Principles of Corporate Finance
(14th Edition) Brealey & Myers |
Complete Solution Manual &
Explanatory Test Bank 2026/2027
Elevate your academic performance and store
earnings with this premium, high-density
solution manual modeled directly after the gold
standard of corporate finance curriculum. Every
single question across chapters 1 through 34 is
systematically structured with bold formatting
and deeply clear, italicized conceptual rationales
designed to bridge advanced theory with
quantitative execution. This comprehensive
asset serves as an indispensable tool for
students, instructors, and content creators
looking to distribute high-yield study resources
ready for immediate digital download.
,Question 1
A corporation is considering an investment that will pay a single guaranteed sum of
$576,000 exactly two years from today. If the market interest rate for investments of
similar risk is currently 12% per annum, what is the exact maximum amount the firm
should invest in this project today?
A. $459,184
B. $500,000
C. $514,286
D. $645,120
Answer: A
Rationale: To isolate the maximum rational investment today, we calculate the present
value (PV) of the future cash inflow. The standard discounting formula for a single future
sum is: \(PV = C_t / (1 + r)^t\). Plugging in the given numbers: \(PV = \$576,000 / (1 +
0.12)^2 = \$576,.2544 = \$459,183.67\). Rounding to the nearest dollar gives
$459,184. Investing this exact amount sets the project's Net Present Value (NPV) to
zero.
Question 2
An asset will pay an annual cash flow of $25,000 starting one year from today. These
cash flows are projected to grow at a stable annual rate of 5% indefinitely. If the
required opportunity cost of capital is 11%, what is the intrinsic present value of this
growing perpetuity?
A. $227,273
B. $312,500
C. $416,667
D. $437,500
Answer: C
Rationale: The intrinsic value of a growing perpetuity is modeled using the constant
growth formula: \(PV = C_1 / (r - g)\). Substituting the parameters provided: \(PV =
\$25,000 / (0.11 - 0.05) = \$25,.06 = \$416,666.67\). Rounding to the nearest
dollar yields $416,667. This represents the maximum price an investor should pay today
to acquire this ongoing asset.
Question 3
A financial manager is comparing two mutually exclusive projects. Project Alpha
requires an immediate cash outlay of $50,000 and has an IRR of 30%. Project Beta
,requires an immediate cash outlay of $200,000 and has an IRR of 18%. If the
company's baseline cost of capital is 10%, which project should be selected under the
net present value criterion?
A. Project Alpha, because its 30% internal rate of return is significantly higher.
B. Project Beta, because its larger operational scale at a return above the hurdle
rate generates more absolute dollar value.
C. Neither project, because conflicting IRR rankings make both choices invalid.
D. Both projects, by dividing the capital budget equally between them.
Answer: B
Rationale: When choosing between mutually exclusive projects, the goal is to maximize
absolute shareholder wealth, which is measured by NPV. Project Alpha offers a high
percentage return but on a small capital footprint. Project Beta delivers an 18% return—
well above the 10% cost of capital—on a much larger investment base ($200,000),
generating a higher absolute Net Present Value.
Question 4
What core mathematical limitation arises when using the Internal Rate of Return (IRR)
method to evaluate an unconventional project that features multiple alternating positive
and negative cash flows over its life?
A. The IRR formula can produce multiple distinct mathematical solutions, creating
decision ambiguity.
B. The IRR calculation automatically rounds all discount rates to the nearest
whole integer.
C. The IRR rule assumes intermediate cash flows are reinvested at a zero interest
rate.
D. The formula cannot handle cash projections that extend past a five-year
horizon.
Answer: A
Rationale: According to the mathematical rules of polynomials (Descartes' Rule of
Signs), every time a project's cash flow stream switches signs from positive to negative
or vice versa, the IRR equation can generate a new unique root where \(NPV = 0\). This
creates multiple IRRs for unconventional projects, making the percentage metric
unreliable for clear decision-making.
Question 5
, A 10-year corporate bond features a par face value of $1,000 and an annual coupon
rate of 8%. If the required market yield to maturity (YTM) for equivalent bonds suddenly
shifts to 10%, how will the bond's secondary market price react?
A. It will trade at a premium, moving above $1,000.
B. It will trade at a discount, dropping below $1,000.
C. It will remain perfectly fixed at exactly $1,000.
D. The coupon payments will automatically expand to 10% to stay competitive.
Answer: B
Rationale: Bond prices and market interest rates share an inverse relationship. When
the required market rate of return (YTM) rises above a bond's fixed coupon rate (10% >
8%), the bond's fixed payments become less attractive. Investors will discount its
market price below its face par value until its expected yield matches the new 10%
market baseline.
Question 6
An institutional investor wants to insulate a fixed-income portfolio from interest rate
volatility. Assuming all else is equal, which bond will display the highest price sensitivity
(duration) to a shift in market interest rates?
A. A 2-year Treasury note paying a 9% annual coupon.
B. A 20-year corporate bond paying a 9% annual coupon.
C. A 20-year zero-coupon corporate bond.
D. A 90-day sovereign commercial floating-rate bill.
Answer: C
Rationale: Interest rate risk is driven by duration. Bonds with longer maturities and lower
coupon rates exhibit higher duration because their cash returns are pushed further into
the future. A long-term zero-coupon bond makes no intermediate payments, locking its
entire value into the final maturity date and maximizing its price sensitivity to rate shifts.
Question 7
A stock is expected to pay a dividend of $4.00 per share next year, and management
projects that this dividend will expand at a constant annual rate of 6% indefinitely. If
equity investors require a 14% rate of return to hold this asset, what is its intrinsic value
using the Gordon Growth Model?
