Solutions Manual Fundamentals of Corporate Finance
13th Edition Ross, Westerfield, and Jordan
Chapters 1 - 27
,CHAPTERt1:tIntroductionttotCorporatetFinance
CHAPTERt2:tFinancialtStatements,tTaxes,tAndtCashtFlow
CHAPTERt3:tWorkingtwithtFinancialtStatements
CHAPTERt4:tLong-TermtFinancialtPlanningtandtGrowth
CHAPTERt5:tIntroductionttotValuation:tThetTimetValuetoftMoney
CHAPTERt6:tDiscountedtCashtFlowtValuation
CHAPTERt7:tInteresttRatestandtBondtValuation
CHAPTERt8:tStocktValuation
CHAPTERt9:tNettPresenttValuetandtOthertInvestmenttCriteria
CHAPTERt10:tMakingtCapitaltInvestmenttDecisions
CHAPTERt11:tProjecttAnalysistandtEvaluation
CHAPTERt12:tSometLessonstfromtCapitaltMarkettHistory
CHAPTERt13:tReturn,tRisk,tAndtthetSecuritytMarkettLine
CHAPTERt14:tCosttoftCapital
CHAPTERt15:tRaisingtCapital
CHAPTERt16:tFinancialtLeveragetandtCapitaltStructuretPolicy
CHAPTERt17:tDividendstandtPayouttPolicy
CHAPTERt18:tShort-TermtFinancetandtPlanning
CHAPTERt19:tCashtandtLiquiditytManagement
CHAPTERt20:tCredittandtInventorytManagement
CHAPTERt21:tInternationaltCorporatetFinance
CHAPTERt22:tBehavioraltFinance:tImplicationstfortFinancialtManage
CHAPTERt23:tEnterprisetRisktManagement
CHAPTERt24:OptionstandtCorporatetFinance
CHAPTERt25:tOptiontValuation
CHAPTERt26:tMergerstandtAcquisitions
CHAPTERt27:tLeasing
,CHAPTERt1
INTRODUCTIONtTOtCORPORAT
EtFINANCE
AnswersttotConceptstReviewtandtCriticaltThinkingtQuestions
1. Capitaltbudgetingt(decidingtwhetherttotexpandtatmanufacturingtplant),tcapitaltstructuret(decidingtw
hetherttotissuetnewtequitytandtusetthetproceedsttotretiretoutstandingtdebt),tandtworkingtcapitaltman
agementt(modifyingtthetfirm‘stcredittcollectiontpolicytwithtitstcustomers).
2. Disadvantages:tunlimitedtliability,tlimitedtlife,tdifficultytinttransferringtownership,thardttotraisetcap
italtfunds.tSometadvantages:tsimpler,tlesstregulation,tthetownerstaretalsotthetmanagers,tsometimest
personalttaxtratestaretbettertthantcorporatettaxtrates.
3. Thetprimarytdisadvantagetoftthetcorporatetformtistthetdoublettaxationttotshareholderstoftdistributed
tearningstandtdividends.tSometadvantagestinclude:tlimitedtliability,teasetofttransferability,tabilitytto
traisetcapital,tunlimitedtlife,tandtsotforth.
4. IntresponsettotSarbanes-
Oxley,tsmalltfirmsthavetelectedttotgotdarktbecausetoftthetcoststoftcompliance.tThetcoststtotcomplyt
withtSarboxtcantbetseveraltmilliontdollars,twhichtcantbetatlargetpercentaget oft atsmallt firmst profit
s.t At majort costt oft goingtdarkt ist lesst accesst tot capital.t Sincet thetfirmtistnotlongertpubliclyttraded,
tittcantnotlongertraisetmoneytintthetpublictmarket.tAlthoughtthetcompanytwilltstillthavetaccessttotb
anktloanstandtthetprivatetequitytmarket,tthetcoststassociatedtwithtraisingtfundstintthesetmarketstaret
usuallythighertthantthetcoststoftraisingtfundstintthetpublictmarket.
