Solutions Manual for Fundamentals of Corporate Finance, Latest Edition – Ross, Westerfield, & Jordan

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,CHAPTER 1 X




INTRODUCTION TO CORPORATE X X X




FINANCE
AnswersXtoXConceptsXReviewXandXCriticalXThinkingXQuestions

1. CapitalXbudgetingX(decidingXwhetherXtoXexpandXaXmanufacturingXplant),XcapitalXstructureX(decidingX
whetherXtoXissueXnewXequityXandXuseXtheXproceedsXtoXretireXoutstandingXdebt),XandXworkingXcapitalX
managementX(modifyingXtheXfirm‘sXcreditXcollectionXpolicyXwithXitsXcustomers).

2. Disadvantages:XunlimitedXliability,XlimitedXlife,XdifficultyXinXtransferringXownership,XdifficultyXinXrai
singXcapitalXfunds.XSomeXadvantages:Xsimpler,XlessXregulation,XtheXownersXareXalsoXtheXmanagers,Xs
ometimesXpersonalXtaxXratesXareXbetterXthanXcorporateXtaxXrates.

3. TheXprimaryXdisadvantageXofXtheXcorporateXformXisXtheXdoubleXtaxationXtoXshareholdersXofXdistribut
edXearningsXandXdividends.XSomeXadvantagesXinclude:XlimitedXliability,XeaseXofXtransferability,Xabilit
yXtoXraiseXcapital,XandXunlimitedXlife.

4. InXresponseXtoXSarbanes-
Oxley,XsmallXfirmsXhaveXelectedXtoXgoXdarkXbecauseXofXtheXcostsXofXcompliance.XTheXcostsXtoXcomp
lyXwithXSarboxXcanXbeXseveralXmillionXdollars,XwhichXcanXbeXaXlargeXpercentageXofXaXsmallXfirm‘sXp
rofits.XAXmajorXcostXofXgoingXdarkXisXlessXaccessXtoXcapital.XSinceXtheXfirmXisXnoXlongerXpubliclyXtra
ded,XitXcanXnoXlongerXraiseXmoneyXinXtheXpublicXmarket.XAlthoughXtheXcompanyXwillXstillXhaveXacce
ssXtoXbankXloansXandXtheXprivateXequityXmarket,XtheXcostsXassociatedXwithXraisingXfundsXinXtheseXma
rketsXareXusuallyXhigherXthanXtheXcostsXofXraisingXfundsXinXtheXpublicXmarket.

5. TheXtreasurer‘sXofficeXandXtheXcontroller‘sXofficeXareXtheXtwoXprimaryXorganizationalX groupsXthatXre
portXdirectlyXtoXtheXchiefXfinancialXofficer.XTheXcontroller‘sXofficeXhandlesXcostXandXfinancialXaccoun
ting,XtaxXmanagement,XandXmanagementXinformationXsystems,XwhileXtheXtreasurer‘sXofficeXisXrespon
sibleX forX cashX andX creditX management,X capitalX budgeting,X andX financialX planning.X Therefore,XtheX
studyXofXcorporateXfinanceXisXconcentratedXwithinXtheXtreasuryXgroup‘sXfunctions.

6. ToXmaximizeXtheXcurrentXmarketXvalueX(shareXprice)XofXtheXequityXofXtheXfirmX(whetherXit‘sXpublicly
XtradedXorXnot).




7. InXtheXcorporateXformXofXownership,XtheXshareholdersXareXtheXownersXofXtheXfirm.XTheXshareholdersX
electXtheXdirectorsXofXtheXcorporation,XwhoXinXturnXappointXtheXfirm‘sXmanagement.XThisXseparationX
ofXownershipXfromXcontrolXinXtheXcorporateXformXofXorganizationXisXwhatXcausesXagencyXproblemsXt
oXexist.XManagementXmayXactXinXitsXownXorXsomeoneXelse‘sXbestXinterests,XratherXthanXthoseXofXtheXs
hareholders.XIfXsuchXeventsXoccur,XtheyXmayXcontradictXtheXgoalXofXmaximizingXtheXshareXpriceXofXt
heXequityXofXtheXfirm.

8. AXprimaryXmarketXtransaction.

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