Solutions Manual Fundamentals of Corporate Finance
13th Edition Ross, Westerfield, and Jordan
Chapters 1 - 27
,CHAPTERJ1:JIntroductionJtoJCorporateJFinance
CHAPTERJ2:JFinancialJStatements,JTaxes,JAndJCashJFlow
CHAPTERJ3:JWorkingJwithJFinancialJStatements
CHAPTERJ4:JLong-TermJFinancialJPlanningJandJGrowth
CHAPTERJ5:JIntroductionJtoJValuation:JTheJTimeJValueJofJMoney
CHAPTERJ6:JDiscountedJCashJFlowJValuation
CHAPTERJ7:JInterestJRatesJandJBondJValuation
CHAPTERJ8:JStockJValuation
CHAPTERJ9:JNetJPresentJValueJandJOtherJInvestmentJCriteria
CHAPTERJ10:JMakingJCapitalJInvestmentJDecisions
CHAPTERJ11:JProjectJAnalysisJandJEvaluation
CHAPTERJ12:JSomeJLessonsJfromJCapitalJMarketJHistory
CHAPTERJ13:JReturn,JRisk,JAndJtheJSecurityJMarketJLine
CHAPTERJ14:JCostJofJCapital
CHAPTERJ15:JRaisingJCapital
CHAPTERJ16:JFinancialJLeverageJandJCapitalJStructureJPolicy
CHAPTERJ17:JDividendsJandJPayoutJPolicy
CHAPTERJ18:JShort-TermJFinanceJandJPlanning
CHAPTERJ19:JCashJandJLiquidityJManagement
CHAPTERJ20:JCreditJandJInventoryJManagement
CHAPTERJ21:JInternationalJCorporateJFinance
CHAPTERJ22:JBehavioralJFinance:JImplicationsJforJFinancialJManage
CHAPTERJ23:JEnterpriseJRiskJManagement
CHAPTERJ24:OptionsJandJCorporateJFinance
CHAPTERJ25:JOptionJValuation
CHAPTERJ26:JMergersJandJAcquisitions
CHAPTERJ27:JLeasing
,CHAPTER 1 J
INTRODUCTION TO CORPORATE J J J
FINANCE
AnswersJtoJConceptsJReviewJandJCriticalJThinkingJQuestions
1. CapitalJbudgetingJ(decidingJwhetherJtoJexpandJaJmanufacturingJplant),JcapitalJstructureJ(decidingJwhet
herJtoJissueJnewJequityJandJuseJtheJproceedsJtoJretireJoutstandingJdebt),JandJworkingJcapitalJmanageme
ntJ(modifyingJtheJfirm‘sJcreditJcollectionJpolicyJwithJitsJcustomers).
2. Disadvantages:JunlimitedJliability,JlimitedJlife,JdifficultyJinJtransferringJownership,JhardJtoJraiseJcapital
Jfunds.JSomeJadvantages:Jsimpler,JlessJregulation,JtheJownersJareJalsoJtheJmanagers,JsometimesJperson
alJtaxJratesJareJbetterJthanJcorporateJtaxJrates.
3. TheJprimaryJdisadvantageJofJtheJcorporateJformJisJtheJdoubleJtaxationJtoJshareholdersJofJdistributedJear
ningsJandJdividends.JSomeJadvantagesJinclude:JlimitedJliability,JeaseJofJtransferability,JabilityJtoJraiseJc
apital,JunlimitedJlife,JandJsoJforth.
