SOLUTION MANUAL FOR #z #z
Fundamentals #zOf #zCorporate #zFinance #z11ce #zStephen #zA. #zRoss, #zRandolph #zW.
#zWesterfield, #zBradford #zD. #zJordan, #zJ. #zAri #zPandes, #zThomas #zHolloway
Chapter 1-26 #z
CHAPTER 1 #z
INTRODUCTION TO CORPORATE FINANCE#z #z #z
Learning Objectives
LO1 The basic types of financial management decisions 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 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).
Ross et al, Fundamentals of Corporate Finance 11th Canadian Edition Solutions Manual
© 2022 McGraw-Hill Education Ltd.
7-1
,8. (LO5) #zIn #zauction #zmarkets #zlike #zthe #zToronto #zStock #zExchange #z(TSX), #zbrokers #zand #zagents
#zmeet #zat #za #zcentral #zlocation #z(the #zexchange) #zto #zmatch #zbuyers #zand #zsellers #zof #zassets. #zPhysical
#zlocations #zfor #zstock #zmarkets #zare #zdisappearing #zas #ztrading #zbecomes #zmore #zelectronic. #zDealer
#zmarkets #zlike #zNasdaq #zconsist #zof #zdealers #zoperating #zat #zdispersed #zlocales #zwho #zbuy #zand #zsell
#zassets #zthemselves, #zcommunicating #z with #zother #zdealers #zeither #zelectronically #zor #zliterally #zover-
the-counter. #zDealer #zmarkets #zare #zless #ztransparent #zthan #zauction #zmarkets #zwhere #ztrades #zare
#zreported #zpublicly #zalmost #zimmediately. # z The #zauction #zmarket #zrun #zby #zthe #zTSX #zis #z where #zthe
#zstocks #zof #zlarger #zCanadian #zcompanies #zare #ztraded; #zthe #zTSX #zalso #zoperates #za #zdealer #zmarket
#zcalled #zthe #zVenture #zExchange #zfor #zcompanies #ztoo # z small #zto #zqualify #zfor #zthe #zTSX #zauction
# z exchange.
9. (LO3) #zSuch #zorganizations #zfrequently #zpursue #zsocial #zor #zpolitical #zmissions, #zso #zmany #zdifferent
#zgoals #zare #zconceivable. #zOne #zgoal #zthat #zis #zoften #zcited #zis #zrevenue #z minimization; #zi.e., #zprovide
#z whatever #zgoods #zand #zservices #zare #zoffered #zat #zthe #zlowest #zpossible #zcost #zto #zsociety. #zAnother
#z would #zbe #zto #zbest #zserve #zthe #zmaximum #zpossible #znumber #zof #zstakeholders #zat #zthe #zlowest #zcost.
#zA #zbetter #zapproach #zmight #zbe #zto #zobserve #zthat #zeven #za #znot-for-profit #zbusiness #zhas #zequity.
#zThus, #zone #zanswer #zis #zthat #zthe #zappropriate #zgoal #zis #zto #zmaximize #zthe #zvalue #zof #zthe #zequity.
10. (LO3) #zPresumably, #zthe #zcurrent #zstock #zvalue #zreflects #zthe #zrisk, #ztiming, #zand #zmagnitude #zof #zall
#zfuture #zcash #zflows, #zboth #zshort-term #zand #zlong-term. #zIf #zthis #zis #zcorrect, #zthen #zthe #zstatement #zis
#zfalse.
11. (LO3) #zAn #zargument #zcan #zbe #zmade #zeither #zway. #zAt #zthe #zone #zextreme, #zwe #zcould #zargue #zthat #zin
#za #zmarket #zeconomy, #zall #zof #zthese #zthings #zare #zpriced. #zThere #zis #zthus #zan #zoptimal #zlevel #zof, #zfor
#zexample, #zethical #zand/or #zillegal #zbehavior, #zand #zthe #zframework #zof #zstock #zvaluation #zexplicitly
#zincludes #zthese. #zAt #zthe #zother #zextreme, #zwe #zcould #zargue #zthat #zthese #zare #znon-economic
#zphenomena #zand #zare #zbest #zhandled #zthrough #zthe #zpolitical #zprocess. #zA #zclassic #z(and #zhighly
#zrelevant) #zthought #zquestion #zthat #zillustrates #zthis #zdebate #zgoes #zsomething #zlike #zthis: #z―A #zfirm
#zhas #zestimated #zthat #zthe #zcost #zof #zimproving #zthe #zsafety #z of #zone #zof #zits #zproducts #zis #z$30 #zmillion.
#zHowever, #zthe #zfirm #zbelieves #zthat #zimproving #zthe #zsafety #zof #zthe #zproduct #zwill #zonly #zsave #z$20
# z million #zin #zproduct #zliability #zclaims #zand #zlost #zcustomer #zgoodwill. #zWhat #zshould #zthe #zfirm #zdo?‖
12. (LO3) #zThe #zgoal #zwill #zbe #zthe #zsame, #zbut #zthe #zbest #zcourse #zof #zaction #ztoward #zthat #zgoal #zmay #zbe
#zdifferent #zbecause #zof #zdiffering #zsocial, #zpolitical, #zand #zeconomic #zinstitutions.
