[DOCUMENT TITLE]
Solution Manual For Essentials Of Corporate Finance,
11th Edition By Stephen A. Ross, Randolph W.
Westerfield, Bradford D. Jordan, J. Ari Pandes,
Thomas Holloway 100% A+ (All Chapters Included)
2026
Page 1 of 696
, [DOCUMENT TITLE]
Chapter 1-26
1
Chapter
Introduction To Corporate Finance
Learning Objectives
Lo1 The B a si c Typesof Financial Managementdecisions And The Role Of The Financial Manager.
Lo2 The Financial Implications Of The Different Forms Of Business Organization.
Lo3 The Goal Of Financial Management.
Lo4 The Conflicts Of Interests That Can Arise Between Managers And Owners.
Lo5 The Roles Of Financial Institutions And Markets.
Lo6 Types Of Financial Institutions.
Lo7 Trends In Financial Markets.
Answers To Concepts Review And Critical Thinking Questions
1. (Lo1) Capital Budgeting (Deciding On 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). (Lo1)
2. (Lo2) 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.
3. (Lo2) 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. (Lo4) 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.
5. (Lo3) To Maximize The Current Market Value (Share Price) Of The Equity Of The Firm
(Whether It‘S Publicly-Traded Or Not).
6. (Lo4) 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
Page 2 of 696
, [DOCUMENT TITLE]
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.
7. (Lo5) A Primary Market Transaction. A Secondary Market Transaction Would Entail
The Sale Between Two 3rd Parties (I.E. Not The Corporation).
8. (Lo5) In Auction Markets Like The Toronto Stock Exchange (Tsx), Brokers And Agents
Meet At A Central Location (The Exchange) To Match Buyers And Sellers Of Assets.
Physical Locations For Stock Markets Are Disappearing As Trading Becomes More
Electronic. 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. Dealer Markets Are Less Transparent Than
Auction Markets Where Trades Are Reported Publicly Almost Immediately. The Auction
Market Run By The Tsx Is Where The Stocks Of Larger Canadian Companies Are Traded;
The Tsx Also Operates A Dealer Market Called The Venture Exchange For Companies Too
Small To Qualify For The Tsx Auction Exchange.
9. (Lo3) 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. Another Would Be To Best Serve The Maximum Possible Number Of Stakeholders
At The Lowest Cost. 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.
10. (Lo3) 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.
11. (Lo3) 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 And Lost Customer
Goodwill. What Should The Firm Do?‖
12. (Lo3) 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.
13. (Lo4) 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
Page 3 of 696
4
, [DOCUMENT TITLE]
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.
14. (Lo4) 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 Means That Each Individual Owner Has A Greater Incentive To Monitor And
Control The Firm—I.E. There Is Less Free-Riding. 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 Canada And In The
United States And The Growing Activism Of These Large Shareholder Groups May Lead To
A Reduction In Agency Problems For Canadian And U.S. Corporations And A More
Efficient Market For Corporate Control.
15. (Lo5) Major Institutions:
Chartered Banks -Accept Deposits And Issue Commercial Loans, Corporate Loans, Personal
Loans And Mortgages.
Trust Companies-Accept Deposits And Make Loans, But Also Engage In Fiduciary
Activities Such As Managing Assets For Estates, Registered Retirement Savings Plans, Etc.
Investment Dealers -Non-Depository Institutions That Assist Firms In Issuing New
Securities. Insurance Companies -Engage In Indirect Financing By Accepting Funds In A
Form Similar To A Deposit And Making Loans.
Pension Funds -Invest Contributions From Employers And Employees In Securities Offered
By Financial Markets.
Mutual Funds -Pool Individual Investments To Purchase A Diversified Portfolio.
Hedge Funds -Cater To Sophisticated Investors And Seek High Returns By Using
Aggressive Financial Strategies Prohibited By Mutual Funds.
Note That Larger Financial Institutions May Embody Many Of These Different Institution.
For Example, Cibc Is A Chartered Bank That Owns An Investment Dealer And Mutual
Funds. Furthermore, It Has An Insurance Arm ―Cibc Insurance‖
Major Markets:
Money Market -Financial Markets Where Short-Term Debt Instruments Are Bought Andsold.
Capital Markets -Financial Markets Where Long-Term Debt And Equity Securities Are
Bought And Sold. Derivatives Markets – Where Options And Futures Are Traded On
Financial Instruments And Commodities Primary Markets Are Where Securities Are Sold
For The First Time; Secondary Markets Are Where Outstanding Securities Trade.
16. (Lo5) Spread Versus Fee Income:
Banks Earn Spread Or Interest Income By Borrowing From Depositors And Lending To
Borrowers (At A Higher Yield). An Example Is A Retail Deposit And A Mortgage. Banks Make
Non-Interest Or Fee Income When They Charge Commissions Or Fees For Services. An Example
Is An Overdraft Fee Or Atm Fee, Or The Example In The Text, The Stamping Fee On A
Banker‘S Acceptance (Which Is A Form Of Insurance And Arranging Fee).
17. (Lo5) Trends:
Financial Engineering -The Creation Of New Securities Or Financial Processes. This
Engineering Could Be Used To Package And Sell Risky Assets To Investors; For Example,
Banks Can Package And Sell Mortgages Into Mortgage Backed Securities And Sell These
On To Other Investors.
