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SOLUTION MANUAL FOR
CORPORATE FINANCE 13TH EDITION
ROSS, WESTERFIELD, AND JAFFE
UPDATED 2026 A+
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b-10 solutions
introduction to corporate finance
answers to concept questions
1. 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.
2. 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 observethat even a not-for-profit business has equity. thus, one
answer is that the appropriate goal is to maximize the value of the equity.
3. presumably, the current stock value reflects the risk, timing, and magnitude of all future cash flows, both short-
termand long-term. if this is correct, then the statement is false.
4. 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. aclassic (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 firmdo?”
5. 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.
6. 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 thatthis 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 increasethe value of the firm beyond the bid price, and no other higher bids come in, then
management is notacting 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.
, Stuvia.com - The Marketplace to Buy and Sell your Study Material
7. we would expect agency problems to be less severe in other countries, primarily due to the relatively small
CHAPTER 1
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 decisionsconcerning 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 experienceswith their own management.
8. 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. however, this may not always be the case. if the managers of the mutual fund or pension plan are
not concerned with the interests of the investors, the agency problem could potentially remain the same, or even
increase since there is the possibility of agency problems between the fund and its investors.
9. how much is too much? who is worth more, jack welch or tiger woods? the simplest answer is that there is a market for
executives just as there is for all types of labor. executive compensation is the price that clears the market. the same is
true for athletes and performers. having said that, one aspect of executive compensation deserves comment. a primary
reason executive compensation has grown so dramatically is that companies have increasingly moved to stock-
based compensation. such movement is obviously consistent with the attempt to better align stockholder and
management interests. in recent years, stock prices have soared, so management has cleaned up. it is sometimes argued
that much of this reward is simply due to rising stock prices in general, not managerial performance. perhaps in
the future, executive compensation will be designed to reward only differential performance, i.e., stock price
increases in excess of general market increases.
10. maximizing the current share price is the same as maximizing the future share price at any futureperiod. the value of
a share of stock depends on all of the future cash flows of company. another way to look at this is that, barring large
cash payments to shareholders, the expected price of thestock must be higher in the future than it is today. who would
buy a stock for $100 today when the share price in one year is expected to be $80?
, Stuvia.com - The Marketplace to Buy and Sell your Study Material
b-4 solutions
accounting statements, taxes, and cash flow
answers toconcepts reviewandcriticalthinkingquestions
1. true. every asset can be converted to cash at some price. however, when we are referring to a liquid asset, the added
assumption that the asset can be converted cash at or near market value is important.
2. the recognition and matching principles in financial accounting call for revenues, and the costs associated with
producing those revenues, to be “booked” when the revenue process is essentially complete, not necessarily when the
cash is collected or bills are paid. note that this way is not necessarily correct; it‟s the way accountants have chosen
to do it.
3. the bottom line number shows the change in the cash balance on the balance sheet. as such, it is not auseful number for
analyzing acompany.
4. the major difference is the treatment of interest expense. the accounting statement of cash flows treats interest as
an operating cash flow, while the financial cash flows treat interest as a financing cash flow. the logic of the
accounting statement of cash flows is that since interest appears on the income statement, which shows the
operations for the period, it is an operating cash flow. in reality, interest is a financing expense, which results from the
company‟s choice of debt and equity. we will have more to say about this in a later chapter. when comparing the two
cash flow statements, the financial statement of cash flows is a more appropriate measure of the company‟s
performance because of its treatment of interest.
5. market values can never be negative. imagine ashare of stock selling for +$20. this would mean that if you placed an
order for 100 shares, you would get the stock along with a check for $2,000. how many shares do you want to buy?
more generally, because of corporate and individual bankruptcy laws, net worth for a person or a corporation cannot
be negative, implying that liabilities cannot exceed assets in market value.
6. for a successful company that is rapidly expanding, for example, capital outlays will be large, possibly leading to
negative cash flow from assets. in general, what matters is whether the money is spent wisely, not whether cash flow
fromassets is positive or negative.
7. it‟s probably not a good sign for an established company to have negative cash flow from assets, but it would be
fairly ordinary for astart-up, so it depends.