13. (LO4) #zThe #zgoal #zof #zmanagement #zshould #zbe #zto #zmaximize #zthe #zshare #zprice #zfor #zthe #zcurrent
#zshareholders. #zIf #zmanagement #zbelieves #zthat #zit #zcan #zimprove #zthe #zprofitability #zof #zthe #zfirm #zso
#zthat #zthe #zshare #zprice #zwill #zexceed #z$35, #zthen #zthey #zshould #zfight #zthe #zoffer #zfrom #zthe #zoutside
#zcompany. #zIf #zmanagement #zbelieves #zthat #zthis #zbidder #zor #zother #zunidentified #zbidders #zwill
#zactually #zpay #zmore #zthan #z$35 #zper #zshare #zto #zacquire #zthe #zcompany, #zthen #zthey #zshould #zstill
#zfight #zthe #zoffer. #zHowever, #zif #zthe #zcurrent #z management #zcannot #zincrease #zthe #zvalue #zof #zthe #zfirm
#zbeyond #zthe #zbid #zprice, #zand #zno #zother #zhigher #zbids #zcome #zin, #zthen #zmanagement #zis #znot #zacting
#zin #zthe #zinterests #zof #zthe #zshareholders #zby #zfighting #zthe #zoffer. #zSince #zcurrent #zmanagers #zoften
#zlose #ztheir #zjobs #zwhen #zthe #zcorporation #zis #zacquired, #zpoorly #zmonitored #zmanagers #zhave #zan
#zincentive #zto #zfight # z corporate #ztakeovers #zin #zsituations #zsuch #zas #zthis.
14. (LO4) #zWe #zwould #zexpect #zagency #zproblems #zto #zbe #zless #zsevere #zin #zother #zcountries, #zprimarily
#zdue #zto #zthe #zrelatively #zsmall #zpercentage #zof #zindividual #zownership. #zFewer #zindividual #zowners
#zmeans #zthat #zeach #zindividual #zowner #zhas #za #zgreater #zincentive #zto #zmonitor #zand #zcontrol #zthe
#zfirm—i.e. #zthere #zis #zless #zfree-riding. #zThe #zhigh #zpercentage #zof #zinstitutional #zownership #zmight
#zlead #zto #za #zhigher #zdegree #zof #zagreement #zbetween #zowners #zand #zmanagers #zon #zdecisions
#zconcerning #zrisky #zprojects. #zIn #zaddition, #zinstitutions #zmay #zbe #zbetter #zable #zto #zimplement
#zeffective #zmonitoring #z mechanisms #zon #zmanagers #zthan #zcan #zindividual #zowners, #zbased #zon #zthe
#zinstitutions‘ #zdeeper #zresources #zand #zexperiences #zwith #ztheir #zown #z management. #zThe #zincrease #zin
#zinstitutional #zownership #zof #zstock #zin #zCanada #zand #zin #zthe #zUnited #zStates #zand #zthe #zgrowing
Ross #zet #zal, #zFundamentals #zof #zCorporate #zFinance #z11th #zCanadian #zEdition
#zSolutions #zManual
© #z2022 #zMcGraw-Hill #zEducation #zLtd.
7-2
, #z activism #zof #zthese #zlarge #zshareholder #zgroups #zmay #zlead #zto #za #zreduction #zin #zagency #zproblems
#z for #zCanadian #zand #zU.S. #zcorporations #zand #za #zmore #zefficient #zmarket #zfor #zcorporate #zcontrol.
1. (LO5) #zMajor #zinstitutions:
Chartered #zbanks #z-accept #zdeposits #zand #zissue #zcommercial #zloans, #zcorporate #zloans, #zpersonal
#zloans #zand #zmortgages.
Trust #zcompanies-accept #zdeposits #zand #zmake #zloans, #zbut #zalso #zengage #zin #zfiduciary #zactivities
#zsuch #zas #zmanaging #zassets #zfor #zestates, #zregistered #zretirement #zsavings #zplans, #zetc.
Investment #zdealers #z-non-depository #zinstitutions #zthat #zassist #zfirms #zin #zissuing #znew #zsecurities.
Insurance #zcompanies #z-engage #zin #zindirect #zfinancing #zby #zaccepting #zfunds #zin #za #zform #zsimilar #zto
#za #zdeposit #zand #zmaking #zloans.
Pension #zfunds #z-invest #zcontributions #zfrom #zemployers #zand #zemployees #zin #zsecurities #zoffered #zby
#zfinancial #z markets.
Mutual #zfunds #z-pool #zindividual #zinvestments #zto #zpurchase #za #zdiversified #zportfolio.
Hedge #zfunds #z-cater #zto #zsophisticated #zinvestors #zand #zseek #zhigh #zreturns #zby #zusing #zaggressive
#zfinancial #zstrategies #zprohibited #zby #zmutual #zfunds.
Note #zthat #zlarger #zfinancial #zinstitutions #zmay #zembody #zmany #zof #zthese #zdifferent #zinstitution. #zFor
#zexample, #zCIBC #zis #za #zchartered #zbank #zthat #zowns #zan #zinvestment #zdealer #zand #zmutual #zfunds.
#zFurthermore, #zit #zhas #zan #zinsurance #zarm #z―CIBC #zInsurance‖
Major #zmarkets:
Money #zmarket #z-financial #zmarkets #zwhere #zshort-term #zdebt #zinstruments #zare #zbought #zand #zsold.
