Solutions Manual For Fundamentals of Corporate Finance, 13th Edition by Ross, Westerfield, and Jordan

SolutionsManual
FundamentalsofLCorporateLFinanceL13thLeditionLRos
s,LWesterfield,LandLJordan

PreparedLb

yLBradLJor

daLn
UniversityLofLFlorida

JoeLSmoliraLBelm
oLntLUniversity

,CHAPTER 1 L


INTRODUCTIONTOCORPORATE FINAN L L


CE
AnswersLtoLConceptsLReviewLandLCriticalLThinkingLQuestions

1. CapitalLbudgeting`(decidingLwhetherLtoLexpandLaLmanufacturingLplant),LcapitalLstructureL(decidin
gLwhLetherLtoLissueLnewLequityLandLuseLtheLproceedsLtoLretireLoutstandingLdebt),LandLworkingL
capitalLmanagLementL(modifyingLtheLfirm‘sLcreditLcollectionLpolicyLwithLitsLcustomers).

2. Disadvantages:LunlimitedLliability,LlimitedLlife,LdifficultyLin`transferringLownership,LdifficultyLinL
raisiLngLcapitalLfunds.LSomeLadvantages:Lsimpler,LlessLregulation,LtheLownersLareLalsoLtheLmana
gers,LsometiLmesLpersonalLtaxLratesLareLbetterLthanLcorporateLtaxLrates.

3. TheLprimaryLdisadvantageLofLtheLcorporateLformLisLtheLdoubleLtaxationLtoLshareholdersLofLdistr
ibutedLearningsLandLdividends.LSomeLadvantagesLinclude:LlimitedLliability,LeaseLofLtransferabilit
y,LabilityLtoLrLaiseLcapital,LandLunlimitedLlife.

4. InLresponseLtoLSarbanes-
Oxley,LsmallLfirmsLhaveLelected`toLgoLdarkLbecauseLofLtheLcostsLofLcompliance.LTheLcostsLtoLco
mplyLwLithLSarboxLcan`beLseveralLmillionLdollars,LwhichLcanLbeLaLlargeLpercentageLofLaLsmallL
firm‘sLprofits.LALmajorLcostLofLgoingLdarkLisLlessLaccessLtoLcapital.LSinceLtheLfirmLisLnoLlonger
LpubliclyLtraded,LitLcan`noLlongerLraiseLmoneyLinLtheLpublicLmarket.LAlthoughLtheLcompanyLwil
lLstillLhaveLaccessLtoLbankLloansLaLndLtheLprivate`equityLmarket,LtheLcostsLassociatedLwithLraisi
ngLfundsLinLtheseLmarketsLareLusuallyLhighLerLthanLtheLcostsLofLraisingLfundsLinLtheLpublicLma
rket.

5. TheLtreasurer‘sLofficeLandLtheLcontroller‘sLofficeLareLtheLtwoLprimaryLorganizationalLgroupsLthat
L reporLtLdirectlyLtoLtheLchief`financialLofficer.LTheLcontroller‘sLofficeLhandlesLcostLandLfinancial
Laccounting,LtLaxLmanagement,LandLmanagementLinformationLsystems,LwhileLtheLtreasurer‘sLoffi
ceLisLresponsibleLfor`L cashLandLcreditLmanagement,LcapitalLbudgeting,LandLfinancialLplanning.LT
herefore,L theLstudyLofLcorpoLrateLfinanceLisLconcentrated`withinLtheLtreasury`group‘sLfunctions.

6. ToLmaximizeLtheLcurrentLmarket`valueL(shareLprice)LofLtheLequityLofLtheLfirmL(whetherLit‘sLpubl
iclyLtraLdedLorLnot).

7. InLtheLcorporateLform`ofLownership,LtheLshareholdersLareLtheLownersLofLtheLfirm.LTheLsharehold
ersLeleLctLtheLdirectorsLofLtheLcorporation,LwhoLinLturnLappointLthe`firm‘sLmanagement.LThisLse
parationLofLowLnershipLfromLcontrolLinLtheLcorporateLformLofLorganizationLisLwhatLcausesLagen
cyLproblemsLtoLexist.LManagementLmayLactLinLitsLown`orLsomeoneLelse‘sLbestLinterests,LratherLt
hanLthoseLofLtheLshareholders
.LIfLsuchLeventsLoccur,LtheyLmayLcontradictLtheLgoalLofLmaximizingLtheLshareLpriceLof`theLequit
yLofLtheLfirm.

8. ALprimary`marketLtransaction.

,2L SOLUTIONSLMANUAL


9. InLauctionLmarketsLlikeLtheLNYSE,LbrokersLandLagentsLmeetLatLaLphysicalLlocationL(theLexchang
e)LtoLmLatchLbuyersLandLsellersLofLassets.LDealerLmarketsLlikeLNASDAQLconsistLofLdealersLope
ratingLatLdisperLsedLlocalesLwhoLbuyLandLsellLassetsLthemselves,LcommunicatingLwithLother`deal
ersLeitherLelectronicallLyLor`literally`over-the-counter.