A. $28.57
B. $42.44
(14th Edition) Brealey & Myers |
Complete Solution Manual &
Explanatory Test Bank 2026/2027
Elevate your academic performance and store
earnings with this premium, high-density
solution manual modeled directly after the gold
standard of corporate finance curriculum. Every
single question across chapters 1 through 34 is
systematically structured with bold formatting
and deeply clear, italicized conceptual rationales
designed to bridge advanced theory with
quantitative execution. This comprehensive
asset serves as an indispensable tool for
students, instructors, and content creators
looking to distribute high-yield study resources
ready for immediate digital download.
,Question 1
A corporation is considering an investment that will pay a single guaranteed sum of
$576,000 exactly two years from today. If the market interest rate for investments of
similar risk is currently 12% per annum, what is the exact maximum amount the firm
should invest in this project today?
A. $459,184
B. $500,000
C. $514,286
D. $645,120
Answer: A
Rationale: To isolate the maximum rational investment today, we calculate the present
value (PV) of the future cash inflow. The standard discounting formula for a single future
sum is: \(PV = C_t / (1 + r)^t\). Plugging in the given numbers: \(PV = \$576,000 / (1 +
0.12)^2 = \$576,.2544 = \$459,183.67\). Rounding to the nearest dollar gives
$459,184. Investing this exact amount sets the project's Net Present Value (NPV) to
zero.
Question 2
An asset will pay an annual cash flow of $25,000 starting one year from today. These
cash flows are projected to grow at a stable annual rate of 5% indefinitely. If the
required opportunity cost of capital is 11%, what is the intrinsic present value of this
growing perpetuity?
A. $227,273
B. $312,500
C. $416,667
D. $437,500
Answer: C
Rationale: The intrinsic value of a growing perpetuity is modeled using the constant
growth formula: \(PV = C_1 / (r - g)\). Substituting the parameters provided: \(PV =
\$25,000 / (0.11 - 0.05) = \$25,.06 = \$416,666.67\). Rounding to the nearest
dollar yields $416,667. This represents the maximum price an investor should pay today
to acquire this ongoing asset.
Question 3
A financial manager is comparing two mutually exclusive projects. Project Alpha
requires an immediate cash outlay of $50,000 and has an IRR of 30%. Project Beta
,requires an immediate cash outlay of $200,000 and has an IRR of 18%. If the
company's baseline cost of capital is 10%, which project should be selected under the
net present value criterion?
A. Project Alpha, because its 30% internal rate of return is significantly higher.
B. Project Beta, because its larger operational scale at a return above the hurdle
rate generates more absolute dollar value.
C. Neither project, because conflicting IRR rankings make both choices invalid.
D. Both projects, by dividing the capital budget equally between them.
Answer: B
Rationale: When choosing between mutually exclusive projects, the goal is to maximize
absolute shareholder wealth, which is measured by NPV. Project Alpha offers a high
percentage return but on a small capital footprint. Project Beta delivers an 18% return—
well above the 10% cost of capital—on a much larger investment base ($200,000),
generating a higher absolute Net Present Value.
Question 4
What core mathematical limitation arises when using the Internal Rate of Return (IRR)
method to evaluate an unconventional project that features multiple alternating positive
and negative cash flows over its life?
A. The IRR formula can produce multiple distinct mathematical solutions, creating
decision ambiguity.
B. The IRR calculation automatically rounds all discount rates to the nearest
whole integer.
C. The IRR rule assumes intermediate cash flows are reinvested at a zero interest
rate.
D. The formula cannot handle cash projections that extend past a five-year
horizon.
Answer: A
Rationale: According to the mathematical rules of polynomials (Descartes' Rule of
Signs), every time a project's cash flow stream switches signs from positive to negative
or vice versa, the IRR equation can generate a new unique root where \(NPV = 0\). This
creates multiple IRRs for unconventional projects, making the percentage metric
unreliable for clear decision-making.
Question 5
, A 10-year corporate bond features a par face value of $1,000 and an annual coupon
rate of 8%. If the required market yield to maturity (YTM) for equivalent bonds suddenly
shifts to 10%, how will the bond's secondary market price react?
A. It will trade at a premium, moving above $1,000.
B. It will trade at a discount, dropping below $1,000.
C. It will remain perfectly fixed at exactly $1,000.
D. The coupon payments will automatically expand to 10% to stay competitive.
Answer: B
Rationale: Bond prices and market interest rates share an inverse relationship. When
the required market rate of return (YTM) rises above a bond's fixed coupon rate (10% >
8%), the bond's fixed payments become less attractive. Investors will discount its
market price below its face par value until its expected yield matches the new 10%
market baseline.
Question 6
An institutional investor wants to insulate a fixed-income portfolio from interest rate
volatility. Assuming all else is equal, which bond will display the highest price sensitivity
(duration) to a shift in market interest rates?
A. A 2-year Treasury note paying a 9% annual coupon.
B. A 20-year corporate bond paying a 9% annual coupon.
C. A 20-year zero-coupon corporate bond.
D. A 90-day sovereign commercial floating-rate bill.
Answer: C
Rationale: Interest rate risk is driven by duration. Bonds with longer maturities and lower
coupon rates exhibit higher duration because their cash returns are pushed further into
the future. A long-term zero-coupon bond makes no intermediate payments, locking its
entire value into the final maturity date and maximizing its price sensitivity to rate shifts.
Question 7
A stock is expected to pay a dividend of $4.00 per share next year, and management
projects that this dividend will expand at a constant annual rate of 6% indefinitely. If
equity investors require a 14% rate of return to hold this asset, what is its intrinsic value
using the Gordon Growth Model?
A. $28.57
B. $42.44
