Solutions Manual g
Fundamentals of Corporate Finance 13th edition
g g g g g g
Ross, Westerfield, and Jordan
g g g
Preparedgby
gBradgJorda
n
UniversitygofgFlorida
JoegSmoliragBelmo
ntgUniversity
,CHAPTER 1 g
INTRODUCTION TO CORPORATE FINAN g g g
CE
AnswersgtogConceptsgReviewgandgCriticalgThinkinggQuestions
1. Capitalgbudgetingg(decidinggwhethergtogexpandgagmanufacturinggplant),gcapitalgstructureg(decidingg
whethergtogissuegnewgequitygandgusegthegproceedsgtogretiregoutstandinggdebt),gandgworkinggcapitalg
managementg(modifyinggthegfirm‘sgcreditgcollectiongpolicygwithgitsgcustomers).
2. Disadvantages:gunlimitedgliability,glimitedglife,gdifficultygingtransferringgownership,gdifficultygingrai
singgcapitalgfunds.gSomegadvantages:gsimpler,glessgregulation,gthegownersgaregalsogthegmanagers,gso
metimesgpersonalgtaxgratesgaregbettergthangcorporategtaxgrates.
3. Thegprimarygdisadvantagegofgthegcorporategformgisgthegdoublegtaxationgtogshareholdersgofgdistribute
dgearningsgandgdividends.gSomegadvantagesginclude:glimitedgliability,geasegofgtransferability,gability
gtograisegcapital,gandgunlimitedglife.
4. IngresponsegtogSarbanes-
Oxley,gsmallgfirmsghavegelectedgtoggogdarkgbecausegofgthegcostsgofgcompliance.gThegcostsgtogcompl
ygwithgSarboxgcangbegseveralgmilliongdollars,gwhichgcangbegaglargegpercentagegofgagsmallgfirm‘sgpr
ofits.gAgmajorgcostgofggoinggdarkgisglessgaccessgtogcapital.gSincegthegfirmgisgnoglongergpubliclygtrad
ed,gitgcangnoglongergraisegmoneygingthegpublicgmarket.gAlthoughgthegcompanygwillgstillghavegaccess
gtogbankgloansgandgthegprivategequitygmarket,gthegcostsgassociatedgwithgraisinggfundsgingthesegmark
etsgaregusuallyghighergthangthegcostsgofgraisinggfundsgingthegpublicgmarket.
5. Thegtreasurer‘sgofficegandgthegcontroller‘sgofficegaregthegtwogprimarygorganizationalggroupsgthatg re
portgdirectlygtogthegchiefgfinancialgofficer.gThegcontroller‘sgofficeghandlesgcostgandgfinancialgaccoun
ting,gtaxgmanagement,gandgmanagementginformationgsystems,gwhilegthegtreasurer‘sgofficegisgrespon
siblegforgcashgandgcreditgmanagement,gcapitalgbudgeting,gandgfinancialgplanning.gTherefore,g thegstu
dygofgcorporategfinancegisgconcentratedgwithingthegtreasuryggroup‘sgfunctions.
6. Togmaximizegthegcurrentgmarketgvalueg(sharegprice)gofgthegequitygofgthegfirmg(whethergit‘sgpublicly
gtradedgorgnot).
7. Ingthegcorporategformgofgownership,gthegshareholdersgaregthegownersgofgthegfirm.gThegshareholdersg
electgthegdirectorsgofgthegcorporation,gwhogingturngappointgthegfirm‘sgmanagement.gThisgseparationg
ofgownershipgfromgcontrolgingthegcorporategformgofgorganizationgisgwhatgcausesgagencygproblemsgt
ogexist.gManagementgmaygactgingitsgowngorgsomeonegelse‘sgbestginterests,grathergthangthosegofgthegs
hareholders.gIfgsuchgeventsgoccur,gtheygmaygcontradictgtheggoalgofgmaximizinggthegsharegpricegofgth
egequitygofgthegfirm.
8. Agprimarygmarketgtransaction.
,2g SOLUTIONSgMANUAL
9. IngauctiongmarketsglikegthegNYSE,gbrokersgandgagentsgmeetgatgagphysicalglocationg(thegexchange)gt
ogmatchgbuyersgandgsellersgofgassets.gDealergmarketsglikegNASDAQgconsistgofgdealersgoperatinggatg
dispersedglocalesgwhogbuygandgsellgassetsgthemselves,gcommunicatinggwithgothergdealersgeithergelec
tronicallygorgliterallygover-the-counter.