Derivative Securities -Options, Futures, Forwards, And Other Securities Whose Value Is
Page 4 of 696
Solution Manual For Essentials Of Corporate Finance,
11th Edition By Stephen A. Ross, Randolph W.
Westerfield, Bradford D. Jordan, J. Ari Pandes,
Thomas Holloway 100% A+ (All Chapters Included)
2026
Page 1 of 696
, [DOCUMENT TITLE]
Chapter 1-26
1
Chapter
Introduction To Corporate Finance
Learning Objectives
Lo1 The B a si c Typesof Financial Managementdecisions And The Role Of The Financial Manager.
Lo2 The Financial Implications Of The Different Forms Of Business Organization.
Lo3 The Goal Of Financial Management.
Lo4 The Conflicts Of Interests That Can Arise Between Managers And Owners.
Lo5 The Roles Of Financial Institutions And Markets.
Lo6 Types Of Financial Institutions.
Lo7 Trends In Financial Markets.
Answers To Concepts Review And Critical Thinking Questions
1. (Lo1) Capital Budgeting (Deciding On 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). (Lo1)
2. (Lo2) 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.
3. (Lo2) 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. (Lo4) 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.
5. (Lo3) To Maximize The Current Market Value (Share Price) Of The Equity Of The Firm
(Whether It‘S Publicly-Traded Or Not).
6. (Lo4) 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
Page 2 of 696
, [DOCUMENT TITLE]
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.
7. (Lo5) A Primary Market Transaction. A Secondary Market Transaction Would Entail
The Sale Between Two 3rd Parties (I.E. Not The Corporation).
8. (Lo5) In Auction Markets Like The Toronto Stock Exchange (Tsx), Brokers And Agents
Meet At A Central Location (The Exchange) To Match Buyers And Sellers Of Assets.
Physical Locations For Stock Markets Are Disappearing As Trading Becomes More
Electronic. 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. Dealer Markets Are Less Transparent Than
Auction Markets Where Trades Are Reported Publicly Almost Immediately. The Auction
Market Run By The Tsx Is Where The Stocks Of Larger Canadian Companies Are Traded;
The Tsx Also Operates A Dealer Market Called The Venture Exchange For Companies Too
Small To Qualify For The Tsx Auction Exchange.
9. (Lo3) 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. Another Would Be To Best Serve The Maximum Possible Number Of Stakeholders
At The Lowest Cost. 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.
10. (Lo3) 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.
11. (Lo3) 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 And Lost Customer
Goodwill. What Should The Firm Do?‖
12. (Lo3) 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.
13. (Lo4) 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
Page 3 of 696
4
, [DOCUMENT TITLE]
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.
14. (Lo4) 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 Means That Each Individual Owner Has A Greater Incentive To Monitor And
Control The Firm—I.E. There Is Less Free-Riding. 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 Canada And In The
United States And The Growing Activism Of These Large Shareholder Groups May Lead To
A Reduction In Agency Problems For Canadian And U.S. Corporations And A More
Efficient Market For Corporate Control.
15. (Lo5) Major Institutions:
Chartered Banks -Accept Deposits And Issue Commercial Loans, Corporate Loans, Personal
Loans And Mortgages.
Trust Companies-Accept Deposits And Make Loans, But Also Engage In Fiduciary
Activities Such As Managing Assets For Estates, Registered Retirement Savings Plans, Etc.
Investment Dealers -Non-Depository Institutions That Assist Firms In Issuing New
Securities. Insurance Companies -Engage In Indirect Financing By Accepting Funds In A
Form Similar To A Deposit And Making Loans.
Pension Funds -Invest Contributions From Employers And Employees In Securities Offered
By Financial Markets.
Mutual Funds -Pool Individual Investments To Purchase A Diversified Portfolio.
Hedge Funds -Cater To Sophisticated Investors And Seek High Returns By Using
Aggressive Financial Strategies Prohibited By Mutual Funds.
Note That Larger Financial Institutions May Embody Many Of These Different Institution.
For Example, Cibc Is A Chartered Bank That Owns An Investment Dealer And Mutual
Funds. Furthermore, It Has An Insurance Arm ―Cibc Insurance‖
Major Markets:
Money Market -Financial Markets Where Short-Term Debt Instruments Are Bought Andsold.
Capital Markets -Financial Markets Where Long-Term Debt And Equity Securities Are
Bought And Sold. Derivatives Markets – Where Options And Futures Are Traded On
Financial Instruments And Commodities Primary Markets Are Where Securities Are Sold
For The First Time; Secondary Markets Are Where Outstanding Securities Trade.
16. (Lo5) Spread Versus Fee Income:
Banks Earn Spread Or Interest Income By Borrowing From Depositors And Lending To
Borrowers (At A Higher Yield). An Example Is A Retail Deposit And A Mortgage. Banks Make
Non-Interest Or Fee Income When They Charge Commissions Or Fees For Services. An Example
Is An Overdraft Fee Or Atm Fee, Or The Example In The Text, The Stamping Fee On A
Banker‘S Acceptance (Which Is A Form Of Insurance And Arranging Fee).
17. (Lo5) Trends:
Financial Engineering -The Creation Of New Securities Or Financial Processes. This
Engineering Could Be Used To Package And Sell Risky Assets To Investors; For Example,
Banks Can Package And Sell Mortgages Into Mortgage Backed Securities And Sell These
On To Other Investors.
Derivative Securities -Options, Futures, Forwards, And Other Securities Whose Value Is
Page 4 of 696
