SOLUTION MANUAL FOR
Principles Of Corporate Finance
14th Edition By Richard Brealey, Stewart Myers, ALL
Chapters (1 - 34)
ABLE OF CONTENTS
Chapter 1: Introduction to Corporate Finance
Chapter 2: How to Calculate Present Values
Chapter 3: Valuing Bonds
Chapter 4: Valuing Stocks
Chapter 5: Net Present Value and Other Investment Criteria
Chapter 6: Making Investment Decisions with the Net Present Value Rule
Chapter 7: Introduction to Risk, Diversification, and Portfolio Selection
Chapter 8: The Capital Asset Pricing Model
Chapter 9: Risk and the Cost of Capital
Chapter 10: Project Analysis
Chapter 11: How to Ensure That Projects Truly Have PositiveNPVs
Chapter 12: Efficient Markets and Behavioral Finance
Chapter 13: An Overview of Corporate Financing
Chapter 14: How Corporations Issue Securities
Chapter 15: Payout Policy
Chapter 16: Does Debt Policy Matter?
Chapter 17: How Much Should a Corporation Borrow?
Chapter 18: Financing and Valuation
Chapter 19: Agency Problems and Corporate Governance
Chapter 20: Stakeholder Capitalism and Responsible Business
Chapter 21: Understanding Options
Chapter 22: Valuing Options
Chapter 23: Real Options
Chapter 24: Credit Risk and the Value of Corporate Debt
Chapter 25: The Many Different Kinds of Debt
Chapter 26: Leasing
,Chapter 27: Managing Risk
Chapter 28: International Financial Management
Chapter 29: Financial Analysis
Chapter 30: Financial Planning
Chapter 31: Working Capital Management
Chapter 32: Mergers
Chapter 33: Corporate Restructuring
Chapter 34: Conclusion: What We Do and Do Not Know about Finance
CHAPTER 1
Introduction to Corporate Finance
The values shown in the solutions may be rounded for display purposes. However, the answers werederived using a
spreadsheet without any intermediate rounding.
Answers to Problem Sets
• a. real
• executive airplanes
• brand names
• financial
• bonds
*f. investment or capital expenditure
*g. capital budgeting or investment
, h. financing
*Note that f and g are interchangeable in the question.
Est time: 01-05
• A trademark, a factory, undeveloped land, and your work force (c, d, e, and g) are all real assets.
Real assets are identifiable as items with intrinsic value. The others in the list are financial assets, that is, these assets
derive value because of a contractual claim.
Est time: 01-05
• a. Financial assets, such as stocks or bank loans, are claims held by investors. Corporations
sell financial assets to raise the cash to invest in real assets such as plantand equipment. Some real assets are
intangible.
• Capital expenditure means investment in real assets. Financing means raising the cashfor this
investment.
• The shares of public corporations are traded on stock exchanges and can be purchasedby a wide
range of investors. The shares of closely held corporations are not publicly traded and are held by a small group of
private investors.
• Unlimited liability: Investors are responsible for all the firm‘s debts. A sole proprietor has unlimited
liability. Investors in corporations have limited liability. They can lose their investment, but no more.
Est time: 01-05
• Items c and d apply to corporations. Because corporations have perpetual life, ownership can be
transferred without affecting operations, and managers can be fired with no effect on ownership. Other forms of
business may have unlimited liability and limited life.
Est time: 01-05
• Separation of ownership facilitates the key attributes of a corporation, including limited liability for
investors, transferability of ownership, a separate legal personality of the corporation, and delegated centralized
management. These four attributes provide substantial benefit for investors, including the ability to diversify their
investment among many uncorrelated returns—a very valuable tool explored in later chapters. Also, these attributes
, allow investors to quickly exit,enter, or short sell an investment, thereby generating an active liquid market for
corporations.
However, these positive aspects also introduce substantial negative externalities as well. The separation of
ownership from management typically leads to agency problems, where managers prefer to consume private
perks or make other decisions for their private benefit—rather than maximize shareholder wealth.
Shareholders tend to exercise less oversight of each individual investment as their diversification increases.
Finally, the corporation‘s separate legal personalitymakes it difficult to enforce accountability if they
externalize costs onto society.
Est time: 01-05
• Shareholders will only vote to maximize shareholder wealth. Shareholders can modify their
pattern of consumption through borrowing and lending, match risk preferences, and hopefully balance their own
checkbooks (or hire a qualified professional to help them with these tasks).
Est time: 01-05
• If the investment increases the firm‘s wealth, it increases the firm‘s share value. Ms. Espinoza
could then sell some or all these more valuable shares to provide for her retirement income.
Est time: 01-05
• a. Assuming that the encabulator market is risky, an 8% expected return on
the F&H encabulator investments may be inferior to a 4% return on U.S.
government securities, depending on the relative risk between the two assets.
b. Unless the financial assets are as safe as U.S. government securities, their cost of capital
would be higher. The CFO could consider expected returns on assets with similar risk.
Est time: 06-10
• Managers would act in shareholders‘ interests because they have a legal duty to act in their interests.
Managers may also receive compensation— bonuses, stock, and option payouts with value tied (roughly) to firm
performance. Managers may fear personal reputational damage from not acting in shareholders‘ interests. And
managers can be fired by the board of directors (electedby shareholders). If managers still fail to act in
shareholders‘ interests, shareholders may sell their shares, lowering the stock price and potentially creating the
possibility of a takeover, which can again lead to changes in the board of directors and senior management.
