Solutions Manual Fundamentals of Corporate Finance
13th Edition Ross, Westerfield, and Jordan
Chapters 1 - 27
,CHAPTERq1:qIntroductionqtoqCorporateqFinance
CHAPTERq2:qFinancialqStatements,qTaxes,qAndqCashqFlow
CHAPTERq3:qWorkingqwithqFinancialqStatements
CHAPTERq4:qLong-TermqFinancialqPlanningqandqGrowth
CHAPTERq5:qIntroductionqtoqValuation:qTheqTimeqValueqofqMoney
CHAPTERq6:qDiscountedqCashqFlowqValuation
CHAPTERq7:qInterestqRatesqandqBondqValuation
CHAPTERq8:qStockqValuation
CHAPTERq9:qNetqPresentqValueqandqOtherqInvestmentqCriteria
CHAPTERq10:qMakingqCapitalqInvestmentqDecisions
CHAPTERq11:qProjectqAnalysisqandqEvaluation
CHAPTERq12:qSomeqLessonsqfromqCapitalqMarketqHistory
CHAPTERq13:qReturn,qRisk,qAndqtheqSecurityqMarketqLine
CHAPTERq14:qCostqofqCapital
CHAPTERq15:qRaisingqCapital
CHAPTERq16:qFinancialqLeverageqandqCapitalqStructureqPolicy
CHAPTERq17:qDividendsqandqPayoutqPolicy
CHAPTERq18:qShort-TermqFinanceqandqPlanning
CHAPTERq19:qCashqandqLiquidityqManagement
CHAPTERq20:qCreditqandqInventoryqManagement
CHAPTERq21:qInternationalqCorporateqFinance
CHAPTERq22:qBehavioralqFinance:qImplicationsqforqFinancialqManage
CHAPTERq23:qEnterpriseqRiskqManagement
CHAPTERq24:OptionsqandqCorporateqFinance
CHAPTERq25:qOptionqValuation
CHAPTERq26:qMergersqandqAcquisitions
CHAPTERq27:qLeasing
,CHAPTER 1 q
INTRODUCTION TO CORPORATE q q q
FINANCE
AnswersqtoqConceptsqReviewqandqCriticalqThinkingqQuestions
1. Capitalqbudgetingq(decidingqwhetherqtoqexpandqaqmanufacturingqplant),qcapitalqstructureq(decidingqwh
etherqtoqissueqnewqequityqandquseqtheqproceedsqtoqretireqoutstandingqdebt),qandqworkingqcapitalqmanage
mentq(modifyingqtheqfirm’sqcreditqcollectionqpolicyqwithqitsqcustomers).
2. Disadvantages:qunlimitedqliability,qlimitedqlife,qdifficultyqinqtransferringqownership,qhardqtoqraiseqcapit
alqfunds.qSomeqadvantages:qsimpler,qlessqregulation,qtheqownersqareqalsoqtheqmanagers,qsometimesqper
sonalqtaxqratesqareqbetterqthanqcorporateqtaxqrates.
3. Theqprimaryqdisadvantageqofqtheqcorporateqformqisqtheqdoubleqtaxationqtoqshareholdersqofqdistributedqe
arningsqandqdividends.qSomeqadvantagesqinclude:qlimitedqliability,qeaseqofqtransferability,qabilityqtoqrai
seqcapital,qunlimitedqlife,qandqsoqforth.
4. InqresponseqtoqSarbanes-
Oxley,qsmallqfirmsqhaveqelectedqtoqgoqdarkqbecauseqofqtheqcostsqofqcompliance.qTheqcostsqtoqcomplyqw
ithqSarboxqcanqbeqseveralqmillionqdollars,qwhichqcanqbeqaqlargeqpercentageq ofq aq smallq firmsq profits.q A
q majorq costq ofq goingq darkq isq lessq accessq toq capital.q Sinceq theqfirmqisqnoqlongerqpubliclyqtraded,qitqcanq
noqlongerqraiseqmoneyqinqtheqpublicqmarket.qAlthoughqtheqcompanyqwillqstillqhaveqaccessqtoqbankqloans
qandqtheqprivateqequityqmarket,qtheqcostsqassociatedqwithqraisingqfundsqinqtheseqmarketsqarequsuallyqhig
herqthanqtheqcostsqofqraisingqfundsqinqtheqpublicqmarket.