10. Suchgorganizationsgfrequentlygpursuegsocialgorgpoliticalgmissions,gsogmanygdifferentggoalsgaregconc
eivable.gOneggoalgthatgisgoftengcitedgisgrevenuegminimization;gthatgis,gprovidegwhateverggoodsg andg
servicesgaregofferedgatgtheglowestgpossiblegcostgtogsociety.gAgbettergapproachgmightgbegtogobservegt
hatgevengagnot-for-
profitgbusinessghasgequity.gThus,goneganswergisgthatgthegappropriateggoalgisgtogmaximizegthegvalueg
ofgthegequity.
11. Presumably,gthegcurrentgstockgvaluegreflectsgthegrisk,gtiming,gandgmagnitudegofgallgfuturegcashgflow
s,gbothgshort-termgandglong-term.gIfgthisgisgcorrect,gthengthegstatementgisgfalse.
12. Angargumentgcangbegmadegeithergway.gAtgthegonegextreme,gwegcouldgarguegthatgingagmarketgecono
my,gallgofgthesegthingsgaregpriced.gTheregisgthusgangoptimalglevelgof,gforgexample,gethicalgand/orgille
galgbehavior,gandgthegframeworkgofgstockgvaluationgexplicitlygincludesgthese.gAtgthegothergextreme,
gwegcouldgarguegthatgthesegaregnoneconomicgphenomenagandgaregbestghandledgthroughgthegpoliticalg
process.gAgclassicg(andghighlygrelevant)gthoughtgquestiongthatgillustratesgthisgdebateggoesgsomething
glikegthis:g―Agfirmghasgestimatedgthatgthegcostgofgimprovinggthegsafetygofgonegofgitsgproductsgisg$3
0gmillion.gHowever,gthegfirmgbelievesgthatgimprovinggthegsafetygofgthegproductgwillgonlygsaveg$20g
milliongingproductgliabilitygclaims.gWhatgshouldgthegfirmgdo?‖
13. Theggoalgwillgbegthegsame,gbutgthegbestgcoursegofgactiongtowardgthatggoalgmaygbegdifferentgbecause
gofgdifferinggsocial,gpolitical,gandgeconomicginstitutions.
14. Theggoalgofgmanagementgshouldgbegtogmaximizegthegsharegpricegforgthegcurrentgshareholders.gIfgma
nagementgbelievesgthatgitgcangimprovegthegprofitabilitygofgthegfirmgsogthatgthegsharegpricegwillgexce
edg$35,gthengtheygshouldgfightgthegoffergfromgthegoutsidegcompany.gIfgmanagementgbelievesgthatgthi
sgbiddergorgothergunidentifiedgbiddersgwillgactuallygpaygmoregthang$35gpergsharegtogacquiregthegcom
pany,gthengtheygshouldgstillgfightgthegoffer.gHowever,gifgthegcurrentgmanagementgcannotgincreasegth
egvaluegofgthegfirmgbeyondgthegbidgprice,gandgnogotherghighergbidsgcomegin,gthengmanagementgisgno
tgactinggingtheginterestsgofgthegshareholdersgbygfightinggthegoffer.gSincegcurrentgmanagersgoftenglose
gtheirgjobsgwhengthegcorporationgisgacquired,gpoorlygmonitoredgmanagersghavegangincentivegtogfight
gcorporategtakeoversgingsituationsgsuchgasgthis.
15. Wegwouldgexpectgagencygproblemsgtogbeglessgseveregingcountriesgwithgagrelativelygsmallgpercentage
g ofgindividualgownership.gFewergindividualgownersgshouldgreducegthegnumbergofgdiversegopinionsg
concerninggcorporateggoals.gTheghighgpercentagegofginstitutionalgownershipgmightgleadgtogaghigherg
degreegofgagreementgbetweengownersgandgmanagersgongdecisionsgconcerninggriskygprojects.gIngaddi
tion,ginstitutionsgmaygbegbettergablegtogimplementgeffectivegmonitoringgmechanismsgongmanagersgth
angcangindividualgowners,gbasedgongtheginstitutions‘gdeepergresourcesgandgexperiencesgwithgtheirgo
wngmanagement.gThegincreaseginginstitutionalgownershipgofgstockgingthegUnitedgStatesgandgtheggro
winggactivismgofgtheseglargegshareholderggroupsgmaygleadgtogagreductiongingagencygproblemsgfor
U.S.gcorporationsgandgagmoregefficientgmarketgforgcorporategcontrol.