5. Thet treasurer‘st officet andt thet controller‘st officet aret thet twot primaryt organizationalt groupst tha
ttreporttdirectlyttotthetchieftfinancialtofficer.tThetcontroller‘stofficethandlestcosttandtfinancialtaccou
nting,ttaxtmanagement,tandtmanagementtinformationtsystems,twhiletthettreasurer‘stofficetistrespon
siblet fort casht andt creditt management,t capitalt budgeting,t andt financialt planning.t Therefore,tthetst
udytoftcorporatetfinancetistconcentratedtwithintthettreasurytgroup‘stfunctions.
6. Totmaximizetthetcurrenttmarkettvaluet(sharetprice)toftthetequitytoftthetfirmt(whethertit‘stpublicly-
ttradedtortnot).
7. Intthetcorporatetformtoftownership,tthetshareholderstaretthetownerstoftthetfirm.tThetshareholderstel
ecttthetdirectorstoftthetcorporation,twhotintturntappointtthetfirm‘stmanagement.tThistseparationtoft
ownershiptfromtcontroltintthetcorporatetformtoftorganizationtistwhattcausestagencytproblemsttotexi
st.tManagementtmaytacttintitstowntortsomeonetelse‘stbesttinterests,trathertthantthosetoftthetshareho
lders.tIftsuchteventstoccur,ttheytmaytcontradicttthetgoaltoftmaximizingtthetsharetpricetoftthetequity
toftthetfirm.
8. Atprimarytmarketttransaction.
, B-2t SOLUTIONS
9. IntauctiontmarketstliketthetNYSE,tbrokerstandtagentstmeettattatphysicaltlocationt(thetexchange)ttot
matchtbuyerstandtsellerstoftassets.tDealertmarketstliketNASDAQtconsisttoftdealerstoperatingtattdis
persedtlocalestwhotbuytandtselltassetstthemselves,tcommunicatingtwithtothertdealersteithertelectron
icallytortliterallytover-the-counter.
10. Suchtorganizationstfrequentlytpursuetsocialtortpoliticaltmissions,tsotmanytdifferenttgoalstaretconcei
vable.tOnetgoaltthattistoftentcitedtistrevenuetminimization;ti.e.,tprovidetwhatevertgoodstandtservice
staretofferedtattthetlowesttpossibletcostttotsociety.tAtbettertapproachtmighttbettotobservetthattevent
atnot-for-
profittbusinessthastequity.tThus,tonetanswertistthattthetappropriatetgoaltist totmaximizetthetvaluetof
tthetequity.
11. Presumably,tthetcurrenttstocktvaluetreflectstthetrisk,ttiming,tandtmagnitudetoftalltfuturetcashtflows,
tbothtshort-termtandtlong-term.tIftthististcorrect,tthentthetstatementtistfalse.
12. Antargumenttcantbetmadeteithertway.tAttthetonetextreme,twetcouldtarguetthattintatmarketteconom
y,talltoftthesetthingstaretpriced.tTheretistthustantoptimaltleveltof,tfortexample,tethicaltand/ortillegalt
behavior,tandtthetframeworktoftstocktvaluationtexplicitlytincludestthese.tAttthetothertextreme,twetc
ouldtarguetthattthesetaretnon-
economictphenomenatandtaretbestthandledtthroughtthetpoliticaltprocess.tAtclassict(andthighlytrelev
ant)tthoughttquestiontthattillustratestthistdebatetgoestsomethingtliketthis:t―Atfirmthastestimatedtthat
tthetcosttoftimprovingtthetsafetytoftonetoftitstproductstist$30tmillion.tHowever,tthetfirmtbelievestth
attimprovingtthetsafetytoftthetproducttwilltonlytsavet$20tmilliontintproducttliabilitytclaims.tWhatts
houldtthetfirmtdo?‖
13. Thetgoaltwilltbetthetsame,tbuttthetbesttcoursetoftactionttowardtthattgoaltmaytbetdifferenttbecauseto
ftdifferingtsocial,tpolitical,tandteconomictinstitutions.