5. Theq treasurer’sq officeq andq theq controller’sq officeq areq theq twoq primaryq organizationalq groupsq thatqr
eportqdirectlyqtoqtheqchiefqfinancialqofficer.qTheqcontroller’sqofficeqhandlesqcostqandqfinancialqaccountin
g,qtaxqmanagement,qandqmanagementqinformationqsystems,qwhileqtheqtreasurer’sqofficeqisqresponsibleq
forq cashq andq creditq management,q capitalq budgeting,q andq financialq planning.q Therefore,qtheqstudyqofq
corporateqfinanceqisqconcentratedqwithinqtheqtreasuryqgroup’sqfunctions.
6. Toqmaximizeqtheqcurrentqmarketqvalueq(shareqprice)qofqtheqequityqofqtheqfirmq(whetherqit’sqpublicly-
qtradedqorqnot).
7. Inqtheqcorporateqformqofqownership,qtheqshareholdersqareqtheqownersqofqtheqfirm.qTheqshareholdersqelec
tqtheqdirectorsqofqtheqcorporation,qwhoqinqturnqappointqtheqfirm’sqmanagement.qThisqseparationqofqown
ershipqfromqcontrolqinqtheqcorporateqformqofqorganizationqisqwhatqcausesqagencyqproblemsqtoqexist.qMa
nagementqmayqactqinqitsqownqorqsomeoneqelse’sqbestqinterests,qratherqthanqthoseqofqtheqshareholders.qIfq
suchqeventsqoccur,qtheyqmayqcontradictqtheqgoalqofqmaximizingqtheqshareqpriceqofqtheqequityqofqtheqfir
m.
8. Aqprimaryqmarketqtransaction.
, B-2q SOLUTIONS
9. InqauctionqmarketsqlikeqtheqNYSE,qbrokersqandqagentsqmeetqatqaqphysicalqlocationq(theqexchange)qtoqm
atchqbuyersqandqsellersqofqassets.qDealerqmarketsqlikeqNASDAQqconsistqofqdealersqoperatingqatqdispers
edqlocalesqwhoqbuyqandqsellqassetsqthemselves,qcommunicatingqwithqotherqdealersqeitherqelectronically
qorqliterallyqover-the-counter.
10. Suchqorganizationsqfrequentlyqpursueqsocialqorqpoliticalqmissions,qsoqmanyqdifferentqgoalsqareqconceiv
able.qOneqgoalqthatqisqoftenqcitedqisqrevenueqminimization;qi.e.,qprovideqwhateverqgoodsqandqservicesqa
reqofferedqatqtheqlowestqpossibleqcostqtoqsociety.qAqbetterqapproachqmightqbeqtoqobserveqthatqevenqaqnot
-for-
profitqbusinessqhasqequity.qThus,qoneqanswerqisqthatqtheqappropriateqgoalqisq toqmaximizeqtheqvalueqofqt
heqequity.
11. Presumably,qtheqcurrentqstockqvalueqreflectsqtheqrisk,qtiming,qandqmagnitudeqofqallqfutureqcashqflows,qb
othqshort-termqandqlong-term.qIfqthisqisqcorrect,qthenqtheqstatementqisqfalse.
12. Anqargumentqcanqbeqmadeqeitherqway.qAtqtheqoneqextreme,qweqcouldqargueqthatqinqaqmarketqeconomy,qa
llqofqtheseqthingsqareqpriced.qThereqisqthusqanqoptimalqlevelqof,qforqexample,qethicalqand/orqillegalqbehav
ior,qandqtheqframeworkqofqstockqvaluationqexplicitlyqincludesqthese.qAtqtheqotherqextreme,qweqcouldqarg
ueqthatqtheseqareqnon-
economicqphenomenaqandqareqbestqhandledqthroughqtheqpoliticalqprocess.qAqclassicq(andqhighlyqreleva
nt)qthoughtqquestionqthatqillustratesqthisqdebateqgoesqsomethingqlikeqthis:q“Aqfirmqhasqestimatedqthatqth
eqcostqofqimprovingqtheqsafetyqofqoneqofqitsqproductsqisq$30qmillion.qHowever,qtheqfirmqbelievesqthatqim
provingqtheqsafetyqofqtheqproductqwillqonlyqsaveq$20qmillionqinqproductqliabilityqclaims.qWhatqshouldqt
heqfirmqdo?”
13. Theqgoalqwillqbeqtheqsame,qbutqtheqbestqcourseqofqactionqtowardqthatqgoalqmayqbeqdifferentqbecauseqofqd
ifferingqsocial,qpolitical,qandqeconomicqinstitutions.