, CHAPTERg2g-g 3
16. Howgmuchgisgtoogmuch?gWhogisgworthgmore,gMarkgParkergorgLeBrongJames?gThegsimplestganswer
gisgthatgtheregisgagmarket gforgexecutivesgjustgasgtheregisgforgallgtypesgofglabor.gExecutivegcompensati
ongisgthegpricegthatgclearsgthegmarket.gThegsamegisgtruegforgathletesgandgperformers.gHavinggsaidgth
at,gonegaspectgofgexecutivegcompensationgdeservesgcomment.gAgprimarygreasongexecutivegcompens
ationghasggrowngsogdramaticallygisgthatgcompaniesghavegincreasinglygmovedgtogstock-
basedgcompensation.g Suchgmovementgisgobviouslygconsistentgwithgthegattemptgtogbettergaligngstock
holdergandgmanagementginterests.gIngrecentgyears,gstockgpricesghavegsoared,gsogmanagementghasgcle
anedgup.gItgisgsometimesgarguedgthatgmuchgofgthisgrewardgisgduegtogrisinggstockgpricesginggeneral,gn
otgmanagerialgperformance.gPerhapsgingthegfuture,gexecutivegcompensationgwillgbegdesignedgtogrew
ardgonlygdifferentialgperformance,gthatgis,gstockgpricegincreasesgingexcessgofggeneralgmarketgincreas
es.
CHAPTER 2 g
FINANCIAL STATEMENTS, TAXES, AND CAS
g g g g
H FLOW
g
AnswersgtogConceptsgReviewgandgCriticalgThinkinggQuestions
1. Liquiditygmeasuresghowgquicklygandgeasilygangassetgcangbegconvertedgtogcashgwithoutgsignificantglo
ssgingvalue.gIt‘sgdesirablegforgfirmsgtoghaveghighgliquiditygsogthatgtheyghavegaglargegfactorgofgsafetyg
ingmeetinggshort-
termgcreditorgdemands.gHowever,gsincegliquiditygalsoghasgangopportunitygcostgassociatedgwithgit—
namelygthatghighergreturnsgcanggenerallygbegfoundgbyginvestinggthegcashgintogproductivegassets—
lowgliquidityglevelsgaregalsogdesirablegtogthegfirm.gIt‘sgupgtogthegfirm‘sgfinancialgmanagementgstaffgt
ogfindgagreasonablegcompromisegbetweengthesegopposinggneeds.
2. Thegrecognitiongandgmatchinggprinciplesgingfinancialgaccountinggcallgforgrevenues,gandgthegcostsgas
sociatedgwithgproducinggthosegrevenues,gtogbeg―booked‖gwhengthegrevenuegprocessgisgessentiallygc
omplete,gnotgnecessarilygwhengthegcashgisgcollectedgorgbillsgaregpaid.gNotegthatgthisgwaygisgnotgnece
ssarilygcorrect;git‘sgthegwaygaccountantsghavegchosengtogdogit.
3. Historicalgcostsgcangbegobjectivelygandgpreciselygmeasuredgwhereasgmarketgvaluesgcangbegdifficultgt
ogestimate,gandgdifferentganalystsgwouldgcomegupgwithgdifferentgnumbers.gThus,gtheregisgagtrade-
offgbetweengrelevanceg(marketgvalues)gandgobjectivityg(bookgvalues).
4. Depreciationgisgagnoncashgdeductiongthatgreflectsgadjustmentsgmadegingassetgbookgvaluesgingaccorda
ncegwithgthegmatchinggprinciplegingfinancialgaccounting.gInterestgexpensegisgagcashgoutlay,gbutgit‘sga
gfinancinggcost,gnotgangoperatinggcost.
5. Marketgvaluesgcangnevergbegnegative.gImaginegagsharegofgstockgsellinggforg–
$20.gThisgwouldgmeang thatgifgyougplacedgangordergforg100gshares,gyougwouldggetgthegstockgalongg
withgagcheckgforg$2,000.gHowgmanygsharesgdogyougwantgtogbuy?gMoreggenerally,gbecausegofgcorpo
rategandgindividualgbankruptcyglaws,gnetgworthgforgagpersongorgagcorporationgcannotgbegnegative,gi
mplyinggthatgliabilitiesgcannotgexceedgassetsgingmarketgvalue.
