SOLUTIONS MANUAL
Corporate Finance: Core Principles and Applications 7th Edition
By Stephen A. Ross, Randolph W. Westerfield, Jeffrey Jaffe
N
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R
SE
D
O
C
S
, TABLE OF CONTENT
PART ONE: OVERVIEW
Chapter One: Introduction to Corporate Finance
Chapter Two: Financial Statements and Cash Flow
Chapter Three: Financial Statements Analysis and Financial Models
PART TWO: VALUATION AND CAPITAL BUDGETING
N
U
Chapter Four: Discounted Cash Flow Valuation
Chapter Five: Interest Rates and Bond Valuation
R
Chapter Six: Stock Valuation
SE
Chapter Seven: Net Present Value and Other Investment Rules
Chapter Eight: Making Capital Investment Decisions
D
Chapter Nine: Risk Analysis, Real Options, and Capital Budgeting
PART THREE: RISK AND RETURN
O
C
Chapter Ten: Risk and Return: Lessons from Market History
Chapter Eleven: Return and Risk: The Capital Asset Pricing Model (CAPM)
S
Chapter Twelve: Risk, Cost of Capital, and Valuation
PART FOUR: CAPITAL STRUCTURE AND DIVIDEND POLICY
Chapter Thirteen: Efficient Capital Markets and Behavioral Challenges
, Chapter Fourteen: Capital Structure: Basic Concepts
Chapter Fifteen: Capital Structure: Limits to the Use of Debt
Chapter Sixteen: Dividends and Other Payouts
PART FIVE: SPECIAL TOPICS
Chapter Seventeen: Options and Corporate Finance
N
Chapter Eighteen: Short-Term Finance and Planning
U
Chapter Nineteen: Raising Capital
R
Chapter Twenty: International Corporate Finance
SE
Chapter Twenty-One: Mergers and Acquisitions (web only)
D
O
C
S
, CHAPTER 1
INTRODUCTION TO CORPORATE FINANCE
Answers to Concept Questions
1. The three basic forms are sole proprietorships, partnerships, and corporations. Some
disadvantages of sole proprietorships and partnerships are unlimited liability, limited life,
N
difficulty in transferring ownership, and hard to raise capital funds. Some advantages are
simplicity, less regulation, the owners are also the managers, and sometimes personal tax
rates are better than corporate tax rates. The primary disadvantage of the corporate form is the
double taxation to shareholders on distributed earnings and dividends. Some advantages
U
include the following: limited liability, ease of transferability, ability to raise capital, and
unlimited life. When a business is started, most take the form of a sole proprietorship or
partnership because of the relative simplicity of starting these forms of businesses.
R
2. To maximize the current market value (share price) of the equity of the firm (whether it’s
publicly traded or not).
SE
3. 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.
D
4. 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
O
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.
C
5. 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.
6. An argument can be made either way. At the one extreme, we could argue that in a market
S
economy, all these things are priced. Thus, there is an optimal level of, for example, unethical
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?”
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw Hill LLC.
Corporate Finance: Core Principles and Applications 7th Edition
By Stephen A. Ross, Randolph W. Westerfield, Jeffrey Jaffe
N
U
R
SE
D
O
C
S
, TABLE OF CONTENT
PART ONE: OVERVIEW
Chapter One: Introduction to Corporate Finance
Chapter Two: Financial Statements and Cash Flow
Chapter Three: Financial Statements Analysis and Financial Models
PART TWO: VALUATION AND CAPITAL BUDGETING
N
U
Chapter Four: Discounted Cash Flow Valuation
Chapter Five: Interest Rates and Bond Valuation
R
Chapter Six: Stock Valuation
SE
Chapter Seven: Net Present Value and Other Investment Rules
Chapter Eight: Making Capital Investment Decisions
D
Chapter Nine: Risk Analysis, Real Options, and Capital Budgeting
PART THREE: RISK AND RETURN
O
C
Chapter Ten: Risk and Return: Lessons from Market History
Chapter Eleven: Return and Risk: The Capital Asset Pricing Model (CAPM)
S
Chapter Twelve: Risk, Cost of Capital, and Valuation
PART FOUR: CAPITAL STRUCTURE AND DIVIDEND POLICY
Chapter Thirteen: Efficient Capital Markets and Behavioral Challenges
, Chapter Fourteen: Capital Structure: Basic Concepts
Chapter Fifteen: Capital Structure: Limits to the Use of Debt
Chapter Sixteen: Dividends and Other Payouts
PART FIVE: SPECIAL TOPICS
Chapter Seventeen: Options and Corporate Finance
N
Chapter Eighteen: Short-Term Finance and Planning
U
Chapter Nineteen: Raising Capital
R
Chapter Twenty: International Corporate Finance
SE
Chapter Twenty-One: Mergers and Acquisitions (web only)
D
O
C
S
, CHAPTER 1
INTRODUCTION TO CORPORATE FINANCE
Answers to Concept Questions
1. The three basic forms are sole proprietorships, partnerships, and corporations. Some
disadvantages of sole proprietorships and partnerships are unlimited liability, limited life,
N
difficulty in transferring ownership, and hard to raise capital funds. Some advantages are
simplicity, less regulation, the owners are also the managers, and sometimes personal tax
rates are better than corporate tax rates. The primary disadvantage of the corporate form is the
double taxation to shareholders on distributed earnings and dividends. Some advantages
U
include the following: limited liability, ease of transferability, ability to raise capital, and
unlimited life. When a business is started, most take the form of a sole proprietorship or
partnership because of the relative simplicity of starting these forms of businesses.
R
2. To maximize the current market value (share price) of the equity of the firm (whether it’s
publicly traded or not).
SE
3. 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.
D
4. 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
O
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.
C
5. 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.
6. An argument can be made either way. At the one extreme, we could argue that in a market
S
economy, all these things are priced. Thus, there is an optimal level of, for example, unethical
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?”
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw Hill LLC.
