Solution manual for principles of
uuu uuu u u
u corporate finance 14th edition by
u u u u u
richard Brealey, stewart myers, fr
u u u u
anklin allen
u
PDF FORMAT u
u
u
, CHAPTERu1
IntroductionutouCorporateuFinance
Theuvaluesushownuinutheusolutionsumayubeuroundeduforudisplayupurposes.uHowever,utheuanswersuwereuderiv
eduusinguauspreadsheetuwithoutuanyuintermediateurounding.
AnswersutouProblemuSets
1. a. realu
b. executiveuairplanesu
c. brandunamesu
d. financialu
e. bondsu
*f. investmentuorucapitaluexpenditureu
*g.
capitalubudgetinguoruinvestment
uh. financingu
*Noteuthatufuanduguareuinterchangeableuinutheuquestion.u
Estutime:u01-05
2. Autrademark,uaufactory,uundevelopeduland,uanduyouruworkuforceu(c,ud,ue,uandug)uareuallurealuassets.u
Realuassetsuareuidentifiableuasuitemsuwithuintrinsicuvalue.uTheuothersuinutheulistuareufinancialuassets,
uthatu is,utheseuassetsuderiveu valueubecauseu ofuaucontractual uclaim.u
Estutime:u01-05
3. a.
Financialuassets,usuchuasustocksuorubankuloans,uareuclaimsuheldubyuinvestors.uCorpo
rationsusellufinancialuassetsutouraiseutheucashutouinvestuinurealuassetsusuchuasuplantuandue
quipment.uSomeurealuassetsuareuintangible.u
b. Capitaluexpenditureumeansuinvestmentuinurealuassets.uFinancingumeansuraisingutheucash
uforuthisuinvestment.u
c. Theusharesuofupublicucorporationsuareutradeduonustockuexchangesuanducanubeupurchasedu
byuauwideurangeuofuinvestors.uTheusharesuofucloselyuhelducorporationsuareunotupubliclyutra
deduanduareuheldubyuausmallugroupuofuprivateuinvestors.u
d. Unlimiteduliability:uInvestorsuareuresponsibleuforuallutheufirm‘sudebts.uAusoleuproprietoruhas
uunlimiteduliability.uInvestorsuinucorporationsuhaveulimiteduliability.uTheyucanuloseutheiruinv
estment,ubutunoumore.u
Estutime:u01-05
u
, 4. Itemsucuanduduapplyutoucorporations.uBecauseucorporationsuhaveuperpetualulife,uownershipucanube
utransferreduwithoutuaffectinguoperations,uandumanagersucanubeufireduwithunoueffectuonuownership.
uOtheruformsu ofubusinessumayuhaveuunlimiteduliabilityuandulimitedulife.u
Estutime:u01-05
5. Separationuofuownershipufacilitatesutheukeyuattributesuofuaucorporation,uincludingulimiteduliabilityufor
uinvestors,utransferabilityuofuownership,uauseparateulegalupersonalityuofutheucorporation,uandudeleg
ateducentralizedumanagement.uTheseufouruattributesuprovideusubstantialubenefituforuinvestors,uincl
udingutheuabilityutou diversifyutheiruinvestmentuamongu manyuuncorrelatedureturns—
auveryuvaluableutooluexploreduinulateruchapters.uAlso,utheseuattributesuallowuinvestorsutouquicklyuexi
t,uenter,uorushortuselluanuinvestment,utherebyugeneratinguanuactiveuliquidumarketuforucorporations.u
However,utheseupositiveuaspectsualsouintroduceusubstantialunegativeuexternalitiesuasuwell.uTheusep
arationuofuownershipufromumanagementutypicallyuleadsutouagencyuproblems,uwhereumanagersupref
erutouconsumeuprivateuperksu orumakeuotherudecisionsuforutheiruprivateubenefit—
ratheruthanumaximizeushareholderuwealth.uShareholdersutendutouexerciseulessuoversightuofueachuin
dividualuinvestmentuasutheirudiversificationuincreases.uFinally,utheucorporation‘suseparateulegalupers
onalityumakesuitudifficultutouenforceuaccountabilityuifutheyuexternalizeucostsuontousociety.u
Estutime:u01-05
6. Shareholdersuwilluonlyuvoteutoumaximizeushareholderuwealth.uShareholdersucanumodifyutheirup
atternuofuconsumptionuthroughuborrowinguandulending,umatchuriskupreferences,uanduhopefullyu
balanceutheiruownucheckbooksu(oruhireuauqualifieduprofessionalutouhelputhemuwithutheseutasks).u
Estutime:u01-05
7. Ifutheuinvestmentuincreasesutheufirm‘suwealth,uituincreasesutheufirm‘sushareuvalue.uMs.uEspinoza
ucoulduthenusellusomeuoruallutheseumoreuvaluableu sharesutouprovideuforuheruretirementuincome.u
Estutime:u01-05
8. a.
