Solutions Manual Fundamentals of Corporate Finance
13th Edition Ross, Westerfield, and Jordan
Chapters 1 - 27
,CHAPTER 1: Introduction to Corporate Finance
qs qs qs qs qs
CHAPTER 2: Financial Statements, Taxes, And Cash Flow
qs qs qs qs qs qs qs
CHAPTER 3: Working with Financial Statements
qs qs qs qs qs
CHAPTER 4: Long-Term Financial Planning and Growth
qs qs qs qs qs qs
CHAPTER 5: Introduction to Valuation: The Time Value of Money
qs qs qs qs qs qs qs qs qs
CHAPTER 6: Discounted Cash Flow Valuation
qs qs qs qs qs
CHAPTER 7: Interest Rates and Bond Valuation
qs qs qs qs qs qs
CHAPTER 8: Stock Valuation
qs qs qs
CHAPTER 9: Net Present Value and Other Investment Criteria
qs qs qs qs qs qs qs qs
CHAPTER 10: Making Capital Investment Decisions
qs qs qs qs qs
CHAPTER 11: Project Analysis and Evaluation
qs qs qs qs qs
CHAPTER 12: Some Lessons from Capital Market History
qs qs qs qs qs qs qs
CHAPTER 13: Return, Risk, And the Security Market Line
qs qs qs qs qs qs qs qs
CHAPTER 14: Cost of Capital
qs qs qs qs
CHAPTER 15: Raising Capital
qs qs qs
CHAPTER 16: Financial Leverage and Capital Structure Policy
qs qs qs qs qs qs qs
CHAPTER 17: Dividends and Payout Policy
qs qs qs qs qs
CHAPTER 18: Short-Term Finance and Planning
qs qs qs qs qs
CHAPTER 19: Cash and Liquidity Management
qs qs qs qs qs
CHAPTER 20: Credit and Inventory Management
qs qs qs qs qs
CHAPTER 21: International Corporate Finance
qs qs qs qs
CHAPTER 22: Behavioral Finance: Implications for Financial Manage
qs qs qs qs qs qs qs
CHAPTER 23: Enterprise Risk Management
qs qs qs qs
CHAPTER 24:Options and Corporate Finance
qs qs qs qs
CHAPTER 25: Option Valuation
qs qs qs
CHAPTER 26: Mergers and Acquisitions
qs qs qs qs
CHAPTER 27: Leasing
qs qs
,CHAPTER 1 qs
INTRODUCTION TO qs
CORPORATEFINANCE
qs q
s
Answers to Concepts Review and Critical Thinking Questions
qs qs qs qs qs qs qs
1. Capital budgeting (deciding whether to expand a manufacturing plant), capital structure
qs qs qs qs qs qs qs qs qs qs
(deciding whether to issue new equity and use the proceeds to retire outstanding debt), and
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
working capital management (modifying the firm’s credit collection policy with its customers).
qs qs qs qs qs qs qs qs qs qs qs qs
2. Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, hard to raise
qs qs qs qs qs qs qs qs qs qs qs
capital funds. Some advantages: simpler, less regulation, the owners are also the managers,
qs qs qs qs qs qs qs qs qs qs qs qs qs
sometimes personal tax rates are better than corporate tax rates.
qs qs qs qs qs qs qs qs qs qs
3. The primary disadvantage of the corporate form is the double taxation to shareholders of
qs qs qs qs qs qs qs qs qs qs qs qs qs
distributed earnings and dividends. Some advantages include: limited liability, ease of
qs qs qs qs qs qs qs qs qs qs qs
transferability, ability to raise capital, unlimited life, and so forth.
qs qs qs qs qs qs qs qs qs qs
4. In response to Sarbanes-Oxley, small firms have elected to go dark because of the costs of
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
compliance. The costs to comply with Sarbox can be several million dollars, which can be a
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
large percentage of a small firms profits. A major cost of going dark is less access
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
qsto capital. Since the firm is no longer publicly traded, it can no longer raise money in the
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
public market. Although the company will still have access to bank loans and the private
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
equity market, the costs associated with raising funds in these markets are usually higher than
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
the costs of raising funds in the public market.
