Solutions Manual Fundamentals of Corporate Finance
13th Edition Ross, Westerfield, and Jordan
Chapters 1 - 27
,CHAPTERr1:rIntroductionrtorCorporaterFinance
CHAPTERr2:rFinancialrStatements,rTaxes,rAndrCashrFlow
CHAPTERr3:rWorkingrwithrFinancialrStatements
CHAPTERr4:rLong-TermrFinancialrPlanningrandrGrowth
CHAPTERr5:rIntroductionrtorValuation:rTherTimerValuerofrMoney
CHAPTERr6:rDiscountedrCashrFlowrValuation
CHAPTERr7:rInterestrRatesrandrBondrValuation
CHAPTERr8:rStockrValuation
CHAPTERr9:rNetrPresentrValuerandrOtherrInvestmentrCriteria
CHAPTERr10:rMakingrCapitalrInvestmentrDecisions
CHAPTERr11:rProjectrAnalysisrandrEvaluation
CHAPTERr12:rSomerLessonsrfromrCapitalrMarketrHistory
CHAPTERr13:rReturn,rRisk,rAndrtherSecurityrMarketrLine
CHAPTERr14:rCostrofrCapital
CHAPTERr15:rRaisingrCapital
CHAPTERr16:rFinancialrLeveragerandrCapitalrStructurerPolicy
CHAPTERr17:rDividendsrandrPayoutrPolicy
CHAPTERr18:rShort-TermrFinancerandrPlanning
CHAPTERr19:rCashrandrLiquidityrManagement
CHAPTERr20:rCreditrandrInventoryrManagement
CHAPTERr21:rInternationalrCorporaterFinance
CHAPTERr22:rBehavioralrFinance:rImplicationsrforrFinancialrManage
CHAPTERr23:rEnterpriserRiskrManagement
CHAPTERr24:OptionsrandrCorporaterFinance
CHAPTERr25:rOptionrValuation
CHAPTERr26:rMergersrandrAcquisitions
CHAPTERr27:rLeasing
,CHAPTER 1 r
INTRODUCTION TO CORPORATE r r r
FINANCE
AnswersrtorConceptsrReviewrandrCriticalrThinkingrQuestions
1. Capitalrbudgetingr(decidingrwhetherrtorexpandrarmanufacturingrplant),rcapitalrstructurer(decidingrwhet
herrtorissuernewrequityrandrusertherproceedsrtorretireroutstandingrdebt),randrworkingrcapitalrmanageme
ntr(modifyingrtherfirm’srcreditrcollectionrpolicyrwithritsrcustomers).
2. Disadvantages:runlimitedrliability,rlimitedrlife,rdifficultyrinrtransferringrownership,rhardrtorraisercapita
lrfunds.rSomeradvantages:rsimpler,rlessrregulation,rtherownersrareralsorthermanagers,rsometimesrperso
nalrtaxrratesrarerbetterrthanrcorporatertaxrrates.
3. Therprimaryrdisadvantagerofrthercorporaterformrisrtherdoublertaxationrtorshareholdersrofrdistributedrear
ningsrandrdividends.rSomeradvantagesrinclude:rlimitedrliability,reaserofrtransferability,rabilityrtorraiserc
apital,runlimitedrlife,randrsorforth.
4. InrresponsertorSarbanes-
Oxley,rsmallrfirmsrhaverelectedrtorgordarkrbecauserofrthercostsrofrcompliance.rThercostsrtorcomplyrwit
hrSarboxrcanrberseveralrmillionrdollars,rwhichrcanrberarlargerpercentager ofr ar smallr firmsr profits.r Ar ma
jorr costr ofr goingr darkr isr lessr accessr tor capital.r Sincer therfirmrisrnorlongerrpubliclyrtraded,ritrcanrnorlon
gerrraisermoneyrinrtherpublicrmarket.rAlthoughrthercompanyrwillrstillrhaveraccessrtorbankrloansrandrther
privaterequityrmarket,rthercostsrassociatedrwithrraisingrfundsrinrthesermarketsrarerusuallyrhigherrthanrth
ercostsrofrraisingrfundsrinrtherpublicrmarket.
