuyEandEsellEassetsEthemselves,EcommunicatingEwithEotherEdealersEeitherEel
ectronicallyEorEliterallyEover-the-counter.
10. SuchEorganizationsEfrequentlyEpursueEsocialEorEpoliticalEmissions,EsoEmanyEdifferentEgoalsEareEconc
eivable.EOneEgoalEthatEisEoftenEcitedEisErevenueEminimization;Ei.e.,EprovideEwhateverEgoodsEandEser
vicesEareEofferedEatEtheElowestEpossibleEcostEtoEsociety.EAEbetterEapproachEmightEbeEtoEobserveEthat
EevenEaEnot-for-
profitEbusinessEhasEequity.EThus,EoneEanswerEisEthatEtheEappropriateEgoalEisE toEmaximizeEtheEvalue
EofEtheEequity.
11. Presumably,EtheEcurrentEstockEvalueEreflectsEtheErisk,Etiming,EandEmagnitudeEofEallEfutureEcashEflo
ws,EbothEshort-termEandElong-term.EIfEthisEisEcorrect,EthenEtheEstatementEisEfalse.
12. AnEargumentEcanEbeEmadeEeitherEway.EAtEtheEoneEextreme,EweEcouldEargueEthatEinEaEmarketEecono
my,EallEofEtheseEthingsEareEpriced.EThereEisEthusEanEoptimalElevelEof,EforEexample,EethicalEand/orEill
egalEbehavior,EandEtheEframeworkEofEstockEvaluationEexplicitlyEincludesEthese.EAtEtheEotherEextrem
e,EweEcouldEargueEthatEtheseEareEnon-
economicEphenomenaEandEareEbestEhandledEthroughEtheEpoliticalEprocess.EAEclassicE(andEhighlyErel
evant)EthoughtEquestionEthatEillustratesEthisEdebateEgoesEsomethingElikeEthis:E―AEfirmEhasEestimated
EthatEtheEcostEofEimprovingEtheEsafetyEofEoneEofEitsEproductsEisE$30Emillion.EHowever,EtheEfirmEbeli
evesEthatEimprovingEtheEsafetyEofEtheEproductEwillEonlyEsaveE$20EmillionEinEproductEliabilityEclaims
.EWhatEshouldEtheEfirmEdo?‖
13. TheEgoalEwillEbeEtheEsame,EbutEtheEbestEcourseEofEactionEtowardEthatEgoalEmayEbeEdifferentEbecaus
eEofEdifferingEsocial,Epolitical,EandEeconomicEinstitutions.
14. TheEgoalEofEmanagementEshouldEbeEtoEmaximizeEtheEshareEpriceEforEtheEcurrentEshareholders.EIfEm
anagementEbelievesEthatEitEcanEimproveEtheEprofitabilityEofEtheEfirmEsoEthatEtheEshareEpriceEwillEexc
eedE$35,EthenEtheyEshouldEfightEtheEofferEfromEtheEoutsideEcompany.EIfEmanagementEbelievesEthatEt
hisEbidderEorEotherEunidentifiedEbiddersEwillEactuallyEpayEmoreEthanE$35EperEshareEtoEacquireEtheEc
ompany,EthenEtheyEshouldEstillEfightEtheEoffer.EHowever,EifEtheEcurrentEmanagementEcannotEincreas
eEtheEvalueEofEtheEfirmEbeyondEtheEbidEprice,EandEnoEotherEhigherEbidsEcomeEin,EthenEmanagementE
isEnotEactingEinEtheEinterestsEofEtheEshareholdersEbyEfightingEtheEoffer.ESinceEcurrentEmanagersEofte
nEloseEtheirEjobsEwhenEtheEcorporationEisEacquired,EpoorlyEmonitoredEmanagersEhaveEanEincentiveEt
oEfightEcorporateEtakeoversEinEsituationsEsuchEasEthis.
15. WeEwouldEexpectEagencyEproblemsEtoEbeElessEsevereEinEotherEcountries,EprimarilyEdueEtoEtheErelati
velyEsmallEpercentageEofEindividualEownership.EFewerEindividualEownersEshouldEreduceEtheEnumber
EofEdiverseEopinionsEconcerningEcorporateEgoals.ETheEhighEpercentageEofEinstitutionalEownershipEm
ightEleadEtoEaEhigherEdegreeEofEagreementEbetweenEownersEandEmanagersEonEdecisionsEconcerningE
riskyEprojects.EInEaddition,EinstitutionsEmayEbeEbetterEableEtoEimplementEeffectiveEmonitoringEmech
anismsEonEmanagersEthanEcanEindividualEowners,EbasedEonEtheEinstitutions‘EdeeperEresourcesEandEe
xperiencesEwithEtheirEownEmanagement.ETheEincreaseEinEinstitutionalEownershipEofEstockEinEtheEUn
itedEStatesEandEtheEgrowingEactivismEofEtheseElargeEshareholderEgroupsEmayEleadEtoEaEreductionEinE
agencyEproblemsEforEU.S.EcorporationsEandEaEmoreEefficientEmarketEforEcorporateEcontrol.
