Solutions Manual Fundamentals of Corporate Finance 13th
c c c c c c c
Edition Ross, Westerfield, and Jordan
c c c c c
Chapters 1 - 27
c c c
expertdocs expertdocs
, CHAPTERc1:cIntroductionctocCorporatecFinance
CHAPTERc2:cFinancialcStatements,cTaxes,cAndcCashcFlow
CHAPTERc3:cWorkingcwithcFinancialcStatements
CHAPTERc4:cLong-TermcFinancialcPlanningcandcGrowth
CHAPTERc5:cIntroductionctocValuation:cThecTimecValuecofcMoney
CHAPTERc6:cDiscountedcCashcFlowcValuation
CHAPTERc7:cInterestcRatescandcBondcValuation
CHAPTERc8:cStockcValuation
CHAPTERc9:cNetcPresentcValuecandcOthercInvestmentcCriteria
CHAPTERc10:cMakingcCapitalcInvestmentcDecisions
CHAPTERc11:cProjectcAnalysiscandcEvaluation
CHAPTERc12:cSomecLessonscfromcCapitalcMarketcHistory
CHAPTERc13:cReturn,cRisk,cAndcthecSecuritycMarketcLine
CHAPTERc14:cCostcofcCapital
CHAPTERc15:cRaisingcCapital
CHAPTERc16:cFinancialcLeveragecandcCapitalcStructurecPolicy
CHAPTERc17:cDividendscandcPayoutcPolicy
CHAPTERc18:cShort-TermcFinancecandcPlanning
CHAPTERc19:cCashcandcLiquiditycManagement
CHAPTERc20:cCreditcandcInventorycManagement
CHAPTERc21:cInternationalcCorporatecFinance
CHAPTERc22:cBehavioralcFinance:cImplicationscforcFinancialcManage
CHAPTERc23:cEnterprisecRiskcManagement
CHAPTERc24:OptionscandcCorporatecFinance
CHAPTERc25:cOptioncValuation
CHAPTERc26:cMergerscandcAcquisitions
CHAPTERc27:cLeasing
expertdocs expertdocs
, CHAPTER 1 c
INTRODUCTION TO CORPORATE c c c
FINANCE
AnswersctocConceptscReviewcandcCriticalcThinkingcQuestions
1. Capitalcbudgetingc(decidingcwhetherctocexpandcacmanufacturingcplant),ccapitalcstructurec(decidingcw
hetherctocissuecnewcequitycandcusecthecproceedsctocretirecoutstandingcdebt),candcworkingccapitalcman
agementc(modifyingcthecfirm’sccreditccollectioncpolicycwithcitsccustomers).
2. Disadvantages:cunlimitedcliability,climitedclife,cdifficultycinctransferringcownership,chardctocraiseccap
italcfunds.cSomecadvantages:csimpler,clesscregulation,cthecownerscarecalsocthecmanagers,csometimesc
personalctaxcratescarecbettercthanccorporatectaxcrates.
3. Thecprimarycdisadvantagecofctheccorporatecformciscthecdoublectaxationctocshareholderscofcdistributed
cearningscandcdividends.cSomecadvantagescinclude:climitedcliability,ceasecofctransferability,cabilitycto
craiseccapital,cunlimitedclife,candcsocforth.
4. IncresponsectocSarbanes-
Oxley,csmallcfirmschavecelectedctocgocdarkcbecausecofctheccostscofccompliance.cTheccostsctoccomply
cwithcSarboxccancbecseveralcmillioncdollars,cwhichccancbecaclargecpercentagec ofc ac smallc firmsc profit
s.c Ac majorc costc ofc goingc darkc isc lessc accessc toc capital.c Sincec thecfirmciscnoclongercpubliclyctraded,
citccancnoclongercraisecmoneycincthecpubliccmarket.cAlthoughctheccompanycwillcstillchavecaccessctocb
ankcloanscandcthecprivatecequitycmarket,ctheccostscassociatedcwithcraisingcfundscincthesecmarketscare
cusuallychighercthanctheccostscofcraisingcfundscincthecpubliccmarket.
