Principles of Corporate Finance, 14th Edition by Richard Brealey & Stewart Myers | Complete Solution Manual Chapters 1–34

SOLUTION MANUAL FOR

Principles Of Corporate Finance

14th Edition By Richard Brealey, Stewart Myers, ALL Chapters (1 - 34)




TABLE OF CONTENTS ZI ZI




Chapter 1: Introduction to Corporate Finance
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Chapter 2: How to Calculate Present Values
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Chapter 3: Valuing Bonds
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,Chapter 4: Valuing Stocks
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Chapter 5: Net Present Value and Other Investment Criteria
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Chapter 6: Making Investment Decisions with the Net Present Value Rule
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Chapter 7: Introduction to Risk, Diversification, and Portfolio Selection
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Chapter 8: The Capital Asset Pricing Model
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Chapter 9: Risk and the Cost of Capital
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Chapter 10: Project Analysis
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Chapter 11: How to Ensure That Projects Truly Have PositiveNPVs
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Chapter 12: Efficient Markets and Behavioral Finance
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Chapter 13: An Overview of Corporate Financing
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Chapter 14: How Corporations Issue Securities
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Chapter 15: Payout Policy
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Chapter 16: Does Debt Policy Matter?
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Chapter 17: How Much Should a Corporation Borrow?
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Chapter 18: Financing and Valuation
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Chapter 19: Agency Problems and Corporate Governance
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Chapter 20: Stakeholder Capitalism and Responsible Business
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Chapter 21: Understanding Options
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Chapter 22: Valuing Options
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Chapter 23: Real Options
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Chapter 24: Credit Risk and the Value of Corporate Debt
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Chapter 25: The Many Different Kinds of Debt
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Chapter 26: Leasing
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Chapter 27: Managing Risk
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Chapter 28: International Financial Management
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Chapter 29: Financial Analysis
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Chapter 30: Financial Planning
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Chapter 31: Working Capital Management
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Chapter 32: Mergers
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Chapter 33: Corporate Restructuring
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Chapter 34: Conclusion: What We Do and Do Not Know about Finance
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, CHAPTER 1 zi




Introduction to Corporate Finance zi zi zi




Thevalues shown in the solutions may be rounded for display purposes.However, the answers werederived usin
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g a spreadsheet without any intermediate rounding.
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Answers to Problem Sets zi zi zi




1. a. real

b. executive airplanes zi




c. brand names zi




d. financial

e. bonds

*f. investment or capital expenditure zi zi zi




*g. capital budgeting or investment zi zi zi




h. financing

*Note that f and g are interchangeable in the question.
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Esttime: 01-05
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2. A trademark, a factory, undeveloped land, and your work force (c, d, e, and g) are all real assets. Real ass
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ets are identifiable as items with intrinsic value. The others in the list are financial assets,that is, these as
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sets derive value because of a contractual claim.
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3. a.
Financial assets, such as stocks or bank loans, are claims held by investors. Corporati zi zi zi zi zi zi zi zi zi zi zi zi zi




ons sell financial assets to raise the cash to invest in real assets such as plantand equipment.
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Some real assets are intangible. zi zi zi zi




b. Capital expenditure means investment in real assets. Financing means raising the cashfor thzi zi zi zi zi zi zi zi zi zi z i i
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is investment. zi




c. The shares of public corporations are traded on stock exchanges and can be purchasedby a w
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ide range of investors. The shares of closely held corporations are not publicly traded and are
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held by a small group of private investors. zi zi zi zi zi zi zi




d. Unlimited liability: Investors are responsible for all the firm‘s debts. A sole proprietor hasunlim zi zi zi zi zi zi zi zi zi zi zi zi zi i
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ited liability. Investors in corporations have limited liability. They can lose their investment, bu
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t no more.
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, 4. Items c and d apply to corporations. Because corporations have perpetual life, ownership can betransf
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erred without affecting operations, and managers can be fired with no effect on ownership. Other forms
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of business may have unlimited liability and limited life.
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5. Separation of ownership facilitates the keyattributes of a corporation, including limited liability forinvest zi zi zi zi zi zi zi zi zi zi z i zi zi i
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ors, transferability of ownership, a separate legal personality of the corporation, and delegated centrali
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zed management. These four attributes provide substantial benefit for investors, including the ability t
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o diversify their investment among many uncorrelated returns—
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a very valuable tool explored in later chapters. Also, these attributes allow investors to quickly exit,enter
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, or short sell an investment, thereby generating an active liquid market for corporations.
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However, these positive aspects also introduce substantial negative externalities as well. The separati zi zi zi zi zi zi zi zi zi zi z i zi




on of ownership from management typically leads to agency problems, where managersprefer to consu
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me private perks or make other decisions for their private benefit—
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rather than maximize shareholder wealth. Shareholders tend to exercise less oversight of each individu
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al investment as their diversification increases. Finally, the corporation‘s separate legal personalitymak
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es it difficult to enforce accountability if they externalize costs onto society.
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6. Shareholders will only vote to maximize shareholder wealth. Shareholders can modify their pattern zi zi zi zi zi zi zi zi zi zi zi zi z




of consumption through borrowing and lending, match risk preferences, and hopefullybalance thei
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r own checkbooks (or hire a qualified professional to help them with these tasks).
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7. If the investment increases the firm‘s wealth, it increases the firm‘s share value. Ms. Espinozacould t
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hen sell some or all these more valuable shares to provide for her retirement income.
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8. a.
Assuming that the encabulator market is risky, an 8% expected return o zi zi zi zi zi zi zi zi zi zi zi




nthe F&H encabulator investments maybe inferior to a 4% return on U.S.
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government securities, depending on the relative risk between the two assets. zi zi zi zi zi zi zi zi zi zi




b.
Unless the financial assets are as safe as U.S. government securities, their cost of capital zi zi zi zi zi zi zi zi zi zi zi zi zi zi i
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would be higher. The CFO could consider expected returns on assets with similar risk.
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Esttime: 06-10
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9. Managers would act in shareholders‘ interests because theyhave a legal duty to act in their interests. M zi zi zi zi zi zi zi zi zi zi zi zi zi zi zi zi z i




anagers may also receive compensation— zi zi zi zi




bonuses, stock, and option payouts with value tied (roughly) to firm performance. Managers may fear p
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ersonal reputational damage from not acting in shareholders‘ interests. And managers can be fired by th
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e board of directors (electedby shareholders). If managers still fail to act in shareholders‘ interests, sha
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reholders may sell their shares, lowering the stock price and potentially creating the possibility of a takeo zi zi zi zi zi zi zi zi zi zi zi zi zi zi zi zi




ver, which can again lead to changes in the board of directors and senior management.
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Esttime: 01-05
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