5. Ther treasurer’sr officer andr ther controller’sr officer arer ther twor primaryr organizationalr groupsr thatrre
portrdirectlyrtortherchiefrfinancialrofficer.rThercontroller’srofficerhandlesrcostrandrfinancialraccounting,r
taxrmanagement,randrmanagementrinformationrsystems,rwhilerthertreasurer’srofficerisrresponsibler forr
cashr andr creditr management,r capitalr budgeting,r andr financialr planning.r Therefore,rtherstudyrofrcorpo
raterfinancerisrconcentratedrwithinrthertreasuryrgroup’srfunctions.
6. Tormaximizerthercurrentrmarketrvaluer(sharerprice)rofrtherequityrofrtherfirmr(whetherrit’srpublicly-
rtradedrorrnot).
7. Inrthercorporaterformrofrownership,rthershareholdersrarertherownersrofrtherfirm.rThershareholdersrelectrt
herdirectorsrofrthercorporation,rwhorinrturnrappointrtherfirm’srmanagement.rThisrseparationrofrownersh
iprfromrcontrolrinrthercorporaterformrofrorganizationrisrwhatrcausesragencyrproblemsrtorexist.rManage
mentrmayractrinritsrownrorrsomeonerelse’srbestrinterests,rratherrthanrthoserofrthershareholders.rIfrsuchre
ventsroccur,rtheyrmayrcontradictrthergoalrofrmaximizingrthersharerpricerofrtherequityrofrtherfirm.
8. Arprimaryrmarketrtransaction.
, B-2r SOLUTIONS
9. InrauctionrmarketsrlikertherNYSE,rbrokersrandragentsrmeetratrarphysicalrlocationr(therexchange)rtormat
chrbuyersrandrsellersrofrassets.rDealerrmarketsrlikerNASDAQrconsistrofrdealersroperatingratrdispersedrl
ocalesrwhorbuyrandrsellrassetsrthemselves,rcommunicatingrwithrotherrdealersreitherrelectronicallyrorrlit
erallyrover-the-counter.
10. Suchrorganizationsrfrequentlyrpursuersocialrorrpoliticalrmissions,rsormanyrdifferentrgoalsrarerconceiva
ble.rOnergoalrthatrisroftenrcitedrisrrevenuerminimization;ri.e.,rproviderwhateverrgoodsrandrservicesrarero
fferedratrtherlowestrpossiblercostrtorsociety.rArbetterrapproachrmightrbertorobserverthatrevenrarnot-for-
profitrbusinessrhasrequity.rThus,roneranswerrisrthatrtherappropriatergoalrisr tormaximizerthervaluerofrther
equity.
11. Presumably,rthercurrentrstockrvaluerreflectsrtherrisk,rtiming,randrmagnituderofrallrfuturercashrflows,rbot
hrshort-termrandrlong-term.rIfrthisrisrcorrect,rthenrtherstatementrisrfalse.
12. Anrargumentrcanrbermadereitherrway.rAtrtheronerextreme,rwercouldrarguerthatrinrarmarketreconomy,rallr
ofrtheserthingsrarerpriced.rThererisrthusranroptimalrlevelrof,rforrexample,rethicalrand/orrillegalrbehavior,r
andrtherframeworkrofrstockrvaluationrexplicitlyrincludesrthese.rAtrtherotherrextreme,rwercouldrarguerth
atrtheserarernon-
economicrphenomenarandrarerbestrhandledrthroughrtherpoliticalrprocess.rArclassicr(andrhighlyrrelevant
)rthoughtrquestionrthatrillustratesrthisrdebatergoesrsomethingrlikerthis:r“Arfirmrhasrestimatedrthatrtherco
strofrimprovingrthersafetyrofronerofritsrproductsrisr$30rmillion.rHowever,rtherfirmrbelievesrthatrimprovi
ngrthersafetyrofrtherproductrwillronlyrsaver$20rmillionrinrproductrliabilityrclaims.rWhatrshouldrtherfirmr
do?”
13. Thergoalrwillrberthersame,rbutrtherbestrcourserofractionrtowardrthatrgoalrmayrberdifferentrbecauserofrdiff
eringrsocial,rpolitical,randreconomicrinstitutions.
