Solutions Manual Fundamentals of Corporate Finance
13th Edition Ross, Westerfield, and Jordan
Chapters 1 - 27
,CHAPTERT1:TIntroductionTtoTCorporateTFinance
CHAPTERT2:TFinancialTStatements,TTaxes,TAndTCashTFlow
CHAPTERT3:TWorkingTwithTFinancialTStatements
CHAPTERT4:TLong-TermTFinancialTPlanningTandTGrowth
CHAPTERT5:TIntroductionTtoTValuation:TTheTTimeTValueTofTMoney
CHAPTERT6:TDiscountedTCashTFlowTValuation
CHAPTERT7:TInterestTRatesTandTBondTValuation
CHAPTERT8:TStockTValuation
CHAPTERT9:TNetTPresentTValueTandTOtherTInvestmentTCriteria
CHAPTERT10:TMakingTCapitalTInvestmentTDecisions
CHAPTERT11:TProjectTAnalysisTandTEvaluation
CHAPTERT12:TSomeTLessonsTfromTCapitalTMarketTHistory
CHAPTERT13:TReturn,TRisk,TAndTtheTSecurityTMarketTLine
CHAPTERT14:TCostTofTCapital
CHAPTERT15:TRaisingTCapital
CHAPTERT16:TFinancialTLeverageTandTCapitalTStructureTPolicy
CHAPTERT17:TDividendsTandTPayoutTPolicy
CHAPTERT18:TShort-TermTFinanceTandTPlanning
CHAPTERT19:TCashTandTLiquidityTManagement
CHAPTERT20:TCreditTandTInventoryTManagement
CHAPTERT21:TInternationalTCorporateTFinance
CHAPTERT22:TBehavioralTFinance:TImplicationsTforTFinancialTManage
CHAPTERT23:TEnterpriseTRiskTManagement
CHAPTERT24:OptionsTandTCorporateTFinance
CHAPTERT25:TOptionTValuation
CHAPTERT26:TMergersTandTAcquisitions
CHAPTERT27:TLeasing
,CHAPTER 1 T
INTRODUCTION TO CORPORATE T T T
FINANCE
AnswersTtoTConceptsTReviewTandTCriticalTThinkingTQuestions
1. CapitalTbudgetingT(decidingTwhetherTtoTexpandTaTmanufacturingTplant),TcapitalTstructureT(decidingTwh
etherTtoTissueTnewTequityTandTuseTtheTproceedsTtoTretireToutstandingTdebt),TandTworkingTcapitalTmanag
ementT(modifyingTtheTfirm’sTcreditTcollectionTpolicyTwithTitsTcustomers).
2. Disadvantages:TunlimitedTliability,TlimitedTlife,TdifficultyTinTtransferringTownership,ThardTtoTraiseTcapit
alTfunds.TSomeTadvantages:Tsimpler,TlessTregulation,TtheTownersTareTalsoTtheTmanagers,TsometimesTper
sonalTtaxTratesTareTbetterTthanTcorporateTtaxTrates.
3. TheTprimaryTdisadvantageTofTtheTcorporateTformTisTtheTdoubleTtaxationTtoTshareholdersTofTdistributedTe
arningsTandTdividends.TSomeTadvantagesTinclude:TlimitedTliability,TeaseTofTtransferability,TabilityTtoTrai
seTcapital,TunlimitedTlife,TandTsoTforth.
4. InTresponseTtoTSarbanes-
Oxley,TsmallTfirmsThaveTelectedTtoTgoTdarkTbecauseTofTtheTcostsTofTcompliance.TTheTcostsTtoTcomplyTw
ithTSarboxTcanTbeTseveralTmillionTdollars,TwhichTcanTbeTaTlargeTpercentageT ofT aT smallT firmsT profits.T A
T majorT costT ofT goingT darkT isT lessT accessT toT capital.T SinceT theTfirmTisTnoTlongerTpubliclyTtraded,TitTcanT
noTlongerTraiseTmoneyTinTtheTpublicTmarket.TAlthoughTtheTcompanyTwillTstillThaveTaccessTtoTbankTloan
sTandTtheTprivateTequityTmarket,TtheTcostsTassociatedTwithTraisingTfundsTinTtheseTmarketsTareTusuallyThi
gherTthanTtheTcostsTofTraisingTfundsTinTtheTpublicTmarket.