4. InJresponseJtoJSarbanes-
Oxley,JsmallJfirmsJhaveJelectedJtoJgoJdarkJbecauseJofJtheJcostsJofJcompliance.JTheJcostsJtoJcomplyJwith
JSarboxJcanJbeJseveralJmillionJdollars,JwhichJcanJbeJaJlargeJpercentageJ ofJ aJ smallJ firmsJ profits.J AJ maj
orJ costJ ofJ goingJ darkJ isJ lessJ accessJ toJ capital.J SinceJ theJfirmJisJnoJlongerJpubliclyJtraded,JitJcanJnoJlong
erJraiseJmoneyJinJtheJpublicJmarket.JAlthoughJtheJcompanyJwillJstillJhaveJaccessJtoJbankJloansJandJtheJp
rivateJequityJmarket,JtheJcostsJassociatedJwithJraisingJfundsJinJtheseJmarketsJareJusuallyJhigherJthanJtheJ
costsJofJraisingJfundsJinJtheJpublicJmarket.
5. TheJ treasurer‘sJ officeJ andJ theJ controller‘sJ officeJ areJ theJ twoJ primaryJ organizationalJ groupsJ thatJre
portJdirectlyJtoJtheJchiefJfinancialJofficer.JTheJcontroller‘sJofficeJhandlesJcostJandJfinancialJaccounting,J
taxJmanagement,JandJmanagementJinformationJsystems,JwhileJtheJtreasurer‘sJofficeJisJresponsibleJ forJ
cashJ andJ creditJ management,J capitalJ budgeting,J andJ financialJ planning.J Therefore,JtheJstudyJofJcorpo
rateJfinanceJisJconcentratedJwithinJtheJtreasuryJgroup‘sJfunctions.
6. ToJmaximizeJtheJcurrentJmarketJvalueJ(shareJprice)JofJtheJequityJofJtheJfirmJ(whetherJit‘sJpublicly-
JtradedJorJnot).
7. InJtheJcorporateJformJofJownership,JtheJshareholdersJareJtheJownersJofJtheJfirm.JTheJshareholdersJelectJt
heJdirectorsJofJtheJcorporation,JwhoJinJturnJappointJtheJfirm‘sJmanagement.JThisJseparationJofJownershi
pJfromJcontrolJinJtheJcorporateJformJofJorganizationJisJwhatJcausesJagencyJproblemsJtoJexist.JManagem
entJmayJactJinJitsJownJorJsomeoneJelse‘sJbestJinterests,JratherJthanJthoseJofJtheJshareholders.JIfJsuchJeve
ntsJoccur,JtheyJmayJcontradictJtheJgoalJofJmaximizingJtheJshareJpriceJofJtheJequityJofJtheJfirm.
8. AJprimaryJmarketJtransaction.
, B-2J SOLUTIONS
9. InJauctionJmarketsJlikeJtheJNYSE,JbrokersJandJagentsJmeetJatJaJphysicalJlocationJ(theJexchange)JtoJmat
chJbuyersJandJsellersJofJassets.JDealerJmarketsJlikeJNASDAQJconsistJofJdealersJoperatingJatJdispersedJl
ocalesJwhoJbuyJandJsellJassetsJthemselves,JcommunicatingJwithJotherJdealersJeitherJelectronicallyJorJlit
erallyJover-the-counter.
10. SuchJorganizationsJfrequentlyJpursueJsocialJorJpoliticalJmissions,JsoJmanyJdifferentJgoalsJareJconceiva
ble.JOneJgoalJthatJisJoftenJcitedJisJrevenueJminimization;Ji.e.,JprovideJwhateverJgoodsJandJservicesJareJo
fferedJatJtheJlowestJpossibleJcostJtoJsociety.JAJbetterJapproachJmightJbeJtoJobserveJthatJevenJaJnot-for-
profitJbusinessJhasJequity.JThus,JoneJanswerJisJthatJtheJappropriateJgoalJisJ toJmaximizeJtheJvalueJofJtheJ
equity.
11. Presumably,JtheJcurrentJstockJvalueJreflectsJtheJrisk,Jtiming,JandJmagnitudeJofJallJfutureJcashJflows,Jbot
hJshort-termJandJlong-term.JIfJthisJisJcorrect,JthenJtheJstatementJisJfalse.