14. Thetgoaltoftmanagementtshouldtbettotmaximizetthetsharetpricetfortthetcurrenttshareholders.tIftman
agementtbelievestthattittcantimprovetthetprofitabilitytoftthetfirmtsotthattthetsharetpricetwilltexceedt
$35,tthenttheytshouldtfighttthetoffertfromtthetoutsidetcompany.tIftmanagementtbelievestthattthistbi
ddertortothertunidentifiedtbidderstwilltactuallytpaytmoretthant$35tpertsharettotacquiretthetcompany
,tthenttheytshouldtstilltfighttthetoffer.tHowever,tiftthetcurrenttmanagementtcannottincreasetthetvalu
etoftthetfirmtbeyondtthetbidtprice,tandtnototherthighertbidstcometin,tthentmanagementtistnottacting
tintthetintereststoftthetshareholderstbytfightingtthetoffer.tSincetcurrenttmanagerstoftentlosettheirtjob
stwhentthetcorporationtistacquired,tpoorlytmonitoredtmanagersthavetantincentivettotfighttcorporatet
takeoverstintsituationstsuchtastthis.
15. Wetwouldtexpecttagencytproblemsttotbetlesstseveretintothertcountries,tprimarilytduettotthetrelativel
ytsmalltpercentagetoftindividualtownership.tFewertindividualtownerstshouldtreducetthetnumbertoftd
iversetopinionstconcerningtcorporatetgoals.tThethightpercentagetoftinstitutionaltownershiptmighttle
adttotathighertdegreetoftagreementtbetweentownerstandtmanagerstontdecisionstconcerningtriskytpro
jects.tIntaddition,tinstitutionstmaytbetbettertablettotimplementteffectivetmonitoringtmechanismstont
managerstthantcantindividualtowners,tbasedtontthetinstitutions‘tdeepertresourcestandtexperiencestw
ithttheirtowntmanagement.tThetincreasetintinstitutionaltownershiptoftstocktintthetUnitedtStatestandtt
hetgrowingtactivismtoftthesetlargetshareholdertgroupstmaytleadttotatreductiontintagencytproblemstf
ortU.S.tcorporationstandtatmoretefficienttmarkettfortcorporatetcontrol.
13th Edition Ross, Westerfield, and Jordan
Chapters 1 - 27
,CHAPTERt1:tIntroductionttotCorporatetFinance
CHAPTERt2:tFinancialtStatements,tTaxes,tAndtCashtFlow
CHAPTERt3:tWorkingtwithtFinancialtStatements
CHAPTERt4:tLong-TermtFinancialtPlanningtandtGrowth
CHAPTERt5:tIntroductionttotValuation:tThetTimetValuetoftMoney
CHAPTERt6:tDiscountedtCashtFlowtValuation
CHAPTERt7:tInteresttRatestandtBondtValuation
CHAPTERt8:tStocktValuation
CHAPTERt9:tNettPresenttValuetandtOthertInvestmenttCriteria
CHAPTERt10:tMakingtCapitaltInvestmenttDecisions
CHAPTERt11:tProjecttAnalysistandtEvaluation
CHAPTERt12:tSometLessonstfromtCapitaltMarkettHistory
CHAPTERt13:tReturn,tRisk,tAndtthetSecuritytMarkettLine
CHAPTERt14:tCosttoftCapital
CHAPTERt15:tRaisingtCapital
CHAPTERt16:tFinancialtLeveragetandtCapitaltStructuretPolicy
CHAPTERt17:tDividendstandtPayouttPolicy
CHAPTERt18:tShort-TermtFinancetandtPlanning
CHAPTERt19:tCashtandtLiquiditytManagement
CHAPTERt20:tCredittandtInventorytManagement
CHAPTERt21:tInternationaltCorporatetFinance
CHAPTERt22:tBehavioraltFinance:tImplicationstfortFinancialtManage
CHAPTERt23:tEnterprisetRisktManagement
CHAPTERt24:OptionstandtCorporatetFinance
CHAPTERt25:tOptiontValuation
CHAPTERt26:tMergerstandtAcquisitions
CHAPTERt27:tLeasing
,CHAPTERt1
INTRODUCTIONtTOtCORPORAT
EtFINANCE
AnswersttotConceptstReviewtandtCriticaltThinkingtQuestions
1. Capitaltbudgetingt(decidingtwhetherttotexpandtatmanufacturingtplant),tcapitaltstructuret(decidingtw
hetherttotissuetnewtequitytandtusetthetproceedsttotretiretoutstandingtdebt),tandtworkingtcapitaltman
agementt(modifyingtthetfirm‘stcredittcollectiontpolicytwithtitstcustomers).