Fundamentals of Corporate Finance 13th edition
g g g g g g
Ross, Westerfield, and Jordan
g g g
Preparedgby
gBradgJorda
n
UniversitygofgFlorida
JoegSmoliragBelmo
ntgUniversity
,CHAPTER 1 g
INTRODUCTION TO CORPORATE FINAN g g g
CE
AnswersgtogConceptsgReviewgandgCriticalgThinkinggQuestions
1. Capitalgbudgetingg(decidinggwhethergtogexpandgagmanufacturinggplant),gcapitalgstructureg(decidingg
whethergtogissuegnewgequitygandgusegthegproceedsgtogretiregoutstandinggdebt),gandgworkinggcapitalg
managementg(modifyinggthegfirm‘sgcreditgcollectiongpolicygwithgitsgcustomers).
2. Disadvantages:gunlimitedgliability,glimitedglife,gdifficultygingtransferringgownership,gdifficultygingrai
singgcapitalgfunds.gSomegadvantages:gsimpler,glessgregulation,gthegownersgaregalsogthegmanagers,gso
metimesgpersonalgtaxgratesgaregbettergthangcorporategtaxgrates.
3. Thegprimarygdisadvantagegofgthegcorporategformgisgthegdoublegtaxationgtogshareholdersgofgdistribute
dgearningsgandgdividends.gSomegadvantagesginclude:glimitedgliability,geasegofgtransferability,gability
gtograisegcapital,gandgunlimitedglife.
4. IngresponsegtogSarbanes-
Oxley,gsmallgfirmsghavegelectedgtoggogdarkgbecausegofgthegcostsgofgcompliance.gThegcostsgtogcompl
ygwithgSarboxgcangbegseveralgmilliongdollars,gwhichgcangbegaglargegpercentagegofgagsmallgfirm‘sgpr
ofits.gAgmajorgcostgofggoinggdarkgisglessgaccessgtogcapital.gSincegthegfirmgisgnoglongergpubliclygtrad
ed,gitgcangnoglongergraisegmoneygingthegpublicgmarket.gAlthoughgthegcompanygwillgstillghavegaccess
gtogbankgloansgandgthegprivategequitygmarket,gthegcostsgassociatedgwithgraisinggfundsgingthesegmark
etsgaregusuallyghighergthangthegcostsgofgraisinggfundsgingthegpublicgmarket.
5. Thegtreasurer‘sgofficegandgthegcontroller‘sgofficegaregthegtwogprimarygorganizationalggroupsgthatg re
portgdirectlygtogthegchiefgfinancialgofficer.gThegcontroller‘sgofficeghandlesgcostgandgfinancialgaccoun
ting,gtaxgmanagement,gandgmanagementginformationgsystems,gwhilegthegtreasurer‘sgofficegisgrespon
siblegforgcashgandgcreditgmanagement,gcapitalgbudgeting,gandgfinancialgplanning.gTherefore,g thegstu
dygofgcorporategfinancegisgconcentratedgwithingthegtreasuryggroup‘sgfunctions.
6. Togmaximizegthegcurrentgmarketgvalueg(sharegprice)gofgthegequitygofgthegfirmg(whethergit‘sgpublicly
gtradedgorgnot).
7. Ingthegcorporategformgofgownership,gthegshareholdersgaregthegownersgofgthegfirm.gThegshareholdersg
electgthegdirectorsgofgthegcorporation,gwhogingturngappointgthegfirm‘sgmanagement.gThisgseparationg
ofgownershipgfromgcontrolgingthegcorporategformgofgorganizationgisgwhatgcausesgagencygproblemsgt
ogexist.gManagementgmaygactgingitsgowngorgsomeonegelse‘sgbestginterests,grathergthangthosegofgthegs
hareholders.gIfgsuchgeventsgoccur,gtheygmaygcontradictgtheggoalgofgmaximizinggthegsharegpricegofgth
egequitygofgthegfirm.
8. Agprimarygmarketgtransaction.
,2g SOLUTIONSgMANUAL
9. IngauctiongmarketsglikegthegNYSE,gbrokersgandgagentsgmeetgatgagphysicalglocationg(thegexchange)gt
ogmatchgbuyersgandgsellersgofgassets.gDealergmarketsglikegNASDAQgconsistgofgdealersgoperatinggatg
dispersedglocalesgwhogbuygandgsellgassetsgthemselves,gcommunicatinggwithgothergdealersgeithergelec
tronicallygorgliterallygover-the-counter.