Capital #zmarkets #z-financial #zmarkets #zwhere #zlong-term #zdebt #zand #zequity #zsecurities #zare #zbought
#zand #zsold. #zDerivatives #z markets #z– #z where #zoptions #zand #zfutures #zare #ztraded #zon #zfinancial
#zinstruments #zand #zcommodities #zPrimary # z markets # z are # z where # z securities # z are # z sold # z for
# z the # z first # z time; # z secondary # z markets # z are # z where #zoutstanding #zsecurities #ztrade.
2. (LO5) #zSpread #zversus #zFee #zIncome:
Banks #zearn #zspread #zor #zinterest #zincome #zby #zborrowing #zfrom #zdepositors #zand #zlending #zto #zborrowers
#z(at #za #zhigher #z yield). #zAn #zexample #zis #za #zretail #zdeposit #zand #za #zmortgage. #zBanks #z make #znon-interest
#zor #zfee #zincome #z when #zthey #zcharge #zcommissions #zor #zfees #zfor #zservices. #zAn #zexample #zis #zan #zoverdraft
#zfee #zor #zATM #zfee, #zor #zthe #zexample #zin #zthe #ztext, #zthe #zstamping #zfee #zon #za #zbanker‘s #zacceptance
#z(which #zis #za #zform #zof #zinsurance #zand #zarranging #zfee).
3. (LO5) #zTrends:
Financial #zengineering #z-the #zcreation #zof #znew #zsecurities #zor #zfinancial #zprocesses. #zThis #zengineering
#zcould #zbe #zused #zto #zpackage #zand #zsell #zrisky #zassets #zto #zinvestors; #zfor #zexample, #zbanks #zcan
#zpackage #zand #zsell #zmortgages #zinto #zmortgage #zbacked #zsecurities #zand #zsell #zthese #zon #zto #zother
#zinvestors.
Derivative #zsecurities #z-options, #zfutures, #zforwards, #zand #zother #zsecurities #zwhose #zvalue #zis #zderived
#zfrom #zthe #zprice #zof #zanother, #zunderlying #zasset. # z For #zexample, #za #zfutures #zcontract #zto #zpurchase
#zoil #zsets #za #zfixed #zpurchase/selling #zprice #zfor #za #zfuture #zdate, #zbut #zits #zvalue #zdepends #zon #zthe
#zprice #zof #zoil. #zThese #zderivatives #zcan #zhelp #zbusinesses #zdivest #zrisks #zthat #zare #znot #zcore #zto #ztheir
#zbusiness, #zsuch #zas #zforeign #zexchange #zand #zinput #zprice #z(like #zoil) #zrisk.
Regulatory #zdialectic #z-the #zpressures #zthat #zfinancial #zinstitutions #zand #zregulatory #zbodies #zexert #zon
#zeach # z other. # z For #zexample, #zwhen #zrestrictions #zare #zremoved, #zgrowth #zopportunities #zmay
#zincrease. # z However, #zthe #zabsence #zof #zregulatory #zrestrictions #z may #zalso #zlead #zto #zproblems #zsuch
#zas #zthe #zglobal #zfinancial #zcrisis #zstarting #zin #z2007 #zcaused #zby #zexcessive #zfinancial #zleverage, #zso #zit
#zis #zimportant #zthat #zthere #zbe #zan #zappropriate #zlevel #zof #zregulatory #zoversight.
ESG #z–Investors #zand #zcorporations #z(and #ztheir #zmany #zstakeholders) #zare #zincreasingly #zfocused #zon
#zEnvironmental, #zSocietal, #zand #zGovernance #zissues. #zThis #zincludes #zemployee #zand #zcustomer
#z welfare #zas #zwell #zas #zclimate #zchange #zand #zpollution.
These #ztrends #zhave #zmade #zfinancial #zmanagement #za #zmuch #zmore #zcomplex #zand #ztechnical #zactivity.
Ross #zet #zal, #zFundamentals #zof #zCorporate #zFinance #z11th #zCanadian #zEdition
#zSolutions #zManual
© #z2022 #zMcGraw-Hill #zEducation #zLtd.
7-3
, CHAPTER 2 #z
FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
#z #z #z #z #z
Learning #zObjectives
LO1 # z The #zdifference #zbetween #zaccounting #zvalue #z(or #z―book‖ #zvalue) #zand #zmarket #zvalue.
LO2 # z The #zdifference #zbetween #zaccounting #zincome #zand #zcash #zflow.
LO3 # z How #zto #zdetermine #za #zfirm‘s #zcash #zflow #zfrom #zits #zfinancial #zstatements.
LO4 # z The #zdifference #zbetween #zaverage #zand #zmarginal #ztax #zrates.
LO5 # z The #zbasics #zof #zCapital #zCost #zAllowance #z(CCA) #zand #zUndepreciated #zCapital #zCost #z(UCC).