12. AnJargumentJcanJbeJmadeJeitherJway.JAtJtheJoneJextreme,JweJcouldJargueJthatJinJaJmarketJeconomy,JallJ
ofJtheseJthingsJareJpriced.JThereJisJthusJanJoptimalJlevelJof,JforJexample,JethicalJand/orJillegalJbehavior,J
andJtheJframeworkJofJstockJvaluationJexplicitlyJincludesJthese.JAtJtheJotherJextreme,JweJcouldJargueJtha
tJtheseJareJnon-
economicJphenomenaJandJareJbestJhandledJthroughJtheJpoliticalJprocess.JAJclassicJ(andJhighlyJrelevant)
JthoughtJquestionJthatJillustratesJthisJdebateJgoesJsomethingJlikeJthis:J―AJfirmJhasJestimatedJthatJtheJcost
JofJimprovingJtheJsafetyJofJoneJofJitsJproductsJisJ$30Jmillion.JHowever,JtheJfirmJbelievesJthatJimproving
JtheJsafetyJofJtheJproductJwillJonlyJsaveJ$20JmillionJinJproductJliabilityJclaims.JWhatJshouldJtheJfirmJdo
?‖
13. TheJgoalJwillJbeJtheJsame,JbutJtheJbestJcourseJofJactionJtowardJthatJgoalJmayJbeJdifferentJbecauseJofJdiff
eringJsocial,Jpolitical,JandJeconomicJinstitutions.
14. TheJgoalJofJmanagementJshouldJbeJtoJmaximizeJtheJshareJpriceJforJtheJcurrentJshareholders.JIfJmanage
mentJbelievesJthatJitJcanJimproveJtheJprofitabilityJofJtheJfirmJsoJthatJtheJshareJpriceJwillJexceedJ$35,Jthe
nJtheyJshouldJfightJtheJofferJfromJtheJoutsideJcompany.JIfJmanagementJbelievesJthatJthisJbidderJorJotherJ
unidentifiedJbiddersJwillJactuallyJpayJmoreJthanJ$35JperJshareJtoJacquireJtheJcompany,JthenJtheyJshould
JstillJfightJtheJoffer.JHowever,JifJtheJcurrentJmanagementJcannotJincreaseJtheJvalueJofJtheJfirmJbeyondJth
eJbidJprice,JandJnoJotherJhigherJbidsJcomeJin,JthenJmanagementJisJnotJactingJinJtheJinterestsJofJtheJshare
holdersJbyJfightingJtheJoffer.JSinceJcurrentJmanagersJoftenJloseJtheirJjobsJwhenJtheJcorporationJisJacqui
red,JpoorlyJmonitoredJmanagersJhaveJanJincentiveJtoJfightJcorporateJtakeoversJinJsituationsJsuchJasJthis.
15. WeJwouldJexpectJagencyJproblemsJtoJbeJlessJsevereJinJotherJcountries,JprimarilyJdueJtoJtheJrelativelyJsm
allJpercentageJofJindividualJownership.JFewerJindividualJownersJshouldJreduceJtheJnumberJofJdiverseJo
pinionsJconcerningJcorporateJgoals.JTheJhighJpercentageJofJinstitutionalJownershipJmightJleadJtoJaJhigh
erJdegreeJofJagreementJbetweenJownersJandJmanagersJonJdecisionsJconcerningJriskyJprojects.JInJadditi
on,JinstitutionsJmayJbeJbetterJableJtoJimplementJeffectiveJmonitoringJmechanismsJonJmanagersJthanJca
nJindividualJowners,JbasedJonJtheJinstitutions‘JdeeperJresourcesJandJexperiencesJwithJtheirJownJmanage
ment.JTheJincreaseJinJinstitutionalJownershipJofJstockJinJtheJUnitedJStatesJandJtheJgrowingJactivismJofJt
heseJlargeJshareholderJgroupsJmayJleadJtoJaJreductionJinJagencyJproblemsJforJU.S.JcorporationsJandJaJm
oreJefficientJmarketJforJcorporateJcontrol.