5. Thec treasurer’sc officec andc thec controller’sc officec arec thec twoc primaryc organizationalc groupsc th
atcreportcdirectlyctocthecchiefcfinancialcofficer.cTheccontroller’scofficechandlesccostcandcfinancialcacco
unting,ctaxcmanagement,candcmanagementcinformationcsystems,cwhilecthectreasurer’scofficeciscrespo
nsiblec forc cashc andc creditc management,c capitalc budgeting,c andc financialc planning.c Therefore,cthec
studycofccorporatecfinanceciscconcentratedcwithincthectreasurycgroup’scfunctions.
6. Tocmaximizectheccurrentcmarketcvaluec(sharecprice)cofcthecequitycofcthecfirmc(whethercit’scpublicly-
ctradedcorcnot).
7. Inctheccorporatecformcofcownership,cthecshareholderscarecthecownerscofcthecfirm.cThecshareholderscel
ectcthecdirectorscofctheccorporation,cwhocincturncappointcthecfirm’scmanagement.cThiscseparationcofc
ownershipcfromccontrolcinctheccorporatecformcofcorganizationciscwhatccausescagencycproblemsctocexi
st.cManagementcmaycactcincitscowncorcsomeonecelse’scbestcinterests,crathercthancthosecofcthecshareho
lders.cIfcsuchceventscoccur,ctheycmayccontradictcthecgoalcofcmaximizingcthecsharecpricecofcthecequity
cofcthecfirm.
8. Acprimarycmarketctransaction.
expertdocs expertdocs
, B-2c SOLUTIONS
9. IncauctioncmarketsclikecthecNYSE,cbrokerscandcagentscmeetcatcacphysicalclocationc(thecexchange)ctoc
matchcbuyerscandcsellerscofcassets.cDealercmarketsclikecNASDAQcconsistcofcdealerscoperatingcatcdis
persedclocalescwhocbuycandcsellcassetscthemselves,ccommunicatingcwithcothercdealersceithercelectron
icallycorcliterallycover-the-counter.
10. Suchcorganizationscfrequentlycpursuecsocialcorcpoliticalcmissions,csocmanycdifferentcgoalscarecconce
ivable.cOnecgoalcthatciscoftenccitedciscrevenuecminimization;ci.e.,cprovidecwhatevercgoodscandcservic
escarecofferedcatctheclowestcpossibleccostctocsociety.cAcbettercapproachcmightcbectocobservecthatceven
cacnot-for-
profitcbusinesschascequity.cThus,conecanswerciscthatcthecappropriatecgoalcisc tocmaximizecthecvalueco
fcthecequity.
11. Presumably,ctheccurrentcstockcvaluecreflectscthecrisk,ctiming,candcmagnitudecofcallcfutureccashcflows,
cbothcshort-termcandclong-term.cIfcthiscisccorrect,cthencthecstatementciscfalse.
12. Ancargumentccancbecmadeceithercway.cAtctheconecextreme,cweccouldcarguecthatcincacmarketceconom
y,callcofcthesecthingscarecpriced.cThereciscthuscancoptimalclevelcof,cforcexample,cethicalcand/orcillegalc
behavior,candcthecframeworkcofcstockcvaluationcexplicitlycincludescthese.cAtcthecothercextreme,cwecc
ouldcarguecthatcthesecarecnon-
economiccphenomenacandcarecbestchandledcthroughcthecpoliticalcprocess.cAcclassicc(andchighlycrelev
ant)cthoughtcquestioncthatcillustratescthiscdebatecgoescsomethingclikecthis:c“Acfirmchascestimatedcthat
ctheccostcofcimprovingcthecsafetycofconecofcitscproductscisc$30cmillion.cHowever,cthecfirmcbelievescth
atcimprovingcthecsafetycofcthecproductcwillconlycsavec$20cmillioncincproductcliabilitycclaims.cWhatcs
houldcthecfirmcdo?”
13. Thecgoalcwillcbecthecsame,cbutcthecbestccoursecofcactionctowardcthatcgoalcmaycbecdifferentcbecauseco
fcdifferingcsocial,cpolitical,candceconomiccinstitutions.
