INSTRUCTOR’S
SOLUTIONS MANUAL
Corporate Finance
Sixth Canadian Edition
Jonathan Berk
Stanford University
Peter DeMarzo
Stanford University
David Stangeland
University of Manitoba
** Immediate Download
** Swift Response
** All Chapters included
** Data Case Solutions
** Problem solutions
** Excel Solutions
, Contents
Part I: Introduction
Chapter 1 The Corporation and Financial Markets 1
Chapter 2 Introduction to Financial Statement Analysis 5
Part II: Tools
Chapter 3 Arbitrage and Financial Decision Making 15
Chapter 4 The Time Value of Money 26
Chapter 5 Interest Rates 48
Part III: Basic Valuation
Chapter 6 Valuing Bonds 64
Chapter 7 Valuing Stocks 76
Chapter 8 Investment Decision Rules 84
Chapter 9 Fundamentals of Capital Budgeting 103
Part IV: Risk and Return
Chapter 10 Capital Markets and the Pricing of Risk 113
Chapter 11 Optimal Portfolio Choice and the Capital Asset Pricing 122
Model
Chapter 12 Estimating the Cost of Capital 137
Chapter 13 Investor Behaviour and Capital Market Efficiency 143
Part V: Options
Chapter 14 Financial Options 150
Chapter 15 Option Valuation 159
Chapter 16 Real Options 169
Part VI: Capital Structure and Dividend Policy
Chapter 17 Capital Structure in a Perfect Market 192
Chapter 18 Debt and Taxes 199
Chapter 19 Financial Distress, Managerial Incentives, and 206
Information
Chapter 20 Payout Policy 214
Part VII: Advanced Valuation
Chapter 21 Capital Budgeting and Valuation with Leverage 220
Chapter 22 Valuation and Financial Modelling: A Case Study 234
Part VIII: Long-Term Financing
Chapter 23 Raising Equity Capital 242
Chapter 24 Debt Financing 247
Chapter 25 Leasing 250
ii
,Part IX: Short-Term Financing
Chapter 26 Working Capital Management 256
Chapter 27 Short-Term Financial Planning 260
Part X: Special Topics
Chapter 28 Mergers and Acquisitions 264
Chapter 29 Corporate Governance 267
Chapter 30 Risk Management 270
Chapter 31 International Corporate Finance 279
iii
, Chapter 1
The Corporation and Financial Markets
1-1. A corporation is a legal entity separate from its owners. This means ownership shares in the corporation
can be freely traded. None of the other organizational forms share this characteristic.
1-2. Owners’ liability is limited to the amount they invested in the firm. Shareholders are not responsible for
any encumbrances of the firm; in particular, they cannot be required to pay back any debts incurred by the
firm.
1-3. Corporations (all shareholders have limited liability). Limited partnerships provide limited liability for the
limited partners, but not for the general partners.
1-4. Advantages: Limited liability, liquidity, infinite life. Disadvantages: Double taxation, separation of ownership
and control.
1-5. The corporation that only holds real estate must pay corporate income taxes. The real estate investment
trust (REIT) does not pay corporate taxes but must pass through substantially all of the income to the trust
unit holders to whom it is taxable.
1-6. All calculations are on a ‘per-share basis’.
At the business level, corporate tax will be paid. Corporate Tax = $2 .34 = $0.68. After corporate tax,
there is $2 − $0.68 = $1.32 to be paid out as a dividend.
At the personal level, $1.32 is received as a dividend. Personal tax on the dividend is $1.32 .18 = $0.24.
This leaves $1.08 after all taxes.
If the shares were held in a TFSA, there would be no personal taxes and thus the amount left after all taxes
would be $1.32.
1-7. All calculations are on a ‘per-unit basis’.
At the business level, no corporate tax will be paid as this is a REIT. Thus, there is the full $2 to be paid out
as a distribution.
At the personal level, $2 is received as a distribution from the REIT. Personal tax on the distribution is
$2 .40 = $0.80. This leaves $1.20 after all taxes.
If the units were held in a TFSA, there would be no personal taxes and thus the amount left after all taxes
would be $2.00. So no taxes would be paid at either the business or personal level and you would get to
keep the full amount!
1-8. As the manager of an iPhone applications developer, you will make three types of financial decisions.
i. You will make investment decisions such as determining which type of iPhone application projects
will offer your company a positive NPV and should, therefore, be developed by your company.
ii. You will make the decision on how to fund your iPhone application investments and what mix of debt
and equity your company will have.
