SOLUTION MANUAL
FUNDAMENTALS OF CORPORATE FINANCE 13 TH
EDITION ROSS, WESTERFIELD, AND JORDAN
JORDAN
UNIVERSITY OF FLORIDA
JOE SMOLIRA
BELMONT
UNIVERSITY
,TABLE OF CONTENTS
PART 1: OVERVIEW OF CORPORATE FINANCE
1. Introduction To Corporate Finance
2. Financial Statements, Taxes, And Cash Flow
PART 2: FINANCIAL STATEMENTS AND LONG-TERM FINANCIAL PLANNING
3. Working With Financial Statements
4. Long-Term Financial Planning And Growth
PART 3: VALUATION OF FUTURE CASH FLOWS
5. Introduction To Valuation: The Time Value Of Money
6. Discounted Cash Flow Valuation
7. Interest Rates And Bond Valuation
8. Stock Valuation
PART 4: CAPITAL BUDGETING
9. Net Present Value And Other Investment Criteria
10. Making Capital Investment Decisions
11. Project Analysis And Evaluation
PART 5: RISK AND RETURN
12. Some Lessons From Capital Market History
13. Return, Risk, And The Security Market Line
PART 6: COST OF CAPITAL AND LONG-TERM FINANCIAL POLICY
14. Cost Of Capital
15. Raising Capital
16. Financial Leverage And Capital Structure Policy
17. Dividends And Payout Policy
PART 7: SHORT-TERM FINANCIAL PLANNING AND MANAGEMENT
18. Short-Term Finance And Planning
19. Cash And Liquidity Management
20. Credit And Inventory Management
PART 8: TOPICS IN CORPORATE FINANCE
21. International Corporate Finance
22. Behavioral Finance Implications For Financial Management
23. Enterprise Risk Management
24. Options And Corporate Finance
25. Option Valuation
26. Mergers And Acquisitions
27. Leasing
,CHAPTER 1
INTRODUCTION TO CORPORATEFINANCE
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.
,
FUNDAMENTALS OF CORPORATE FINANCE 13 TH
EDITION ROSS, WESTERFIELD, AND JORDAN
JORDAN
UNIVERSITY OF FLORIDA
JOE SMOLIRA
BELMONT
UNIVERSITY
,TABLE OF CONTENTS
PART 1: OVERVIEW OF CORPORATE FINANCE
1. Introduction To Corporate Finance
2. Financial Statements, Taxes, And Cash Flow
PART 2: FINANCIAL STATEMENTS AND LONG-TERM FINANCIAL PLANNING
3. Working With Financial Statements
4. Long-Term Financial Planning And Growth
PART 3: VALUATION OF FUTURE CASH FLOWS
5. Introduction To Valuation: The Time Value Of Money
6. Discounted Cash Flow Valuation
7. Interest Rates And Bond Valuation
8. Stock Valuation
PART 4: CAPITAL BUDGETING
9. Net Present Value And Other Investment Criteria
10. Making Capital Investment Decisions
11. Project Analysis And Evaluation
PART 5: RISK AND RETURN
12. Some Lessons From Capital Market History
13. Return, Risk, And The Security Market Line
PART 6: COST OF CAPITAL AND LONG-TERM FINANCIAL POLICY
14. Cost Of Capital
15. Raising Capital
16. Financial Leverage And Capital Structure Policy
17. Dividends And Payout Policy
PART 7: SHORT-TERM FINANCIAL PLANNING AND MANAGEMENT
18. Short-Term Finance And Planning
19. Cash And Liquidity Management
20. Credit And Inventory Management
PART 8: TOPICS IN CORPORATE FINANCE
21. International Corporate Finance
22. Behavioral Finance Implications For Financial Management
23. Enterprise Risk Management
24. Options And Corporate Finance
25. Option Valuation
26. Mergers And Acquisitions
27. Leasing
,CHAPTER 1
INTRODUCTION TO CORPORATEFINANCE
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.
,
