Solutions Manual
, TABLE OF CONTENT
CHAPTER 1: Introduction to Corporate Finance
CHAPTER 2: Financial Statements, Taxes, And Cash Flow
CHAPTER 3: Working with Financial Statements
CHAPTER 4: Long-Term Financial Planning and Growth
CHAPTER 5: Introduction to Valuation: The Time Value of Money
CHAPTER 6: Discounted Cash Flow Valuation
CHAPTER 7: Interest Rates and Bond Valuation
CHAPTER 8: Stock Valuation
CHAPTER 9: Net Present Value and Other Investment Criteria
CHAPTER 10: Making Capital Investment Decisions
CHAPTER 11: Project Analysis and Evaluation
CHAPTER 12: Some Lessons from Capital Market History
CHAPTER 13: Return, Risk, And the Security Market Line
CHAPTER 14: Cost of Capital
CHAPTER 15: Raising Capital
CHAPTER 16: Financial Leverage and Capital Structure Policy
CHAPTER 17: Dividends and Payout Policy
CHAPTER 18: Short-Term Finance and Planning
CHAPTER 19: Cash and Liquidity Management
CHAPTER 20: Credit and Inventory Management
CHAPTER 21: International Corporate Finance
,CHAPTER 22: Behavioral Finance: Implications for Financial Manage
CHAPTER 23: Enterprise Risk Management
CHAPTER 24:Options and Corporate Finance
CHAPTER 25: Option Valuation
CHAPTER 26: Mergers and Acquisitions
CHAPTER 27: Leasing
CHAPTER 1
INTRODUCTION TO CORPORATEFINANCE
, Answers to Concepts Review and Critical Thinking Questions
1. Capital budgeting (deciding whether to expand a manufacturing plant),
capital structure (deciding whether to issue new equity and use the
proceeds to retire outstanding debt), and working capital management
(modifying the firm’s credit collection policy with its customers).
2. Disadvantages: unlimited liability, limited life, difficulty in transferring
ownership, hard to raise capital funds. Some advantages: simpler, less
regulation, the owners are also the managers, sometimes personal tax
rates are better than corporate tax rates.
3. The primary disadvantage of the corporate form is the double taxation
to shareholders of distributed earnings and dividends. Some advantages
include: limited liability, ease of transferability, ability to raise capital,
unlimited life, and so forth.
4. In response to Sarbanes-Oxley, small firms have elected to go dark
because of the costs of compliance. The costs to comply with Sarbox can
be several million dollars, which can be a large percentage of a small
firms profits. A major cost of going dark is less access to capital. Since
thefirm is no longer publicly traded, it can no longer raise money in the
public market. Although the company will still have access to bank loans
and the private equity market, the costs associated with raising funds in
these markets are usually higher than the costs of raising funds in the
public market.
5. The treasurer’s office and the controller’s office are the two primary
organizational groups that report directly to the chief financial officer.
The controller’s office handles cost and financial accounting, tax
management, and management information systems, while the
treasurer’s office is responsible for cash and credit management,
capital budgeting, and financial planning. Therefore, the study of
corporate finance is concentrated within the treasury group’s functions.
6. To maximize the current market value (share price) of the equity of the
firm (whether it’s publicly- traded or not).
7. In the corporate form of ownership, the shareholders are the owners of
the firm. The shareholders elect the directors of the corporation, who in
turn appoint the firm’s management. This separation of ownership from
control in the corporate form of organization is what causes agency
, TABLE OF CONTENT
CHAPTER 1: Introduction to Corporate Finance
CHAPTER 2: Financial Statements, Taxes, And Cash Flow
CHAPTER 3: Working with Financial Statements
CHAPTER 4: Long-Term Financial Planning and Growth
CHAPTER 5: Introduction to Valuation: The Time Value of Money
CHAPTER 6: Discounted Cash Flow Valuation
CHAPTER 7: Interest Rates and Bond Valuation
CHAPTER 8: Stock Valuation
CHAPTER 9: Net Present Value and Other Investment Criteria
CHAPTER 10: Making Capital Investment Decisions
CHAPTER 11: Project Analysis and Evaluation
CHAPTER 12: Some Lessons from Capital Market History
CHAPTER 13: Return, Risk, And the Security Market Line
CHAPTER 14: Cost of Capital
CHAPTER 15: Raising Capital
CHAPTER 16: Financial Leverage and Capital Structure Policy
CHAPTER 17: Dividends and Payout Policy
CHAPTER 18: Short-Term Finance and Planning
CHAPTER 19: Cash and Liquidity Management
CHAPTER 20: Credit and Inventory Management
CHAPTER 21: International Corporate Finance
,CHAPTER 22: Behavioral Finance: Implications for Financial Manage
CHAPTER 23: Enterprise Risk Management
CHAPTER 24:Options and Corporate Finance
CHAPTER 25: Option Valuation
CHAPTER 26: Mergers and Acquisitions
CHAPTER 27: Leasing
CHAPTER 1
INTRODUCTION TO CORPORATEFINANCE
, Answers to Concepts Review and Critical Thinking Questions
1. Capital budgeting (deciding whether to expand a manufacturing plant),
capital structure (deciding whether to issue new equity and use the
proceeds to retire outstanding debt), and working capital management
(modifying the firm’s credit collection policy with its customers).
2. Disadvantages: unlimited liability, limited life, difficulty in transferring
ownership, hard to raise capital funds. Some advantages: simpler, less
regulation, the owners are also the managers, sometimes personal tax
rates are better than corporate tax rates.
3. The primary disadvantage of the corporate form is the double taxation
to shareholders of distributed earnings and dividends. Some advantages
include: limited liability, ease of transferability, ability to raise capital,
unlimited life, and so forth.
4. In response to Sarbanes-Oxley, small firms have elected to go dark
because of the costs of compliance. The costs to comply with Sarbox can
be several million dollars, which can be a large percentage of a small
firms profits. A major cost of going dark is less access to capital. Since
thefirm is no longer publicly traded, it can no longer raise money in the
public market. Although the company will still have access to bank loans
and the private equity market, the costs associated with raising funds in
these markets are usually higher than the costs of raising funds in the
public market.
5. The treasurer’s office and the controller’s office are the two primary
organizational groups that report directly to the chief financial officer.
The controller’s office handles cost and financial accounting, tax
management, and management information systems, while the
treasurer’s office is responsible for cash and credit management,
capital budgeting, and financial planning. Therefore, the study of
corporate finance is concentrated within the treasury group’s functions.
6. To maximize the current market value (share price) of the equity of the
firm (whether it’s publicly- traded or not).
7. In the corporate form of ownership, the shareholders are the owners of
the firm. The shareholders elect the directors of the corporation, who in
turn appoint the firm’s management. This separation of ownership from
control in the corporate form of organization is what causes agency
