SOLUTIONS MANUAL
Fundamentals Of Corporate Finance
13th Edition Ross, Westerfield, And Jordan
Chapters 1 - 27
,CHAPTERg1:gIntroductiongtogCorporategFinance
CHAPTERg2:gFinancialgStatements,gTaxes,gAndgCashgFlow
CHAPTERg3:gWorkinggwithgFinancialgStatements
CHAPTERg4:gLong-TermgFinancialgPlanninggandgGrowth
CHAPTERg5:gIntroductiongtogValuation:gThegTimegValuegofgMoney
CHAPTERg6:gDiscountedgCashgFlowgValuation
CHAPTERg7:gInterestgRatesgandgBondgValuation
CHAPTERg8:gStockgValuation
CHAPTERg9:gNetgPresentgValuegandgOthergInvestmentgCriteria
CHAPTERg10:gMakinggCapitalgInvestmentgDecisions
CHAPTERg11:gProjectgAnalysisgandgEvaluation
CHAPTERg12:gSomegLessonsgfromgCapitalgMarketgHistory
CHAPTERg13:gReturn,gRisk,gAndgthegSecuritygMarketgLine
CHAPTERg14:gCostgofgCapital
CHAPTERg15:gRaisinggCapital
CHAPTERg16:gFinancialgLeveragegandgCapitalgStructuregPolicy
CHAPTERg17:gDividendsgandgPayoutgPolicy
CHAPTERg18:gShort-TermgFinancegandgPlanning
CHAPTERg19:gCashgandgLiquiditygManagement
CHAPTERg20:gCreditgandgInventorygManagement
CHAPTERg21:gInternationalgCorporategFinance
CHAPTERg22:gBehavioralgFinance:gImplicationsgforgFinancialgManage
CHAPTERg23:gEnterprisegRiskgManagement
CHAPTERg24:OptionsgandgCorporategFinance
CHAPTERg25:gOptiongValuation
CHAPTERg26:gMergersgandgAcquisitions
CHAPTERg27:gLeasing
,CHAPTER 1 g
INTRODUCTION TO CORPORATEFI g g g
NANCE
AnswersgtogConceptsgReviewgandgCriticalgThinkinggQuestions
1. Capitalgbudgetingg(decidinggwhethergtogexpandgagmanufacturinggplant),gcapitalgstructureg(decid
inggwhethergtogissuegnewgequitygandgusegthegproceedsgtogretiregoutstandinggdebt),gandgworkingg
capitalgmanagementg(modifyinggthegfirm’sgcreditgcollectiongpolicygwithgitsgcustomers).
2. Disadvantages:gunlimitedgliability,glimitedglife,gdifficultygingtransferringgownership,ghardgtograise
gcapitalgfunds.gSomegadvantages:gsimpler,glessgregulation,gthegownersgaregalsogthegmanagers,gso
metimesgpersonalgtaxgratesgaregbettergthangcorporategtaxgrates.
3. Thegprimarygdisadvantagegofgthegcorporategformgisgthegdoublegtaxationgtogshareholdersgofgdistri
butedgearningsgandgdividends.gSomegadvantagesginclude:glimitedgliability,geasegofgtransferability
,gabilitygtograisegcapital,gunlimitedglife,gandgsogforth.
4. IngresponsegtogSarbanes-
Oxley,gsmallgfirmsghavegelectedgtoggogdarkgbecausegofgthegcostsgofgcompliance.gThegcostsgtogco
mplygwithgSarboxgcangbegseveralgmilliongdollars,gwhichgcangbegaglargegpercentageg ofg ag smallg fir
msg profits.g Ag majorg costg ofg goingg darkg isg lessg accessg tog capital.g Sinceg thegfirmgisgnoglongergpubl
iclygtraded,gitgcangnoglongergraisegmoneygingthegpublicgmarket.gAlthoughgthegcompanygwillgstillgh
avegaccessgtogbankgloansgandgthegprivategequitygmarket,gthegcostsgassociatedgwithgraisinggfundsgi
ngthesegmarketsgaregusuallyghighergthangthegcostsgofgraisinggfundsgingthegpublicgmarket.
