Solution Manual for Fundamentals of Corporate Finance 13th
Edition by Ross, Westerfield, and Jordan
,Table of Contents
CHAPTERc1:cIntroductionctocCorporatecFinance
CHAPTERc2:cFinancialcStatements,cTaxes,cAndcCashcFlow
CHAPTERc3:cWorkingcwithcFinancialcStatements
CHAPTERc4:cLong-TermcFinancialcPlanningcandcGrowth
CHAPTERc5:cIntroductionctocValuation:cThecTimecValuecofcMoney
CHAPTERc6:cDiscountedcCashcFlowcValuation
CHAPTERc7:cInterestcRatescandcBondcValuation
CHAPTERc8:cStockcValuation
CHAPTERc9:cNetcPresentcValuecandcOthercInvestmentcCriteria
CHAPTERc10:cMakingcCapitalcInvestmentcDecisions
CHAPTERc11:cProjectcAnalysiscandcEvaluation
CHAPTERc12:cSomecLessonscfromcCapitalcMarketcHistory
CHAPTERc13:cReturn,cRisk,cAndcthecSecuritycMarketcLine
CHAPTERc14:cCostcofcCapital
CHAPTERc15:cRaisingcCapital
CHAPTERc16:cFinancialcLeveragecandcCapitalcStructurecPolicy
CHAPTERc17:cDividendscandcPayoutcPolicy
CHAPTERc18:cShort-TermcFinancecandcPlanning
CHAPTERc19:cCashcandcLiquiditycManagement
CHAPTERc20:cCreditcandcInventorycManagement
CHAPTERc21:cInternationalcCorporatecFinance
CHAPTERc22:cBehavioralcFinance:cImplicationscforcFinancialcManage
CHAPTERc23:cEnterprisecRiskcManagement
CHAPTERc24:OptionscandcCorporatecFinance
CHAPTERc25:cOptioncValuation
CHAPTERc26:cMergerscandcAcquisitions
CHAPTERc27:cLeasing
, CHAPTER 1: INTRODUCTION TO
CORPORATE FINANCE c
Answers to Concepts Review and Critical Thinking Questions
1. Capital budgeting (such as deciding on expanding a manufacturing facility), capital structure
(deciding whether to issue new stock and use the proceeds to pay down existing debt), and working
capital management (adjusting the firm’s credit policy toward customers).
2. Disadvantages: unlimited liability, limited lifespan, difficulty transferring ownership, and challenges
raising funds. Advantages: simpler, fewer regulations, owners also manage the business, and
sometimes personal tax rates are lower than corporate tax rates.
3. The biggest drawback of the corporate structure is double taxation of shareholders on distributed
earnings and dividends. Advantages include limited liability, ease of ownership transfer, easier
access to capital, unlimited life, and so on.
4. In response to Sarbanes-Oxley, some small firms chose to go dark due to the high costs of
compliance. Complying with Sarbox can cost several million dollars, a significant portion of a small
firm’s profits. One major downside of going dark is reduced access to capital. Since the firm is no
longer publicly traded, it cannot raise money in public markets. Although it can still access bank
loans and private equity, raising funds in these markets is generally more expensive than in public
markets.
5. The treasurer’s office and the controller’s office are the two main organizational units reporting
directly to the CFO. The controller’s office is in charge of 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, corporate finance
study focuses mainly on treasury functions.
6. To maximize the current market value (share price) of the firm’s equity (whether or not it is publicly
traded).
, 7. In the corporate form of ownership, shareholders own the firm. They elect the board of directors,
who then appoint management. This separation of ownership from control in corporations is what
creates agency problems. Management may act in its own or someone else’s best interest rather than
in the shareholders’ best interest. If that happens, it may conflict with the objective of maximizing
the firm’s equity share price.
8. A primary market transaction.
9. In auction markets like the NYSE, brokers and agents meet in person (at the exchange) to match
buyers and sellers of assets. Dealer markets such as NASDAQ consist of dealers working in
dispersed locations who buy and sell assets themselves, communicating with other dealers either
electronically or literally over-the-counter.
10. These organizations often have social or political missions, so they may have many possible goals.
One frequently mentioned goal is revenue minimization; that is, providing offered goods and
services at the lowest possible cost to society. A better approach might be to observe that even a not-
for-profit business has equity. Therefore, one possible answer is that the proper goal is to maximize
the value of that equity.
11. Presumably, today’s stock price reflects the risk, timing, and size of all future cash flows, both short-
term and long-term. If that is correct, then the statement is false.
12. An argument can go either way. At one extreme, one could argue that in a market economy, all of
these matters are priced. Therefore there is an optimal level of, for instance, ethical and/or illegal
behavior, and stock valuation explicitly accounts for them. At the other extreme, one might argue
these are non-economic issues best handled through politics. A classic (and very relevant) thought
question that highlights 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 expects this safety
improvement would only save $20 million in product liability claims. What should the firm do?”
13. The goal will be the same, but the best strategy to achieve it may differ depending on social,
political, and economic institutions.