10. SuchLorganizationsLfrequentlyLpursueLsocialLorLpoliticalLmissions,LsoLmanyLdifferentLgoalsLareLc
onceivLable.LOneLgoalLthatLisLoftenLcitedLisLrevenueLminimization;LthatLis,LprovideLwhatever`go
odsL andLservicLesLareLofferedLatLtheLlowestLpossibleLcostLtoLsociety.LALbetterLapproachLmightLb
eLtoLobserveLthatLevenLaLnot-for-
profitLbusinessLhasLequity.LThus,LoneLanswerLisLthatLtheLappropriateLgoalLisLtoLmaximizeLtheLv
alueLofLtLheLequity.

11. Presumably,LtheLcurrentLstockLvalueLreflectsLtheLrisk,Ltiming,LandLmagnitudeLofLallLfuture`cash
Lflows,LbothLshort-termLand`long-term.LIfLthisLisLcorrect,LthenLtheLstatementLisLfalse.


12. An`argumentLcanLbeLmadeLeitherLway.LAtLtheLoneLextreme,LweLcouldLargueLthatLinLaLmarketLe
conomy,LallLofLtheseLthingsLareLpriced.LThereLisLthusLanLoptimalLlevelLof,LforLexample,LethicalL
and/orLillegalLbehLavior,LandLtheLframeworkLofLstockLvaluationLexplicitlyLincludesLthese.LAtLthe
LotherLextreme,LweLcould`L argueLthatLtheseLareLnoneconomicLphenomenaLandLareLbestLhandledL
throughLtheLpoliticalLprocess.LALclLassicL(andLhighlyLrelevant)LthoughtLquestionLthatLillustratesLt
hisLdebateLgoesLsomethingLlikeLthis:L―ALfirmLhasLestimatedLthatLtheLcostLofLimprovingLtheLsaf
etyLofLoneLofLitsLproductsLisL$30Lmillion.LHoweveLr,LtheLfirmLbelievesLthatLimprovingLtheLsafet
yLofLtheLproductLwillLonlyLsaveL$20LmillionLinLproductLliabLilityLclaims.LWhat`shouldLtheLfirmL
do?‖

13. TheLgoalLwillLbeLtheLsame,LbutLtheLbestLcourseLofLactionLtowardLthatLgoalLmayLbeLdifferentLbe
causeLofLdifferingLsocial,Lpolitical,LandLeconomicLinstitutions.

14. TheLgoalLofLmanagementLshouldLbeLtoLmaximizeLtheLshareLpriceLforLtheLcurrentLshareholders.LI
fLmanaLgementLbelievesLthatLitLcanLimproveLtheLprofitabilityLofLtheLfirmLsoLthatLtheLshareLprice
LwillLexceedL$3L5,LthenLtheyLshouldLfightLtheLoffer`fromLtheLoutsideLcompany.LIfLmanagementL
believesLthatLthisLbidderLorLotherLunidentifiedLbiddersLwillLactuallyLpayLmoreLthanL$35LperLshar
eLtoLacquireLtheLcompany,LthenLtLheyLshouldLstillLfightLtheLoffer.LHowever,LifLtheLcurrentLmana
gement`cannot`increaseLtheLvalueLofLtheLfLirmLbeyondLtheLbidLprice,LandLnoLotherLhigherLbidsLc
omeLin,LthenLmanagementLisLnotLactingLinLtheLinteLrestsLofLtheLshareholdersLbyLfightingLtheLoff
er.LSinceLcurrentLmanagersLoftenLloseLtheirLjobsLwhenLtheLcLorporationLisLacquired,LpoorlyLmoni
tored`managersLhaveLanLincentiveLtoLfightLcorporateLtakeoversLinLsLituationsLsuchLasLthis.

15. WeLwouldLexpectLagencyLproblemsLtoLbeLlessLsevereLinLcountriesLwithLaLrelativelyLsmallLperce
ntageL oLfLindividualLownership.LFewer`individualLownersLshouldLreduceLtheLnumberLof`diverseLo
pinionsLconceLrningLcorporateLgoals.LTheLhighLpercentageLofLinstitutionalLownershipLmightLlead
LtoLaLhigherLdegreeLoLfLagreementLbetweenLownersLandLmanagersLonLdecisionsLconcerningLrisk
yLprojects.LInLaddition,LinstitLutionsLmayLbeLbetterLableLto`implementLeffectiveLmonitoringLmech
anismsLonLmanagersLthanLcanLindivLidualLowners,LbasedLonLtheLinstitutions‘LdeeperLresourcesLa
ndLexperiencesLwithLtheirLownLmanagemen
t.LTheLincreaseLinLinstitutionalLownershipLofLstockLinLtheLUnitedLStatesLand`theLgrowingLactivis
mLofLthLeseLlargeLshareholderLgroupsLmayLleadLtoLaLreductionLinLagencyLproblemsLfor
U.S.LcorporationsLand`aLmoreLefficientLmarketLforLcorporateLcontrol.

