Solutions Manual Fundamentals of Corporate Finance
13th Edition Ross, Westerfield, and Jordan
Chapters 1 - 27
,CHAPTER611:61Introduction61to61Corporate61Finance6
1 CHAPTER612:61Financial61Statements,61Taxes,61And61
Cash61Flow61CHAPTER613:61Working61with61Financial6
1Statements61CHAPTER614:61Long-
Term61Financial61Planning61and61Growth
CHAPTER615:61Introduction61to61Valuation:61The61Time61Value61of61
Money61CHAPTER616:61Discounted61Cash61Flow61Valuation
CHAPTER617:61Interest61Rates61and61Bond61Val
uation61CHAPTER618:61Stock61Valuation
CHAPTER619:61NetEPresent61Value61and61Other61Investment61Criteri
a61CHAPTER6110:61Making61Capital61Investment61Decisions
CHAPTER61 11:6 1 Project61 Analysis6 1 and61 Evaluation
CHAPTER6112:61Some61Lessons61from61Capital61MarketE
History61CHAPTER6113:61Return,61Risk,61And61the61Secu
rity61MarketELine61CHAPTER6114:61CostEof61Capital
CHAPTER61 15:6 1 Raising61 Capital
CHAPTER6116:61Financial61Leverage61and61Capital61Structure61Polic
y61CHAPTER6117:61Dividends61and61Payout61Policy
CHAPTER6118:61Short-
Term61Finance61and61Planning61CHAPTER6119:
61Cash61and61Liquidity61Management61CHAPTE
R6120:61Credit61and61Inventory61Management61
CHAPTER6121:61International61Corporate61Fina
nce
CHAPTER6122:61Behavioral61Finance:61Implications61for61Financial61
Manage61CHAPTER6123:61Enterprise61Risk61Management
CHAPTER6124:Options61and61Corporate61Financ
,e61CHAPTER6125:61Option61Valuation
CHAPTER6126:61Mergers61and61Acquisitions61C
HAPTER6127:61Leasing
, CHAPTER 1 61
INTRODUCTION TO CORPORATE FINAN 61 61 61
CE
Answers61 to6 1 Concepts6 1 Review6 1 and6 1 Critical6 1 Thinking6 1 Questions
1. Capital61budgeting61(deciding61whether61to61expand61a61manufacturing61plant),61capital61structure
61(deciding61whether61to61issue61new61equity61and61use61the61proceeds61to61retire61outstanding61d
ebt),61and61working61capital61management61(modifying61the61firm‘s61credit61collection61policy61w
ith61its61customers).
2. Disadvantages:61unlimited61liability,61limited61life,61difficulty61in61transferring61ownership,61hard6
1to61raise61c61apital61funds.61Some61advantages:61simpler,61less61regulation,61the61owners61are61als
o61the61managers,61someti61mes61personal61tax61rates61are61betterEthan61corporate61tax61rates.
3. The6 1 primary6 1 disadvantage6 1 of6 1 the6 1 corporate6 1 form61is6 1 the6 1 double6 1 taxation6 1 to6 1 sharehol
ders6 1 of6 1 distribut61ed61 earnings61 and61dividends.61 Some6 1 advantages61 include:61 limited61liabilit
y,6 1 ease61 of61transferability,6 1 abilit61y61to61raise61capital,61unlimited61life,61and61so61forth.
4. In6 1 response6 1 to6 1 Sarbanes-
Oxley,6 1 small6 1 firms6 1 have6 1 elected6 1 to6 1 go6 1 dark61 because6 1 of6 1 the6 1 costs6 1 of6 1 compliance.6
1 The61 costs61 to6 1 comp61ly61with61 Sarbox61 can61 be61 several61 million61 dollars,6 1 which61 can61 be6
1 a61 large6 1 percentage6 1 of6 1 a6 1 small6 1 firms6 1 p61rofits.6 1 A6 1 majorE61cost6 1 of6 1 going6 1 dark6
1 is6 1 less6 1 access6 1 to6 1 capital.6 1 Since6 1 thefirm6 1 is6 1 no6 1 longerEpublicly61traded,61it6 1 can61no6
1longer61raise6 1 money61in61the61public61market.6 1 Although61the61company61will61still61have61ac6 1
cess61to61bank61loans61and61the61private61equity61market,61the61costs61associated61with61raising61fu
nds61in61these6 1 markets6 1 are61usually61higherEthan61the61costs61of61raising61funds61in61the61publi
c61market.
