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Solution Manual for Principles of Corporate Finance 14th Edition by Richard Brealey, Stewart Myers, Franklin Allen and Alex Edmans (All Chapter 1 - 34) | , Complete Solution |Grade A+.R335,69
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Solution Manual for Principles of Corporate Finance 14th Edition by Richard Brealey, Stewart Myers, Franklin Allen and Alex Edmans (All Chapter 1 - 34) | , Complete Solution |Grade A+.
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Principles Of Corporate Finance 14th Edition
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Solution Manual for Principles of Corporate Finance 14th Edition by Richard Brealey, Stewart Myers, Franklin Allen and Alex Edmans (All Chapter 1 - 34) | , Complete Solution |Grade A+.Solution Manual for Principles of Corporate Finance 14th Edition by Richard Brealey, Stewart Myers, Franklin Allen ...
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, CHAPTER 1 il.
Introduction to Corporate Finance il. il. il.
The values shown in the solutions may be rounded for display purposes. However, the answers
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werederived using a spreadsheet without any intermediate rounding.
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Answers to Problem Sets il. il. il.
1. a. real
b. executive airplanes il.
c. brand names il.
d. financial
e. bonds
*f. investment or capital expenditure il. il. il.
*g. capital budgeting or investment il. il. il.
h. financing
*Note that f and g are interchangeable in the question.
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Est time: 01-05
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2. A trademark, a factory, undeveloped land, and your work force (c, d, e, and g) are all real
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assets. Real assets are identifiable as items with intrinsic value. The others in the list are
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financial assets,that is, these assets derive value because of a contractual claim.
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Est time: 01-05
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3. a. Financial assets, such as stocks or bank loans, are claims held by investors. il. il. il. il. il. il. il. il. il. il. il. il .
Corporations sell financial assets to raise the cash to invest in real assets such as
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plantand equipment. Some real assets are intangible.
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b. Capital expenditure means investment in real assets. Financing means raising the
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cashfor this investment.
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c. The shares of public corporations are traded on stock exchanges and can be
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purchasedby a wide range of investors. The shares of closely held corporations are
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not publicly traded and are held by a small group of private investors.
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d. Unlimited liability: Investors are responsible for all the firm‘s debts. A sole proprietor
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hasunlimited liability. Investors in corporations have limited liability. They can lose
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their investment, but no more.
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,4. Items c and d apply to corporations. Because corporations have perpetual life, ownership can
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betransferred without affecting operations, and managers can be fired with no effect on
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ownership. Other forms of business may have unlimited liability and limited life.
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Est time: 01-05
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5. Separation of ownership facilitates the key attributes of a corporation, including limited liability
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forinvestors, transferability of ownership, a separate legal personality of the corporation, and
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delegated centralized management. These four attributes provide substantial benefit for
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investors, including the ability to diversify their investment among many uncorrelated
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returns—a very valuable tool explored in later chapters. Also, these attributes allow investors to
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quickly exit,enter, or short sell an investment, thereby generating an active liquid market for
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corporations.
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However, these positive aspects also introduce substantial negative externalities as well. The
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separation of ownership from management typically leads to agency problems, where
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managersprefer to consume private perks or make other decisions for their private benefit—
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rather than maximize shareholder wealth. Shareholders tend to exercise less oversight of each
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individual investment as their diversification increases. Finally, the corporation‘s separate legal
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personalitymakes it difficult to enforce accountability if they externalize costs onto society.
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6. Shareholders will only vote to maximize shareholder wealth. Shareholders can modify their il. il. il. il. il. il. il. il. il. il. il.
pattern of consumption through borrowing and lending, match risk preferences, and
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hopefullybalance their own checkbooks (or hire a qualified professional to help them with
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these tasks).
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7. If the investment increases the firm‘s wealth, it increases the firm‘s share value. Ms.
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Espinozacould then sell some or all these more valuable shares to provide for her retirement
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income.
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8. a. Assuming that the encabulator market is risky, an 8% expected return il. il. il. il. il. il. il. il. il. il.
onthe F&H encabulator investments may be inferior to a 4% return on
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U.S.
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government securities, depending on the relative risk between the two assets. il. il. il. il. il. il. il. il. il. il.
b. Unless the financial assets are as safe as U.S. government securities, their cost of
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capitalwould be higher. The CFO could consider expected returns on assets with
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similar risk.
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Est time: 06-10
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9. Managers would act in shareholders‘ interests because they have a legal duty to act in their
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interests. Managers may also receive compensation— bonuses, stock, and option payouts
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with value tied (roughly) to firm performance. Managers may fear personal reputational damage
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from not acting in shareholders‘ interests. And managers can be fired by the board of directors
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(electedby shareholders). If managers still fail to act in shareholders‘ interests, shareholders
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may sell their shares, lowering the stock price and potentially creating the possibility of a
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, takeover, which can again lead to changes in the board of directors and senior management.
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Est time: 01-05
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