5. Theg treasurer’sg officeg andg theg controller’sg officeg areg theg twog primaryg organizationalg group
sg thatgreportgdirectlygtogthegchiefgfinancialgofficer.gThegcontroller’sgofficeghandlesgcostgandgfinanc
ialgaccounting,gtaxgmanagement,gandgmanagementginformationgsystems,gwhilegthegtreasurer’sgo
fficegisgresponsibleg forg cashg andg creditg management,g capitalg budgeting,g andg financialg plannin
g.g Therefore,gthegstudygofgcorporategfinancegisgconcentratedgwithingthegtreasuryggroup’sgfunctio
ns.
6. Togmaximizegthegcurrentgmarketgvalueg(sharegprice)gofgthegequitygofgthegfirmg(whethergit’sgpubli
cly-gtradedgorgnot).
7. Ingthegcorporategformgofgownership,gthegshareholdersgaregthegownersgofgthegfirm.gThegsharehol
dersgelectgthegdirectorsgofgthegcorporation,gwhogingturngappointgthegfirm’sgmanagement.gThisgse
parationgofgownershipgfromgcontrolgingthegcorporategformgofgorganizationgisgwhatgcausesgagenc
ygproblemsgtogexist.gManagementgmaygactgingitsgowngorgsomeonegelse’sgbestginterests,grathergtha
ngthosegofgthegshareholders.gIfgsuchgeventsgoccur,gtheygmaygcontradictgtheggoalgofgmaximizinggth
egsharegpricegofgthegequitygofgthegfirm.
8. Agprimarygmarketgtransaction.
, B-2g SOLUTIONS
9. IngauctiongmarketsglikegthegNYSE,gbrokersgandgagentsgmeetgatgagphysicalglocationg(thegexchange)
gtogmatchgbuyersgandgsellersgofgassets.gDealergmarketsglikegNASDAQgconsistgofgdealersgoperating
gatgdispersedglocalesgwhogbuygandgsellgassetsgthemselves,gcommunicatinggwithgothergdealersgeith
ergelectronicallygorgliterallygover-the-counter.
10. Suchgorganizationsgfrequentlygpursuegsocialgorgpoliticalgmissions,gsogmanygdifferentggoalsgaregco
nceivable.gOneggoalgthatgisgoftengcitedgisgrevenuegminimization;gi.e.,gprovidegwhateverggoodsga
ndgservicesgaregofferedgatgtheglowestgpossiblegcostgtogsociety.gAgbettergapproachgmightgbegtogobs
ervegthatgevengagnot-for-
profitgbusinessghasgequity.gThus,goneganswergisgthatgthegappropriateggoalgisg togmaximizegthegval
uegofgthegequity.
11. Presumably,gthegcurrentgstockgvaluegreflectsgthegrisk,gtiming,gandgmagnitudegofgallgfuturegcashgfl
ows,gbothgshort-termgandglong-term.gIfgthisgisgcorrect,gthengthegstatementgisgfalse.
12. Angargumentgcangbegmadegeithergway.gAtgthegonegextreme,gwegcouldgarguegthatgingagmarketgeco
nomy,gallgofgthesegthingsgaregpriced.gTheregisgthusgangoptimalglevelgof,gforgexample,gethicalgand/
orgillegalgbehavior,gandgthegframeworkgofgstockgvaluationgexplicitlygincludesgthese.gAtgthegother
gextreme,gwegcouldgarguegthatgthesegaregnon-
economicgphenomenagandgaregbestghandledgthroughgthegpoliticalgprocess.gAgclassicg(andghighlyg
relevant)gthoughtgquestiongthatgillustratesgthisgdebateggoesgsomethingglikegthis:g“Agfirmghasgesti
matedgthatgthegcostgofgimprovinggthegsafetygofgonegofgitsgproductsgisg$30gmillion.gHowever,gtheg
firmgbelievesgthatgimprovinggthegsafetygofgthegproductgwillgonlygsaveg$20gmilliongingproductglia
bilitygclaims.gWhatgshouldgthegfirmgdo?”
13. Theggoalgwillgbegthegsame,gbutgthegbestgcoursegofgactiongtowardgthatggoalgmaygbegdifferentgbeca
usegofgdifferinggsocial,gpolitical,gandgeconomicginstitutions.