Answers #zto #zConcepts #zReview #zand #zCritical #zThinking #zQuestions
1. (LO1) #zLiquidity #zmeasures #zhow #zquickly #zand #zeasily #zan #zasset #zcan #zbe #zconverted #zto #zcash
#z without #zsignificant #zloss #zin #zvalue. #zIt‘s #zdesirable #zfor #zfirms #zto #zhave #zhigh #zliquidity #zso #zthat
#zthey #zhave #za #zlarge #zfactor #zof #zsafety #zin #zmeeting #zshort-term #zcreditor #zdemands. #zHowever, #zsince
#zliquidity #zalso #zhas #zan #zopportunity #zcost #zassociated #zwith #zit—namely #zthat #zhigher #zreturns #zcan
#zgenerally #zbe #zfound #zby #zinvesting #zthe #zcash #zinto #zproductive #zassets—low #zliquidity #zlevels #zare
#zalso #zdesirable #zto #zthe #zfirm. #zIt‘s #zup #zto #zthe #zfirm‘s #zfinancial #z management #zstaff #zto #zfind #za
#zreasonable #zcompromise #zbetween #zthese #zopposing #zneeds.
2. (LO2) #zThe #zrecognition #zand #zmatching #zprinciples #zin #zfinancial #zaccounting #zcall #zfor #zrevenues,
#zand #zthe # z costs #zassociated #zwith #zproducing #zthose #zrevenues, #zto #zbe #z―booked‖ #zwhen #zthe
#zrevenue #zprocess #zis #zessentially #zcomplete, #znot #znecessarily #z when #zthe #zcash #zis #zcollected #zor #zbills
#zare #zpaid. #zNote #zthat #zthis #zway #zis #znot #znecessarily #zincorrect; #zit‘s #zthe #zway #zaccountants #zhave
#zchosen #zto #zdo #zit.
3. (LO1) #zHistorical #zcosts #zcan #zbe #zobjectively #zand #zprecisely #zmeasured #zwhereas #zmarket #zvalues
#zcan #zbe #zdifficult #zto #zestimate, #zand #zdifferent #zanalysts #zwould #zcome #zup #zwith #zdifferent #znumbers.
#zThus, #zthere #zis #za #ztradeoff #zbetween #zrelevance #z(market #zvalues) #zand #zobjectivity #z(book #zvalues).
4. (LO3) #zDepreciation #zis #za #znoncash #zdeduction #zthat #zreflects #zadjustments #zmade #zin #zasset #zbook
#zvalues #zin #zaccordance #zwith #zthe #zmatching #zprinciple #zin #zfinancial #zaccounting. #zInterest #zexpense
#zis #za #zcash #zoutlay, #zbut #zit‘s #za #zfinancing #zcost, #znot #zan #zoperating #zcost.
5. (LO1) # z Market # z values # z for #z corporations # z can # z never # z be # z negative. # z Imagine # z a # z share # z of # z stock # z selling # z for # z –
$20. #zThis #zwould #zmean #zthat #zif #zyou #zplaced #zan #zorder #zfor #z100 #zshares, #zyou #zwould #zget #zthe
#zstock #zalong #zwith #za #zcheck #zfor #z$2,000. #zHow #zmany #zshares #zdo #zyou #z want #zto #zbuy? #zMore
#zgenerally, #zbecause #zof #zcorporate #zbankruptcy #zlaws, #znet #zworth #zfor #za #zcorporation #zcannot #zbe
#znegative, #zimplying #zthat #zliabilities #zcannot #zexceed #zassets #zin #zmarket #zvalue.
6. (LO3) #zFor #za #zsuccessful #zcompany #zthat #zis #zrapidly #zexpanding, #zfor #zexample, #zcapital #zoutlays
#z will #zbe #zlarge, #zpossibly #zleading #zto #znegative #zcash #zflow #zfrom #zassets. #zIn #zgeneral, #zwhat
#zmatters #zis #zwhether #zthe #zmoney #zis #zspent #zwisely, #znot #zwhether #zcash #zflow #zfrom #zassets #zis
#zpositive #zor #znegative.
7. (LO3) #zIt‘s #zprobably #znot #za #zgood #zsign #zfor #zan #zestablished #zcompany, #zbut #zit #zwould #zbe #zfairly
#zordinary #zfor #za #zstart-up, #zso #zit #zdepends.
8. (LO3) #zFor #zexample, #zif #za #zcompany #zwere #zto #zbecome #zmore #zefficient #zin #zinventory
#zmanagement, #zthe #zamount #zof #zinventory #zneeded #zwould #zdecline. #zThe #zsame #z might #zbe #ztrue #zif
#zit #zbecomes #zbetter #zat #zcollecting #zits #zreceivables. #zIn #zgeneral, #zanything #zthat #zleads #zto #za #zdecline
#zin #zending #zNWC #zrelative #zto #zbeginning # z would #zhave #zthis #zeffect. #zNegative #znet #zcapital
#zspending #z would #zmean #zmore #zlong-lived #zassets #zwere #zliquidated #zthan #zpurchased.
9. (LO3) #zIf #za #zcompany #zraises #zmore #zmoney #zfrom #zselling #zstock #zthan #zit #zpays #zin #zdividends #zin #za
#zparticular #zperiod, #zits #zcash #zflow #zto #zstockholders #zwill #zbe #znegative. # z If #za #zcompany #zborrows
Ross #zet #zal, #zFundamentals #zof #zCorporate #zFinance #z11th #zCanadian #zEdition
#zSolutions #zManual
© #z2022 #zMcGraw-Hill #zEducation #zLtd.