14. Theqgoalqofqmanagementqshouldqbeqtoqmaximizeqtheqshareqpriceqforqtheqcurrentqshareholders.qIfqmanag
ementqbelievesqthatqitqcanqimproveqtheqprofitabilityqofqtheqfirmqsoqthatqtheqshareqpriceqwillqexceedq$35,q
thenqtheyqshouldqfightqtheqofferqfromqtheqoutsideqcompany.qIfqmanagementqbelievesqthatqthisqbidderqorq
otherqunidentifiedqbiddersqwillqactuallyqpayqmoreqthanq$35qperqshareqtoqacquireqtheqcompany,qthenqthe
yqshouldqstillqfightqtheqoffer.qHowever,qifqtheqcurrentqmanagementqcannotqincreaseqtheqvalueqofqtheqfir
mqbeyondqtheqbidqprice,qandqnoqotherqhigherqbidsqcomeqin,qthenqmanagementqisqnotqactingqinqtheqintere
stsqofqtheqshareholdersqbyqfightingqtheqoffer.qSinceqcurrentqmanagersqoftenqloseqtheirqjobsqwhenqtheqcor
porationqisqacquired,qpoorlyqmonitoredqmanagersqhaveqanqincentiveqtoqfightqcorporateqtakeoversqinqsitu
ationsqsuchqasqthis.
15. Weqwouldqexpectqagencyqproblemsqtoqbeqlessqsevereqinqotherqcountries,qprimarilyqdueqtoqtheqrelativelyqs
mallqpercentageqofqindividualqownership.qFewerqindividualqownersqshouldqreduceqtheqnumberqofqdiver
seqopinionsqconcerningqcorporateqgoals.qTheqhighqpercentageqofqinstitutionalqownershipqmightqleadqtoq
aqhigherqdegreeqofqagreementqbetweenqownersqandqmanagersqonqdecisionsqconcerningqriskyqprojects.qI
nqaddition,qinstitutionsqmayqbeqbetterqableqtoqimplementqeffectiveqmonitoringqmechanismsqonqmanager
sqthanqcanqindividualqowners,qbasedqonqtheqinstitutions’qdeeperqresourcesqandqexperiencesqwithqtheirqo
wnqmanagement.qTheqincreaseqinqinstitutionalqownershipqofqstockqinqtheqUnitedqStatesqandqtheqgrowing
qactivismqofqtheseqlargeqshareholderqgroupsqmayqleadqtoqaqreductionqinqagencyqproblemsqforqU.S.qcorpo
rationsqandqaqmoreqefficientqmarketqforqcorporateqcontrol.
13th Edition Ross, Westerfield, and Jordan
Chapters 1 - 27
,CHAPTERq1:qIntroductionqtoqCorporateqFinance
CHAPTERq2:qFinancialqStatements,qTaxes,qAndqCashqFlow
CHAPTERq3:qWorkingqwithqFinancialqStatements
CHAPTERq4:qLong-TermqFinancialqPlanningqandqGrowth
CHAPTERq5:qIntroductionqtoqValuation:qTheqTimeqValueqofqMoney
CHAPTERq6:qDiscountedqCashqFlowqValuation
CHAPTERq7:qInterestqRatesqandqBondqValuation
CHAPTERq8:qStockqValuation
CHAPTERq9:qNetqPresentqValueqandqOtherqInvestmentqCriteria
CHAPTERq10:qMakingqCapitalqInvestmentqDecisions
CHAPTERq11:qProjectqAnalysisqandqEvaluation
CHAPTERq12:qSomeqLessonsqfromqCapitalqMarketqHistory
CHAPTERq13:qReturn,qRisk,qAndqtheqSecurityqMarketqLine
CHAPTERq14:qCostqofqCapital
CHAPTERq15:qRaisingqCapital
CHAPTERq16:qFinancialqLeverageqandqCapitalqStructureqPolicy
CHAPTERq17:qDividendsqandqPayoutqPolicy
CHAPTERq18:qShort-TermqFinanceqandqPlanning
CHAPTERq19:qCashqandqLiquidityqManagement
CHAPTERq20:qCreditqandqInventoryqManagement
CHAPTERq21:qInternationalqCorporateqFinance
CHAPTERq22:qBehavioralqFinance:qImplicationsqforqFinancialqManage
CHAPTERq23:qEnterpriseqRiskqManagement
CHAPTERq24:OptionsqandqCorporateqFinance
CHAPTERq25:qOptionqValuation
CHAPTERq26:qMergersqandqAcquisitions
CHAPTERq27:qLeasing
,CHAPTER 1 q
INTRODUCTION TO CORPORATE q q q
FINANCE
AnswersqtoqConceptsqReviewqandqCriticalqThinkingqQuestions
1. Capitalqbudgetingq(decidingqwhetherqtoqexpandqaqmanufacturingqplant),qcapitalqstructureq(decidingqwh
etherqtoqissueqnewqequityqandquseqtheqproceedsqtoqretireqoutstandingqdebt),qandqworkingqcapitalqmanage
mentq(modifyingqtheqfirm’sqcreditqcollectionqpolicyqwithqitsqcustomers).
