Solutions for Fundamentals Of Corporate Finance, 11th Canadian Edition Ross (All Chapters included)
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omplete Solutions Manual for Fundamentals Of Corporate Finance, 11th Canadian Edition by Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan, J. Ari Pandes, Thomas Holloway ; ISBN13: 9781260881387. (Full Chapters included Chapter 1 to 26). Mini Cases solutions included...
1. Introduction ...
Fundamentals Of Corporate Finance
11th Canadian Edition
by Stephen A. Ross
Complete Chapter Solutions Manual
are included (Ch 1 to 26)
** Immediate Download
** Swift Response
** All Chapters included
** Mini Cases Solutions
** Excel file Solutions
,CHAPTER 1
INTRODUCTION TO CORPORATE FINANCE
Learning Objectives
LO1 The basic types of financial management decisions and the role of the financial manager.
LO2 The financial implications of the different forms of business organization.
LO3 The goal of financial management.
LO4 The conflicts of interests that can arise between managers and owners.
LO5 The roles of financial institutions and markets.
LO6 Types of financial institutions.
LO7 Trends in financial markets.
Answers to Concepts Review and Critical Thinking Questions
1. (LO1) Capital budgeting (deciding on whether to expand a manufacturing plant), capital structure
(deciding whether to issue new equity and use the proceeds to retire outstanding debt), and working
capital management (modifying the firm’s credit collection policy with its customers). (LO1)
2. (LO2) Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, hard to raise
capital funds. Some advantages: simpler, less regulation, the owners are also the managers.
3. (LO2) The primary disadvantage of the corporate form is the double taxation to shareholders of
distributed earnings and dividends. Some advantages include: limited liability, ease of transferability,
ability to raise capital, unlimited life, and so forth.
4. (LO4) The treasurer’s office and the controller’s office are the two primary organizational groups that
report directly to the chief financial officer. The controller’s office handles cost and financial
accounting, tax management, and management information systems, while the treasurer’s office is
responsible for cash and credit management, capital budgeting, and financial planning. Therefore, the
study of corporate finance is concentrated within the treasury group’s functions.
5. (LO3) To maximize the current market value (share price) of the equity of the firm (whether it’s
publicly-traded or not).
6. (LO4) In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders
elect the directors of the corporation, who in turn appoint the firm’s management. This separation of
ownership from control in the corporate form of organization is what causes agency problems to exist.
Management may act in its own or someone else’s best interests, rather than those of the shareholders.
If such events occur, they may contradict the goal of maximizing the share price of the equity of the
firm.
7. (LO5) A primary market transaction. A secondary market transaction would entail the sale between
two 3rd parties (i.e. not the corporation).
8. (LO5) In auction markets like the Toronto Stock Exchange (TSX), brokers and agents meet at a central
location (the exchange) to match buyers and sellers of assets. Physical locations for stock markets are
disappearing as trading becomes more electronic. Dealer markets like Nasdaq consist of dealers
operating at dispersed locales who buy and sell assets themselves, communicating with other dealers
either electronically or literally over-the-counter. Dealer markets are less transparent than auction
markets where trades are reported publicly almost immediately. The auction market run by the TSX is
where the stocks of larger Canadian companies are traded; the TSX also operates a dealer market called
the Venture Exchange for companies too small to qualify for the TSX auction exchange.
, 9. (LO3) Such organizations frequently pursue social or political missions, so many different goals are
conceivable. One goal that is often cited is revenue minimization; i.e., provide whatever goods and
services are offered at the lowest possible cost to society. Another would be to best serve the maximum
possible number of stakeholders at the lowest cost. A better approach might be to observe that even a
not-for-profit business has equity. Thus, one answer is that the appropriate goal is to maximize the value
of the equity.
10. (LO3) Presumably, the current stock value reflects the risk, timing, and magnitude of all future cash
flows, both short-term and long-term. If this is correct, then the statement is false.
11. (LO3) An argument can be made either way. At the one extreme, we could argue that in a market
economy, all of these things are priced. There is thus an optimal level of, for example, ethical and/or
illegal behavior, and the framework of stock valuation explicitly includes these. At the other extreme,
we could argue that these are non-economic phenomena and are best handled through the political
process. A classic (and highly relevant) thought question that illustrates this debate goes something like
this: “A firm has estimated that the cost of improving the safety of one of its products is $30 million.
However, the firm believes that improving the safety of the product will only save $20 million in
product liability claims and lost customer goodwill. What should the firm do?”
12. (LO3) The goal will be the same, but the best course of action toward that goal may be different
because of differing social, political, and economic institutions.
13. (LO4) The goal of management should be to maximize the share price for the current shareholders. If
management believes that it can improve the profitability of the firm so that the share price will exceed
$35, then they should fight the offer from the outside company. If management believes that this bidder
or other unidentified bidders will actually pay more than $35 per share to acquire the company, then
they should still fight the offer. However, if the current management cannot increase the value of the
firm beyond the bid price, and no other higher bids come in, then management is not acting in the
interests of the shareholders by fighting the offer. Since current managers often lose their jobs when the
corporation is acquired, poorly monitored managers have an incentive to fight corporate takeovers in
situations such as this.
14. (LO4) We would expect agency problems to be less severe in other countries, primarily due to the
relatively small percentage of individual ownership. Fewer individual owners means that each
individual owner has a greater incentive to monitor and control the firm—i.e. there is less free-riding.
The high percentage of institutional ownership might lead to a higher degree of agreement between
owners and managers on decisions concerning risky projects. In addition, institutions may be better able
to implement effective monitoring mechanisms on managers than can individual owners, based on the
institutions’ deeper resources and experiences with their own management. The increase in institutional
ownership of stock in Canada and in the United States and the growing activism of these large
shareholder groups may lead to a reduction in agency problems for Canadian and U.S. corporations and
a more efficient market for corporate control.
15. (LO5) Major institutions:
Chartered banks -accept deposits and issue commercial loans, corporate loans, personal loans and
mortgages.
Trust companies-accept deposits and make loans, but also engage in fiduciary activities such as
managing assets for estates, registered retirement savings plans, etc.
Investment dealers -non-depository institutions that assist firms in issuing new securities.
Insurance companies -engage in indirect financing by accepting funds in a form similar to a deposit and
making loans.
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