14. Theggoalgofgmanagementgshouldgbegtogmaximizegthegsharegpricegforgthegcurrentgshareholders.gIfg
managementgbelievesgthatgitgcangimprovegthegprofitabilitygofgthegfirmgsogthatgthegsharegpricegwil
lgexceedg$35,gthengtheygshouldgfightgthegoffergfromgthegoutsidegcompany.gIfgmanagementgbeliev
esgthatgthisgbiddergorgothergunidentifiedgbiddersgwillgactuallygpaygmoregthang$35gpergsharegtogac
quiregthegcompany,gthengtheygshouldgstillgfightgthegoffer.gHowever,gifgthegcurrentgmanagementg
cannotgincreasegthegvaluegofgthegfirmgbeyondgthegbidgprice,gandgnogotherghighergbidsgcomegin,gt
hengmanagementgisgnotgactinggingtheginterestsgofgthegshareholdersgbygfightinggthegoffer.gSincegcur
rentgmanagersgoftenglosegtheirgjobsgwhengthegcorporationgisgacquired,gpoorlygmonitoredgmana
gersghavegangincentivegtogfightgcorporategtakeoversgingsituationsgsuchgasgthis.
15. Wegwouldgexpectgagencygproblemsgtogbeglessgseveregingothergcountries,gprimarilygduegtogthegrel
ativelygsmallgpercentagegofgindividualgownership.gFewergindividualgownersgshouldgreducegthegn
umbergofgdiversegopinionsgconcerninggcorporateggoals.gTheghighgpercentagegofginstitutionalgow
nershipgmightgleadgtogaghighergdegreegofgagreementgbetweengownersgandgmanagersgongdecision
sgconcerninggriskygprojects.gIngaddition,ginstitutionsgmaygbegbettergablegtogimplementgeffectiveg
monitoringgmechanismsgongmanagersgthangcangindividualgowners,gbasedgongtheginstitutions’gde
epergresourcesgandgexperiencesgwithgtheirgowngmanagement.gThegincreaseginginstitutionalgown
ershipgofgstockgingthegUnitedgStatesgandgtheggrowinggactivismgofgtheseglargegshareholderggroupsg
maygleadgtogagreductiongingagencygproblemsgforgU.S.gcorporationsgandgagmoregefficientgmarketgf
orgcorporategcontrol.
Fundamentals Of Corporate Finance
13th Edition Ross, Westerfield, And Jordan
Chapters 1 - 27
,CHAPTERg1:gIntroductiongtogCorporategFinance
CHAPTERg2:gFinancialgStatements,gTaxes,gAndgCashgFlow
CHAPTERg3:gWorkinggwithgFinancialgStatements
CHAPTERg4:gLong-TermgFinancialgPlanninggandgGrowth
CHAPTERg5:gIntroductiongtogValuation:gThegTimegValuegofgMoney
CHAPTERg6:gDiscountedgCashgFlowgValuation
CHAPTERg7:gInterestgRatesgandgBondgValuation
CHAPTERg8:gStockgValuation
CHAPTERg9:gNetgPresentgValuegandgOthergInvestmentgCriteria
CHAPTERg10:gMakinggCapitalgInvestmentgDecisions
CHAPTERg11:gProjectgAnalysisgandgEvaluation
CHAPTERg12:gSomegLessonsgfromgCapitalgMarketgHistory
CHAPTERg13:gReturn,gRisk,gAndgthegSecuritygMarketgLine
CHAPTERg14:gCostgofgCapital
CHAPTERg15:gRaisinggCapital
CHAPTERg16:gFinancialgLeveragegandgCapitalgStructuregPolicy
CHAPTERg17:gDividendsgandgPayoutgPolicy
CHAPTERg18:gShort-TermgFinancegandgPlanning
CHAPTERg19:gCashgandgLiquiditygManagement
CHAPTERg20:gCreditgandgInventorygManagement
CHAPTERg21:gInternationalgCorporategFinance
CHAPTERg22:gBehavioralgFinance:gImplicationsgforgFinancialgManage
CHAPTERg23:gEnterprisegRiskgManagement
CHAPTERg24:OptionsgandgCorporategFinance
CHAPTERg25:gOptiongValuation
CHAPTERg26:gMergersgandgAcquisitions
CHAPTERg27:gLeasing
,CHAPTER 1 g
INTRODUCTION TO CORPORATEFI g g g
NANCE
AnswersgtogConceptsgReviewgandgCriticalgThinkinggQuestions
1. Capitalgbudgetingg(decidinggwhethergtogexpandgagmanufacturinggplant),gcapitalgstructureg(decid
inggwhethergtogissuegnewgequitygandgusegthegproceedsgtogretiregoutstandinggdebt),gandgworkingg
capitalgmanagementg(modifyinggthegfirm’sgcreditgcollectiongpolicygwithgitsgcustomers).