14. Thecgoalcofcmanagementcshouldcbectocmaximizecthecsharecpricecforctheccurrentcshareholders.cIfcman
agementcbelievescthatcitccancimprovecthecprofitabilitycofcthecfirmcsocthatcthecsharecpricecwillcexceedc
$35,cthenctheycshouldcfightcthecoffercfromcthecoutsideccompany.cIfcmanagementcbelievescthatcthiscbi
ddercorcothercunidentifiedcbidderscwillcactuallycpaycmorecthanc$35cpercsharectocacquirectheccompany
,cthenctheycshouldcstillcfightcthecoffer.cHowever,cifctheccurrentcmanagementccannotcincreasecthecvalu
ecofcthecfirmcbeyondcthecbidcprice,candcnocotherchighercbidsccomecin,cthencmanagementciscnotcacting
cincthecinterestscofcthecshareholderscbycfightingcthecoffer.cSinceccurrentcmanagerscoftenclosectheircjob
scwhenctheccorporationciscacquired,cpoorlycmonitoredcmanagerschavecancincentivectocfightccorporatec
takeoverscincsituationscsuchcascthis.
15. Wecwouldcexpectcagencycproblemsctocbeclesscseverecincotherccountries,cprimarilycduectocthecrelativel
ycsmallcpercentagecofcindividualcownership.cFewercindividualcownerscshouldcreducecthecnumbercofcd
iversecopinionscconcerningccorporatecgoals.cThechighcpercentagecofcinstitutionalcownershipcmightcle
adctocachighercdegreecofcagreementcbetweencownerscandcmanagersconcdecisionscconcerningcriskycpr
ojects.cIncaddition,cinstitutionscmaycbecbettercablectocimplementceffectivecmonitoringcmechanismsco
ncmanagerscthanccancindividualcowners,cbasedconcthecinstitutions’cdeepercresourcescandcexperiencesc
withctheircowncmanagement.cThecincreasecincinstitutionalcownershipcofcstockcincthecUnitedcStatescan
dcthecgrowingcactivismcofctheseclargecshareholdercgroupscmaycleadctocacreductioncincagencycproblem
scforcU.S.ccorporationscandcacmorecefficientcmarketcforccorporateccontrol.
expertdocs expertdocs
c c c c c c c
Edition Ross, Westerfield, and Jordan
c c c c c
Chapters 1 - 27
c c c
expertdocs expertdocs
, CHAPTERc1:cIntroductionctocCorporatecFinance
CHAPTERc2:cFinancialcStatements,cTaxes,cAndcCashcFlow
CHAPTERc3:cWorkingcwithcFinancialcStatements
CHAPTERc4:cLong-TermcFinancialcPlanningcandcGrowth
CHAPTERc5:cIntroductionctocValuation:cThecTimecValuecofcMoney
CHAPTERc6:cDiscountedcCashcFlowcValuation
CHAPTERc7:cInterestcRatescandcBondcValuation
CHAPTERc8:cStockcValuation
CHAPTERc9:cNetcPresentcValuecandcOthercInvestmentcCriteria
CHAPTERc10:cMakingcCapitalcInvestmentcDecisions
CHAPTERc11:cProjectcAnalysiscandcEvaluation
CHAPTERc12:cSomecLessonscfromcCapitalcMarketcHistory
CHAPTERc13:cReturn,cRisk,cAndcthecSecuritycMarketcLine
CHAPTERc14:cCostcofcCapital
CHAPTERc15:cRaisingcCapital
CHAPTERc16:cFinancialcLeveragecandcCapitalcStructurecPolicy
CHAPTERc17:cDividendscandcPayoutcPolicy
CHAPTERc18:cShort-TermcFinancecandcPlanning
CHAPTERc19:cCashcandcLiquiditycManagement
CHAPTERc20:cCreditcandcInventorycManagement
CHAPTERc21:cInternationalcCorporatecFinance
CHAPTERc22:cBehavioralcFinance:cImplicationscforcFinancialcManage
CHAPTERc23:cEnterprisecRiskcManagement
CHAPTERc24:OptionscandcCorporatecFinance
CHAPTERc25:cOptioncValuation
CHAPTERc26:cMergerscandcAcquisitions
CHAPTERc27:cLeasing
expertdocs expertdocs
, CHAPTER 1 c
INTRODUCTION TO CORPORATE c c c
FINANCE
AnswersctocConceptscReviewcandcCriticalcThinkingcQuestions
1. Capitalcbudgetingc(decidingcwhetherctocexpandcacmanufacturingcplant),ccapitalcstructurec(decidingcw
hetherctocissuecnewcequitycandcusecthecproceedsctocretirecoutstandingcdebt),candcworkingccapitalcman
agementc(modifyingcthecfirm’sccreditccollectioncpolicycwithcitsccustomers).