13th Edition Ross, Westerfield, and Jordan
Chapters 1 - 27
,CHAPTERJ1:JIntroductionJtoJCorporateJFinance
CHAPTERJ2:JFinancialJStatements,JTaxes,JAndJCashJFlow
CHAPTERJ3:JWorkingJwithJFinancialJStatements
CHAPTERJ4:JLong-TermJFinancialJPlanningJandJGrowth
CHAPTERJ5:JIntroductionJtoJValuation:JTheJTimeJValueJofJMoney
CHAPTERJ6:JDiscountedJCashJFlowJValuation
CHAPTERJ7:JInterestJRatesJandJBondJValuation
CHAPTERJ8:JStockJValuation
CHAPTERJ9:JNetJPresentJValueJandJOtherJInvestmentJCriteria
CHAPTERJ10:JMakingJCapitalJInvestmentJDecisions
CHAPTERJ11:JProjectJAnalysisJandJEvaluation
CHAPTERJ12:JSomeJLessonsJfromJCapitalJMarketJHistory
CHAPTERJ13:JReturn,JRisk,JAndJtheJSecurityJMarketJLine
CHAPTERJ14:JCostJofJCapital
CHAPTERJ15:JRaisingJCapital
CHAPTERJ16:JFinancialJLeverageJandJCapitalJStructureJPolicy
CHAPTERJ17:JDividendsJandJPayoutJPolicy
CHAPTERJ18:JShort-TermJFinanceJandJPlanning
CHAPTERJ19:JCashJandJLiquidityJManagement
CHAPTERJ20:JCreditJandJInventoryJManagement
CHAPTERJ21:JInternationalJCorporateJFinance
CHAPTERJ22:JBehavioralJFinance:JImplicationsJforJFinancialJManage
CHAPTERJ23:JEnterpriseJRiskJManagement
CHAPTERJ24:OptionsJandJCorporateJFinance
CHAPTERJ25:JOptionJValuation
CHAPTERJ26:JMergersJandJAcquisitions
CHAPTERJ27:JLeasing
,CHAPTER 1 J
INTRODUCTION TO CORPORATE J J J
FINANCE
AnswersJtoJConceptsJReviewJandJCriticalJThinkingJQuestions
1. CapitalJbudgetingJ(decidingJwhetherJtoJexpandJaJmanufacturingJplant),JcapitalJstructureJ(decidingJwhet
herJtoJissueJnewJequityJandJuseJtheJproceedsJtoJretireJoutstandingJdebt),JandJworkingJcapitalJmanageme
ntJ(modifyingJtheJfirm‘sJcreditJcollectionJpolicyJwithJitsJcustomers).
2. Disadvantages:JunlimitedJliability,JlimitedJlife,JdifficultyJinJtransferringJownership,JhardJtoJraiseJcapital
Jfunds.JSomeJadvantages:Jsimpler,JlessJregulation,JtheJownersJareJalsoJtheJmanagers,JsometimesJperson
alJtaxJratesJareJbetterJthanJcorporateJtaxJrates.
3. TheJprimaryJdisadvantageJofJtheJcorporateJformJisJtheJdoubleJtaxationJtoJshareholdersJofJdistributedJear
ningsJandJdividends.JSomeJadvantagesJinclude:JlimitedJliability,JeaseJofJtransferability,JabilityJtoJraiseJc
apital,JunlimitedJlife,JandJsoJforth.