2. Disadvantages:gunlimitedgliability,glimitedglife,gdifficultygingtransferringgownership,ghardgtograise
gcapitalgfunds.gSomegadvantages:gsimpler,glessgregulation,gthegownersgaregalsogthegmanagers,gso
metimesgpersonalgtaxgratesgaregbettergthangcorporategtaxgrates.
3. Thegprimarygdisadvantagegofgthegcorporategformgisgthegdoublegtaxationgtogshareholdersgofgdistri
butedgearningsgandgdividends.gSomegadvantagesginclude:glimitedgliability,geasegofgtransferability
,gabilitygtograisegcapital,gunlimitedglife,gandgsogforth.
4. IngresponsegtogSarbanes-
Oxley,gsmallgfirmsghavegelectedgtoggogdarkgbecausegofgthegcostsgofgcompliance.gThegcostsgtogco
mplygwithgSarboxgcangbegseveralgmilliongdollars,gwhichgcangbegaglargegpercentageg ofg ag smallg fir
msg profits.g Ag majorg costg ofg goingg darkg isg lessg accessg tog capital.g Sinceg thegfirmgisgnoglongergpubl
iclygtraded,gitgcangnoglongergraisegmoneygingthegpublicgmarket.gAlthoughgthegcompanygwillgstillgh
avegaccessgtogbankgloansgandgthegprivategequitygmarket,gthegcostsgassociatedgwithgraisinggfundsgi
ngthesegmarketsgaregusuallyghighergthangthegcostsgofgraisinggfundsgingthegpublicgmarket.
5. Theg treasurer’sg officeg andg theg controller’sg officeg areg theg twog primaryg organizationalg group
sg thatgreportgdirectlygtogthegchiefgfinancialgofficer.gThegcontroller’sgofficeghandlesgcostgandgfinanc
ialgaccounting,gtaxgmanagement,gandgmanagementginformationgsystems,gwhilegthegtreasurer’sgo
fficegisgresponsibleg forg cashg andg creditg management,g capitalg budgeting,g andg financialg plannin
g.g Therefore,gthegstudygofgcorporategfinancegisgconcentratedgwithingthegtreasuryggroup’sgfunctio
ns.
6. Togmaximizegthegcurrentgmarketgvalueg(sharegprice)gofgthegequitygofgthegfirmg(whethergit’sgpubli
cly-gtradedgorgnot).
7. Ingthegcorporategformgofgownership,gthegshareholdersgaregthegownersgofgthegfirm.gThegsharehol
dersgelectgthegdirectorsgofgthegcorporation,gwhogingturngappointgthegfirm’sgmanagement.gThisgse
parationgofgownershipgfromgcontrolgingthegcorporategformgofgorganizationgisgwhatgcausesgagenc
ygproblemsgtogexist.gManagementgmaygactgingitsgowngorgsomeonegelse’sgbestginterests,grathergtha
ngthosegofgthegshareholders.gIfgsuchgeventsgoccur,gtheygmaygcontradictgtheggoalgofgmaximizinggth
egsharegpricegofgthegequitygofgthegfirm.
8. Agprimarygmarketgtransaction.
, B-2g SOLUTIONS
9. IngauctiongmarketsglikegthegNYSE,gbrokersgandgagentsgmeetgatgagphysicalglocationg(thegexchange)
gtogmatchgbuyersgandgsellersgofgassets.gDealergmarketsglikegNASDAQgconsistgofgdealersgoperating
gatgdispersedglocalesgwhogbuygandgsellgassetsgthemselves,gcommunicatinggwithgothergdealersgeith
ergelectronicallygorgliterallygover-the-counter.