Est time: 01-05
Principles Of Corporate Finance
14th Edition By Richard Brealey, Stewart Myers, ALL
Chapters (1 - 34)
ABLE OF CONTENTS
Chapter 1: Introduction to Corporate Finance
Chapter 2: How to Calculate Present Values
Chapter 3: Valuing Bonds
Chapter 4: Valuing Stocks
Chapter 5: Net Present Value and Other Investment Criteria
Chapter 6: Making Investment Decisions with the Net Present Value Rule
Chapter 7: Introduction to Risk, Diversification, and Portfolio Selection
Chapter 8: The Capital Asset Pricing Model
Chapter 9: Risk and the Cost of Capital
Chapter 10: Project Analysis
Chapter 11: How to Ensure That Projects Truly Have PositiveNPVs
Chapter 12: Efficient Markets and Behavioral Finance
Chapter 13: An Overview of Corporate Financing
Chapter 14: How Corporations Issue Securities
Chapter 15: Payout Policy
Chapter 16: Does Debt Policy Matter?
Chapter 17: How Much Should a Corporation Borrow?
Chapter 18: Financing and Valuation
Chapter 19: Agency Problems and Corporate Governance
Chapter 20: Stakeholder Capitalism and Responsible Business
Chapter 21: Understanding Options
Chapter 22: Valuing Options
Chapter 23: Real Options
Chapter 24: Credit Risk and the Value of Corporate Debt
Chapter 25: The Many Different Kinds of Debt
Chapter 26: Leasing
,Chapter 27: Managing Risk
Chapter 28: International Financial Management
Chapter 29: Financial Analysis
Chapter 30: Financial Planning
Chapter 31: Working Capital Management
Chapter 32: Mergers
Chapter 33: Corporate Restructuring
Chapter 34: Conclusion: What We Do and Do Not Know about Finance
CHAPTER 1
Introduction to Corporate Finance
The values shown in the solutions may be rounded for display purposes. However, the answers werederived using a
spreadsheet without any intermediate rounding.
Answers to Problem Sets
• a. real
• executive airplanes
• brand names
• financial
• bonds
*f. investment or capital expenditure
*g. capital budgeting or investment
, h. financing
*Note that f and g are interchangeable in the question.
Est time: 01-05
• A trademark, a factory, undeveloped land, and your work force (c, d, e, and g) are all real assets.
Real assets are identifiable as items with intrinsic value. The others in the list are financial assets, that is, these assets
derive value because of a contractual claim.
Est time: 01-05
• a. Financial assets, such as stocks or bank loans, are claims held by investors. Corporations
sell financial assets to raise the cash to invest in real assets such as plantand equipment. Some real assets are
intangible.
• Capital expenditure means investment in real assets. Financing means raising the cashfor this
investment.
• The shares of public corporations are traded on stock exchanges and can be purchasedby a wide
range of investors. The shares of closely held corporations are not publicly traded and are held by a small group of
private investors.
• Unlimited liability: Investors are responsible for all the firm‘s debts. A sole proprietor has unlimited
liability. Investors in corporations have limited liability. They can lose their investment, but no more.
Est time: 01-05
• Items c and d apply to corporations. Because corporations have perpetual life, ownership can be
transferred without affecting operations, and managers can be fired with no effect on ownership. Other forms of
business may have unlimited liability and limited life.
Est time: 01-05
• Separation of ownership facilitates the key attributes of a corporation, including limited liability for
investors, transferability of ownership, a separate legal personality of the corporation, and delegated centralized
management. These four attributes provide substantial benefit for investors, including the ability to diversify their
investment among many uncorrelated returns—a very valuable tool explored in later chapters. Also, these attributes
, allow investors to quickly exit,enter, or short sell an investment, thereby generating an active liquid market for
corporations.
However, these positive aspects also introduce substantial negative externalities as well. The separation of
ownership from management typically leads to agency problems, where managers prefer to consume private
perks or make other decisions for their private benefit—rather than maximize shareholder wealth.
Shareholders tend to exercise less oversight of each individual investment as their diversification increases.
Finally, the corporation‘s separate legal personalitymakes it difficult to enforce accountability if they
externalize costs onto society.
Est time: 01-05
• Shareholders will only vote to maximize shareholder wealth. Shareholders can modify their
pattern of consumption through borrowing and lending, match risk preferences, and hopefully balance their own
checkbooks (or hire a qualified professional to help them with these tasks).
Est time: 01-05
• If the investment increases the firm‘s wealth, it increases the firm‘s share value. Ms. Espinoza
could then sell some or all these more valuable shares to provide for her retirement income.
Est time: 01-05
• a. Assuming that the encabulator market is risky, an 8% expected return on
the F&H encabulator investments may be inferior to a 4% return on U.S.
government securities, depending on the relative risk between the two assets.
b. Unless the financial assets are as safe as U.S. government securities, their cost of capital
would be higher. The CFO could consider expected returns on assets with similar risk.
Est time: 06-10
• Managers would act in shareholders‘ interests because they have a legal duty to act in their interests.
Managers may also receive compensation— bonuses, stock, and option payouts with value tied (roughly) to firm
performance. Managers may fear personal reputational damage from not acting in shareholders‘ interests. And
managers can be fired by the board of directors (electedby shareholders). If managers still fail to act in
shareholders‘ interests, shareholders may sell their shares, lowering the stock price and potentially creating the
possibility of a takeover, which can again lead to changes in the board of directors and senior management.
Est time: 01-05
