Solution Manual for Fundamentals of Corporate
Finance 13th Edition by Stephen Ross Randolph
Westerfield Bradford Jordan Updated 2024/2025 A+
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, Solutions Manual
Fundamentals of Corporate Finance 13th edition
Ross, Westerfield, and Jordan
Prepared by
Brad Jordan
University of Florida
Joe Smolira
Belmont University
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,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 wor 𝐤ing capital
management (modifying the firm‘s credit collection policy with its customers).
2. Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, difficulty in
raising 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, and unlimited life.
4. In response to Sarbanes-Oxley, small firms have elected to go dar 𝐤 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 firm‘s profits. A major cost of going dar 𝐤 is less access to capital. Since the
firm is no longer publicly traded, it can no longer raise money in the public mar 𝐤et. Although the
company will still have access to ban𝐤 loans and the private equity mar 𝐤et, the costs associated with
raising funds in these mar𝐤ets are usually higher than the costs of raising funds in the public mar 𝐤et.
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.
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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 mar 𝐤ets li 𝐤e 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; that is, 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 ris 𝐤, 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 mar 𝐤et 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 stoc 𝐤 valuation explicitly includes these. At the other extreme, we
could argue that these are noneconomic 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 countries with a 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 ris 𝐤y 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 stoc 𝐤 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.
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Finance 13th Edition by Stephen Ross Randolph
Westerfield Bradford Jordan Updated 2024/2025 A+
written by
TestBan𝐤Stuvia
www.stuvia.com
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, Solutions Manual
Fundamentals of Corporate Finance 13th edition
Ross, Westerfield, and Jordan
Prepared by
Brad Jordan
University of Florida
Joe Smolira
Belmont University
A+ Page 0
Downloaded by: TestBan𝐤Stuvia |
romeshasho𝐤 extra per year?
Distribution of this document is illegal Want to earn $1.236
,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 wor 𝐤ing capital
management (modifying the firm‘s credit collection policy with its customers).
2. Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, difficulty in
raising 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, and unlimited life.
4. In response to Sarbanes-Oxley, small firms have elected to go dar 𝐤 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 firm‘s profits. A major cost of going dar 𝐤 is less access to capital. Since the
firm is no longer publicly traded, it can no longer raise money in the public mar 𝐤et. Although the
company will still have access to ban𝐤 loans and the private equity mar 𝐤et, the costs associated with
raising funds in these mar𝐤ets are usually higher than the costs of raising funds in the public mar 𝐤et.
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.
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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 mar 𝐤ets li 𝐤e 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; that is, 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 ris 𝐤, 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 mar 𝐤et 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 stoc 𝐤 valuation explicitly includes these. At the other extreme, we
could argue that these are noneconomic 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 countries with a 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 ris 𝐤y 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 stoc 𝐤 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.
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