SOLUTION MANUAL FOR
CORPORATE FINANCE 13TH EDITION
ROSS, WESTERFIELD, AND JAFFE
UPDATED 2026 A+
, Stuvia.com - The Marketplace to Buy and Sell your Study Material
b-10 solutions
introduction to corporate finance
answers to concept questions
1. 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.
2. 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 observethat even a not-for-profit business has equity. thus, one
answer is that the appropriate goal is to maximize the value of the equity.
3. presumably, the current stock value reflects the risk, timing, and magnitude of all future cash flows, both short-
termand long-term. if this is correct, then the statement is false.
4. 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. aclassic (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 firmdo?”
5. 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.
6. 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 thatthis 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 increasethe value of the firm beyond the bid price, and no other higher bids come in, then
management is notacting 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.
, Stuvia.com - The Marketplace to Buy and Sell your Study Material
7. we would expect agency problems to be less severe in other countries, primarily due to the relatively small
CHAPTER 1
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 decisionsconcerning 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 experienceswith their own management.
8. 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. however, this may not always be the case. if the managers of the mutual fund or pension plan are
not concerned with the interests of the investors, the agency problem could potentially remain the same, or even
increase since there is the possibility of agency problems between the fund and its investors.
9. how much is too much? who is worth more, jack welch or tiger woods? the simplest answer is that there is a market for
executives just as there is for all types of labor. executive compensation is the price that clears the market. the same is
true for athletes and performers. having said that, one aspect of executive compensation deserves comment. a primary
reason executive compensation has grown so dramatically is that companies have increasingly moved to stock-
based compensation. such movement is obviously consistent with the attempt to better align stockholder and
management interests. in recent years, stock prices have soared, so management has cleaned up. it is sometimes argued
that much of this reward is simply due to rising stock prices in general, not managerial performance. perhaps in
the future, executive compensation will be designed to reward only differential performance, i.e., stock price
increases in excess of general market increases.
10. maximizing the current share price is the same as maximizing the future share price at any futureperiod. the value of
a share of stock depends on all of the future cash flows of company. another way to look at this is that, barring large
cash payments to shareholders, the expected price of thestock must be higher in the future than it is today. who would
buy a stock for $100 today when the share price in one year is expected to be $80?
, Stuvia.com - The Marketplace to Buy and Sell your Study Material
b-4 solutions
accounting statements, taxes, and cash flow
answers toconcepts reviewandcriticalthinkingquestions
1. true. every asset can be converted to cash at some price. however, when we are referring to a liquid asset, the added
assumption that the asset can be converted cash at or near market value is important.
2. the recognition and matching principles in financial accounting call for revenues, and the costs associated with
producing those revenues, to be “booked” when the revenue process is essentially complete, not necessarily when the
cash is collected or bills are paid. note that this way is not necessarily correct; it‟s the way accountants have chosen
to do it.
3. the bottom line number shows the change in the cash balance on the balance sheet. as such, it is not auseful number for
analyzing acompany.
4. the major difference is the treatment of interest expense. the accounting statement of cash flows treats interest as
an operating cash flow, while the financial cash flows treat interest as a financing cash flow. the logic of the
accounting statement of cash flows is that since interest appears on the income statement, which shows the
operations for the period, it is an operating cash flow. in reality, interest is a financing expense, which results from the
company‟s choice of debt and equity. we will have more to say about this in a later chapter. when comparing the two
cash flow statements, the financial statement of cash flows is a more appropriate measure of the company‟s
performance because of its treatment of interest.
5. market values can never be negative. imagine ashare of stock selling for +$20. this would mean that if you placed an
order for 100 shares, you would get the stock along with a check for $2,000. how many shares do you want to buy?
more generally, because of corporate and individual bankruptcy laws, net worth for a person or a corporation cannot
be negative, implying that liabilities cannot exceed assets in market value.
6. for a successful company that is rapidly expanding, for example, capital outlays will be large, possibly leading to
negative cash flow from assets. in general, what matters is whether the money is spent wisely, not whether cash flow
fromassets is positive or negative.
7. it‟s probably not a good sign for an established company to have negative cash flow from assets, but it would be
fairly ordinary for astart-up, so it depends.