7-4
Fundamentals #zOf #zCorporate #zFinance #z11ce #zStephen #zA. #zRoss, #zRandolph #zW.
#zWesterfield, #zBradford #zD. #zJordan, #zJ. #zAri #zPandes, #zThomas #zHolloway
Chapter 1-26 #z
CHAPTER 1 #z
INTRODUCTION TO CORPORATE FINANCE#z #z #z
Learning Objectives
LO1 The basic types of financial management decisions 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 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).
Ross et al, Fundamentals of Corporate Finance 11th Canadian Edition Solutions Manual
© 2022 McGraw-Hill Education Ltd.
7-1
,8. (LO5) #zIn #zauction #zmarkets #zlike #zthe #zToronto #zStock #zExchange #z(TSX), #zbrokers #zand #zagents
#zmeet #zat #za #zcentral #zlocation #z(the #zexchange) #zto #zmatch #zbuyers #zand #zsellers #zof #zassets. #zPhysical
#zlocations #zfor #zstock #zmarkets #zare #zdisappearing #zas #ztrading #zbecomes #zmore #zelectronic. #zDealer
#zmarkets #zlike #zNasdaq #zconsist #zof #zdealers #zoperating #zat #zdispersed #zlocales #zwho #zbuy #zand #zsell
#zassets #zthemselves, #zcommunicating #z with #zother #zdealers #zeither #zelectronically #zor #zliterally #zover-
the-counter. #zDealer #zmarkets #zare #zless #ztransparent #zthan #zauction #zmarkets #zwhere #ztrades #zare
#zreported #zpublicly #zalmost #zimmediately. # z The #zauction #zmarket #zrun #zby #zthe #zTSX #zis #z where #zthe
#zstocks #zof #zlarger #zCanadian #zcompanies #zare #ztraded; #zthe #zTSX #zalso #zoperates #za #zdealer #zmarket
#zcalled #zthe #zVenture #zExchange #zfor #zcompanies #ztoo # z small #zto #zqualify #zfor #zthe #zTSX #zauction
# z exchange.
9. (LO3) #zSuch #zorganizations #zfrequently #zpursue #zsocial #zor #zpolitical #zmissions, #zso #zmany #zdifferent
#zgoals #zare #zconceivable. #zOne #zgoal #zthat #zis #zoften #zcited #zis #zrevenue #z minimization; #zi.e., #zprovide
#z whatever #zgoods #zand #zservices #zare #zoffered #zat #zthe #zlowest #zpossible #zcost #zto #zsociety. #zAnother
#z would #zbe #zto #zbest #zserve #zthe #zmaximum #zpossible #znumber #zof #zstakeholders #zat #zthe #zlowest #zcost.
#zA #zbetter #zapproach #zmight #zbe #zto #zobserve #zthat #zeven #za #znot-for-profit #zbusiness #zhas #zequity.
#zThus, #zone #zanswer #zis #zthat #zthe #zappropriate #zgoal #zis #zto #zmaximize #zthe #zvalue #zof #zthe #zequity.
10. (LO3) #zPresumably, #zthe #zcurrent #zstock #zvalue #zreflects #zthe #zrisk, #ztiming, #zand #zmagnitude #zof #zall
#zfuture #zcash #zflows, #zboth #zshort-term #zand #zlong-term. #zIf #zthis #zis #zcorrect, #zthen #zthe #zstatement #zis
#zfalse.
11. (LO3) #zAn #zargument #zcan #zbe #zmade #zeither #zway. #zAt #zthe #zone #zextreme, #zwe #zcould #zargue #zthat #zin
#za #zmarket #zeconomy, #zall #zof #zthese #zthings #zare #zpriced. #zThere #zis #zthus #zan #zoptimal #zlevel #zof, #zfor
#zexample, #zethical #zand/or #zillegal #zbehavior, #zand #zthe #zframework #zof #zstock #zvaluation #zexplicitly
#zincludes #zthese. #zAt #zthe #zother #zextreme, #zwe #zcould #zargue #zthat #zthese #zare #znon-economic
#zphenomena #zand #zare #zbest #zhandled #zthrough #zthe #zpolitical #zprocess. #zA #zclassic #z(and #zhighly
#zrelevant) #zthought #zquestion #zthat #zillustrates #zthis #zdebate #zgoes #zsomething #zlike #zthis: #z―A #zfirm
#zhas #zestimated #zthat #zthe #zcost #zof #zimproving #zthe #zsafety #z of #zone #zof #zits #zproducts #zis #z$30 #zmillion.
#zHowever, #zthe #zfirm #zbelieves #zthat #zimproving #zthe #zsafety #zof #zthe #zproduct #zwill #zonly #zsave #z$20
# z million #zin #zproduct #zliability #zclaims #zand #zlost #zcustomer #zgoodwill. #zWhat #zshould #zthe #zfirm #zdo?‖
12. (LO3) #zThe #zgoal #zwill #zbe #zthe #zsame, #zbut #zthe #zbest #zcourse #zof #zaction #ztoward #zthat #zgoal #zmay #zbe
#zdifferent #zbecause #zof #zdiffering #zsocial, #zpolitical, #zand #zeconomic #zinstitutions.