4. InJresponseJtoJSarbanes-
Oxley,JsmallJfirmsJhaveJelectedJtoJgoJdarkJbecauseJofJtheJcostsJofJcompliance.JTheJcostsJtoJcomplyJwith
JSarboxJcanJbeJseveralJmillionJdollars,JwhichJcanJbeJaJlargeJpercentageJ ofJ aJ smallJ firmsJ profits.J AJ maj
orJ costJ ofJ goingJ darkJ isJ lessJ accessJ toJ capital.J SinceJ theJfirmJisJnoJlongerJpubliclyJtraded,JitJcanJnoJlong
erJraiseJmoneyJinJtheJpublicJmarket.JAlthoughJtheJcompanyJwillJstillJhaveJaccessJtoJbankJloansJandJtheJp
rivateJequityJmarket,JtheJcostsJassociatedJwithJraisingJfundsJinJtheseJmarketsJareJusuallyJhigherJthanJtheJ
costsJofJraisingJfundsJinJtheJpublicJmarket.
5. TheJ treasurer‘sJ officeJ andJ theJ controller‘sJ officeJ areJ theJ twoJ primaryJ organizationalJ groupsJ thatJre
portJdirectlyJtoJtheJchiefJfinancialJofficer.JTheJcontroller‘sJofficeJhandlesJcostJandJfinancialJaccounting,J
taxJmanagement,JandJmanagementJinformationJsystems,JwhileJtheJtreasurer‘sJofficeJisJresponsibleJ forJ
cashJ andJ creditJ management,J capitalJ budgeting,J andJ financialJ planning.J Therefore,JtheJstudyJofJcorpo
rateJfinanceJisJconcentratedJwithinJtheJtreasuryJgroup‘sJfunctions.
6. ToJmaximizeJtheJcurrentJmarketJvalueJ(shareJprice)JofJtheJequityJofJtheJfirmJ(whetherJit‘sJpublicly-
JtradedJorJnot).
7. InJtheJcorporateJformJofJownership,JtheJshareholdersJareJtheJownersJofJtheJfirm.JTheJshareholdersJelectJt
heJdirectorsJofJtheJcorporation,JwhoJinJturnJappointJtheJfirm‘sJmanagement.JThisJseparationJofJownershi
pJfromJcontrolJinJtheJcorporateJformJofJorganizationJisJwhatJcausesJagencyJproblemsJtoJexist.JManagem
entJmayJactJinJitsJownJorJsomeoneJelse‘sJbestJinterests,JratherJthanJthoseJofJtheJshareholders.JIfJsuchJeve
ntsJoccur,JtheyJmayJcontradictJtheJgoalJofJmaximizingJtheJshareJpriceJofJtheJequityJofJtheJfirm.
8. AJprimaryJmarketJtransaction.
, B-2J SOLUTIONS
9. InJauctionJmarketsJlikeJtheJNYSE,JbrokersJandJagentsJmeetJatJaJphysicalJlocationJ(theJexchange)JtoJmat
chJbuyersJandJsellersJofJassets.JDealerJmarketsJlikeJNASDAQJconsistJofJdealersJoperatingJatJdispersedJl
ocalesJwhoJbuyJandJsellJassetsJthemselves,JcommunicatingJwithJotherJdealersJeitherJelectronicallyJorJlit
erallyJover-the-counter.
10. SuchJorganizationsJfrequentlyJpursueJsocialJorJpoliticalJmissions,JsoJmanyJdifferentJgoalsJareJconceiva
ble.JOneJgoalJthatJisJoftenJcitedJisJrevenueJminimization;Ji.e.,JprovideJwhateverJgoodsJandJservicesJareJo
fferedJatJtheJlowestJpossibleJcostJtoJsociety.JAJbetterJapproachJmightJbeJtoJobserveJthatJevenJaJnot-for-
profitJbusinessJhasJequity.JThus,JoneJanswerJisJthatJtheJappropriateJgoalJisJ toJmaximizeJtheJvalueJofJtheJ
equity.
11. Presumably,JtheJcurrentJstockJvalueJreflectsJtheJrisk,Jtiming,JandJmagnitudeJofJallJfutureJcashJflows,Jbot
hJshort-termJandJlong-term.JIfJthisJisJcorrect,JthenJtheJstatementJisJfalse.