qs qs qs qs qs qs qs qs qs
5. The treasurer’s office
q s and the controller’s office are the two primary q s q s q s q s q s q s q s q s q s
organizational groups that report directly to the chief financial officer. The controller’s
q s q s q s qs qs qs qs qs qs qs qs qs
office handles cost and financial accounting, tax management, and management information
qs qs qs qs qs s
q qs qs qs qs qs
systems, while the treasurer’s office is responsible for cash and credit management,
qs qs qs qs qs qs qs qs qs qs qs qs
qscapital budgeting, and financial planning. Therefore, the study of corporate finance is
qs qs qs qs qs s
q qs qs qs qs qs
concentrated within the treasury group’s functions.
qs qs qs qs qs qs
6. To maximize the current market value (share price) of the equity of the firm (whether it’s
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
publicly- traded or not).
qs qs qs qs
7. In the corporate form of ownership, the shareholders are the owners of the firm. The
qs qs qs qs qs qs qs qs qs qs qs qs qs qs
shareholders elect the directors of the corporation, who in turn appoint the firm’s management.
qs qs qs qs qs qs qs qs qs qs qs qs qs qs
This separation of ownership from control in the corporate form of organization is what causes
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
agency problems to exist. Management may act in its own or someone else’s best interests,
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
rather than those of the shareholders. If such events occur, they may contradict the goal of
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
maximizing the share price of the equity of the firm.
qs qs qs qs qs qs qs qs qs qs
8. A primary market transaction.
qs qs qs
, B-2 q s SOLUTIONS
9. In auction markets like the NYSE, brokers and agents meet at a physical location (the
qs qs qs qs qs qs qs qs qs qs qs qs qs qs
exchange) to match buyers and sellers of assets. Dealer markets like NASDAQ consist of
qs qs qs qs qs qs qs qs qs qs qs qs qs qs
dealers operating at dispersed locales who buy and sell assets themselves, communicating with
qs qs qs qs qs qs qs qs qs qs qs qs qs
other dealers either electronically or literally over-the-counter.
qs qs qs qs qs qs qs
10. Such organizations frequently pursue social or political missions, so many different goals are
qs qs qs qs qs qs qs qs qs qs qs qs
conceivable. One goal that is often cited is revenue minimization; i.e., provide whatever goods
qs qs qs qs qs qs qs qs qs qs qs qs qs qs
and services are offered at the lowest possible cost to society. A better approach might be to
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
observe that even a not-for-profit business has equity. Thus, one answer is that the appropriate
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
goal is to maximize the value of the equity.
qs qs q s qs qs qs qs qs qs
11. Presumably, the current stock value reflects the risk, timing, and magnitude of all future cash
qs qs qs qs qs qs qs qs qs qs qs qs qs qs
flows, both short-term and long-term. If this is correct, then the statement is false.
qs qs qs qs qs qs qs qs qs qs qs qs qs qs
12. An argument can be made either way. At the one extreme, we could argue that in a market
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
economy, all of these things are priced. There is thus an optimal level of, for example, ethical
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
and/or illegal behavior, and the framework of stock valuation explicitly includes these. At the
qs qs qs qs qs qs qs qs qs qs qs qs qs qs
other extreme, we could argue that these are non-economic phenomena and are best handled
qs qs qs qs qs qs qs qs qs qs qs qs qs qs
through the political process. A classic (and highly relevant) thought question that illustrates
qs qs qs qs qs qs qs qs qs qs qs qs qs
this debate goes something like this: “A firm has estimated that the cost of improving the
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
safety of one of its products is $30 million. However, the firm believes that improving the
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
safety of the product will only save $20 million in product liability claims. What should the
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
firm do?”