13. (LO4) #zThe #zgoal #zof #zmanagement #zshould #zbe #zto #zmaximize #zthe #zshare #zprice #zfor #zthe #zcurrent
#zshareholders. #zIf #zmanagement #zbelieves #zthat #zit #zcan #zimprove #zthe #zprofitability #zof #zthe #zfirm #zso
#zthat #zthe #zshare #zprice #zwill #zexceed #z$35, #zthen #zthey #zshould #zfight #zthe #zoffer #zfrom #zthe #zoutside
#zcompany. #zIf #zmanagement #zbelieves #zthat #zthis #zbidder #zor #zother #zunidentified #zbidders #zwill
#zactually #zpay #zmore #zthan #z$35 #zper #zshare #zto #zacquire #zthe #zcompany, #zthen #zthey #zshould #zstill
#zfight #zthe #zoffer. #zHowever, #zif #zthe #zcurrent #z management #zcannot #zincrease #zthe #zvalue #zof #zthe #zfirm
#zbeyond #zthe #zbid #zprice, #zand #zno #zother #zhigher #zbids #zcome #zin, #zthen #zmanagement #zis #znot #zacting
#zin #zthe #zinterests #zof #zthe #zshareholders #zby #zfighting #zthe #zoffer. #zSince #zcurrent #zmanagers #zoften
#zlose #ztheir #zjobs #zwhen #zthe #zcorporation #zis #zacquired, #zpoorly #zmonitored #zmanagers #zhave #zan
#zincentive #zto #zfight # z corporate #ztakeovers #zin #zsituations #zsuch #zas #zthis.
14. (LO4) #zWe #zwould #zexpect #zagency #zproblems #zto #zbe #zless #zsevere #zin #zother #zcountries, #zprimarily
#zdue #zto #zthe #zrelatively #zsmall #zpercentage #zof #zindividual #zownership. #zFewer #zindividual #zowners
#zmeans #zthat #zeach #zindividual #zowner #zhas #za #zgreater #zincentive #zto #zmonitor #zand #zcontrol #zthe
#zfirm—i.e. #zthere #zis #zless #zfree-riding. #zThe #zhigh #zpercentage #zof #zinstitutional #zownership #zmight
#zlead #zto #za #zhigher #zdegree #zof #zagreement #zbetween #zowners #zand #zmanagers #zon #zdecisions
#zconcerning #zrisky #zprojects. #zIn #zaddition, #zinstitutions #zmay #zbe #zbetter #zable #zto #zimplement
#zeffective #zmonitoring #z mechanisms #zon #zmanagers #zthan #zcan #zindividual #zowners, #zbased #zon #zthe
#zinstitutions‘ #zdeeper #zresources #zand #zexperiences #zwith #ztheir #zown #z management. #zThe #zincrease #zin
#zinstitutional #zownership #zof #zstock #zin #zCanada #zand #zin #zthe #zUnited #zStates #zand #zthe #zgrowing
Ross #zet #zal, #zFundamentals #zof #zCorporate #zFinance #z11th #zCanadian #zEdition
#zSolutions #zManual
© #z2022 #zMcGraw-Hill #zEducation #zLtd.
7-2
, #z activism #zof #zthese #zlarge #zshareholder #zgroups #zmay #zlead #zto #za #zreduction #zin #zagency #zproblems
#z for #zCanadian #zand #zU.S. #zcorporations #zand #za #zmore #zefficient #zmarket #zfor #zcorporate #zcontrol.
1. (LO5) #zMajor #zinstitutions:
Chartered #zbanks #z-accept #zdeposits #zand #zissue #zcommercial #zloans, #zcorporate #zloans, #zpersonal
#zloans #zand #zmortgages.
Trust #zcompanies-accept #zdeposits #zand #zmake #zloans, #zbut #zalso #zengage #zin #zfiduciary #zactivities
#zsuch #zas #zmanaging #zassets #zfor #zestates, #zregistered #zretirement #zsavings #zplans, #zetc.
Investment #zdealers #z-non-depository #zinstitutions #zthat #zassist #zfirms #zin #zissuing #znew #zsecurities.
Insurance #zcompanies #z-engage #zin #zindirect #zfinancing #zby #zaccepting #zfunds #zin #za #zform #zsimilar #zto
#za #zdeposit #zand #zmaking #zloans.
Pension #zfunds #z-invest #zcontributions #zfrom #zemployers #zand #zemployees #zin #zsecurities #zoffered #zby
#zfinancial #z markets.
Mutual #zfunds #z-pool #zindividual #zinvestments #zto #zpurchase #za #zdiversified #zportfolio.
Hedge #zfunds #z-cater #zto #zsophisticated #zinvestors #zand #zseek #zhigh #zreturns #zby #zusing #zaggressive
#zfinancial #zstrategies #zprohibited #zby #zmutual #zfunds.
Note #zthat #zlarger #zfinancial #zinstitutions #zmay #zembody #zmany #zof #zthese #zdifferent #zinstitution. #zFor
#zexample, #zCIBC #zis #za #zchartered #zbank #zthat #zowns #zan #zinvestment #zdealer #zand #zmutual #zfunds.
#zFurthermore, #zit #zhas #zan #zinsurance #zarm #z―CIBC #zInsurance‖
Major #zmarkets:
Money #zmarket #z-financial #zmarkets #zwhere #zshort-term #zdebt #zinstruments #zare #zbought #zand #zsold.