5. The61treasurer‘s61office61and61the61controller‘s61office61are61the61two61primary61organizational61gr
oups61t6 1 hatreport61directly61to61the61chief61financial61officer.61The61controller‘s61office61handles6
1cost61and61financiala61ccounting,61tax61management,61and61management61information61systems,61
while61the61treasurer‘s61office61is61r61esponsible6 1 for6 1 cash6 1 and6 1 credit6 1 management,6 1 capit
al6 1 budgeting,6 1 and6 1 financial6 1 planning.6 1 Therefor61e,61the61study61of61corporate61finance61is61
concentrated61within61the61treasury61group‘s61functions.
6. To61maximize6 1 the61 current61market6 1 value6 1 (share61price)61 of61the61equity61of6 1 the61firm61(wh
ether61 it‘s61publicl61y-61traded61orEnot).
7. In61the61corporate61form61of61ownership,61the61shareholders61are61the61owners61of61the61firm.61The
61shareholders6 1 elect6 1 the6 1 directors6 1 of6 1 the6 1 corporation,6 1 who6 1 in6 1 turn6 1 appoint6 1 the6 1 firm
‘s6 1 management.6 1 This6 1 separation61of6 1 ownership6 1 from6 1 control6 1 in6 1 the6 1 corporate6 1 form6
1 of6 1 organization6 1 is6 1 what6 1 causes6 1 agency6 1 problems61to61exist.61Management61may61act61in6
1its61own61or61someone61else‘s61best61interests,61ratherEthan61those61of61the6 1 shareholders.6 1 If6 1 s
uch6 1 events6 1 occur,6 1 they6 1 may6 1 contradict6 1 the6 1 goal6 1 of6 1 maximizing6 1 the6 1 share6 1 price6 1 o
f61the61equity61of61the61firm.
8. A61 primary61 market6 1 transaction.
13th Edition Ross, Westerfield, and Jordan
Chapters 1 - 27
,CHAPTER611:61Introduction61to61Corporate61Finance6
1 CHAPTER612:61Financial61Statements,61Taxes,61And61
Cash61Flow61CHAPTER613:61Working61with61Financial6
1Statements61CHAPTER614:61Long-
Term61Financial61Planning61and61Growth
CHAPTER615:61Introduction61to61Valuation:61The61Time61Value61of61
Money61CHAPTER616:61Discounted61Cash61Flow61Valuation
CHAPTER617:61Interest61Rates61and61Bond61Val
uation61CHAPTER618:61Stock61Valuation
CHAPTER619:61NetEPresent61Value61and61Other61Investment61Criteri
a61CHAPTER6110:61Making61Capital61Investment61Decisions
CHAPTER61 11:6 1 Project61 Analysis6 1 and61 Evaluation
CHAPTER6112:61Some61Lessons61from61Capital61MarketE
History61CHAPTER6113:61Return,61Risk,61And61the61Secu
rity61MarketELine61CHAPTER6114:61CostEof61Capital
CHAPTER61 15:6 1 Raising61 Capital
CHAPTER6116:61Financial61Leverage61and61Capital61Structure61Polic
y61CHAPTER6117:61Dividends61and61Payout61Policy
CHAPTER6118:61Short-
Term61Finance61and61Planning61CHAPTER6119:
61Cash61and61Liquidity61Management61CHAPTE
R6120:61Credit61and61Inventory61Management61
CHAPTER6121:61International61Corporate61Fina
nce
CHAPTER6122:61Behavioral61Finance:61Implications61for61Financial61
Manage61CHAPTER6123:61Enterprise61Risk61Management
CHAPTER6124:Options61and61Corporate61Financ
,e61CHAPTER6125:61Option61Valuation
CHAPTER6126:61Mergers61and61Acquisitions61C
HAPTER6127:61Leasing
, CHAPTER 1 61
INTRODUCTION TO CORPORATE FINAN 61 61 61
CE
Answers61 to6 1 Concepts6 1 Review6 1 and6 1 Critical6 1 Thinking6 1 Questions
1. Capital61budgeting61(deciding61whether61to61expand61a61manufacturing61plant),61capital61structure
61(deciding61whether61to61issue61new61equity61and61use61the61proceeds61to61retire61outstanding61d
ebt),61and61working61capital61management61(modifying61the61firm‘s61credit61collection61policy61w
ith61its61customers).
