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