5. TheT treasurer’sT officeT andT theT controller’sT officeT areT theT twoT primaryT organizationalT groupsT thatTr
eportTdirectlyTtoTtheTchiefTfinancialTofficer.TTheTcontroller’sTofficeThandlesTcostTandTfinancialTaccounti
ng,TtaxTmanagement,TandTmanagementTinformationTsystems,TwhileTtheTtreasurer’sTofficeTisTresponsible
T forT cashT andT creditT management,T capitalT budgeting,T andT financialT planning.T Therefore,TtheTstudyTof
TcorporateTfinanceTisTconcentratedTwithinTtheTtreasuryTgroup’sTfunctions.
6. ToTmaximizeTtheTcurrentTmarketTvalueT(shareTprice)TofTtheTequityTofTtheTfirmT(whetherTit’sTpublicly-
TtradedTorTnot).
7. InTtheTcorporateTformTofTownership,TtheTshareholdersTareTtheTownersTofTtheTfirm.TTheTshareholdersTele
ctTtheTdirectorsTofTtheTcorporation,TwhoTinTturnTappointTtheTfirm’sTmanagement.TThisTseparationTofTow
nershipTfromTcontrolTinTtheTcorporateTformTofTorganizationTisTwhatTcausesTagencyTproblemsTtoTexist.T
ManagementTmayTactTinTitsTownTorTsomeoneTelse’sTbestTinterests,TratherTthanTthoseTofTtheTshareholders
.TIfTsuchTeventsToccur,TtheyTmayTcontradictTtheTgoalTofTmaximizingTtheTshareTpriceTofTtheTequityTofTtheT
firm.
8. ATprimaryTmarketTtransaction.
, B-2T SOLUTIONS
9. InTauctionTmarketsTlikeTtheTNYSE,TbrokersTandTagentsTmeetTatTaTphysicalTlocationT(theTexchange)TtoTm
atchTbuyersTandTsellersTofTassets.TDealerTmarketsTlikeTNASDAQTconsistTofTdealersToperatingTatTdispers
edTlocalesTwhoTbuyTandTsellTassetsTthemselves,TcommunicatingTwithTotherTdealersTeitherTelectronically
TorTliterallyTover-the-counter.
10. SuchTorganizationsTfrequentlyTpursueTsocialTorTpoliticalTmissions,TsoTmanyTdifferentTgoalsTareTconceiv
able.TOneTgoalTthatTisToftenTcitedTisTrevenueTminimization;Ti.e.,TprovideTwhateverTgoodsTandTservicesTa
reTofferedTatTtheTlowestTpossibleTcostTtoTsociety.TATbetterTapproachTmightTbeTtoTobserveTthatTevenTaTnot
-for-
profitTbusinessThasTequity.TThus,ToneTanswerTisTthatTtheTappropriateTgoalTisT toTmaximizeTtheTvalueTofTt
heTequity.
11. Presumably,TtheTcurrentTstockTvalueTreflectsTtheTrisk,Ttiming,TandTmagnitudeTofTallTfutureTcashTflows,Tb
othTshort-termTandTlong-term.TIfTthisTisTcorrect,TthenTtheTstatementTisTfalse.
12. AnTargumentTcanTbeTmadeTeitherTway.TAtTtheToneTextreme,TweTcouldTargueTthatTinTaTmarketTeconomy,Ta
llTofTtheseTthingsTareTpriced.TThereTisTthusTanToptimalTlevelTof,TforTexample,TethicalTand/orTillegalTbeha
vior,TandTtheTframeworkTofTstockTvaluationTexplicitlyTincludesTthese.TAtTtheTotherTextreme,TweTcouldTa
rgueTthatTtheseTareTnon-
economicTphenomenaTandTareTbestThandledTthroughTtheTpoliticalTprocess.TATclassicT(andThighlyTreleva
nt)TthoughtTquestionTthatTillustratesTthisTdebateTgoesTsomethingTlikeTthis:T“ATfirmThasTestimatedTthatTth
eTcostTofTimprovingTtheTsafetyTofToneTofTitsTproductsTisT$30Tmillion.THowever,TtheTfirmTbelievesTthatTi
mprovingTtheTsafetyTofTtheTproductTwillTonlyTsaveT$20TmillionTinTproductTliabilityTclaims.TWhatTshould
TtheTfirmTdo?”
13. TheTgoalTwillTbeTtheTsame,TbutTtheTbestTcourseTofTactionTtowardTthatTgoalTmayTbeTdifferentTbecauseTofTd
ifferingTsocial,Tpolitical,TandTeconomicTinstitutions.
