Solutions Manual Fundamentals of Corporate Finance 13th Edition Ross, Westerfield, and Jordan Chapters 1 - 27

Solutions Manual Fundamentals of Corporate Finance
13th Edition Ross, Westerfield, and Jordan
Chapters 1 - 27

,CHAPTERJ1:JIntroductionJtoJCorporateJFinance

CHAPTERJ2:JFinancialJStatements,JTaxes,JAndJCashJFlow

CHAPTERJ3:JWorkingJwithJFinancialJStatements

CHAPTERJ4:JLong-TermJFinancialJPlanningJandJGrowth

CHAPTERJ5:JIntroductionJtoJValuation:JTheJTimeJValueJofJMoney

CHAPTERJ6:JDiscountedJCashJFlowJValuation

CHAPTERJ7:JInterestJRatesJandJBondJValuation

CHAPTERJ8:JStockJValuation

CHAPTERJ9:JNetJPresentJValueJandJOtherJInvestmentJCriteria

CHAPTERJ10:JMakingJCapitalJInvestmentJDecisions

CHAPTERJ11:JProjectJAnalysisJandJEvaluation

CHAPTERJ12:JSomeJLessonsJfromJCapitalJMarketJHistory

CHAPTERJ13:JReturn,JRisk,JAndJtheJSecurityJMarketJLine

CHAPTERJ14:JCostJofJCapital

CHAPTERJ15:JRaisingJCapital

CHAPTERJ16:JFinancialJLeverageJandJCapitalJStructureJPolicy

CHAPTERJ17:JDividendsJandJPayoutJPolicy

CHAPTERJ18:JShort-TermJFinanceJandJPlanning

CHAPTERJ19:JCashJandJLiquidityJManagement

CHAPTERJ20:JCreditJandJInventoryJManagement

CHAPTERJ21:JInternationalJCorporateJFinance

CHAPTERJ22:JBehavioralJFinance:JImplicationsJforJFinancialJManage

CHAPTERJ23:JEnterpriseJRiskJManagement

CHAPTERJ24:OptionsJandJCorporateJFinance

CHAPTERJ25:JOptionJValuation

CHAPTERJ26:JMergersJandJAcquisitions

CHAPTERJ27:JLeasing

,CHAPTER 1 J




INTRODUCTION TO CORPORATE J J J




FINANCE
AnswersJtoJConceptsJReviewJandJCriticalJThinkingJQuestions

1. CapitalJbudgetingJ(decidingJwhetherJtoJexpandJaJmanufacturingJplant),JcapitalJstructureJ(decidingJwhet
herJtoJissueJnewJequityJandJuseJtheJproceedsJtoJretireJoutstandingJdebt),JandJworkingJcapitalJmanageme
ntJ(modifyingJtheJfirm‘sJcreditJcollectionJpolicyJwithJitsJcustomers).

2. Disadvantages:JunlimitedJliability,JlimitedJlife,JdifficultyJinJtransferringJownership,JhardJtoJraiseJcapital
Jfunds.JSomeJadvantages:Jsimpler,JlessJregulation,JtheJownersJareJalsoJtheJmanagers,JsometimesJperson

alJtaxJratesJareJbetterJthanJcorporateJtaxJrates.

3. TheJprimaryJdisadvantageJofJtheJcorporateJformJisJtheJdoubleJtaxationJtoJshareholdersJofJdistributedJear
ningsJandJdividends.JSomeJadvantagesJinclude:JlimitedJliability,JeaseJofJtransferability,JabilityJtoJraiseJc
apital,JunlimitedJlife,JandJsoJforth.

