SOLUTION MANUAL FOR
Principles Of Corporate Finance
14th Edition By Richard Brealey, Stewart Myers, ALL
Chapters (1 - 34)
ABLE OF CONTENTS
Chapter 1: Introduction to Corporate Finance
Chapter 2: How to Calculate Present Values
Chapter 3: Valuing Bonds
Chapter 4: Valuing Stocks
Chapter 5: Net Present Value and Other Investment Criteria
Chapter 6: Making Investment Decisions with the Net Present Value Rule
Chapter 7: Introduction to Risk, Diversification, and Portfolio Selection
Chapter 8: The Capital Asset Pricing Model
Chapter 9: Risk and the Cost of Capital
Chapter 10: Project Analysis
Chapter 11: How to Ensure That Projects Truly Have PositiveNPVs
Chapter 12: Efficient Markets and Behavioral Finance
Chapter 13: An Overview of Corporate Financing
Chapter 14: How Corporations Issue Securities
Chapter 15: Payout Policy
Chapter 16: Does Debt Policy Matter?
Chapter 17: How Much Should a Corporation Borrow?
Chapter 18: Financing and Valuation
Chapter 19: Agency Problems and Corporate Governance
Chapter 20: Stakeholder Capitalism and Responsible Business
Chapter 21: Understanding Options
Chapter 22: Valuing Options
Chapter 23: Real Options
,Chapter 24: Credit Risk and the Value of Corporate Debt
Chapter 25: The Many Different Kinds of Debt
Chapter 26: Leasing
Chapter 27: Managing Risk
Chapter 28: International Financial Management
Chapter 29: Financial Analysis
Chapter 30: Financial Planning
Chapter 31: Working Capital Management
Chapter 32: Mergers
Chapter 33: Corporate Restructuring
Chapter 34: Conclusion: What We Do and Do Not Know about Finance
CHAPTER 1
Introduction to Corporate Finance
The values shown in the solutions may be rounded for display purposes. However, the answers werederived using a
spreadsheet without any intermediate rounding.
Answers to Problem Sets
• a. real
• executive airplanes
• brand names
• financial
, • bonds
*f. investment or! capital! expenditure
*g. capital! budgeting! or! investment
h. financing
*Note! that! f! and! g! are! interchangeable! in! the! question.
Est! time:! 01-05
• A! trademark,! a! factory,! undeveloped! land,! and! your! work! force! (c, ! d,! e,! and! g)! are! all! real! assets.!
Real! assets! are! identifiable! as! items! with! intrinsic! value.! The! others! in! the! list! are! financial! assets,!that! is,! these! assets!
derive! value! because! of! a ! contractual! claim.
Est! time:! 01-05
• a. Financial! assets,! such! as! stocks! or! bank! loans,! are! claims! held! by! investors.!
Corporations! sell! financial! assets! to! raise! the! cash! to! invest ! in! real! assets! such! as! plant!and! equipment.! Some! real!
assets! are! intangible.
• Capital! expenditure! means! investment! in! real! assets.! Financing! means! raising! the! cash!for! this!
investment.
• The! shares! of! public! corporations! are! traded! on! stock! exchanges! and! can! be! purchased!by! a! wide!
range! of! investors.! The! shares! of! closely! held! corporations! are! not! publicly! traded! and! are! held! by! a ! small! group! of!
private! investors.
• Unlimited! liability:! Investors! are! responsible! for! all! the! firm‘s! debts. ! A! sole! proprietor! has!
unlimited! liability.! Investors! in! corporations! have! limited! liability. ! They! can! lose! their! investment,! but! no! more.
Est! time:! 01-05
, • Items! c! and! d! apply! to! corporations.! Because! corporations! have! perpetual! life, ! ownership! can! be!
transferred! without! affecting! operations,! and! managers! can! be! fired! with! no! effect! on! ownership.! Other! forms! of!
business! may! have! unlimited! liability! and! limited! life.
