Complete Solutions Manual — Fundamentals of Corporate Finance, 5th Edition — Robert Parrino — ISBN 9781119795438 — (All Chapters Covered 1–21, Solutions Included)

Fundamentals of Corporate
Finance 5th Edition
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SOLUTIONS
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MANUAL
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Robert Parrino
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David Kidwell
Thomas W. Bates
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Stuart L. Gillan

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Comprehensive Solutions Manual for Instructors
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and Students
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© Robert Parrino, David Kidwell, Thomas W. Bates & Stuart L. Gillan. All rights reserved.
Reproduction or distribution without permission is prohibited.
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© Successhands

, Solutions Manual for Fundamentals of Corporate Finance (5th Edition)
Robert Parrino, David Kidwell, Thomas W. Bates & Stuart L. Gillan
ISBN: 9781119795438
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PART I: INTRODUCTION TO CORPORATE FINANCE
1. The Financial Manager and the Firm
2. The Financial System and the Level of Interest Rates
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PART II: FINANCIAL STATEMENTS AND VALUATION
3. Financial Statements, Cash Flows, and Taxes
4. Analyzing Financial Statements
5. The Time Value of Money
6. Discounted Cash Flows and Valuation
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PART III: RISK AND RETURN
7. Risk and Return
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8. Bond Valuation and the Structure of Interest Rates
9. Stock Valuation

PART IV: CAPITAL BUDGETING
10. The Fundamentals of Capital Budgeting
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11. Cash Flows and Capital Budgeting
12. Evaluating Project Economics

PART V: COST OF CAPITAL AND FINANCIAL POLICY
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13. The Cost of Capital
14. Working Capital Management
15. How Firms Raise Capital
16. Capital Structure Policy
17. Dividends, Stock Repurchases, and Payout Policy
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PART VI: CORPORATE GROWTH AND ADVANCED TOPICS
18. Business Formation, Growth, and Valuation
19. Financial Planning and Managing Growth
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20. Options and Corporate Finance
21. International Financial Management
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© Successhands

, Parrino et al. Fundamentals of Corporate Finance, 5th edition Solutions Manual



Solution Manual for
Fundamentals of Corporate Finance, 5th Edition by Robert Parrino, David Kidwell,
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Bates & Gillan. ISBN 9781119795438

Chapter 1-21
Chapter 1
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The Financial Manager and the Firm
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Before You Go On Questions and Answers
Section 1.1
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1. What are the three basic types of financial decisions managers must make?
The three basic decisions each business must make are the capital budgeting decision, the
financing decision, and the working capital management decision. These decisions determine
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which productive assets to buy, how to pay for or finance these purchases, and how to
manage the day-to-day financial matters so the company can pay its bills.
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2. Explain why you would make an investment if the value of the expected cash flows
exceeds the cost of the project.
You would accept an investment project whose cash flows exceed the cost of the project
because such projects will increase the value of the firm, making the owners wealthier. Most
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people start a business to increase their wealth. Remember that the cost of capital (time value
of money) will affect the decision about whether to invest.
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3. Why are capital budgeting decisions among the most important decisions in the life of a
firm?
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The capital budgeting decisions are considered the most important in the life of the firm
because these decisions determine which productive assets the firm purchases, and which
assets generate most of the firm’s cash flows. Furthermore, capital budgeting decisions are



Copyright © 2022 John Wiley & Sons, Inc. SM 4-1

, Parrino et al. Fundamentals of Corporate Finance, 5th edition Solutions Manual


long-term decisions and if you make a mistake in selecting a productive asset, you are stuck
with the decision for a long time.
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Section 1.2
1. Why are many businesses operated as sole proprietorships or partnerships?
Many businesses elect to operate as sole proprietorships or partnerships because of the small
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operating scale and capital base of their firms. Both of these forms of business organization
are fairly easy to start and impose few regulations on the owners.
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2. What are some advantages and disadvantages of operating as a public corporation?
The main advantages of operating as a public corporation are the access to the public
securities markets, which makes it easier to raise large amounts of capital, and the ease of
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ownership transfer. All the shareholders have to do is to call their broker to buy or sell shares
of stock. Since a public corporation usually has many shares outstanding, large blocks of
securities can be purchased or sold without an appreciable impact on the price of the stock.
The major disadvantage of corporations is the tax situation. Not only must the corporation
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pay taxes on its income, but the owners of the corporation get taxed again when dividends
are paid to them. This is referred to as double taxation. In addition to taxes, public
corporations are subject to stringent reporting requirements, and the incentives may convince
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managers to focus on shorter-term profitability than longer-term wealth creation.


3. Explain why professional partnerships such as physicians’ groups organize as limited
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liability partnerships.
Professional partnerships such as physicians’ groups desire to organize as limited liability
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partnerships (LLPs) to take advantage of the tax arrangements of partnerships combined with
the advantages of the limited liability of a corporation. By operating as an LLP, the
partnership is able to avoid a potential financial disaster resulting from the misconduct of one
partner.
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Section 1.3
1. What are the major responsibilities of the CFO?


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