lomoar cpsd| 5569839
solutions manual
fundamentals of corporate finance 12th edition
ross, westerfield, and jordan
06-15-2025
prepared by
brad jordan
university of kentucky
joe smolira
belmont university
,Chapter 1
Introduction To Corporate Finance
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, 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.
2 Solutions Manual
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.
, lOMoAR cPSD| 5569839
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 1 - 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.
, chapter 2
financial statements, taxes, and cash flow
answers to 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.
6. for a successful company that is rapidly expanding, for example, capital outlays will be large, possibly
leading to negative cash flow from assets. in general, what matters is whether the money is spent
wisely, not whether cash flow from assets is positive or negative.
7. it’s probably not a good sign for an established company, but it would be fairly ordinary for a startup,
so it depends.
8. for example, if a company were to become more efficient in inventory management, the amount of
inventory needed would decline. the same might be true if it becomes better at collecting its
receivables. in general, anything that leads to a decline in ending nwc relative to beginning would
have this effect. negative net capital spending would mean that more long-lived assets were liquidated
than purchased.
solutions manual
fundamentals of corporate finance 12th edition
ross, westerfield, and jordan
06-15-2025
prepared by
brad jordan
university of kentucky
joe smolira
belmont university
,Chapter 1
Introduction To Corporate Finance
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, 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.
2 Solutions Manual
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.
, lOMoAR cPSD| 5569839
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 1 - 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.
, chapter 2
financial statements, taxes, and cash flow
answers to 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.
6. for a successful company that is rapidly expanding, for example, capital outlays will be large, possibly
leading to negative cash flow from assets. in general, what matters is whether the money is spent
wisely, not whether cash flow from assets is positive or negative.
7. it’s probably not a good sign for an established company, but it would be fairly ordinary for a startup,
so it depends.
8. for example, if a company were to become more efficient in inventory management, the amount of
inventory needed would decline. the same might be true if it becomes better at collecting its
receivables. in general, anything that leads to a decline in ending nwc relative to beginning would
have this effect. negative net capital spending would mean that more long-lived assets were liquidated
than purchased.