10. Suchgorganizationsgfrequentlygpursuegsocialgorgpoliticalgmissions,gsogmanygdifferentggoalsgaregco
nceivable.gOneggoalgthatgisgoftengcitedgisgrevenuegminimization;gi.e.,gprovidegwhateverggoodsga
ndgservicesgaregofferedgatgtheglowestgpossiblegcostgtogsociety.gAgbettergapproachgmightgbegtogobs
ervegthatgevengagnot-for-
profitgbusinessghasgequity.gThus,goneganswergisgthatgthegappropriateggoalgisg togmaximizegthegval
uegofgthegequity.
11. Presumably,gthegcurrentgstockgvaluegreflectsgthegrisk,gtiming,gandgmagnitudegofgallgfuturegcashgfl
ows,gbothgshort-termgandglong-term.gIfgthisgisgcorrect,gthengthegstatementgisgfalse.
12. Angargumentgcangbegmadegeithergway.gAtgthegonegextreme,gwegcouldgarguegthatgingagmarketgeco
nomy,gallgofgthesegthingsgaregpriced.gTheregisgthusgangoptimalglevelgof,gforgexample,gethicalgand/
orgillegalgbehavior,gandgthegframeworkgofgstockgvaluationgexplicitlygincludesgthese.gAtgthegother
gextreme,gwegcouldgarguegthatgthesegaregnon-
economicgphenomenagandgaregbestghandledgthroughgthegpoliticalgprocess.gAgclassicg(andghighlyg
relevant)gthoughtgquestiongthatgillustratesgthisgdebateggoesgsomethingglikegthis:g“Agfirmghasgesti
matedgthatgthegcostgofgimprovinggthegsafetygofgonegofgitsgproductsgisg$30gmillion.gHowever,gtheg
firmgbelievesgthatgimprovinggthegsafetygofgthegproductgwillgonlygsaveg$20gmilliongingproductglia
bilitygclaims.gWhatgshouldgthegfirmgdo?”
13. Theggoalgwillgbegthegsame,gbutgthegbestgcoursegofgactiongtowardgthatggoalgmaygbegdifferentgbeca
usegofgdifferinggsocial,gpolitical,gandgeconomicginstitutions.
14. Theggoalgofgmanagementgshouldgbegtogmaximizegthegsharegpricegforgthegcurrentgshareholders.gIfg
managementgbelievesgthatgitgcangimprovegthegprofitabilitygofgthegfirmgsogthatgthegsharegpricegwil
lgexceedg$35,gthengtheygshouldgfightgthegoffergfromgthegoutsidegcompany.gIfgmanagementgbeliev
esgthatgthisgbiddergorgothergunidentifiedgbiddersgwillgactuallygpaygmoregthang$35gpergsharegtogac
quiregthegcompany,gthengtheygshouldgstillgfightgthegoffer.gHowever,gifgthegcurrentgmanagementg
cannotgincreasegthegvaluegofgthegfirmgbeyondgthegbidgprice,gandgnogotherghighergbidsgcomegin,gt
hengmanagementgisgnotgactinggingtheginterestsgofgthegshareholdersgbygfightinggthegoffer.gSincegcur
rentgmanagersgoftenglosegtheirgjobsgwhengthegcorporationgisgacquired,gpoorlygmonitoredgmana
gersghavegangincentivegtogfightgcorporategtakeoversgingsituationsgsuchgasgthis.
15. Wegwouldgexpectgagencygproblemsgtogbeglessgseveregingothergcountries,gprimarilygduegtogthegrel
ativelygsmallgpercentagegofgindividualgownership.gFewergindividualgownersgshouldgreducegthegn
umbergofgdiversegopinionsgconcerninggcorporateggoals.gTheghighgpercentagegofginstitutionalgow
nershipgmightgleadgtogaghighergdegreegofgagreementgbetweengownersgandgmanagersgongdecision
sgconcerninggriskygprojects.gIngaddition,ginstitutionsgmaygbegbettergablegtogimplementgeffectiveg
monitoringgmechanismsgongmanagersgthangcangindividualgowners,gbasedgongtheginstitutions’gde
epergresourcesgandgexperiencesgwithgtheirgowngmanagement.gThegincreaseginginstitutionalgown
ershipgofgstockgingthegUnitedgStatesgandgtheggrowinggactivismgofgtheseglargegshareholderggroupsg
maygleadgtogagreductiongingagencygproblemsgforgU.S.gcorporationsgandgagmoregefficientgmarketgf
orgcorporategcontrol.