4. InJresponseJtoJSarbanes-
Oxley,JsmallJfirmsJhaveJelectedJtoJgoJdarkJbecauseJofJtheJcostsJofJcompliance.JTheJcostsJtoJcomplyJwith
JSarboxJcanJbeJseveralJmillionJdollars,JwhichJcanJbeJaJlargeJpercentageJ ofJ aJ smallJ firmsJ profits.J AJ maj

orJ costJ ofJ goingJ darkJ isJ lessJ accessJ toJ capital.J SinceJ theJfirmJisJnoJlongerJpubliclyJtraded,JitJcanJnoJlong
erJraiseJmoneyJinJtheJpublicJmarket.JAlthoughJtheJcompanyJwillJstillJhaveJaccessJtoJbankJloansJandJtheJp
rivateJequityJmarket,JtheJcostsJassociatedJwithJraisingJfundsJinJtheseJmarketsJareJusuallyJhigherJthanJtheJ
costsJofJraisingJfundsJinJtheJpublicJmarket.

5. TheJ treasurer‘sJ officeJ andJ theJ controller‘sJ officeJ areJ theJ twoJ primaryJ organizationalJ groupsJ thatJre
portJdirectlyJtoJtheJchiefJfinancialJofficer.JTheJcontroller‘sJofficeJhandlesJcostJandJfinancialJaccounting,J
taxJmanagement,JandJmanagementJinformationJsystems,JwhileJtheJtreasurer‘sJofficeJisJresponsibleJ forJ
cashJ andJ creditJ management,J capitalJ budgeting,J andJ financialJ planning.J Therefore,JtheJstudyJofJcorpo
rateJfinanceJisJconcentratedJwithinJtheJtreasuryJgroup‘sJfunctions.

6. ToJmaximizeJtheJcurrentJmarketJvalueJ(shareJprice)JofJtheJequityJofJtheJfirmJ(whetherJit‘sJpublicly-
JtradedJorJnot).




7. InJtheJcorporateJformJofJownership,JtheJshareholdersJareJtheJownersJofJtheJfirm.JTheJshareholdersJelectJt
heJdirectorsJofJtheJcorporation,JwhoJinJturnJappointJtheJfirm‘sJmanagement.JThisJseparationJofJownershi
pJfromJcontrolJinJtheJcorporateJformJofJorganizationJisJwhatJcausesJagencyJproblemsJtoJexist.JManagem
entJmayJactJinJitsJownJorJsomeoneJelse‘sJbestJinterests,JratherJthanJthoseJofJtheJshareholders.JIfJsuchJeve
ntsJoccur,JtheyJmayJcontradictJtheJgoalJofJmaximizingJtheJshareJpriceJofJtheJequityJofJtheJfirm.

8. AJprimaryJmarketJtransaction.

, B-2J SOLUTIONS


9. InJauctionJmarketsJlikeJtheJNYSE,JbrokersJandJagentsJmeetJatJaJphysicalJlocationJ(theJexchange)JtoJmat
chJbuyersJandJsellersJofJassets.JDealerJmarketsJlikeJNASDAQJconsistJofJdealersJoperatingJatJdispersedJl
ocalesJwhoJbuyJandJsellJassetsJthemselves,JcommunicatingJwithJotherJdealersJeitherJelectronicallyJorJlit
erallyJover-the-counter.

10. SuchJorganizationsJfrequentlyJpursueJsocialJorJpoliticalJmissions,JsoJmanyJdifferentJgoalsJareJconceiva
ble.JOneJgoalJthatJisJoftenJcitedJisJrevenueJminimization;Ji.e.,JprovideJwhateverJgoodsJandJservicesJareJo
fferedJatJtheJlowestJpossibleJcostJtoJsociety.JAJbetterJapproachJmightJbeJtoJobserveJthatJevenJaJnot-for-
profitJbusinessJhasJequity.JThus,JoneJanswerJisJthatJtheJappropriateJgoalJisJ toJmaximizeJtheJvalueJofJtheJ
equity.

11. Presumably,JtheJcurrentJstockJvalueJreflectsJtheJrisk,Jtiming,JandJmagnitudeJofJallJfutureJcashJflows,Jbot
hJshort-termJandJlong-term.JIfJthisJisJcorrect,JthenJtheJstatementJisJfalse.

