T his Is A T est Bank Of T est (Study Questions ) T o Help You P repare F or T he T ests
T o Clarify, T his Is A T est Bank , N ot A T extbook You Have Im m ediate
Access T o Download Your T est Bank .
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Receive A F ull Bank Of T ests , In Other Words, All Chapters Will Be T here.
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Is Required T o Download T hem .
Solutions Manual
Fundamentals Of Corporate Finance 13th Edition Ross, Westerfield, And Jordan
Prepared By
Brad Jordan
University Of Florida
Joe Smolira
Belmont University
,CHAP TER 1
IN T RODUCTION TO CORPORATEFINANCE
Answers T o 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,
Difficulty In Raising 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, And Unlimited Life.
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 Firm‗S Profits. A Major Cost Of Going Dark Is Less Access
To Capital. Since The Firm 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 Problems To Exist. Management May Act In Its Own Or
Someone Else‗S Best Interests, Rather Than Those Of The Shareholders. If Such Events Occur,
They May Contradict The Goal Of Maximizing The Share Price Of The Equity Of The Firm.
8. A Primary Market Transaction.
,BESTSOLUTIONS1
9. In Auction Markets Like The NYSE, Brokers And Agents Meet At A Physical Location (The
Exchange) To Match Buyers And Sellers Of Assets. Dealer Markets Like NASDAQ Consist Of
Dealers Operating At Dispersed Locales Who Buy And Sell Assets Themselves, Communicating
With Other Dealers Either Electronically Or Literally Over-The-Counter.
10. Such Organizations Frequently Pursue Social Or Political Missions, So Many Different Goals
Are Conceivable. One Goal That Is Often Cited Is Revenue Minimization; That Is, Provide
Whatever Goods And Services Are Offered At The Lowest Possible Cost To Society. A Better
Approach Might Be To Observe That Even A Not-For-Profit Business Has Equity. Thus, One
Answer Is That The Appropriate Goal Is To Maximize The Value Of The Equity.
11. Presumably, The Current Stock Value Reflects The Risk, Timing, And Magnitude Of All Future
Cash Flows, Both Short-Term And Long-Term. If This Is Correct, Then The Statement Is False.
12. An Argument Can Be Made Either Way. At The One Extreme, We Could Argue That In A
Market Economy, All Of These Things Are Priced. There Is Thus An Optimal Level Of, For
Example, Ethical And/Or Illegal Behavior, And The Framework Of Stock Valuation Explicitly
Includes These. At The Other Extreme, We Could Argue That These Are Noneconomic
Phenomena And Are Best Handled Through The Political Process. A Classic (And Highly
Relevant) Thought Question That Illustrates This Debate Goes Something Like This: ―A Firm
Has Estimated That The Cost Of Improving The Safety Of One Of Its Products Is $30 Million.
However, The Firm Believes That Improving The Safety Of The Product Will Only Save $20
Million In Product Liability Claims. What Should The Firm Do?‖
13. The Goal Will Be The Same, But The Best Course Of Action Toward That Goal May Be
Different Because Of Differing Social, Political, And Economic Institutions.
14. The Goal Of Management Should Be To Maximize The Share Price For The Current
Shareholders. If Management Believes That It Can Improve The Profitability Of The Firm So
That The Share Price Will Exceed $35, Then They Should Fight The Offer From The Outside
Company. If Management Believes That This Bidder Or Other Unidentified Bidders Will
Actually Pay More Than $35 Per Share To Acquire The Company, Then They Should Still Fight
The Offer. However, If The Current Management Cannot Increase The Value Of The Firm
Beyond The Bid Price, And No Other Higher Bids Come In, Then Management Is Not Acting In
The Interests Of The Shareholders By Fighting The Offer. Since Current Managers Often Lose
Their Jobs When The Corporation Is Acquired, Poorly Monitored Managers Have An Incentive
To Fight Corporate Takeovers In Situations Such As This.