qs qs
13. The goal will be the same, but the best course of action toward that goal may be different
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
because of differing social, political, and economic institutions.
qs qs qs qs qs qs qs qs
14. The goal of management should be to maximize the share price for the current shareholders. If
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
management believes that it can improve the profitability of the firm so that the share price
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
will exceed $35, then they should fight the offer from the outside company. If management
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
believes that this bidder or other unidentified bidders will actually pay more than $35 per
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
share to acquire the company, then they should still fight the offer. However, if the current
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
management cannot increase the value of the firm beyond the bid price, and no other higher
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
bids come in, then management is not acting in the interests of the shareholders by fighting
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
the offer. Since current managers often lose their jobs when the corporation is acquired, poorly
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
monitored managers have an incentive to fight corporate takeovers in situations such as this.
qs qs qs qs qs qs qs qs qs qs qs qs qs qs
15. We would expect agency problems to be less severe in other countries, primarily due to the
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
relatively small percentage of individual ownership. Fewer individual owners should reduce the
qs qs qs qs qs qs qs qs qs qs qs qs
number of diverse opinions concerning corporate goals. The high percentage of institutional
qs qs qs qs qs qs qs qs qs qs qs qs
ownership might lead to a higher degree of agreement between owners and managers on
qs qs qs qs qs qs qs qs qs qs qs qs qs qs
decisions concerning risky projects. In addition, institutions may be better able to implement
qs qs qs qs qs qs qs qs qs qs qs qs qs
effective monitoring mechanisms on managers than can individual owners, based on the
qs qs qs qs qs qs qs qs qs qs qs qs
institutions’ deeper resources and experiences with their own management. The increase in
qs qs qs qs qs qs qs qs qs qs qs qs
institutional ownership of stock in the United States and the growing activism of these large
qs qs qs qs qs qs qs qs qs s
q qs qs qs qs qs
shareholder groups may lead to a reduction in agency problems for U.S. corporations and a
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
more efficient market for corporate control.
qs qs qs qs qs qs
13th Edition Ross, Westerfield, and Jordan
Chapters 1 - 27
,CHAPTER 1: Introduction to Corporate Finance
qs qs qs qs qs
CHAPTER 2: Financial Statements, Taxes, And Cash Flow
qs qs qs qs qs qs qs
CHAPTER 3: Working with Financial Statements
qs qs qs qs qs
CHAPTER 4: Long-Term Financial Planning and Growth
qs qs qs qs qs qs
CHAPTER 5: Introduction to Valuation: The Time Value of Money
qs qs qs qs qs qs qs qs qs
CHAPTER 6: Discounted Cash Flow Valuation
qs qs qs qs qs
CHAPTER 7: Interest Rates and Bond Valuation
qs qs qs qs qs qs
CHAPTER 8: Stock Valuation
qs qs qs
CHAPTER 9: Net Present Value and Other Investment Criteria
qs qs qs qs qs qs qs qs
CHAPTER 10: Making Capital Investment Decisions
qs qs qs qs qs
CHAPTER 11: Project Analysis and Evaluation
qs qs qs qs qs
CHAPTER 12: Some Lessons from Capital Market History
qs qs qs qs qs qs qs
CHAPTER 13: Return, Risk, And the Security Market Line
qs qs qs qs qs qs qs qs
CHAPTER 14: Cost of Capital
qs qs qs qs
CHAPTER 15: Raising Capital
qs qs qs
CHAPTER 16: Financial Leverage and Capital Structure Policy
qs qs qs qs qs qs qs
CHAPTER 17: Dividends and Payout Policy
qs qs qs qs qs
CHAPTER 18: Short-Term Finance and Planning
qs qs qs qs qs
CHAPTER 19: Cash and Liquidity Management
qs qs qs qs qs
CHAPTER 20: Credit and Inventory Management
qs qs qs qs qs
CHAPTER 21: International Corporate Finance
qs qs qs qs
CHAPTER 22: Behavioral Finance: Implications for Financial Manage
qs qs qs qs qs qs qs
CHAPTER 23: Enterprise Risk Management
qs qs qs qs
CHAPTER 24:Options and Corporate Finance
qs qs qs qs
CHAPTER 25: Option Valuation
qs qs qs
CHAPTER 26: Mergers and Acquisitions
qs qs qs qs
CHAPTER 27: Leasing
qs qs
,CHAPTER 1 qs
INTRODUCTION TO qs
CORPORATEFINANCE
qs q
s
Answers to Concepts Review and Critical Thinking Questions
qs qs qs qs qs qs qs
1. Capital budgeting (deciding whether to expand a manufacturing plant), capital structure
qs qs qs qs qs qs qs qs qs qs
(deciding whether to issue new equity and use the proceeds to retire outstanding debt), and
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
working capital management (modifying the firm’s credit collection policy with its customers).