14. TheTgoalTofTmanagementTshouldTbeTtoTmaximizeTtheTshareTpriceTforTtheTcurrentTshareholders.TIfTmanag
ementTbelievesTthatTitTcanTimproveTtheTprofitabilityTofTtheTfirmTsoTthatTtheTshareTpriceTwillTexceedT$35,T
thenTtheyTshouldTfightTtheTofferTfromTtheToutsideTcompany.TIfTmanagementTbelievesTthatTthisTbidderTorT
otherTunidentifiedTbiddersTwillTactuallyTpayTmoreTthanT$35TperTshareTtoTacquireTtheTcompany,TthenTthe
yTshouldTstillTfightTtheToffer.THowever,TifTtheTcurrentTmanagementTcannotTincreaseTtheTvalueTofTtheTfir
mTbeyondTtheTbidTprice,TandTnoTotherThigherTbidsTcomeTin,TthenTmanagementTisTnotTactingTinTtheTintere
stsTofTtheTshareholdersTbyTfightingTtheToffer.TSinceTcurrentTmanagersToftenTloseTtheirTjobsTwhenTtheTcor
porationTisTacquired,TpoorlyTmonitoredTmanagersThaveTanTincentiveTtoTfightTcorporateTtakeoversTinTsitu
ationsTsuchTasTthis.
15. WeTwouldTexpectTagencyTproblemsTtoTbeTlessTsevereTinTotherTcountries,TprimarilyTdueTtoTtheTrelativelyT
smallTpercentageTofTindividualTownership.TFewerTindividualTownersTshouldTreduceTtheTnumberTofTdive
rseTopinionsTconcerningTcorporateTgoals.TTheThighTpercentageTofTinstitutionalTownershipTmightTleadTto
TaThigherTdegreeTofTagreementTbetweenTownersTandTmanagersTonTdecisionsTconcerningTriskyTprojects.TI
nTaddition,TinstitutionsTmayTbeTbetterTableTtoTimplementTeffectiveTmonitoringTmechanismsTonTmanager
sTthanTcanTindividualTowners,TbasedTonTtheTinstitutions’TdeeperTresourcesTandTexperiencesTwithTtheirTo
wnTmanagement.TTheTincreaseTinTinstitutionalTownershipTofTstockTinTtheTUnitedTStatesTandTtheTgrowing
TactivismTofTtheseTlargeTshareholderTgroupsTmayTleadTtoTaTreductionTinTagencyTproblemsTforTU.S.Tcorpo
rationsTandTaTmoreTefficientTmarketTforTcorporateTcontrol.
13th Edition Ross, Westerfield, and Jordan
Chapters 1 - 27
,CHAPTERT1:TIntroductionTtoTCorporateTFinance
CHAPTERT2:TFinancialTStatements,TTaxes,TAndTCashTFlow
CHAPTERT3:TWorkingTwithTFinancialTStatements
CHAPTERT4:TLong-TermTFinancialTPlanningTandTGrowth
CHAPTERT5:TIntroductionTtoTValuation:TTheTTimeTValueTofTMoney
CHAPTERT6:TDiscountedTCashTFlowTValuation
CHAPTERT7:TInterestTRatesTandTBondTValuation
CHAPTERT8:TStockTValuation
CHAPTERT9:TNetTPresentTValueTandTOtherTInvestmentTCriteria
CHAPTERT10:TMakingTCapitalTInvestmentTDecisions
CHAPTERT11:TProjectTAnalysisTandTEvaluation
CHAPTERT12:TSomeTLessonsTfromTCapitalTMarketTHistory
CHAPTERT13:TReturn,TRisk,TAndTtheTSecurityTMarketTLine
CHAPTERT14:TCostTofTCapital
CHAPTERT15:TRaisingTCapital
CHAPTERT16:TFinancialTLeverageTandTCapitalTStructureTPolicy
CHAPTERT17:TDividendsTandTPayoutTPolicy
CHAPTERT18:TShort-TermTFinanceTandTPlanning
CHAPTERT19:TCashTandTLiquidityTManagement
CHAPTERT20:TCreditTandTInventoryTManagement
CHAPTERT21:TInternationalTCorporateTFinance
CHAPTERT22:TBehavioralTFinance:TImplicationsTforTFinancialTManage
CHAPTERT23:TEnterpriseTRiskTManagement
CHAPTERT24:OptionsTandTCorporateTFinance
CHAPTERT25:TOptionTValuation
CHAPTERT26:TMergersTandTAcquisitions
CHAPTERT27:TLeasing
,CHAPTER 1 T
INTRODUCTION TO CORPORATE T T T
FINANCE
AnswersTtoTConceptsTReviewTandTCriticalTThinkingTQuestions
1. CapitalTbudgetingT(decidingTwhetherTtoTexpandTaTmanufacturingTplant),TcapitalTstructureT(decidingTwh
etherTtoTissueTnewTequityTandTuseTtheTproceedsTtoTretireToutstandingTdebt),TandTworkingTcapitalTmanag
ementT(modifyingTtheTfirm’sTcreditTcollectionTpolicyTwithTitsTcustomers).