15. We Would Expect Agency Problems To Be Less Severe In Countries With A Relatively Small
Percentage Of Individual Ownership. Fewer Individual Owners Should Reduce The Number Of
Diverse Opinions Concerning Corporate Goals. The High Percentage Of Institutional Ownership
Might Lead To A Higher Degree Of Agreement Between Owners And Managers On Decisions
Concerning Risky Projects. In Addition, Institutions May Be Better Able To Implement Effective
Monitoring Mechanisms On Managers Than Can Individual Owners, Based On The Institutions‗
Deeper Resources And Experiences With Their Own Management. The Increase In Institutional
Ownership Of Stock In The United States And The Growing Activism Of These Large
Shareholder Groups May Lead To A Reduction In Agency Problems For
U.S. Corporations And A More Efficient Market For Corporate Control.
, CHAPTER 2 - 3
16. How Much Is Too Much? Who Is Worth More, Mark Parker Or Lebron James? The Simplest
Answer Is That There Is A Market For Executives Just As There Is For All Types Of Labor.
Executive Compensation Is The Price That Clears The Market. The Same Is True For Athletes
And Performers. Having Said That, One Aspect Of Executive Compensation Deserves
Comment. A Primary Reason Executive Compensation Has Grown So Dramatically Is That
Companies Have Increasingly Moved To Stock-Based Compensation. Such Movement Is
Obviously Consistent With The Attempt To Better Align Stockholder And Management
Interests. In Recent Years, Stock Prices Have Soared, So Management Has Cleaned Up. It Is
Sometimes Argued That Much Of This Reward Is Due To Rising Stock Prices In General, Not
Managerial Performance. Perhaps In The Future, Executive Compensation Will Be Designed To
Reward Only Differential Performance, That Is, Stock Price Increases In Excess Of General
Market Increases.
CHAP TER 2
F IN ANCIAL STATEMENTS, T AXES, ANDCASH F LOW
Answers T o Concepts Review And Critical Thinking Questions
1. Liquidity Measures How Quickly And Easily An Asset Can Be Converted To Cash Without
Significant Loss In Value. It‗S Desirable For Firms To Have High Liquidity So That They Have
A Large Factor Of Safety In Meeting Short-Term Creditor Demands. However, Since Liquidity
Also Has An Opportunity Cost Associated With It—Namely That Higher Returns Can
Generally Be Found By Investing The Cash Into Productive Assets—Low Liquidity Levels Are
Also Desirable To The Firm. It‗S Up To The Firm‗S Financial Management Staff To Find A
Reasonable Compromise Between These Opposing Needs.
2. The Recognition And Matching Principles In Financial Accounting Call For Revenues, And The
Costs Associated With Producing Those Revenues, To Be ―Booked‖ When The Revenue Process
Is Essentially Complete, Not Necessarily When The Cash Is Collected Or Bills Are Paid. Note
That This Way Is Not Necessarily Correct; It‗S The Way Accountants Have Chosen To Do It.
3. Historical Costs Can Be Objectively And Precisely Measured Whereas Market Values Can Be
Difficult To Estimate, And Different Analysts Would Come Up With Different Numbers. Thus,
There Is A Trade-Off Between Relevance (Market Values) And Objectivity (Book Values).
4. Depreciation Is A Noncash Deduction That Reflects Adjustments Made In Asset Book Values In
Accordance With The Matching Principle In Financial Accounting. Interest Expense Is A Cash
Outlay, But It‗S A Financing Cost, Not An Operating Cost.
5. Market Values Can Never Be Negative. Imagine A Share Of Stock Selling For –$20. This
Would Mean That If You Placed An Order For 100 Shares, You Would Get The Stock Along
With A Check For $2,000. How Many Shares Do You Want To Buy? More Generally, Because Of
Corporate And Individual Bankruptcy Laws, Net Worth For A Person Or A Corporation Cannot
Be Negative, Implying That Liabilities Cannot Exceed Assets In Market Value.