qs qs qs qs qs qs qs qs qs qs qs qs
2. Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, hard to raise
qs qs qs qs qs qs qs qs qs qs qs
capital funds. Some advantages: simpler, less regulation, the owners are also the managers,
qs qs qs qs qs qs qs qs qs qs qs qs qs
sometimes personal tax rates are better than corporate tax rates.
qs qs qs qs qs qs qs qs qs qs
3. The primary disadvantage of the corporate form is the double taxation to shareholders of
qs qs qs qs qs qs qs qs qs qs qs qs qs
distributed earnings and dividends. Some advantages include: limited liability, ease of
qs qs qs qs qs qs qs qs qs qs qs
transferability, ability to raise capital, unlimited life, and so forth.
qs qs qs qs qs qs qs qs qs qs
4. In response to Sarbanes-Oxley, small firms have elected to go dark because of the costs of
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
compliance. The costs to comply with Sarbox can be several million dollars, which can be a
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
large percentage of a small firms profits. A major cost of going dark is less access
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
qsto capital. Since the firm is no longer publicly traded, it can no longer raise money in the
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
public market. Although the company will still have access to bank loans and the private
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
equity market, the costs associated with raising funds in these markets are usually higher than
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
the costs of raising funds in the public market.
qs qs qs qs qs qs qs qs qs
5. The treasurer’s office
q s and the controller’s office are the two primary q s q s q s q s q s q s q s q s q s
organizational groups that report directly to the chief financial officer. The controller’s
q s q s q s qs qs qs qs qs qs qs qs qs
office handles cost and financial accounting, tax management, and management information
qs qs qs qs qs s
q qs qs qs qs qs
systems, while the treasurer’s office is responsible for cash and credit management,
qs qs qs qs qs qs qs qs qs qs qs qs
qscapital budgeting, and financial planning. Therefore, the study of corporate finance is
qs qs qs qs qs s
q qs qs qs qs qs
concentrated within the treasury group’s functions.
qs qs qs qs qs qs
6. To maximize the current market value (share price) of the equity of the firm (whether it’s
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
publicly- traded or not).
qs qs qs qs
7. In the corporate form of ownership, the shareholders are the owners of the firm. The
qs qs qs qs qs qs qs qs qs qs qs qs qs qs
shareholders elect the directors of the corporation, who in turn appoint the firm’s management.
qs qs qs qs qs qs qs qs qs qs qs qs qs qs
This separation of ownership from control in the corporate form of organization is what causes
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
agency problems to exist. Management may act in its own or someone else’s best interests,
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
rather than those of the shareholders. If such events occur, they may contradict the goal of
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
maximizing the share price of the equity of the firm.
qs qs qs qs qs qs qs qs qs qs
8. A primary market transaction.
qs qs qs
, B-2 q s SOLUTIONS
9. In auction markets like the NYSE, brokers and agents meet at a physical location (the
qs qs qs qs qs qs qs qs qs qs qs qs qs qs
exchange) to match buyers and sellers of assets. Dealer markets like NASDAQ consist of
qs qs qs qs qs qs qs qs qs qs qs qs qs qs
dealers operating at dispersed locales who buy and sell assets themselves, communicating with
qs qs qs qs qs qs qs qs qs qs qs qs qs
other dealers either electronically or literally over-the-counter.