2. Disadvantages:tunlimitedtliability,tlimitedtlife,tdifficultytinttransferringtownership,thardttotraisetcap
italtfunds.tSometadvantages:tsimpler,tlesstregulation,tthetownerstaretalsotthetmanagers,tsometimest
personalttaxtratestaretbettertthantcorporatettaxtrates.
3. Thetprimarytdisadvantagetoftthetcorporatetformtistthetdoublettaxationttotshareholderstoftdistributed
tearningstandtdividends.tSometadvantagestinclude:tlimitedtliability,teasetofttransferability,tabilitytto
traisetcapital,tunlimitedtlife,tandtsotforth.
4. IntresponsettotSarbanes-
Oxley,tsmalltfirmsthavetelectedttotgotdarktbecausetoftthetcoststoftcompliance.tThetcoststtotcomplyt
withtSarboxtcantbetseveraltmilliontdollars,twhichtcantbetatlargetpercentaget oft atsmallt firmst profit
s.t At majort costt oft goingtdarkt ist lesst accesst tot capital.t Sincet thetfirmtistnotlongertpubliclyttraded,
tittcantnotlongertraisetmoneytintthetpublictmarket.tAlthoughtthetcompanytwilltstillthavetaccessttotb
anktloanstandtthetprivatetequitytmarket,tthetcoststassociatedtwithtraisingtfundstintthesetmarketstaret
usuallythighertthantthetcoststoftraisingtfundstintthetpublictmarket.
5. Thet treasurer‘st officet andt thet controller‘st officet aret thet twot primaryt organizationalt groupst tha
ttreporttdirectlyttotthetchieftfinancialtofficer.tThetcontroller‘stofficethandlestcosttandtfinancialtaccou
nting,ttaxtmanagement,tandtmanagementtinformationtsystems,twhiletthettreasurer‘stofficetistrespon
siblet fort casht andt creditt management,t capitalt budgeting,t andt financialt planning.t Therefore,tthetst
udytoftcorporatetfinancetistconcentratedtwithintthettreasurytgroup‘stfunctions.
6. Totmaximizetthetcurrenttmarkettvaluet(sharetprice)toftthetequitytoftthetfirmt(whethertit‘stpublicly-
ttradedtortnot).
7. Intthetcorporatetformtoftownership,tthetshareholderstaretthetownerstoftthetfirm.tThetshareholderstel
ecttthetdirectorstoftthetcorporation,twhotintturntappointtthetfirm‘stmanagement.tThistseparationtoft
ownershiptfromtcontroltintthetcorporatetformtoftorganizationtistwhattcausestagencytproblemsttotexi
st.tManagementtmaytacttintitstowntortsomeonetelse‘stbesttinterests,trathertthantthosetoftthetshareho
lders.tIftsuchteventstoccur,ttheytmaytcontradicttthetgoaltoftmaximizingtthetsharetpricetoftthetequity
toftthetfirm.
8. Atprimarytmarketttransaction.
, B-2t SOLUTIONS
9. IntauctiontmarketstliketthetNYSE,tbrokerstandtagentstmeettattatphysicaltlocationt(thetexchange)ttot
matchtbuyerstandtsellerstoftassets.tDealertmarketstliketNASDAQtconsisttoftdealerstoperatingtattdis
persedtlocalestwhotbuytandtselltassetstthemselves,tcommunicatingtwithtothertdealersteithertelectron
icallytortliterallytover-the-counter.