Est! time:! 01-05
• Separation! of! ownership! facilitates! the! key! attributes! of! a! corporation,! including! limited! liability!
for!investors,! transferability! of! ownership,! a! separate! legal! personality! of! the! corporation,! and! delegated! centralized!
management.! These! four! attributes! provide! substantial! benefit! for! investors,! including! the! ability! to! diversify! their!
investment! among! many! uncorrelated! returns—a! very! valuable! tool ! explored! in! later! chapters.! Also,! these! attributes!
allow! investors! to! quickly! exit,!enter,! or! short! sell ! an! investment,! thereby! generating! an! active! liquid! market! for!
corporations.
However,! these! positive! aspects! also! introduce! substantial! negative! externalities! as! well.! The! separation!
of! ownership! from! management! typically! leads! to! agency! problems,! where! managers!prefer! to! consume!
private! perks! or! make! other! decisions! for! their! private! benefit—rather! than! maximize! shareholder!
wealth.! Shareholders! tend! to! exercise! less! oversight! of! each! individual! investment! as! their! diversification !
increases.! Finally,! the! corporation‘s! separate! legal! personality!makes! it ! difficult ! to! enforce! accountability!
if! they! externalize! costs! onto! society.
Est! time:! 01-05
• Shareholders! will! only! vote! to! maximize! shareholder! wealth.! Shareholders! can! modify! their!
pattern! of! consumption! through! borrowing! and! lending,! match! risk! preferences,! and! hopefully!balance! their! own!
checkbooks! (or! hire! a! qualified! professional! to! help! them! with! these! tasks).
Est! time:! 01-05
• If! the! investment! increases! the! firm‘s! wealth,! it! increases! the! firm‘s! share! value.! Ms.! Espinoza!
could! then! sell! some! or! all! these! more! valuable! shares! to! provide! for! her! retirement! income.
Est! time:! 01-05
• a. Assuming! that! the! encabulator ! market! is! risky, ! an! 8%! expected! return! on!
the! F&H! encabulator! investments! may! be! inferior! to! a! 4%! return! on! U.S.
government! securities,! depending! on! the! relative! risk! between! the! two! assets.
Principles Of Corporate Finance
14th Edition By Richard Brealey, Stewart Myers, ALL
Chapters (1 - 34)
ABLE OF CONTENTS
Chapter 1: Introduction to Corporate Finance
Chapter 2: How to Calculate Present Values
Chapter 3: Valuing Bonds
Chapter 4: Valuing Stocks
Chapter 5: Net Present Value and Other Investment Criteria
Chapter 6: Making Investment Decisions with the Net Present Value Rule
Chapter 7: Introduction to Risk, Diversification, and Portfolio Selection
Chapter 8: The Capital Asset Pricing Model
Chapter 9: Risk and the Cost of Capital
Chapter 10: Project Analysis
Chapter 11: How to Ensure That Projects Truly Have PositiveNPVs
Chapter 12: Efficient Markets and Behavioral Finance
Chapter 13: An Overview of Corporate Financing
Chapter 14: How Corporations Issue Securities
Chapter 15: Payout Policy
Chapter 16: Does Debt Policy Matter?
Chapter 17: How Much Should a Corporation Borrow?
Chapter 18: Financing and Valuation
Chapter 19: Agency Problems and Corporate Governance
Chapter 20: Stakeholder Capitalism and Responsible Business
Chapter 21: Understanding Options
Chapter 22: Valuing Options
Chapter 23: Real Options
,Chapter 24: Credit Risk and the Value of Corporate Debt
Chapter 25: The Many Different Kinds of Debt
Chapter 26: Leasing
Chapter 27: Managing Risk
Chapter 28: International Financial Management
Chapter 29: Financial Analysis
Chapter 30: Financial Planning
Chapter 31: Working Capital Management
Chapter 32: Mergers
Chapter 33: Corporate Restructuring
Chapter 34: Conclusion: What We Do and Do Not Know about Finance
CHAPTER 1
Introduction to Corporate Finance
The values shown in the solutions may be rounded for display purposes. However, the answers werederived using a
spreadsheet without any intermediate rounding.