10. Suchgorganizationsgfrequentlygpursuegsocialgorgpoliticalgmissions,gsogmanygdifferentggoalsgaregconc
eivable.gOneggoalgthatgisgoftengcitedgisgrevenuegminimization;gthatgis,gprovidegwhateverggoodsg andg
servicesgaregofferedgatgtheglowestgpossiblegcostgtogsociety.gAgbettergapproachgmightgbegtogobservegt
hatgevengagnot-for-
profitgbusinessghasgequity.gThus,goneganswergisgthatgthegappropriateggoalgisgtogmaximizegthegvalueg
ofgthegequity.
11. Presumably,gthegcurrentgstockgvaluegreflectsgthegrisk,gtiming,gandgmagnitudegofgallgfuturegcashgflow
s,gbothgshort-termgandglong-term.gIfgthisgisgcorrect,gthengthegstatementgisgfalse.
12. Angargumentgcangbegmadegeithergway.gAtgthegonegextreme,gwegcouldgarguegthatgingagmarketgecono
my,gallgofgthesegthingsgaregpriced.gTheregisgthusgangoptimalglevelgof,gforgexample,gethicalgand/orgille
galgbehavior,gandgthegframeworkgofgstockgvaluationgexplicitlygincludesgthese.gAtgthegothergextreme,
gwegcouldgarguegthatgthesegaregnoneconomicgphenomenagandgaregbestghandledgthroughgthegpoliticalg
process.gAgclassicg(andghighlygrelevant)gthoughtgquestiongthatgillustratesgthisgdebateggoesgsomething
glikegthis:g―Agfirmghasgestimatedgthatgthegcostgofgimprovinggthegsafetygofgonegofgitsgproductsgisg$3
0gmillion.gHowever,gthegfirmgbelievesgthatgimprovinggthegsafetygofgthegproductgwillgonlygsaveg$20g
milliongingproductgliabilitygclaims.gWhatgshouldgthegfirmgdo?‖
13. Theggoalgwillgbegthegsame,gbutgthegbestgcoursegofgactiongtowardgthatggoalgmaygbegdifferentgbecause
gofgdifferinggsocial,gpolitical,gandgeconomicginstitutions.
14. Theggoalgofgmanagementgshouldgbegtogmaximizegthegsharegpricegforgthegcurrentgshareholders.gIfgma
nagementgbelievesgthatgitgcangimprovegthegprofitabilitygofgthegfirmgsogthatgthegsharegpricegwillgexce
edg$35,gthengtheygshouldgfightgthegoffergfromgthegoutsidegcompany.gIfgmanagementgbelievesgthatgthi
sgbiddergorgothergunidentifiedgbiddersgwillgactuallygpaygmoregthang$35gpergsharegtogacquiregthegcom
pany,gthengtheygshouldgstillgfightgthegoffer.gHowever,gifgthegcurrentgmanagementgcannotgincreasegth
egvaluegofgthegfirmgbeyondgthegbidgprice,gandgnogotherghighergbidsgcomegin,gthengmanagementgisgno
tgactinggingtheginterestsgofgthegshareholdersgbygfightinggthegoffer.gSincegcurrentgmanagersgoftenglose
gtheirgjobsgwhengthegcorporationgisgacquired,gpoorlygmonitoredgmanagersghavegangincentivegtogfight
gcorporategtakeoversgingsituationsgsuchgasgthis.
15. Wegwouldgexpectgagencygproblemsgtogbeglessgseveregingcountriesgwithgagrelativelygsmallgpercentage
g ofgindividualgownership.gFewergindividualgownersgshouldgreducegthegnumbergofgdiversegopinionsg
concerninggcorporateggoals.gTheghighgpercentagegofginstitutionalgownershipgmightgleadgtogaghigherg
degreegofgagreementgbetweengownersgandgmanagersgongdecisionsgconcerninggriskygprojects.gIngaddi
tion,ginstitutionsgmaygbegbettergablegtogimplementgeffectivegmonitoringgmechanismsgongmanagersgth
angcangindividualgowners,gbasedgongtheginstitutions‘gdeepergresourcesgandgexperiencesgwithgtheirgo
wngmanagement.gThegincreaseginginstitutionalgownershipgofgstockgingthegUnitedgStatesgandgtheggro
winggactivismgofgtheseglargegshareholderggroupsgmaygleadgtogagreductiongingagencygproblemsgfor
U.S.gcorporationsgandgagmoregefficientgmarketgforgcorporategcontrol.