2. Disadvantages:qunlimitedqliability,qlimitedqlife,qdifficultyqinqtransferringqownership,qhardqtoqraiseqcapit
alqfunds.qSomeqadvantages:qsimpler,qlessqregulation,qtheqownersqareqalsoqtheqmanagers,qsometimesqper
sonalqtaxqratesqareqbetterqthanqcorporateqtaxqrates.
3. Theqprimaryqdisadvantageqofqtheqcorporateqformqisqtheqdoubleqtaxationqtoqshareholdersqofqdistributedqe
arningsqandqdividends.qSomeqadvantagesqinclude:qlimitedqliability,qeaseqofqtransferability,qabilityqtoqrai
seqcapital,qunlimitedqlife,qandqsoqforth.
4. InqresponseqtoqSarbanes-
Oxley,qsmallqfirmsqhaveqelectedqtoqgoqdarkqbecauseqofqtheqcostsqofqcompliance.qTheqcostsqtoqcomplyqw
ithqSarboxqcanqbeqseveralqmillionqdollars,qwhichqcanqbeqaqlargeqpercentageq ofq aq smallq firmsq profits.q A
q majorq costq ofq goingq darkq isq lessq accessq toq capital.q Sinceq theqfirmqisqnoqlongerqpubliclyqtraded,qitqcanq
noqlongerqraiseqmoneyqinqtheqpublicqmarket.qAlthoughqtheqcompanyqwillqstillqhaveqaccessqtoqbankqloans
qandqtheqprivateqequityqmarket,qtheqcostsqassociatedqwithqraisingqfundsqinqtheseqmarketsqarequsuallyqhig
herqthanqtheqcostsqofqraisingqfundsqinqtheqpublicqmarket.
5. Theq treasurer’sq officeq andq theq controller’sq officeq areq theq twoq primaryq organizationalq groupsq thatqr
eportqdirectlyqtoqtheqchiefqfinancialqofficer.qTheqcontroller’sqofficeqhandlesqcostqandqfinancialqaccountin
g,qtaxqmanagement,qandqmanagementqinformationqsystems,qwhileqtheqtreasurer’sqofficeqisqresponsibleq
forq cashq andq creditq management,q capitalq budgeting,q andq financialq planning.q Therefore,qtheqstudyqofq
corporateqfinanceqisqconcentratedqwithinqtheqtreasuryqgroup’sqfunctions.
6. Toqmaximizeqtheqcurrentqmarketqvalueq(shareqprice)qofqtheqequityqofqtheqfirmq(whetherqit’sqpublicly-
qtradedqorqnot).
7. Inqtheqcorporateqformqofqownership,qtheqshareholdersqareqtheqownersqofqtheqfirm.qTheqshareholdersqelec
tqtheqdirectorsqofqtheqcorporation,qwhoqinqturnqappointqtheqfirm’sqmanagement.qThisqseparationqofqown
ershipqfromqcontrolqinqtheqcorporateqformqofqorganizationqisqwhatqcausesqagencyqproblemsqtoqexist.qMa
nagementqmayqactqinqitsqownqorqsomeoneqelse’sqbestqinterests,qratherqthanqthoseqofqtheqshareholders.qIfq
suchqeventsqoccur,qtheyqmayqcontradictqtheqgoalqofqmaximizingqtheqshareqpriceqofqtheqequityqofqtheqfir
m.
8. Aqprimaryqmarketqtransaction.
, B-2q SOLUTIONS
9. InqauctionqmarketsqlikeqtheqNYSE,qbrokersqandqagentsqmeetqatqaqphysicalqlocationq(theqexchange)qtoqm
atchqbuyersqandqsellersqofqassets.qDealerqmarketsqlikeqNASDAQqconsistqofqdealersqoperatingqatqdispers
edqlocalesqwhoqbuyqandqsellqassetsqthemselves,qcommunicatingqwithqotherqdealersqeitherqelectronically
qorqliterallyqover-the-counter.
10. Suchqorganizationsqfrequentlyqpursueqsocialqorqpoliticalqmissions,qsoqmanyqdifferentqgoalsqareqconceiv
able.qOneqgoalqthatqisqoftenqcitedqisqrevenueqminimization;qi.e.,qprovideqwhateverqgoodsqandqservicesqa
reqofferedqatqtheqlowestqpossibleqcostqtoqsociety.qAqbetterqapproachqmightqbeqtoqobserveqthatqevenqaqnot
-for-
profitqbusinessqhasqequity.qThus,qoneqanswerqisqthatqtheqappropriateqgoalqisq toqmaximizeqtheqvalueqofqt
heqequity.