2. Disadvantages:TunlimitedTliability,TlimitedTlife,TdifficultyTinTtransferringTownership,ThardTtoTraiseTcapit
alTfunds.TSomeTadvantages:Tsimpler,TlessTregulation,TtheTownersTareTalsoTtheTmanagers,TsometimesTper
sonalTtaxTratesTareTbetterTthanTcorporateTtaxTrates.
3. TheTprimaryTdisadvantageTofTtheTcorporateTformTisTtheTdoubleTtaxationTtoTshareholdersTofTdistributedTe
arningsTandTdividends.TSomeTadvantagesTinclude:TlimitedTliability,TeaseTofTtransferability,TabilityTtoTrai
seTcapital,TunlimitedTlife,TandTsoTforth.
4. InTresponseTtoTSarbanes-
Oxley,TsmallTfirmsThaveTelectedTtoTgoTdarkTbecauseTofTtheTcostsTofTcompliance.TTheTcostsTtoTcomplyTw
ithTSarboxTcanTbeTseveralTmillionTdollars,TwhichTcanTbeTaTlargeTpercentageT ofT aT smallT firmsT profits.T A
T majorT costT ofT goingT darkT isT lessT accessT toT capital.T SinceT theTfirmTisTnoTlongerTpubliclyTtraded,TitTcanT
noTlongerTraiseTmoneyTinTtheTpublicTmarket.TAlthoughTtheTcompanyTwillTstillThaveTaccessTtoTbankTloan
sTandTtheTprivateTequityTmarket,TtheTcostsTassociatedTwithTraisingTfundsTinTtheseTmarketsTareTusuallyThi
gherTthanTtheTcostsTofTraisingTfundsTinTtheTpublicTmarket.
5. TheT treasurer’sT officeT andT theT controller’sT officeT areT theT twoT primaryT organizationalT groupsT thatTr
eportTdirectlyTtoTtheTchiefTfinancialTofficer.TTheTcontroller’sTofficeThandlesTcostTandTfinancialTaccounti
ng,TtaxTmanagement,TandTmanagementTinformationTsystems,TwhileTtheTtreasurer’sTofficeTisTresponsible
T forT cashT andT creditT management,T capitalT budgeting,T andT financialT planning.T Therefore,TtheTstudyTof
TcorporateTfinanceTisTconcentratedTwithinTtheTtreasuryTgroup’sTfunctions.
6. ToTmaximizeTtheTcurrentTmarketTvalueT(shareTprice)TofTtheTequityTofTtheTfirmT(whetherTit’sTpublicly-
TtradedTorTnot).
7. InTtheTcorporateTformTofTownership,TtheTshareholdersTareTtheTownersTofTtheTfirm.TTheTshareholdersTele
ctTtheTdirectorsTofTtheTcorporation,TwhoTinTturnTappointTtheTfirm’sTmanagement.TThisTseparationTofTow
nershipTfromTcontrolTinTtheTcorporateTformTofTorganizationTisTwhatTcausesTagencyTproblemsTtoTexist.T
ManagementTmayTactTinTitsTownTorTsomeoneTelse’sTbestTinterests,TratherTthanTthoseTofTtheTshareholders
.TIfTsuchTeventsToccur,TtheyTmayTcontradictTtheTgoalTofTmaximizingTtheTshareTpriceTofTtheTequityTofTtheT
firm.
8. ATprimaryTmarketTtransaction.
, B-2T SOLUTIONS
9. InTauctionTmarketsTlikeTtheTNYSE,TbrokersTandTagentsTmeetTatTaTphysicalTlocationT(theTexchange)TtoTm
atchTbuyersTandTsellersTofTassets.TDealerTmarketsTlikeTNASDAQTconsistTofTdealersToperatingTatTdispers
edTlocalesTwhoTbuyTandTsellTassetsTthemselves,TcommunicatingTwithTotherTdealersTeitherTelectronically
TorTliterallyTover-the-counter.
10. SuchTorganizationsTfrequentlyTpursueTsocialTorTpoliticalTmissions,TsoTmanyTdifferentTgoalsTareTconceiv
able.TOneTgoalTthatTisToftenTcitedTisTrevenueTminimization;Ti.e.,TprovideTwhateverTgoodsTandTservicesTa
reTofferedTatTtheTlowestTpossibleTcostTtoTsociety.TATbetterTapproachTmightTbeTtoTobserveTthatTevenTaTnot
-for-
profitTbusinessThasTequity.TThus,ToneTanswerTisTthatTtheTappropriateTgoalTisT toTmaximizeTtheTvalueTofTt
heTequity.