12. AnJargumentJcanJbeJmadeJeitherJway.JAtJtheJoneJextreme,JweJcouldJargueJthatJinJaJmarketJeconomy,JallJ
ofJtheseJthingsJareJpriced.JThereJisJthusJanJoptimalJlevelJof,JforJexample,JethicalJand/orJillegalJbehavior,J
andJtheJframeworkJofJstockJvaluationJexplicitlyJincludesJthese.JAtJtheJotherJextreme,JweJcouldJargueJtha
tJtheseJareJnon-
economicJphenomenaJandJareJbestJhandledJthroughJtheJpoliticalJprocess.JAJclassicJ(andJhighlyJrelevant)
JthoughtJquestionJthatJillustratesJthisJdebateJgoesJsomethingJlikeJthis:J―AJfirmJhasJestimatedJthatJtheJcost

JofJimprovingJtheJsafetyJofJoneJofJitsJproductsJisJ$30Jmillion.JHowever,JtheJfirmJbelievesJthatJimproving

JtheJsafetyJofJtheJproductJwillJonlyJsaveJ$20JmillionJinJproductJliabilityJclaims.JWhatJshouldJtheJfirmJdo

?‖

13. TheJgoalJwillJbeJtheJsame,JbutJtheJbestJcourseJofJactionJtowardJthatJgoalJmayJbeJdifferentJbecauseJofJdiff
eringJsocial,Jpolitical,JandJeconomicJinstitutions.

14. TheJgoalJofJmanagementJshouldJbeJtoJmaximizeJtheJshareJpriceJforJtheJcurrentJshareholders.JIfJmanage
mentJbelievesJthatJitJcanJimproveJtheJprofitabilityJofJtheJfirmJsoJthatJtheJshareJpriceJwillJexceedJ$35,Jthe
nJtheyJshouldJfightJtheJofferJfromJtheJoutsideJcompany.JIfJmanagementJbelievesJthatJthisJbidderJorJotherJ
unidentifiedJbiddersJwillJactuallyJpayJmoreJthanJ$35JperJshareJtoJacquireJtheJcompany,JthenJtheyJshould
JstillJfightJtheJoffer.JHowever,JifJtheJcurrentJmanagementJcannotJincreaseJtheJvalueJofJtheJfirmJbeyondJth

eJbidJprice,JandJnoJotherJhigherJbidsJcomeJin,JthenJmanagementJisJnotJactingJinJtheJinterestsJofJtheJshare
holdersJbyJfightingJtheJoffer.JSinceJcurrentJmanagersJoftenJloseJtheirJjobsJwhenJtheJcorporationJisJacqui
red,JpoorlyJmonitoredJmanagersJhaveJanJincentiveJtoJfightJcorporateJtakeoversJinJsituationsJsuchJasJthis.

15. WeJwouldJexpectJagencyJproblemsJtoJbeJlessJsevereJinJotherJcountries,JprimarilyJdueJtoJtheJrelativelyJsm
allJpercentageJofJindividualJownership.JFewerJindividualJownersJshouldJreduceJtheJnumberJofJdiverseJo
pinionsJconcerningJcorporateJgoals.JTheJhighJpercentageJofJinstitutionalJownershipJmightJleadJtoJaJhigh
erJdegreeJofJagreementJbetweenJownersJandJmanagersJonJdecisionsJconcerningJriskyJprojects.JInJadditi
on,JinstitutionsJmayJbeJbetterJableJtoJimplementJeffectiveJmonitoringJmechanismsJonJmanagersJthanJca
nJindividualJowners,JbasedJonJtheJinstitutions‘JdeeperJresourcesJandJexperiencesJwithJtheirJownJmanage
ment.JTheJincreaseJinJinstitutionalJownershipJofJstockJinJtheJUnitedJStatesJandJtheJgrowingJactivismJofJt
heseJlargeJshareholderJgroupsJmayJleadJtoJaJreductionJinJagencyJproblemsJforJU.S.JcorporationsJandJaJm
oreJefficientJmarketJforJcorporateJcontrol.