10. Suchtorganizationstfrequentlytpursuetsocialtortpoliticaltmissions,tsotmanytdifferenttgoalstaretconcei
vable.tOnetgoaltthattistoftentcitedtistrevenuetminimization;ti.e.,tprovidetwhatevertgoodstandtservice
staretofferedtattthetlowesttpossibletcostttotsociety.tAtbettertapproachtmighttbettotobservetthattevent
atnot-for-
profittbusinessthastequity.tThus,tonetanswertistthattthetappropriatetgoaltist totmaximizetthetvaluetof
tthetequity.
11. Presumably,tthetcurrenttstocktvaluetreflectstthetrisk,ttiming,tandtmagnitudetoftalltfuturetcashtflows,
tbothtshort-termtandtlong-term.tIftthististcorrect,tthentthetstatementtistfalse.
12. Antargumenttcantbetmadeteithertway.tAttthetonetextreme,twetcouldtarguetthattintatmarketteconom
y,talltoftthesetthingstaretpriced.tTheretistthustantoptimaltleveltof,tfortexample,tethicaltand/ortillegalt
behavior,tandtthetframeworktoftstocktvaluationtexplicitlytincludestthese.tAttthetothertextreme,twetc
ouldtarguetthattthesetaretnon-
economictphenomenatandtaretbestthandledtthroughtthetpoliticaltprocess.tAtclassict(andthighlytrelev
ant)tthoughttquestiontthattillustratestthistdebatetgoestsomethingtliketthis:t―Atfirmthastestimatedtthat
tthetcosttoftimprovingtthetsafetytoftonetoftitstproductstist$30tmillion.tHowever,tthetfirmtbelievestth
attimprovingtthetsafetytoftthetproducttwilltonlytsavet$20tmilliontintproducttliabilitytclaims.tWhatts
houldtthetfirmtdo?‖
13. Thetgoaltwilltbetthetsame,tbuttthetbesttcoursetoftactionttowardtthattgoaltmaytbetdifferenttbecauseto
ftdifferingtsocial,tpolitical,tandteconomictinstitutions.
14. Thetgoaltoftmanagementtshouldtbettotmaximizetthetsharetpricetfortthetcurrenttshareholders.tIftman
agementtbelievestthattittcantimprovetthetprofitabilitytoftthetfirmtsotthattthetsharetpricetwilltexceedt
$35,tthenttheytshouldtfighttthetoffertfromtthetoutsidetcompany.tIftmanagementtbelievestthattthistbi
ddertortothertunidentifiedtbidderstwilltactuallytpaytmoretthant$35tpertsharettotacquiretthetcompany
,tthenttheytshouldtstilltfighttthetoffer.tHowever,tiftthetcurrenttmanagementtcannottincreasetthetvalu
etoftthetfirmtbeyondtthetbidtprice,tandtnototherthighertbidstcometin,tthentmanagementtistnottacting
tintthetintereststoftthetshareholderstbytfightingtthetoffer.tSincetcurrenttmanagerstoftentlosettheirtjob
stwhentthetcorporationtistacquired,tpoorlytmonitoredtmanagersthavetantincentivettotfighttcorporatet
takeoverstintsituationstsuchtastthis.
15. Wetwouldtexpecttagencytproblemsttotbetlesstseveretintothertcountries,tprimarilytduettotthetrelativel
ytsmalltpercentagetoftindividualtownership.tFewertindividualtownerstshouldtreducetthetnumbertoftd
iversetopinionstconcerningtcorporatetgoals.tThethightpercentagetoftinstitutionaltownershiptmighttle
adttotathighertdegreetoftagreementtbetweentownerstandtmanagerstontdecisionstconcerningtriskytpro
jects.tIntaddition,tinstitutionstmaytbetbettertablettotimplementteffectivetmonitoringtmechanismstont
managerstthantcantindividualtowners,tbasedtontthetinstitutions‘tdeepertresourcestandtexperiencestw
ithttheirtowntmanagement.tThetincreasetintinstitutionaltownershiptoftstocktintthetUnitedtStatestandtt
hetgrowingtactivismtoftthesetlargetshareholdertgroupstmaytleadttotatreductiontintagencytproblemstf
ortU.S.tcorporationstandtatmoretefficienttmarkettfortcorporatetcontrol.