, CHAPTERL2L-L 3


16. HowLmuchLisLtooLmuch?LWhoLisLworthLmore,LMarkLParkerLorLLeBronLJames?LTheLsimplestLa
nswer`isLthatLthereLisLaLmarketLforLexecutivesLjustLasLthereLisLforLallLtypesLofLlabor.LExecutiveL
compensationLisLtLheLpriceLthatLclearsLtheLmarket.LTheLsameLisLtrueLforLathletesLandLperformer
s.LHavingLsaid`that,LoneLasLpectLofLexecutive`compensationLdeservesLcomment.LALprimaryLreaso
nLexecutiveLcompensationLhasLgrLownLsoLdramaticallyLisLthatLcompaniesLhaveLincreasinglyLmo
vedLtoLstock-
basedLcompensation.L SuchLmovementLisLobviouslyLconsistentLwithLtheLattemptLtoLbetterLalign`st
ockhoLlderLandLmanagementLinterests.LInLrecentLyears,LstockLpricesLhaveLsoared,LsoLmanagemen
tLhasLcleanedLup.LItLisLsometimesLarguedLthatLmuchLofLthisLrewardLisLdueLtoLrisingLstockLprice
sLinLgeneral,LnotLmanaLgerialLperformance.LPerhapsLinLtheLfuture,LexecutiveLcompensationLwillL
beLdesignedLto`rewardLonlyLdi
L L L fferentialLperformance,LthatLis,LstockLpriceLincreasesLinLexcessLofLgeneralLmarketLincreases.




CHAPTER 2 L


FINANCIALSTATEMENTS,TAXES,ANDCASH L


FLOW
AnswersLtoLConceptsLReviewLandLCriticalLThinkingLQuestions

1. LiquidityLmeasuresLhowLquicklyLandLeasilyLanLassetLcanLbeLconvertedLtoLcashLwithoutLsignifica
ntLlossLinLvalue.LIt‘sLdesirableLforLfirmsLtoLhaveLhigh`liquidityLsoLthatLtheyLhaveLaLlargeLfactor
LofLsafetyLinLmeLetingLshort-
termLcreditorLdemands.LHowever,LsinceLliquidityLalsoLhasLanLopportunityLcostLassociatedLwith`it
—
LnamelyLthatLhigherLreturnsLcanLgenerallyLbeLfoundLbyLinvestingLtheLcashLintoLproductiveLasset
s—
lowLliquidityLlevelsLareLalsoLdesirableLtoLtheLfirm.LIt‘sLupLtoLtheLfirm‘sLfinancialLmanagementLst
affLtoLfLindLaLreasonableLcompromiseLbetweenLtheseLopposingLneeds.

2. TheLrecognition`andLmatchingLprinciplesLinLfinancialLaccountingLcallLforLrevenues,LandLtheLcosts
LassocLiatedLwithLproducingLthoseLrevenues,LtoLbeL―booked‖LwhenLtheLrevenueLprocessLisLesse
ntiallyLcompleLte,LnotLnecessarilyLwhenLtheLcashLisLcollectedLorLbillsLareLpaid.LNoteLthatLthisLw
ayLisLnotLnecessarilyLcoLrrect;Lit‘sLtheLwayLaccountantsLhaveLchosenLtoLdoLit.

3. HistoricalLcostsLcanLbeLobjectivelyLandLpreciselyLmeasuredLwhereasLmarketLvaluesLcanLbeLdiffi
cultLtoLestimate,LandLdifferentLanalystsLwouldLcomeLupLwithLdifferentLnumbers.LThus,LthereLis
LaLtrade-
offLbetweenLrelevanceL(marketLvalues)LandLobjectivityL(bookLvalues).

4. DepreciationLisLaLnoncashLdeductionLthatLreflectsLadjustmentsLmadeLinLassetLbookLvaluesLinLacc
ordancLeLwithLtheLmatching`principleLinLfinancialLaccounting.LInterestLexpenseLisLaLcashLoutlay,
LbutLit‘sLaLfinaLncingLcost,LnotLanLoperatingLcost.


5. MarketLvaluesLcanLneverLbeLnegative.LImagineLaLshareLofLstockLsellingLforL–
$20.LThisLwould`meanL thatLifLyouLplacedLanLorderLfor`100Lshares,LyouLwouldLgetLtheLstockLalo
ngLwithLaLcheckLforL$2,000.LHowLmanyLsharesLdoLyouLwantLtoLbuy?LMoreLgenerally,LbecauseL
ofLcorporateLandLindividualLbankruptcyLlaws,LnetLworthLforLaLpersonLorLaLcorporationLcannot`be
Lnegative,LimplyingLthatLliabilitiesLcannotLexceedLassetsLinLmarketLvalue.