14. Thergoalrofrmanagementrshouldrbertormaximizerthersharerpricerforrthercurrentrshareholders.rIfrmanage
mentrbelievesrthatritrcanrimprovertherprofitabilityrofrtherfirmrsorthatrthersharerpricerwillrexceedr$35,rthe
nrtheyrshouldrfightrtherofferrfromrtheroutsidercompany.rIfrmanagementrbelievesrthatrthisrbidderrorrother
runidentifiedrbiddersrwillractuallyrpayrmorerthanr$35rperrsharertoracquirerthercompany,rthenrtheyrshoul
drstillrfightrtheroffer.rHowever,rifrthercurrentrmanagementrcannotrincreaserthervaluerofrtherfirmrbeyondr
therbidrprice,randrnorotherrhigherrbidsrcomerin,rthenrmanagementrisrnotractingrinrtherinterestsrofrthersha
reholdersrbyrfightingrtheroffer.rSincercurrentrmanagersroftenrlosertheirrjobsrwhenrthercorporationrisracq
uired,rpoorlyrmonitoredrmanagersrhaveranrincentivertorfightrcorporatertakeoversrinrsituationsrsuchrasrth
is.
15. Werwouldrexpectragencyrproblemsrtorberlessrsevererinrotherrcountries,rprimarilyrduertortherrelativelyrs
mallrpercentagerofrindividualrownership.rFewerrindividualrownersrshouldrreducerthernumberrofrdiverse
ropinionsrconcerningrcorporatergoals.rTherhighrpercentagerofrinstitutionalrownershiprmightrleadrtorarhi
gherrdegreerofragreementrbetweenrownersrandrmanagersronrdecisionsrconcerningrriskyrprojects.rInradd
ition,rinstitutionsrmayrberbetterrablertorimplementreffectivermonitoringrmechanismsronrmanagersrthanr
canrindividualrowners,rbasedronrtherinstitutions’rdeeperrresourcesrandrexperiencesrwithrtheirrownrmana
gement.rTherincreaserinrinstitutionalrownershiprofrstockrinrtherUnitedrStatesrandrthergrowingractivismro
frtheserlargershareholderrgroupsrmayrleadrtorarreductionrinragencyrproblemsrforrU.S.rcorporationsrandra
rmorerefficientrmarketrforrcorporatercontrol.
13th Edition Ross, Westerfield, and Jordan
Chapters 1 - 27
,CHAPTERr1:rIntroductionrtorCorporaterFinance
CHAPTERr2:rFinancialrStatements,rTaxes,rAndrCashrFlow
CHAPTERr3:rWorkingrwithrFinancialrStatements
CHAPTERr4:rLong-TermrFinancialrPlanningrandrGrowth
CHAPTERr5:rIntroductionrtorValuation:rTherTimerValuerofrMoney
CHAPTERr6:rDiscountedrCashrFlowrValuation
CHAPTERr7:rInterestrRatesrandrBondrValuation
CHAPTERr8:rStockrValuation
CHAPTERr9:rNetrPresentrValuerandrOtherrInvestmentrCriteria
CHAPTERr10:rMakingrCapitalrInvestmentrDecisions
CHAPTERr11:rProjectrAnalysisrandrEvaluation
CHAPTERr12:rSomerLessonsrfromrCapitalrMarketrHistory
CHAPTERr13:rReturn,rRisk,rAndrtherSecurityrMarketrLine
CHAPTERr14:rCostrofrCapital
CHAPTERr15:rRaisingrCapital
CHAPTERr16:rFinancialrLeveragerandrCapitalrStructurerPolicy
CHAPTERr17:rDividendsrandrPayoutrPolicy
CHAPTERr18:rShort-TermrFinancerandrPlanning
CHAPTERr19:rCashrandrLiquidityrManagement
CHAPTERr20:rCreditrandrInventoryrManagement
CHAPTERr21:rInternationalrCorporaterFinance
CHAPTERr22:rBehavioralrFinance:rImplicationsrforrFinancialrManage
CHAPTERr23:rEnterpriserRiskrManagement
CHAPTERr24:OptionsrandrCorporaterFinance
CHAPTERr25:rOptionrValuation
CHAPTERr26:rMergersrandrAcquisitions
CHAPTERr27:rLeasing
,CHAPTER 1 r
INTRODUCTION TO CORPORATE r r r
FINANCE
AnswersrtorConceptsrReviewrandrCriticalrThinkingrQuestions
1. Capitalrbudgetingr(decidingrwhetherrtorexpandrarmanufacturingrplant),rcapitalrstructurer(decidingrwhet
herrtorissuernewrequityrandrusertherproceedsrtorretireroutstandingrdebt),randrworkingrcapitalrmanageme
ntr(modifyingrtherfirm’srcreditrcollectionrpolicyrwithritsrcustomers).