Assuminguthatutheuencabulatorumarketuisurisky,uanu8%uexpecteduretur
nuonutheuF&Huencabulatoruinvestmentsumayubeuinferiorutouau4%ureturnuonu
U.S.u
governmentusecurities,udependinguonutheurelativeuriskubetweenutheutwouassets.u
b.
UnlessutheufinancialuassetsuareuasusafeuasuU.S.ugovernmentusecurities,utheirucostuofuca
pitaluwouldubeuhigher.uTheuCFOucoulduconsideruexpectedureturnsuonuassetsuwithusimilaruris
k.u
Estutime:u06-10
9. Managersuwoulduactuinushareholders‘uinterestsubecauseutheyuhaveuaulegaludutyutouactuinutheiruintere
sts.u Managersumayualsoureceiveu compensation—
ubonuses,ustock,u andu optionupayoutsu withuvalueutiedu(roughly)utoufirmuperformance.uManagersumayu
fearupersonalureputationaludamageufromunotuactinguinushareholders‘uinterests.uAndumanagersucanub
eufiredubyutheuboarduofudirectorsu(electedubyushareholders).u Ifumanagersu stillufailutou actu inusharehol
ders‘uinterests,u shareholdersumayusellutheirushares,uloweringutheustockupriceuandupotentiallyucreatin
gutheupossibilityuofuautakeover,uwhichucanuagainuleadutouchangesuinutheuboarduofu directorsuanduseni
u
, orumanagement.u
Estutime:u01-05
u
uuu uuu u u
u corporate finance 14th edition by
u u u u u
richard Brealey, stewart myers, fr
u u u u
anklin allen
u
PDF FORMAT u
u
u
, CHAPTERu1
IntroductionutouCorporateuFinance
Theuvaluesushownuinutheusolutionsumayubeuroundeduforudisplayupurposes.uHowever,utheuanswersuwereuderiv
eduusinguauspreadsheetuwithoutuanyuintermediateurounding.
AnswersutouProblemuSets
1. a. realu
b. executiveuairplanesu
c. brandunamesu
d. financialu
e. bondsu
*f. investmentuorucapitaluexpenditureu
*g.
capitalubudgetinguoruinvestment
uh. financingu
*Noteuthatufuanduguareuinterchangeableuinutheuquestion.u
Estutime:u01-05
2. Autrademark,uaufactory,uundevelopeduland,uanduyouruworkuforceu(c,ud,ue,uandug)uareuallurealuassets.u
Realuassetsuareuidentifiableuasuitemsuwithuintrinsicuvalue.uTheuothersuinutheulistuareufinancialuassets,
uthatu is,utheseuassetsuderiveu valueubecauseu ofuaucontractual uclaim.u
Estutime:u01-05
3. a.
Financialuassets,usuchuasustocksuorubankuloans,uareuclaimsuheldubyuinvestors.uCorpo
rationsusellufinancialuassetsutouraiseutheucashutouinvestuinurealuassetsusuchuasuplantuandue
quipment.uSomeurealuassetsuareuintangible.u
b. Capitaluexpenditureumeansuinvestmentuinurealuassets.uFinancingumeansuraisingutheucash
uforuthisuinvestment.u
c. Theusharesuofupublicucorporationsuareutradeduonustockuexchangesuanducanubeupurchasedu
byuauwideurangeuofuinvestors.uTheusharesuofucloselyuhelducorporationsuareunotupubliclyutra
deduanduareuheldubyuausmallugroupuofuprivateuinvestors.u
d. Unlimiteduliability:uInvestorsuareuresponsibleuforuallutheufirm‘sudebts.uAusoleuproprietoruhas
uunlimiteduliability.uInvestorsuinucorporationsuhaveulimiteduliability.uTheyucanuloseutheiruinv
estment,ubutunoumore.u
Estutime:u01-05
u
, 4. Itemsucuanduduapplyutoucorporations.uBecauseucorporationsuhaveuperpetualulife,uownershipucanube
utransferreduwithoutuaffectinguoperations,uandumanagersucanubeufireduwithunoueffectuonuownership.