T o Clarify, T his Is A T est Bank , N ot A T extbook You Have Im m ediate
Access T o Download Your T est Bank .
N o Delays In L oading Is F ast And Instant Im m ediately After P urchase ! You Will
Receive A F ull Bank Of T ests , In Other Words, All Chapters Will Be T here.
T est Banks Are P resented In P DF F orm at T herefore , N o Special Software
Is Required T o Download T hem .
Solutions Manual
Fundamentals Of Corporate Finance 13th Edition Ross, Westerfield, And Jordan
Prepared By
Brad Jordan
University Of Florida
Joe Smolira
Belmont University
,CHAP TER 1
IN T RODUCTION TO CORPORATEFINANCE
Answers T o 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,
Difficulty In Raising 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, And Unlimited Life.
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 Firm‗S Profits. A Major Cost Of Going Dark Is Less Access
To Capital. Since The Firm 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 Problems To Exist. Management May Act In Its Own Or
Someone Else‗S Best Interests, Rather Than Those Of The Shareholders. If Such Events Occur,
They May Contradict The Goal Of Maximizing The Share Price Of The Equity Of The Firm.
8. A Primary Market Transaction.
,BESTSOLUTIONS1
9. In Auction Markets Like The NYSE, Brokers And Agents Meet At A Physical Location (The
Exchange) To Match Buyers And Sellers Of Assets. Dealer Markets Like NASDAQ Consist Of
Dealers Operating At Dispersed Locales Who Buy And Sell Assets Themselves, Communicating
With Other Dealers Either Electronically Or Literally Over-The-Counter.
10. Such Organizations Frequently Pursue Social Or Political Missions, So Many Different Goals
Are Conceivable. One Goal That Is Often Cited Is Revenue Minimization; That Is, Provide
Whatever Goods And Services Are Offered At The Lowest Possible Cost To Society. A Better
Approach Might Be To Observe That Even A Not-For-Profit Business Has Equity. Thus, One
Answer Is That The Appropriate Goal Is To Maximize The Value Of The Equity.
11. Presumably, The Current Stock Value Reflects The Risk, Timing, And Magnitude Of All Future
Cash Flows, Both Short-Term And Long-Term. If This Is Correct, Then The Statement Is False.
12. An Argument Can Be Made Either Way. At The One Extreme, We Could Argue That In A
Market Economy, All Of These Things Are Priced. There Is Thus An Optimal Level Of, For
Example, Ethical And/Or Illegal Behavior, And The Framework Of Stock Valuation Explicitly
Includes These. At The Other Extreme, We Could Argue That These Are Noneconomic
Phenomena And Are Best Handled Through The Political Process. A Classic (And Highly
Relevant) Thought Question That Illustrates This Debate Goes Something Like This: ―A Firm
Has Estimated That The Cost Of Improving The Safety Of One Of Its Products Is $30 Million.
However, The Firm Believes That Improving The Safety Of The Product Will Only Save $20
Million In Product Liability Claims. What Should The Firm Do?‖
13. The Goal Will Be The Same, But The Best Course Of Action Toward That Goal May Be
Different Because Of Differing Social, Political, And Economic Institutions.
14. The Goal Of Management Should Be To Maximize The Share Price For The Current
Shareholders. If Management Believes That It Can Improve The Profitability Of The Firm So
That The Share Price Will Exceed $35, Then They Should Fight The Offer From The Outside
Company. If Management Believes That This Bidder Or Other Unidentified Bidders Will
Actually Pay More Than $35 Per Share To Acquire The Company, Then They Should Still Fight
The Offer. However, If The Current Management Cannot Increase The Value Of The Firm
Beyond The Bid Price, And No Other Higher Bids Come In, Then Management Is Not Acting In
The Interests Of The Shareholders By Fighting The Offer. Since Current Managers Often Lose
Their Jobs When The Corporation Is Acquired, Poorly Monitored Managers Have An Incentive
To Fight Corporate Takeovers In Situations Such As This.