2. Disadvantages:runlimitedrliability,rlimitedrlife,rdifficultyrinrtransferringrownership,rhardrtorraisercapita
lrfunds.rSomeradvantages:rsimpler,rlessrregulation,rtherownersrareralsorthermanagers,rsometimesrperso
nalrtaxrratesrarerbetterrthanrcorporatertaxrrates.
3. Therprimaryrdisadvantagerofrthercorporaterformrisrtherdoublertaxationrtorshareholdersrofrdistributedrear
ningsrandrdividends.rSomeradvantagesrinclude:rlimitedrliability,reaserofrtransferability,rabilityrtorraiserc
apital,runlimitedrlife,randrsorforth.
4. InrresponsertorSarbanes-
Oxley,rsmallrfirmsrhaverelectedrtorgordarkrbecauserofrthercostsrofrcompliance.rThercostsrtorcomplyrwit
hrSarboxrcanrberseveralrmillionrdollars,rwhichrcanrberarlargerpercentager ofr ar smallr firmsr profits.r Ar ma
jorr costr ofr goingr darkr isr lessr accessr tor capital.r Sincer therfirmrisrnorlongerrpubliclyrtraded,ritrcanrnorlon
gerrraisermoneyrinrtherpublicrmarket.rAlthoughrthercompanyrwillrstillrhaveraccessrtorbankrloansrandrther
privaterequityrmarket,rthercostsrassociatedrwithrraisingrfundsrinrthesermarketsrarerusuallyrhigherrthanrth
ercostsrofrraisingrfundsrinrtherpublicrmarket.
5. Ther treasurer’sr officer andr ther controller’sr officer arer ther twor primaryr organizationalr groupsr thatrre
portrdirectlyrtortherchiefrfinancialrofficer.rThercontroller’srofficerhandlesrcostrandrfinancialraccounting,r
taxrmanagement,randrmanagementrinformationrsystems,rwhilerthertreasurer’srofficerisrresponsibler forr
cashr andr creditr management,r capitalr budgeting,r andr financialr planning.r Therefore,rtherstudyrofrcorpo
raterfinancerisrconcentratedrwithinrthertreasuryrgroup’srfunctions.
6. Tormaximizerthercurrentrmarketrvaluer(sharerprice)rofrtherequityrofrtherfirmr(whetherrit’srpublicly-
rtradedrorrnot).
7. Inrthercorporaterformrofrownership,rthershareholdersrarertherownersrofrtherfirm.rThershareholdersrelectrt
herdirectorsrofrthercorporation,rwhorinrturnrappointrtherfirm’srmanagement.rThisrseparationrofrownersh
iprfromrcontrolrinrthercorporaterformrofrorganizationrisrwhatrcausesragencyrproblemsrtorexist.rManage
mentrmayractrinritsrownrorrsomeonerelse’srbestrinterests,rratherrthanrthoserofrthershareholders.rIfrsuchre
ventsroccur,rtheyrmayrcontradictrthergoalrofrmaximizingrthersharerpricerofrtherequityrofrtherfirm.
8. Arprimaryrmarketrtransaction.
, B-2r SOLUTIONS
9. InrauctionrmarketsrlikertherNYSE,rbrokersrandragentsrmeetratrarphysicalrlocationr(therexchange)rtormat
chrbuyersrandrsellersrofrassets.rDealerrmarketsrlikerNASDAQrconsistrofrdealersroperatingratrdispersedrl
ocalesrwhorbuyrandrsellrassetsrthemselves,rcommunicatingrwithrotherrdealersreitherrelectronicallyrorrlit
erallyrover-the-counter.