Capital #zmarkets #z-financial #zmarkets #zwhere #zlong-term #zdebt #zand #zequity #zsecurities #zare #zbought
#zand #zsold. #zDerivatives #z markets #z– #z where #zoptions #zand #zfutures #zare #ztraded #zon #zfinancial
#zinstruments #zand #zcommodities #zPrimary # z markets # z are # z where # z securities # z are # z sold # z for
# z the # z first # z time; # z secondary # z markets # z are # z where #zoutstanding #zsecurities #ztrade.
2. (LO5) #zSpread #zversus #zFee #zIncome:
Banks #zearn #zspread #zor #zinterest #zincome #zby #zborrowing #zfrom #zdepositors #zand #zlending #zto #zborrowers
#z(at #za #zhigher #z yield). #zAn #zexample #zis #za #zretail #zdeposit #zand #za #zmortgage. #zBanks #z make #znon-interest
#zor #zfee #zincome #z when #zthey #zcharge #zcommissions #zor #zfees #zfor #zservices. #zAn #zexample #zis #zan #zoverdraft
#zfee #zor #zATM #zfee, #zor #zthe #zexample #zin #zthe #ztext, #zthe #zstamping #zfee #zon #za #zbanker‘s #zacceptance
#z(which #zis #za #zform #zof #zinsurance #zand #zarranging #zfee).
3. (LO5) #zTrends:
Financial #zengineering #z-the #zcreation #zof #znew #zsecurities #zor #zfinancial #zprocesses. #zThis #zengineering
#zcould #zbe #zused #zto #zpackage #zand #zsell #zrisky #zassets #zto #zinvestors; #zfor #zexample, #zbanks #zcan
#zpackage #zand #zsell #zmortgages #zinto #zmortgage #zbacked #zsecurities #zand #zsell #zthese #zon #zto #zother
#zinvestors.
Derivative #zsecurities #z-options, #zfutures, #zforwards, #zand #zother #zsecurities #zwhose #zvalue #zis #zderived
#zfrom #zthe #zprice #zof #zanother, #zunderlying #zasset. # z For #zexample, #za #zfutures #zcontract #zto #zpurchase
#zoil #zsets #za #zfixed #zpurchase/selling #zprice #zfor #za #zfuture #zdate, #zbut #zits #zvalue #zdepends #zon #zthe
#zprice #zof #zoil. #zThese #zderivatives #zcan #zhelp #zbusinesses #zdivest #zrisks #zthat #zare #znot #zcore #zto #ztheir
#zbusiness, #zsuch #zas #zforeign #zexchange #zand #zinput #zprice #z(like #zoil) #zrisk.
Regulatory #zdialectic #z-the #zpressures #zthat #zfinancial #zinstitutions #zand #zregulatory #zbodies #zexert #zon
#zeach # z other. # z For #zexample, #zwhen #zrestrictions #zare #zremoved, #zgrowth #zopportunities #zmay
#zincrease. # z However, #zthe #zabsence #zof #zregulatory #zrestrictions #z may #zalso #zlead #zto #zproblems #zsuch
#zas #zthe #zglobal #zfinancial #zcrisis #zstarting #zin #z2007 #zcaused #zby #zexcessive #zfinancial #zleverage, #zso #zit
#zis #zimportant #zthat #zthere #zbe #zan #zappropriate #zlevel #zof #zregulatory #zoversight.
ESG #z–Investors #zand #zcorporations #z(and #ztheir #zmany #zstakeholders) #zare #zincreasingly #zfocused #zon
#zEnvironmental, #zSocietal, #zand #zGovernance #zissues. #zThis #zincludes #zemployee #zand #zcustomer
#z welfare #zas #zwell #zas #zclimate #zchange #zand #zpollution.
These #ztrends #zhave #zmade #zfinancial #zmanagement #za #zmuch #zmore #zcomplex #zand #ztechnical #zactivity.
Ross #zet #zal, #zFundamentals #zof #zCorporate #zFinance #z11th #zCanadian #zEdition
#zSolutions #zManual
© #z2022 #zMcGraw-Hill #zEducation #zLtd.
7-3
, CHAPTER 2 #z
FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
#z #z #z #z #z
Learning #zObjectives
LO1 # z The #zdifference #zbetween #zaccounting #zvalue #z(or #z―book‖ #zvalue) #zand #zmarket #zvalue.
LO2 # z The #zdifference #zbetween #zaccounting #zincome #zand #zcash #zflow.
LO3 # z How #zto #zdetermine #za #zfirm‘s #zcash #zflow #zfrom #zits #zfinancial #zstatements.
LO4 # z The #zdifference #zbetween #zaverage #zand #zmarginal #ztax #zrates.
LO5 # z The #zbasics #zof #zCapital #zCost #zAllowance #z(CCA) #zand #zUndepreciated #zCapital #zCost #z(UCC).