Edition by Ross, Westerfield, and Jordan
,Table of Contents
CHAPTERc1:cIntroductionctocCorporatecFinance
CHAPTERc2:cFinancialcStatements,cTaxes,cAndcCashcFlow
CHAPTERc3:cWorkingcwithcFinancialcStatements
CHAPTERc4:cLong-TermcFinancialcPlanningcandcGrowth
CHAPTERc5:cIntroductionctocValuation:cThecTimecValuecofcMoney
CHAPTERc6:cDiscountedcCashcFlowcValuation
CHAPTERc7:cInterestcRatescandcBondcValuation
CHAPTERc8:cStockcValuation
CHAPTERc9:cNetcPresentcValuecandcOthercInvestmentcCriteria
CHAPTERc10:cMakingcCapitalcInvestmentcDecisions
CHAPTERc11:cProjectcAnalysiscandcEvaluation
CHAPTERc12:cSomecLessonscfromcCapitalcMarketcHistory
CHAPTERc13:cReturn,cRisk,cAndcthecSecuritycMarketcLine
CHAPTERc14:cCostcofcCapital
CHAPTERc15:cRaisingcCapital
CHAPTERc16:cFinancialcLeveragecandcCapitalcStructurecPolicy
CHAPTERc17:cDividendscandcPayoutcPolicy
CHAPTERc18:cShort-TermcFinancecandcPlanning
CHAPTERc19:cCashcandcLiquiditycManagement
CHAPTERc20:cCreditcandcInventorycManagement
CHAPTERc21:cInternationalcCorporatecFinance
CHAPTERc22:cBehavioralcFinance:cImplicationscforcFinancialcManage
CHAPTERc23:cEnterprisecRiskcManagement
CHAPTERc24:OptionscandcCorporatecFinance
CHAPTERc25:cOptioncValuation
CHAPTERc26:cMergerscandcAcquisitions
CHAPTERc27:cLeasing
, CHAPTER 1: INTRODUCTION TO
CORPORATE FINANCE c
Answers to Concepts Review and Critical Thinking Questions
1. Capital budgeting (such as deciding on expanding a manufacturing facility), capital structure
(deciding whether to issue new stock and use the proceeds to pay down existing debt), and working
capital management (adjusting the firm’s credit policy toward customers).
2. Disadvantages: unlimited liability, limited lifespan, difficulty transferring ownership, and challenges
raising funds. Advantages: simpler, fewer regulations, owners also manage the business, and
sometimes personal tax rates are lower than corporate tax rates.
3. The biggest drawback of the corporate structure is double taxation of shareholders on distributed
earnings and dividends. Advantages include limited liability, ease of ownership transfer, easier
access to capital, unlimited life, and so on.
4. In response to Sarbanes-Oxley, some small firms chose to go dark due to the high costs of
compliance. Complying with Sarbox can cost several million dollars, a significant portion of a small
firm’s profits. One major downside of going dark is reduced access to capital. Since the firm is no
longer publicly traded, it cannot raise money in public markets. Although it can still access bank
loans and private equity, raising funds in these markets is generally more expensive than in public
markets.
5. The treasurer’s office and the controller’s office are the two main organizational units reporting
directly to the CFO. The controller’s office is in charge of 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, corporate finance
study focuses mainly on treasury functions.
6. To maximize the current market value (share price) of the firm’s equity (whether or not it is publicly
traded).
, 7. In the corporate form of ownership, shareholders own the firm. They elect the board of directors,
who then appoint management. This separation of ownership from control in corporations is what
creates agency problems. Management may act in its own or someone else’s best interest rather than
in the shareholders’ best interest. If that happens, it may conflict with the objective of maximizing
the firm’s equity share price.
8. A primary market transaction.
9. In auction markets like the NYSE, brokers and agents meet in person (at the exchange) to match
buyers and sellers of assets. Dealer markets such as NASDAQ consist of dealers working in
dispersed locations who buy and sell assets themselves, communicating with other dealers either
electronically or literally over-the-counter.
10. These organizations often have social or political missions, so they may have many possible goals.
One frequently mentioned goal is revenue minimization; that is, providing offered goods and
services at the lowest possible cost to society. A better approach might be to observe that even a not-
for-profit business has equity. Therefore, one possible answer is that the proper goal is to maximize
the value of that equity.
11. Presumably, today’s stock price reflects the risk, timing, and size of all future cash flows, both short-
term and long-term. If that is correct, then the statement is false.
12. An argument can go either way. At one extreme, one could argue that in a market economy, all of
these matters are priced. Therefore there is an optimal level of, for instance, ethical and/or illegal
behavior, and stock valuation explicitly accounts for them. At the other extreme, one might argue
these are non-economic issues best handled through politics. A classic (and very relevant) thought
question that highlights 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 expects this safety
improvement would only save $20 million in product liability claims. What should the firm do?”
13. The goal will be the same, but the best strategy to achieve it may differ depending on social,
political, and economic institutions.