2. Disadvantages:cunlimitedcliability,climitedclife,cdifficultycinctransferringcownership,chardctocraiseccap
italcfunds.cSomecadvantages:csimpler,clesscregulation,cthecownerscarecalsocthecmanagers,csometimesc
personalctaxcratescarecbettercthanccorporatectaxcrates.
3. Thecprimarycdisadvantagecofctheccorporatecformciscthecdoublectaxationctocshareholderscofcdistributed
cearningscandcdividends.cSomecadvantagescinclude:climitedcliability,ceasecofctransferability,cabilitycto
craiseccapital,cunlimitedclife,candcsocforth.
4. IncresponsectocSarbanes-
Oxley,csmallcfirmschavecelectedctocgocdarkcbecausecofctheccostscofccompliance.cTheccostsctoccomply
cwithcSarboxccancbecseveralcmillioncdollars,cwhichccancbecaclargecpercentagec ofc ac smallc firmsc profit
s.c Ac majorc costc ofc goingc darkc isc lessc accessc toc capital.c Sincec thecfirmciscnoclongercpubliclyctraded,
citccancnoclongercraisecmoneycincthecpubliccmarket.cAlthoughctheccompanycwillcstillchavecaccessctocb
ankcloanscandcthecprivatecequitycmarket,ctheccostscassociatedcwithcraisingcfundscincthesecmarketscare
cusuallychighercthanctheccostscofcraisingcfundscincthecpubliccmarket.
5. Thec treasurer’sc officec andc thec controller’sc officec arec thec twoc primaryc organizationalc groupsc th
atcreportcdirectlyctocthecchiefcfinancialcofficer.cTheccontroller’scofficechandlesccostcandcfinancialcacco
unting,ctaxcmanagement,candcmanagementcinformationcsystems,cwhilecthectreasurer’scofficeciscrespo
nsiblec forc cashc andc creditc management,c capitalc budgeting,c andc financialc planning.c Therefore,cthec
studycofccorporatecfinanceciscconcentratedcwithincthectreasurycgroup’scfunctions.
6. Tocmaximizectheccurrentcmarketcvaluec(sharecprice)cofcthecequitycofcthecfirmc(whethercit’scpublicly-
ctradedcorcnot).
7. Inctheccorporatecformcofcownership,cthecshareholderscarecthecownerscofcthecfirm.cThecshareholderscel
ectcthecdirectorscofctheccorporation,cwhocincturncappointcthecfirm’scmanagement.cThiscseparationcofc
ownershipcfromccontrolcinctheccorporatecformcofcorganizationciscwhatccausescagencycproblemsctocexi
st.cManagementcmaycactcincitscowncorcsomeonecelse’scbestcinterests,crathercthancthosecofcthecshareho
lders.cIfcsuchceventscoccur,ctheycmayccontradictcthecgoalcofcmaximizingcthecsharecpricecofcthecequity
cofcthecfirm.
8. Acprimarycmarketctransaction.
expertdocs expertdocs
, B-2c SOLUTIONS
9. IncauctioncmarketsclikecthecNYSE,cbrokerscandcagentscmeetcatcacphysicalclocationc(thecexchange)ctoc
matchcbuyerscandcsellerscofcassets.cDealercmarketsclikecNASDAQcconsistcofcdealerscoperatingcatcdis
persedclocalescwhocbuycandcsellcassetscthemselves,ccommunicatingcwithcothercdealersceithercelectron
icallycorcliterallycover-the-counter.