Answers #zto #zConcepts #zReview #zand #zCritical #zThinking #zQuestions
1. (LO1) #zLiquidity #zmeasures #zhow #zquickly #zand #zeasily #zan #zasset #zcan #zbe #zconverted #zto #zcash
#z without #zsignificant #zloss #zin #zvalue. #zIt‘s #zdesirable #zfor #zfirms #zto #zhave #zhigh #zliquidity #zso #zthat
#zthey #zhave #za #zlarge #zfactor #zof #zsafety #zin #zmeeting #zshort-term #zcreditor #zdemands. #zHowever, #zsince
#zliquidity #zalso #zhas #zan #zopportunity #zcost #zassociated #zwith #zit—namely #zthat #zhigher #zreturns #zcan
#zgenerally #zbe #zfound #zby #zinvesting #zthe #zcash #zinto #zproductive #zassets—low #zliquidity #zlevels #zare
#zalso #zdesirable #zto #zthe #zfirm. #zIt‘s #zup #zto #zthe #zfirm‘s #zfinancial #z management #zstaff #zto #zfind #za
#zreasonable #zcompromise #zbetween #zthese #zopposing #zneeds.
2. (LO2) #zThe #zrecognition #zand #zmatching #zprinciples #zin #zfinancial #zaccounting #zcall #zfor #zrevenues,
#zand #zthe # z costs #zassociated #zwith #zproducing #zthose #zrevenues, #zto #zbe #z―booked‖ #zwhen #zthe
#zrevenue #zprocess #zis #zessentially #zcomplete, #znot #znecessarily #z when #zthe #zcash #zis #zcollected #zor #zbills
#zare #zpaid. #zNote #zthat #zthis #zway #zis #znot #znecessarily #zincorrect; #zit‘s #zthe #zway #zaccountants #zhave
#zchosen #zto #zdo #zit.
3. (LO1) #zHistorical #zcosts #zcan #zbe #zobjectively #zand #zprecisely #zmeasured #zwhereas #zmarket #zvalues
#zcan #zbe #zdifficult #zto #zestimate, #zand #zdifferent #zanalysts #zwould #zcome #zup #zwith #zdifferent #znumbers.
#zThus, #zthere #zis #za #ztradeoff #zbetween #zrelevance #z(market #zvalues) #zand #zobjectivity #z(book #zvalues).
4. (LO3) #zDepreciation #zis #za #znoncash #zdeduction #zthat #zreflects #zadjustments #zmade #zin #zasset #zbook
#zvalues #zin #zaccordance #zwith #zthe #zmatching #zprinciple #zin #zfinancial #zaccounting. #zInterest #zexpense
#zis #za #zcash #zoutlay, #zbut #zit‘s #za #zfinancing #zcost, #znot #zan #zoperating #zcost.
5. (LO1) # z Market # z values # z for #z corporations # z can # z never # z be # z negative. # z Imagine # z a # z share # z of # z stock # z selling # z for # z –
$20. #zThis #zwould #zmean #zthat #zif #zyou #zplaced #zan #zorder #zfor #z100 #zshares, #zyou #zwould #zget #zthe
#zstock #zalong #zwith #za #zcheck #zfor #z$2,000. #zHow #zmany #zshares #zdo #zyou #z want #zto #zbuy? #zMore
#zgenerally, #zbecause #zof #zcorporate #zbankruptcy #zlaws, #znet #zworth #zfor #za #zcorporation #zcannot #zbe
#znegative, #zimplying #zthat #zliabilities #zcannot #zexceed #zassets #zin #zmarket #zvalue.
6. (LO3) #zFor #za #zsuccessful #zcompany #zthat #zis #zrapidly #zexpanding, #zfor #zexample, #zcapital #zoutlays
#z will #zbe #zlarge, #zpossibly #zleading #zto #znegative #zcash #zflow #zfrom #zassets. #zIn #zgeneral, #zwhat
#zmatters #zis #zwhether #zthe #zmoney #zis #zspent #zwisely, #znot #zwhether #zcash #zflow #zfrom #zassets #zis
#zpositive #zor #znegative.
7. (LO3) #zIt‘s #zprobably #znot #za #zgood #zsign #zfor #zan #zestablished #zcompany, #zbut #zit #zwould #zbe #zfairly
#zordinary #zfor #za #zstart-up, #zso #zit #zdepends.
8. (LO3) #zFor #zexample, #zif #za #zcompany #zwere #zto #zbecome #zmore #zefficient #zin #zinventory
#zmanagement, #zthe #zamount #zof #zinventory #zneeded #zwould #zdecline. #zThe #zsame #z might #zbe #ztrue #zif
#zit #zbecomes #zbetter #zat #zcollecting #zits #zreceivables. #zIn #zgeneral, #zanything #zthat #zleads #zto #za #zdecline
#zin #zending #zNWC #zrelative #zto #zbeginning # z would #zhave #zthis #zeffect. #zNegative #znet #zcapital
#zspending #z would #zmean #zmore #zlong-lived #zassets #zwere #zliquidated #zthan #zpurchased.
9. (LO3) #zIf #za #zcompany #zraises #zmore #zmoney #zfrom #zselling #zstock #zthan #zit #zpays #zin #zdividends #zin #za
#zparticular #zperiod, #zits #zcash #zflow #zto #zstockholders #zwill #zbe #znegative. # z If #za #zcompany #zborrows
Ross #zet #zal, #zFundamentals #zof #zCorporate #zFinance #z11th #zCanadian #zEdition
#zSolutions #zManual
© #z2022 #zMcGraw-Hill #zEducation #zLtd.
7-4