Answers to Problem Sets
• a. real
• executive airplanes
• brand names
• financial
, • bonds
*f. investment or! capital! expenditure
*g. capital! budgeting! or! investment
h. financing
*Note! that! f! and! g! are! interchangeable! in! the! question.
Est! time:! 01-05
• A! trademark,! a! factory,! undeveloped! land,! and! your! work! force! (c, ! d,! e,! and! g)! are! all! real! assets.!
Real! assets! are! identifiable! as! items! with! intrinsic! value.! The! others! in! the! list! are! financial! assets,!that! is,! these! assets!
derive! value! because! of! a ! contractual! claim.
Est! time:! 01-05
• a. Financial! assets,! such! as! stocks! or! bank! loans,! are! claims! held! by! investors.!
Corporations! sell! financial! assets! to! raise! the! cash! to! invest ! in! real! assets! such! as! plant!and! equipment.! Some! real!
assets! are! intangible.
• Capital! expenditure! means! investment! in! real! assets.! Financing! means! raising! the! cash!for! this!
investment.
• The! shares! of! public! corporations! are! traded! on! stock! exchanges! and! can! be! purchased!by! a! wide!
range! of! investors.! The! shares! of! closely! held! corporations! are! not! publicly! traded! and! are! held! by! a ! small! group! of!
private! investors.
• Unlimited! liability:! Investors! are! responsible! for! all! the! firm‘s! debts. ! A! sole! proprietor! has!
unlimited! liability.! Investors! in! corporations! have! limited! liability. ! They! can! lose! their! investment,! but! no! more.
Est! time:! 01-05
, • Items! c! and! d! apply! to! corporations.! Because! corporations! have! perpetual! life, ! ownership! can! be!
transferred! without! affecting! operations,! and! managers! can! be! fired! with! no! effect! on! ownership.! Other! forms! of!
business! may! have! unlimited! liability! and! limited! life.
Est! time:! 01-05
• Separation! of! ownership! facilitates! the! key! attributes! of! a! corporation,! including! limited! liability!
for!investors,! transferability! of! ownership,! a! separate! legal! personality! of! the! corporation,! and! delegated! centralized!
management.! These! four! attributes! provide! substantial! benefit! for! investors,! including! the! ability! to! diversify! their!
investment! among! many! uncorrelated! returns—a! very! valuable! tool ! explored! in! later! chapters.! Also,! these! attributes!
allow! investors! to! quickly! exit,!enter,! or! short! sell ! an! investment,! thereby! generating! an! active! liquid! market! for!
corporations.
However,! these! positive! aspects! also! introduce! substantial! negative! externalities! as! well.! The! separation!
of! ownership! from! management! typically! leads! to! agency! problems,! where! managers!prefer! to! consume!
private! perks! or! make! other! decisions! for! their! private! benefit—rather! than! maximize! shareholder!
wealth.! Shareholders! tend! to! exercise! less! oversight! of! each! individual! investment! as! their! diversification !
increases.! Finally,! the! corporation‘s! separate! legal! personality!makes! it ! difficult ! to! enforce! accountability!
if! they! externalize! costs! onto! society.
Est! time:! 01-05
• Shareholders! will! only! vote! to! maximize! shareholder! wealth.! Shareholders! can! modify! their!
pattern! of! consumption! through! borrowing! and! lending,! match! risk! preferences,! and! hopefully!balance! their! own!
checkbooks! (or! hire! a! qualified! professional! to! help! them! with! these! tasks).
Est! time:! 01-05
• If! the! investment! increases! the! firm‘s! wealth,! it! increases! the! firm‘s! share! value.! Ms.! Espinoza!
could! then! sell! some! or! all! these! more! valuable! shares! to! provide! for! her! retirement! income.
Est! time:! 01-05
• a. Assuming! that! the! encabulator ! market! is! risky, ! an! 8%! expected! return! on!
the! F&H! encabulator! investments! may! be! inferior! to! a! 4%! return! on! U.S.
government! securities,! depending! on! the! relative! risk! between! the! two! assets.