qs qs qs qs qs qs qs
10. Such organizations frequently pursue social or political missions, so many different goals are
qs qs qs qs qs qs qs qs qs qs qs qs
conceivable. One goal that is often cited is revenue minimization; i.e., provide whatever goods
qs qs qs qs qs qs qs qs qs qs qs qs qs qs
and services are offered at the lowest possible cost to society. A better approach might be to
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
observe that even a not-for-profit business has equity. Thus, one answer is that the appropriate
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
goal is to maximize the value of the equity.
qs qs q s qs qs qs qs qs qs
11. Presumably, the current stock value reflects the risk, timing, and magnitude of all future cash
qs qs qs qs qs qs qs qs qs qs qs qs qs qs
flows, both short-term and long-term. If this is correct, then the statement is false.
qs qs qs qs qs qs qs qs qs qs qs qs qs qs
12. An argument can be made either way. At the one extreme, we could argue that in a market
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
economy, all of these things are priced. There is thus an optimal level of, for example, ethical
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
and/or illegal behavior, and the framework of stock valuation explicitly includes these. At the
qs qs qs qs qs qs qs qs qs qs qs qs qs qs
other extreme, we could argue that these are non-economic phenomena and are best handled
qs qs qs qs qs qs qs qs qs qs qs qs qs qs
through the political process. A classic (and highly relevant) thought question that illustrates
qs qs qs qs qs qs qs qs qs qs qs qs qs
this debate goes something like this: “A firm has estimated that the cost of improving the
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
safety of one of its products is $30 million. However, the firm believes that improving the
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
safety of the product will only save $20 million in product liability claims. What should the
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
firm do?”
qs qs
13. The goal will be the same, but the best course of action toward that goal may be different
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
because of differing social, political, and economic institutions.
qs qs qs qs qs qs qs qs
14. The goal of management should be to maximize the share price for the current shareholders. If
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
management believes that it can improve the profitability of the firm so that the share price
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
will exceed $35, then they should fight the offer from the outside company. If management
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
believes that this bidder or other unidentified bidders will actually pay more than $35 per
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
share to acquire the company, then they should still fight the offer. However, if the current
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
management cannot increase the value of the firm beyond the bid price, and no other higher
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
bids come in, then management is not acting in the interests of the shareholders by fighting
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
the offer. Since current managers often lose their jobs when the corporation is acquired, poorly
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
monitored managers have an incentive to fight corporate takeovers in situations such as this.
qs qs qs qs qs qs qs qs qs qs qs qs qs qs
15. We would expect agency problems to be less severe in other countries, primarily due to the
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
relatively small percentage of individual ownership. Fewer individual owners should reduce the
qs qs qs qs qs qs qs qs qs qs qs qs
number of diverse opinions concerning corporate goals. The high percentage of institutional
qs qs qs qs qs qs qs qs qs qs qs qs
ownership might lead to a higher degree of agreement between owners and managers on
qs qs qs qs qs qs qs qs qs qs qs qs qs qs
decisions concerning risky projects. In addition, institutions may be better able to implement
qs qs qs qs qs qs qs qs qs qs qs qs qs
effective monitoring mechanisms on managers than can individual owners, based on the
qs qs qs qs qs qs qs qs qs qs qs qs
institutions’ deeper resources and experiences with their own management. The increase in
qs qs qs qs qs qs qs qs qs qs qs qs
institutional ownership of stock in the United States and the growing activism of these large
qs qs qs qs qs qs qs qs qs s
q qs qs qs qs qs
shareholder groups may lead to a reduction in agency problems for U.S. corporations and a
qs qs qs qs qs qs qs qs qs qs qs qs qs qs qs
more efficient market for corporate control.
qs qs qs qs qs qs