15. We Would Expect Agency Problems To Be Less Severe In Countries With A Relatively Small
Percentage Of Individual Ownership. Fewer Individual Owners Should Reduce The Number Of
Diverse Opinions Concerning Corporate Goals. The High Percentage Of Institutional Ownership
Might Lead To A Higher Degree Of Agreement Between Owners And Managers On Decisions
Concerning Risky Projects. In Addition, Institutions May Be Better Able To Implement Effective
Monitoring Mechanisms On Managers Than Can Individual Owners, Based On The Institutions‗
Deeper Resources And Experiences With Their Own Management. The Increase In Institutional
Ownership Of Stock In The United States And The Growing Activism Of These Large
Shareholder Groups May Lead To A Reduction In Agency Problems For
U.S. Corporations And A More Efficient Market For Corporate Control.
, CHAPTER 2 - 3
16. How Much Is Too Much? Who Is Worth More, Mark Parker Or Lebron James? The Simplest
Answer Is That There Is A Market For Executives Just As There Is For All Types Of Labor.
Executive Compensation Is The Price That Clears The Market. The Same Is True For Athletes
And Performers. Having Said That, One Aspect Of Executive Compensation Deserves
Comment. A Primary Reason Executive Compensation Has Grown So Dramatically Is That
Companies Have Increasingly Moved To Stock-Based Compensation. Such Movement Is
Obviously Consistent With The Attempt To Better Align Stockholder And Management
Interests. In Recent Years, Stock Prices Have Soared, So Management Has Cleaned Up. It Is
Sometimes Argued That Much Of This Reward Is Due To Rising Stock Prices In General, Not
Managerial Performance. Perhaps In The Future, Executive Compensation Will Be Designed To
Reward Only Differential Performance, That Is, Stock Price Increases In Excess Of General
Market Increases.
CHAP TER 2
F IN ANCIAL STATEMENTS, T AXES, ANDCASH F LOW
Answers T o Concepts Review And Critical Thinking Questions
1. Liquidity Measures How Quickly And Easily An Asset Can Be Converted To Cash Without
Significant Loss In Value. It‗S Desirable For Firms To Have High Liquidity So That They Have
A Large Factor Of Safety In Meeting Short-Term Creditor Demands. However, Since Liquidity
Also Has An Opportunity Cost Associated With It—Namely That Higher Returns Can
Generally Be Found By Investing The Cash Into Productive Assets—Low Liquidity Levels Are
Also Desirable To The Firm. It‗S Up To The Firm‗S Financial Management Staff To Find A
Reasonable Compromise Between These Opposing Needs.
2. The Recognition And Matching Principles In Financial Accounting Call For Revenues, And The
Costs Associated With Producing Those Revenues, To Be ―Booked‖ When The Revenue Process
Is Essentially Complete, Not Necessarily When The Cash Is Collected Or Bills Are Paid. Note
That This Way Is Not Necessarily Correct; It‗S The Way Accountants Have Chosen To Do It.
3. Historical Costs Can Be Objectively And Precisely Measured Whereas Market Values Can Be
Difficult To Estimate, And Different Analysts Would Come Up With Different Numbers. Thus,
There Is A Trade-Off Between Relevance (Market Values) And Objectivity (Book Values).
4. Depreciation Is A Noncash Deduction That Reflects Adjustments Made In Asset Book Values In
Accordance With The Matching Principle In Financial Accounting. Interest Expense Is A Cash
Outlay, But It‗S A Financing Cost, Not An Operating Cost.
5. Market Values Can Never Be Negative. Imagine A Share Of Stock Selling For –$20. This
Would Mean That If You Placed An Order For 100 Shares, You Would Get The Stock Along
With A Check For $2,000. How Many Shares Do You Want To Buy? More Generally, Because Of
Corporate And Individual Bankruptcy Laws, Net Worth For A Person Or A Corporation Cannot
Be Negative, Implying That Liabilities Cannot Exceed Assets In Market Value.