11. Presumably,TtheTcurrentTstockTvalueTreflectsTtheTrisk,Ttiming,TandTmagnitudeTofTallTfutureTcashTflows,Tb
othTshort-termTandTlong-term.TIfTthisTisTcorrect,TthenTtheTstatementTisTfalse.
12. AnTargumentTcanTbeTmadeTeitherTway.TAtTtheToneTextreme,TweTcouldTargueTthatTinTaTmarketTeconomy,Ta
llTofTtheseTthingsTareTpriced.TThereTisTthusTanToptimalTlevelTof,TforTexample,TethicalTand/orTillegalTbeha
vior,TandTtheTframeworkTofTstockTvaluationTexplicitlyTincludesTthese.TAtTtheTotherTextreme,TweTcouldTa
rgueTthatTtheseTareTnon-
economicTphenomenaTandTareTbestThandledTthroughTtheTpoliticalTprocess.TATclassicT(andThighlyTreleva
nt)TthoughtTquestionTthatTillustratesTthisTdebateTgoesTsomethingTlikeTthis:T“ATfirmThasTestimatedTthatTth
eTcostTofTimprovingTtheTsafetyTofToneTofTitsTproductsTisT$30Tmillion.THowever,TtheTfirmTbelievesTthatTi
mprovingTtheTsafetyTofTtheTproductTwillTonlyTsaveT$20TmillionTinTproductTliabilityTclaims.TWhatTshould
TtheTfirmTdo?”
13. TheTgoalTwillTbeTtheTsame,TbutTtheTbestTcourseTofTactionTtowardTthatTgoalTmayTbeTdifferentTbecauseTofTd
ifferingTsocial,Tpolitical,TandTeconomicTinstitutions.
14. TheTgoalTofTmanagementTshouldTbeTtoTmaximizeTtheTshareTpriceTforTtheTcurrentTshareholders.TIfTmanag
ementTbelievesTthatTitTcanTimproveTtheTprofitabilityTofTtheTfirmTsoTthatTtheTshareTpriceTwillTexceedT$35,T
thenTtheyTshouldTfightTtheTofferTfromTtheToutsideTcompany.TIfTmanagementTbelievesTthatTthisTbidderTorT
otherTunidentifiedTbiddersTwillTactuallyTpayTmoreTthanT$35TperTshareTtoTacquireTtheTcompany,TthenTthe
yTshouldTstillTfightTtheToffer.THowever,TifTtheTcurrentTmanagementTcannotTincreaseTtheTvalueTofTtheTfir
mTbeyondTtheTbidTprice,TandTnoTotherThigherTbidsTcomeTin,TthenTmanagementTisTnotTactingTinTtheTintere
stsTofTtheTshareholdersTbyTfightingTtheToffer.TSinceTcurrentTmanagersToftenTloseTtheirTjobsTwhenTtheTcor
porationTisTacquired,TpoorlyTmonitoredTmanagersThaveTanTincentiveTtoTfightTcorporateTtakeoversTinTsitu
ationsTsuchTasTthis.
15. WeTwouldTexpectTagencyTproblemsTtoTbeTlessTsevereTinTotherTcountries,TprimarilyTdueTtoTtheTrelativelyT
smallTpercentageTofTindividualTownership.TFewerTindividualTownersTshouldTreduceTtheTnumberTofTdive
rseTopinionsTconcerningTcorporateTgoals.TTheThighTpercentageTofTinstitutionalTownershipTmightTleadTto
TaThigherTdegreeTofTagreementTbetweenTownersTandTmanagersTonTdecisionsTconcerningTriskyTprojects.TI
nTaddition,TinstitutionsTmayTbeTbetterTableTtoTimplementTeffectiveTmonitoringTmechanismsTonTmanager
sTthanTcanTindividualTowners,TbasedTonTtheTinstitutions’TdeeperTresourcesTandTexperiencesTwithTtheirTo
wnTmanagement.TTheTincreaseTinTinstitutionalTownershipTofTstockTinTtheTUnitedTStatesTandTtheTgrowing
TactivismTofTtheseTlargeTshareholderTgroupsTmayTleadTtoTaTreductionTinTagencyTproblemsTforTU.S.Tcorpo
rationsTandTaTmoreTefficientTmarketTforTcorporateTcontrol.