uOtheruformsu ofubusinessumayuhaveuunlimiteduliabilityuandulimitedulife.u
Estutime:u01-05
5. Separationuofuownershipufacilitatesutheukeyuattributesuofuaucorporation,uincludingulimiteduliabilityufor
uinvestors,utransferabilityuofuownership,uauseparateulegalupersonalityuofutheucorporation,uandudeleg
ateducentralizedumanagement.uTheseufouruattributesuprovideusubstantialubenefituforuinvestors,uincl
udingutheuabilityutou diversifyutheiruinvestmentuamongu manyuuncorrelatedureturns—
auveryuvaluableutooluexploreduinulateruchapters.uAlso,utheseuattributesuallowuinvestorsutouquicklyuexi
t,uenter,uorushortuselluanuinvestment,utherebyugeneratinguanuactiveuliquidumarketuforucorporations.u
However,utheseupositiveuaspectsualsouintroduceusubstantialunegativeuexternalitiesuasuwell.uTheusep
arationuofuownershipufromumanagementutypicallyuleadsutouagencyuproblems,uwhereumanagersupref
erutouconsumeuprivateuperksu orumakeuotherudecisionsuforutheiruprivateubenefit—
ratheruthanumaximizeushareholderuwealth.uShareholdersutendutouexerciseulessuoversightuofueachuin
dividualuinvestmentuasutheirudiversificationuincreases.uFinally,utheucorporation‘suseparateulegalupers
onalityumakesuitudifficultutouenforceuaccountabilityuifutheyuexternalizeucostsuontousociety.u
Estutime:u01-05
6. Shareholdersuwilluonlyuvoteutoumaximizeushareholderuwealth.uShareholdersucanumodifyutheirup
atternuofuconsumptionuthroughuborrowinguandulending,umatchuriskupreferences,uanduhopefullyu
balanceutheiruownucheckbooksu(oruhireuauqualifieduprofessionalutouhelputhemuwithutheseutasks).u
Estutime:u01-05
7. Ifutheuinvestmentuincreasesutheufirm‘suwealth,uituincreasesutheufirm‘sushareuvalue.uMs.uEspinoza
ucoulduthenusellusomeuoruallutheseumoreuvaluableu sharesutouprovideuforuheruretirementuincome.u
Estutime:u01-05
8. a.
Assuminguthatutheuencabulatorumarketuisurisky,uanu8%uexpecteduretur
nuonutheuF&Huencabulatoruinvestmentsumayubeuinferiorutouau4%ureturnuonu
U.S.u
governmentusecurities,udependinguonutheurelativeuriskubetweenutheutwouassets.u
b.
UnlessutheufinancialuassetsuareuasusafeuasuU.S.ugovernmentusecurities,utheirucostuofuca
pitaluwouldubeuhigher.uTheuCFOucoulduconsideruexpectedureturnsuonuassetsuwithusimilaruris
k.u
Estutime:u06-10
9. Managersuwoulduactuinushareholders‘uinterestsubecauseutheyuhaveuaulegaludutyutouactuinutheiruintere
sts.u Managersumayualsoureceiveu compensation—
ubonuses,ustock,u andu optionupayoutsu withuvalueutiedu(roughly)utoufirmuperformance.uManagersumayu
fearupersonalureputationaludamageufromunotuactinguinushareholders‘uinterests.uAndumanagersucanub
eufiredubyutheuboarduofudirectorsu(electedubyushareholders).u Ifumanagersu stillufailutou actu inusharehol
ders‘uinterests,u shareholdersumayusellutheirushares,uloweringutheustockupriceuandupotentiallyucreatin
gutheupossibilityuofuautakeover,uwhichucanuagainuleadutouchangesuinutheuboarduofu directorsuanduseni
u
, orumanagement.u
Estutime:u01-05
u