10. Suchcorganizationscfrequentlycpursuecsocialcorcpoliticalcmissions,csocmanycdifferentcgoalscarecconce
ivable.cOnecgoalcthatciscoftenccitedciscrevenuecminimization;ci.e.,cprovidecwhatevercgoodscandcservic
escarecofferedcatctheclowestcpossibleccostctocsociety.cAcbettercapproachcmightcbectocobservecthatceven
cacnot-for-
profitcbusinesschascequity.cThus,conecanswerciscthatcthecappropriatecgoalcisc tocmaximizecthecvalueco
fcthecequity.
11. Presumably,ctheccurrentcstockcvaluecreflectscthecrisk,ctiming,candcmagnitudecofcallcfutureccashcflows,
cbothcshort-termcandclong-term.cIfcthiscisccorrect,cthencthecstatementciscfalse.
12. Ancargumentccancbecmadeceithercway.cAtctheconecextreme,cweccouldcarguecthatcincacmarketceconom
y,callcofcthesecthingscarecpriced.cThereciscthuscancoptimalclevelcof,cforcexample,cethicalcand/orcillegalc
behavior,candcthecframeworkcofcstockcvaluationcexplicitlycincludescthese.cAtcthecothercextreme,cwecc
ouldcarguecthatcthesecarecnon-
economiccphenomenacandcarecbestchandledcthroughcthecpoliticalcprocess.cAcclassicc(andchighlycrelev
ant)cthoughtcquestioncthatcillustratescthiscdebatecgoescsomethingclikecthis:c“Acfirmchascestimatedcthat
ctheccostcofcimprovingcthecsafetycofconecofcitscproductscisc$30cmillion.cHowever,cthecfirmcbelievescth
atcimprovingcthecsafetycofcthecproductcwillconlycsavec$20cmillioncincproductcliabilitycclaims.cWhatcs
houldcthecfirmcdo?”
13. Thecgoalcwillcbecthecsame,cbutcthecbestccoursecofcactionctowardcthatcgoalcmaycbecdifferentcbecauseco
fcdifferingcsocial,cpolitical,candceconomiccinstitutions.
14. Thecgoalcofcmanagementcshouldcbectocmaximizecthecsharecpricecforctheccurrentcshareholders.cIfcman
agementcbelievescthatcitccancimprovecthecprofitabilitycofcthecfirmcsocthatcthecsharecpricecwillcexceedc
$35,cthenctheycshouldcfightcthecoffercfromcthecoutsideccompany.cIfcmanagementcbelievescthatcthiscbi
ddercorcothercunidentifiedcbidderscwillcactuallycpaycmorecthanc$35cpercsharectocacquirectheccompany
,cthenctheycshouldcstillcfightcthecoffer.cHowever,cifctheccurrentcmanagementccannotcincreasecthecvalu
ecofcthecfirmcbeyondcthecbidcprice,candcnocotherchighercbidsccomecin,cthencmanagementciscnotcacting
cincthecinterestscofcthecshareholderscbycfightingcthecoffer.cSinceccurrentcmanagerscoftenclosectheircjob
scwhenctheccorporationciscacquired,cpoorlycmonitoredcmanagerschavecancincentivectocfightccorporatec
takeoverscincsituationscsuchcascthis.
15. Wecwouldcexpectcagencycproblemsctocbeclesscseverecincotherccountries,cprimarilycduectocthecrelativel
ycsmallcpercentagecofcindividualcownership.cFewercindividualcownerscshouldcreducecthecnumbercofcd
iversecopinionscconcerningccorporatecgoals.cThechighcpercentagecofcinstitutionalcownershipcmightcle
adctocachighercdegreecofcagreementcbetweencownerscandcmanagersconcdecisionscconcerningcriskycpr
ojects.cIncaddition,cinstitutionscmaycbecbettercablectocimplementceffectivecmonitoringcmechanismsco
ncmanagerscthanccancindividualcowners,cbasedconcthecinstitutions’cdeepercresourcescandcexperiencesc
withctheircowncmanagement.cThecincreasecincinstitutionalcownershipcofcstockcincthecUnitedcStatescan
dcthecgrowingcactivismcofctheseclargecshareholdercgroupscmaycleadctocacreductioncincagencycproblem
scforcU.S.ccorporationscandcacmorecefficientcmarketcforccorporateccontrol.
expertdocs expertdocs