, CHAPTERg2g-g 3
16. Howgmuchgisgtoogmuch?gWhogisgworthgmore,gMarkgParkergorgLeBrongJames?gThegsimplestganswer
gisgthatgtheregisgagmarket gforgexecutivesgjustgasgtheregisgforgallgtypesgofglabor.gExecutivegcompensati
ongisgthegpricegthatgclearsgthegmarket.gThegsamegisgtruegforgathletesgandgperformers.gHavinggsaidgth
at,gonegaspectgofgexecutivegcompensationgdeservesgcomment.gAgprimarygreasongexecutivegcompens
ationghasggrowngsogdramaticallygisgthatgcompaniesghavegincreasinglygmovedgtogstock-
basedgcompensation.g Suchgmovementgisgobviouslygconsistentgwithgthegattemptgtogbettergaligngstock
holdergandgmanagementginterests.gIngrecentgyears,gstockgpricesghavegsoared,gsogmanagementghasgcle
anedgup.gItgisgsometimesgarguedgthatgmuchgofgthisgrewardgisgduegtogrisinggstockgpricesginggeneral,gn
otgmanagerialgperformance.gPerhapsgingthegfuture,gexecutivegcompensationgwillgbegdesignedgtogrew
ardgonlygdifferentialgperformance,gthatgis,gstockgpricegincreasesgingexcessgofggeneralgmarketgincreas
es.
CHAPTER 2 g
FINANCIAL STATEMENTS, TAXES, AND CAS
g g g g
H FLOW
g
AnswersgtogConceptsgReviewgandgCriticalgThinkinggQuestions
1. Liquiditygmeasuresghowgquicklygandgeasilygangassetgcangbegconvertedgtogcashgwithoutgsignificantglo
ssgingvalue.gIt‘sgdesirablegforgfirmsgtoghaveghighgliquiditygsogthatgtheyghavegaglargegfactorgofgsafetyg
ingmeetinggshort-
termgcreditorgdemands.gHowever,gsincegliquiditygalsoghasgangopportunitygcostgassociatedgwithgit—
namelygthatghighergreturnsgcanggenerallygbegfoundgbyginvestinggthegcashgintogproductivegassets—
lowgliquidityglevelsgaregalsogdesirablegtogthegfirm.gIt‘sgupgtogthegfirm‘sgfinancialgmanagementgstaffgt
ogfindgagreasonablegcompromisegbetweengthesegopposinggneeds.
2. Thegrecognitiongandgmatchinggprinciplesgingfinancialgaccountinggcallgforgrevenues,gandgthegcostsgas
sociatedgwithgproducinggthosegrevenues,gtogbeg―booked‖gwhengthegrevenuegprocessgisgessentiallygc
omplete,gnotgnecessarilygwhengthegcashgisgcollectedgorgbillsgaregpaid.gNotegthatgthisgwaygisgnotgnece
ssarilygcorrect;git‘sgthegwaygaccountantsghavegchosengtogdogit.
3. Historicalgcostsgcangbegobjectivelygandgpreciselygmeasuredgwhereasgmarketgvaluesgcangbegdifficultgt
ogestimate,gandgdifferentganalystsgwouldgcomegupgwithgdifferentgnumbers.gThus,gtheregisgagtrade-
offgbetweengrelevanceg(marketgvalues)gandgobjectivityg(bookgvalues).
4. Depreciationgisgagnoncashgdeductiongthatgreflectsgadjustmentsgmadegingassetgbookgvaluesgingaccorda
ncegwithgthegmatchinggprinciplegingfinancialgaccounting.gInterestgexpensegisgagcashgoutlay,gbutgit‘sga
gfinancinggcost,gnotgangoperatinggcost.
5. Marketgvaluesgcangnevergbegnegative.gImaginegagsharegofgstockgsellinggforg–
$20.gThisgwouldgmeang thatgifgyougplacedgangordergforg100gshares,gyougwouldggetgthegstockgalongg
withgagcheckgforg$2,000.gHowgmanygsharesgdogyougwantgtogbuy?gMoreggenerally,gbecausegofgcorpo
rategandgindividualgbankruptcyglaws,gnetgworthgforgagpersongorgagcorporationgcannotgbegnegative,gi
mplyinggthatgliabilitiesgcannotgexceedgassetsgingmarketgvalue.