11. Presumably,qtheqcurrentqstockqvalueqreflectsqtheqrisk,qtiming,qandqmagnitudeqofqallqfutureqcashqflows,qb
othqshort-termqandqlong-term.qIfqthisqisqcorrect,qthenqtheqstatementqisqfalse.
12. Anqargumentqcanqbeqmadeqeitherqway.qAtqtheqoneqextreme,qweqcouldqargueqthatqinqaqmarketqeconomy,qa
llqofqtheseqthingsqareqpriced.qThereqisqthusqanqoptimalqlevelqof,qforqexample,qethicalqand/orqillegalqbehav
ior,qandqtheqframeworkqofqstockqvaluationqexplicitlyqincludesqthese.qAtqtheqotherqextreme,qweqcouldqarg
ueqthatqtheseqareqnon-
economicqphenomenaqandqareqbestqhandledqthroughqtheqpoliticalqprocess.qAqclassicq(andqhighlyqreleva
nt)qthoughtqquestionqthatqillustratesqthisqdebateqgoesqsomethingqlikeqthis:q“Aqfirmqhasqestimatedqthatqth
eqcostqofqimprovingqtheqsafetyqofqoneqofqitsqproductsqisq$30qmillion.qHowever,qtheqfirmqbelievesqthatqim
provingqtheqsafetyqofqtheqproductqwillqonlyqsaveq$20qmillionqinqproductqliabilityqclaims.qWhatqshouldqt
heqfirmqdo?”
13. Theqgoalqwillqbeqtheqsame,qbutqtheqbestqcourseqofqactionqtowardqthatqgoalqmayqbeqdifferentqbecauseqofqd
ifferingqsocial,qpolitical,qandqeconomicqinstitutions.
14. Theqgoalqofqmanagementqshouldqbeqtoqmaximizeqtheqshareqpriceqforqtheqcurrentqshareholders.qIfqmanag
ementqbelievesqthatqitqcanqimproveqtheqprofitabilityqofqtheqfirmqsoqthatqtheqshareqpriceqwillqexceedq$35,q
thenqtheyqshouldqfightqtheqofferqfromqtheqoutsideqcompany.qIfqmanagementqbelievesqthatqthisqbidderqorq
otherqunidentifiedqbiddersqwillqactuallyqpayqmoreqthanq$35qperqshareqtoqacquireqtheqcompany,qthenqthe
yqshouldqstillqfightqtheqoffer.qHowever,qifqtheqcurrentqmanagementqcannotqincreaseqtheqvalueqofqtheqfir
mqbeyondqtheqbidqprice,qandqnoqotherqhigherqbidsqcomeqin,qthenqmanagementqisqnotqactingqinqtheqintere
stsqofqtheqshareholdersqbyqfightingqtheqoffer.qSinceqcurrentqmanagersqoftenqloseqtheirqjobsqwhenqtheqcor
porationqisqacquired,qpoorlyqmonitoredqmanagersqhaveqanqincentiveqtoqfightqcorporateqtakeoversqinqsitu
ationsqsuchqasqthis.
15. Weqwouldqexpectqagencyqproblemsqtoqbeqlessqsevereqinqotherqcountries,qprimarilyqdueqtoqtheqrelativelyqs
mallqpercentageqofqindividualqownership.qFewerqindividualqownersqshouldqreduceqtheqnumberqofqdiver
seqopinionsqconcerningqcorporateqgoals.qTheqhighqpercentageqofqinstitutionalqownershipqmightqleadqtoq
aqhigherqdegreeqofqagreementqbetweenqownersqandqmanagersqonqdecisionsqconcerningqriskyqprojects.qI
nqaddition,qinstitutionsqmayqbeqbetterqableqtoqimplementqeffectiveqmonitoringqmechanismsqonqmanager
sqthanqcanqindividualqowners,qbasedqonqtheqinstitutions’qdeeperqresourcesqandqexperiencesqwithqtheirqo
wnqmanagement.qTheqincreaseqinqinstitutionalqownershipqofqstockqinqtheqUnitedqStatesqandqtheqgrowing
qactivismqofqtheseqlargeqshareholderqgroupsqmayqleadqtoqaqreductionqinqagencyqproblemsqforqU.S.qcorpo
rationsqandqaqmoreqefficientqmarketqforqcorporateqcontrol.