10. Suchrorganizationsrfrequentlyrpursuersocialrorrpoliticalrmissions,rsormanyrdifferentrgoalsrarerconceiva
ble.rOnergoalrthatrisroftenrcitedrisrrevenuerminimization;ri.e.,rproviderwhateverrgoodsrandrservicesrarero
fferedratrtherlowestrpossiblercostrtorsociety.rArbetterrapproachrmightrbertorobserverthatrevenrarnot-for-
profitrbusinessrhasrequity.rThus,roneranswerrisrthatrtherappropriatergoalrisr tormaximizerthervaluerofrther
equity.
11. Presumably,rthercurrentrstockrvaluerreflectsrtherrisk,rtiming,randrmagnituderofrallrfuturercashrflows,rbot
hrshort-termrandrlong-term.rIfrthisrisrcorrect,rthenrtherstatementrisrfalse.
12. Anrargumentrcanrbermadereitherrway.rAtrtheronerextreme,rwercouldrarguerthatrinrarmarketreconomy,rallr
ofrtheserthingsrarerpriced.rThererisrthusranroptimalrlevelrof,rforrexample,rethicalrand/orrillegalrbehavior,r
andrtherframeworkrofrstockrvaluationrexplicitlyrincludesrthese.rAtrtherotherrextreme,rwercouldrarguerth
atrtheserarernon-
economicrphenomenarandrarerbestrhandledrthroughrtherpoliticalrprocess.rArclassicr(andrhighlyrrelevant
)rthoughtrquestionrthatrillustratesrthisrdebatergoesrsomethingrlikerthis:r“Arfirmrhasrestimatedrthatrtherco
strofrimprovingrthersafetyrofronerofritsrproductsrisr$30rmillion.rHowever,rtherfirmrbelievesrthatrimprovi
ngrthersafetyrofrtherproductrwillronlyrsaver$20rmillionrinrproductrliabilityrclaims.rWhatrshouldrtherfirmr
do?”
13. Thergoalrwillrberthersame,rbutrtherbestrcourserofractionrtowardrthatrgoalrmayrberdifferentrbecauserofrdiff
eringrsocial,rpolitical,randreconomicrinstitutions.
14. Thergoalrofrmanagementrshouldrbertormaximizerthersharerpricerforrthercurrentrshareholders.rIfrmanage
mentrbelievesrthatritrcanrimprovertherprofitabilityrofrtherfirmrsorthatrthersharerpricerwillrexceedr$35,rthe
nrtheyrshouldrfightrtherofferrfromrtheroutsidercompany.rIfrmanagementrbelievesrthatrthisrbidderrorrother
runidentifiedrbiddersrwillractuallyrpayrmorerthanr$35rperrsharertoracquirerthercompany,rthenrtheyrshoul
drstillrfightrtheroffer.rHowever,rifrthercurrentrmanagementrcannotrincreaserthervaluerofrtherfirmrbeyondr
therbidrprice,randrnorotherrhigherrbidsrcomerin,rthenrmanagementrisrnotractingrinrtherinterestsrofrthersha
reholdersrbyrfightingrtheroffer.rSincercurrentrmanagersroftenrlosertheirrjobsrwhenrthercorporationrisracq
uired,rpoorlyrmonitoredrmanagersrhaveranrincentivertorfightrcorporatertakeoversrinrsituationsrsuchrasrth
is.
15. Werwouldrexpectragencyrproblemsrtorberlessrsevererinrotherrcountries,rprimarilyrduertortherrelativelyrs
mallrpercentagerofrindividualrownership.rFewerrindividualrownersrshouldrreducerthernumberrofrdiverse
ropinionsrconcerningrcorporatergoals.rTherhighrpercentagerofrinstitutionalrownershiprmightrleadrtorarhi
gherrdegreerofragreementrbetweenrownersrandrmanagersronrdecisionsrconcerningrriskyrprojects.rInradd
ition,rinstitutionsrmayrberbetterrablertorimplementreffectivermonitoringrmechanismsronrmanagersrthanr
canrindividualrowners,rbasedronrtherinstitutions’rdeeperrresourcesrandrexperiencesrwithrtheirrownrmana
gement.rTherincreaserinrinstitutionalrownershiprofrstockrinrtherUnitedrStatesrandrthergrowingractivismro
frtheserlargershareholderrgroupsrmayrleadrtorarreductionrinragencyrproblemsrforrU.S.rcorporationsrandra
rmorerefficientrmarketrforrcorporatercontrol.