2. Disadvantages:61unlimited61liability,61limited61life,61difficulty61in61transferring61ownership,61hard6
1to61raise61c61apital61funds.61Some61advantages:61simpler,61less61regulation,61the61owners61are61als
o61the61managers,61someti61mes61personal61tax61rates61are61betterEthan61corporate61tax61rates.
3. The6 1 primary6 1 disadvantage6 1 of6 1 the6 1 corporate6 1 form61is6 1 the6 1 double6 1 taxation6 1 to6 1 sharehol
ders6 1 of6 1 distribut61ed61 earnings61 and61dividends.61 Some6 1 advantages61 include:61 limited61liabilit
y,6 1 ease61 of61transferability,6 1 abilit61y61to61raise61capital,61unlimited61life,61and61so61forth.
4. In6 1 response6 1 to6 1 Sarbanes-
Oxley,6 1 small6 1 firms6 1 have6 1 elected6 1 to6 1 go6 1 dark61 because6 1 of6 1 the6 1 costs6 1 of6 1 compliance.6
1 The61 costs61 to6 1 comp61ly61with61 Sarbox61 can61 be61 several61 million61 dollars,6 1 which61 can61 be6
1 a61 large6 1 percentage6 1 of6 1 a6 1 small6 1 firms6 1 p61rofits.6 1 A6 1 majorE61cost6 1 of6 1 going6 1 dark6
1 is6 1 less6 1 access6 1 to6 1 capital.6 1 Since6 1 thefirm6 1 is6 1 no6 1 longerEpublicly61traded,61it6 1 can61no6
1longer61raise6 1 money61in61the61public61market.6 1 Although61the61company61will61still61have61ac6 1
cess61to61bank61loans61and61the61private61equity61market,61the61costs61associated61with61raising61fu
nds61in61these6 1 markets6 1 are61usually61higherEthan61the61costs61of61raising61funds61in61the61publi
c61market.
5. The61treasurer‘s61office61and61the61controller‘s61office61are61the61two61primary61organizational61gr
oups61t6 1 hatreport61directly61to61the61chief61financial61officer.61The61controller‘s61office61handles6
1cost61and61financiala61ccounting,61tax61management,61and61management61information61systems,61
while61the61treasurer‘s61office61is61r61esponsible6 1 for6 1 cash6 1 and6 1 credit6 1 management,6 1 capit
al6 1 budgeting,6 1 and6 1 financial6 1 planning.6 1 Therefor61e,61the61study61of61corporate61finance61is61
concentrated61within61the61treasury61group‘s61functions.
6. To61maximize6 1 the61 current61market6 1 value6 1 (share61price)61 of61the61equity61of6 1 the61firm61(wh
ether61 it‘s61publicl61y-61traded61orEnot).
7. In61the61corporate61form61of61ownership,61the61shareholders61are61the61owners61of61the61firm.61The
61shareholders6 1 elect6 1 the6 1 directors6 1 of6 1 the6 1 corporation,6 1 who6 1 in6 1 turn6 1 appoint6 1 the6 1 firm
‘s6 1 management.6 1 This6 1 separation61of6 1 ownership6 1 from6 1 control6 1 in6 1 the6 1 corporate6 1 form6
1 of6 1 organization6 1 is6 1 what6 1 causes6 1 agency6 1 problems61to61exist.61Management61may61act61in6
1its61own61or61someone61else‘s61best61interests,61ratherEthan61those61of61the6 1 shareholders.6 1 If6 1 s
uch6 1 events6 1 occur,6 1 they6 1 may6 1 contradict6 1 the6 1 goal6 1 of6 1 maximizing6 1 the6 1 share6 1 price6 1 o
f61the61equity61of61the61firm.
8. A61 primary61 market6 1 transaction.