1
SOLUTIONS MANUAL
Corporate Finance
Sixth Canadian Edition
Jonathan Berk
Stanford University
Peter DeMarzo
Stanford University
David Stangeland
University of Manitoba
** Immediate Download
** Swift Response
** All Chapters included
** Data Case Solutions
** Problem solutions
** Excel Solutions
, Contents
Part I: Introduction
Chapter 1 The Corporation and Financial Markets 1
Chapter 2 Introduction to Financial Statement Analysis 5
Part II: Tools
Chapter 3 Arbitrage and Financial Decision Making 15
Chapter 4 The Time Value of Money 26
Chapter 5 Interest Rates 48
Part III: Basic Valuation
Chapter 6 Valuing Bonds 64
Chapter 7 Valuing Stocks 76
Chapter 8 Investment Decision Rules 84
Chapter 9 Fundamentals of Capital Budgeting 103
Part IV: Risk and Return
Chapter 10 Capital Markets and the Pricing of Risk 113
Chapter 11 Optimal Portfolio Choice and the Capital Asset Pricing 122
Model
Chapter 12 Estimating the Cost of Capital 137
Chapter 13 Investor Behaviour and Capital Market Efficiency 143
Part V: Options
Chapter 14 Financial Options 150
Chapter 15 Option Valuation 159
Chapter 16 Real Options 169
Part VI: Capital Structure and Dividend Policy
Chapter 17 Capital Structure in a Perfect Market 192
Chapter 18 Debt and Taxes 199
Chapter 19 Financial Distress, Managerial Incentives, and 206
Information
Chapter 20 Payout Policy 214
Part VII: Advanced Valuation
Chapter 21 Capital Budgeting and Valuation with Leverage 220
Chapter 22 Valuation and Financial Modelling: A Case Study 234
Part VIII: Long-Term Financing
Chapter 23 Raising Equity Capital 242
Chapter 24 Debt Financing 247
Chapter 25 Leasing 250
ii
,Part IX: Short-Term Financing
Chapter 26 Working Capital Management 256
Chapter 27 Short-Term Financial Planning 260
Part X: Special Topics
Chapter 28 Mergers and Acquisitions 264
Chapter 29 Corporate Governance 267
Chapter 30 Risk Management 270
Chapter 31 International Corporate Finance 279
iii
, Chapter 1
The Corporation and Financial Markets
1-1. A corporation is a legal entity separate from its owners. This means ownership shares in the corporation
can be freely traded. None of the other organizational forms share this characteristic.
1-2. Owners’ liability is limited to the amount they invested in the firm. Shareholders are not responsible for
any encumbrances of the firm; in particular, they cannot be required to pay back any debts incurred by the
firm.
1-3. Corporations (all shareholders have limited liability). Limited partnerships provide limited liability for the
limited partners, but not for the general partners.
1-4. Advantages: Limited liability, liquidity, infinite life. Disadvantages: Double taxation, separation of ownership
and control.
1-5. The corporation that only holds real estate must pay corporate income taxes. The real estate investment
trust (REIT) does not pay corporate taxes but must pass through substantially all of the income to the trust
unit holders to whom it is taxable.
1-6. All calculations are on a ‘per-share basis’.
At the business level, corporate tax will be paid. Corporate Tax = $2 .34 = $0.68. After corporate tax,
there is $2 − $0.68 = $1.32 to be paid out as a dividend.
At the personal level, $1.32 is received as a dividend. Personal tax on the dividend is $1.32 .18 = $0.24.
This leaves $1.08 after all taxes.
If the shares were held in a TFSA, there would be no personal taxes and thus the amount left after all taxes
would be $1.32.
1-7. All calculations are on a ‘per-unit basis’.
At the business level, no corporate tax will be paid as this is a REIT. Thus, there is the full $2 to be paid out
as a distribution.
At the personal level, $2 is received as a distribution from the REIT. Personal tax on the distribution is
$2 .40 = $0.80. This leaves $1.20 after all taxes.
If the units were held in a TFSA, there would be no personal taxes and thus the amount left after all taxes
would be $2.00. So no taxes would be paid at either the business or personal level and you would get to
keep the full amount!
1-8. As the manager of an iPhone applications developer, you will make three types of financial decisions.
i. You will make investment decisions such as determining which type of iPhone application projects
will offer your company a positive NPV and should, therefore, be developed by your company.
ii. You will make the decision on how to fund your iPhone application investments and what mix of debt
and equity your company will have.
1