12. AnJargumentJcanJbeJmadeJeitherJway.JAtJtheJoneJextreme,JweJcouldJargueJthatJinJaJmarketJeconomy,JallJ
ofJtheseJthingsJareJpriced.JThereJisJthusJanJoptimalJlevelJof,JforJexample,JethicalJand/orJillegalJbehavior,J
andJtheJframeworkJofJstockJvaluationJexplicitlyJincludesJthese.JAtJtheJotherJextreme,JweJcouldJargueJtha
tJtheseJareJnon-
economicJphenomenaJandJareJbestJhandledJthroughJtheJpoliticalJprocess.JAJclassicJ(andJhighlyJrelevant)
JthoughtJquestionJthatJillustratesJthisJdebateJgoesJsomethingJlikeJthis:J―AJfirmJhasJestimatedJthatJtheJcost
JofJimprovingJtheJsafetyJofJoneJofJitsJproductsJisJ$30Jmillion.JHowever,JtheJfirmJbelievesJthatJimproving
JtheJsafetyJofJtheJproductJwillJonlyJsaveJ$20JmillionJinJproductJliabilityJclaims.JWhatJshouldJtheJfirmJdo
?‖
13. TheJgoalJwillJbeJtheJsame,JbutJtheJbestJcourseJofJactionJtowardJthatJgoalJmayJbeJdifferentJbecauseJofJdiff
eringJsocial,Jpolitical,JandJeconomicJinstitutions.
14. TheJgoalJofJmanagementJshouldJbeJtoJmaximizeJtheJshareJpriceJforJtheJcurrentJshareholders.JIfJmanage
mentJbelievesJthatJitJcanJimproveJtheJprofitabilityJofJtheJfirmJsoJthatJtheJshareJpriceJwillJexceedJ$35,Jthe
nJtheyJshouldJfightJtheJofferJfromJtheJoutsideJcompany.JIfJmanagementJbelievesJthatJthisJbidderJorJotherJ
unidentifiedJbiddersJwillJactuallyJpayJmoreJthanJ$35JperJshareJtoJacquireJtheJcompany,JthenJtheyJshould
JstillJfightJtheJoffer.JHowever,JifJtheJcurrentJmanagementJcannotJincreaseJtheJvalueJofJtheJfirmJbeyondJth
eJbidJprice,JandJnoJotherJhigherJbidsJcomeJin,JthenJmanagementJisJnotJactingJinJtheJinterestsJofJtheJshare
holdersJbyJfightingJtheJoffer.JSinceJcurrentJmanagersJoftenJloseJtheirJjobsJwhenJtheJcorporationJisJacqui
red,JpoorlyJmonitoredJmanagersJhaveJanJincentiveJtoJfightJcorporateJtakeoversJinJsituationsJsuchJasJthis.
15. WeJwouldJexpectJagencyJproblemsJtoJbeJlessJsevereJinJotherJcountries,JprimarilyJdueJtoJtheJrelativelyJsm
allJpercentageJofJindividualJownership.JFewerJindividualJownersJshouldJreduceJtheJnumberJofJdiverseJo
pinionsJconcerningJcorporateJgoals.JTheJhighJpercentageJofJinstitutionalJownershipJmightJleadJtoJaJhigh
erJdegreeJofJagreementJbetweenJownersJandJmanagersJonJdecisionsJconcerningJriskyJprojects.JInJadditi
on,JinstitutionsJmayJbeJbetterJableJtoJimplementJeffectiveJmonitoringJmechanismsJonJmanagersJthanJca
nJindividualJowners,JbasedJonJtheJinstitutions‘JdeeperJresourcesJandJexperiencesJwithJtheirJownJmanage
ment.JTheJincreaseJinJinstitutionalJownershipJofJstockJinJtheJUnitedJStatesJandJtheJgrowingJactivismJofJt
heseJlargeJshareholderJgroupsJmayJleadJtoJaJreductionJinJagencyJproblemsJforJU.S.JcorporationsJandJaJm
oreJefficientJmarketJforJcorporateJcontrol.
