Fundamentals of Corporate Finance 8th Edition (Australia Edition) By Stephen Ross (Solutions Manual)

Solutions Manual Fundamentals of Corporate Finance 13th
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k Edition Ross, Westerfield, and Jordan
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Chapters 1 - 27
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,CHAPTER 1: Introduction to Corporate Finance
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CHAPTER 2: Financial Statements, Taxes, And Cash Flow
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CHAPTER 3: Working with Financial Statements
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CHAPTER 4: Long-Term Financial Planning and Growth
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CHAPTER 5: Introduction to Valuation: The Time Value of Money
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CHAPTER 6: Discounted Cash Flow Valuation
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CHAPTER 7: Interest Rates and Bond Valuation
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CHAPTER 8: Stock Valuation
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CHAPTER 9: Net Present Value and Other Investment Criteria
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CHAPTER 10: Making Capital Investment Decisions
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CHAPTER 11: Project Analysis and Evaluation
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CHAPTER 12: Some Lessons from Capital Market History
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CHAPTER 13: Return, Risk, And the Security Market Line
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CHAPTER 14: Cost of Capital
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CHAPTER 15: Raising Capital
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CHAPTER 16: Financial Leverage and Capital Structure Policy
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CHAPTER 17: Dividends and Payout Policy
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CHAPTER 18: Short-Term Finance and Planning
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CHAPTER 19: Cash and Liquidity Management
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CHAPTER 20: Credit and Inventory Management
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CHAPTER 21: International Corporate Finance
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CHAPTER 22: Behavioral Finance: Implications for Financial Manage
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CHAPTER 23: Enterprise Risk Management
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CHAPTER 24:Options and Corporate Finance
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CHAPTER 25: Option Valuation
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CHAPTER 26: Mergers and Acquisitions
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CHAPTER 27: Leasing
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,CHAPTER 1 k




INTRODUCTION TO CORPORATE k k




FINANCE
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Answers to Concepts Review and Critical Thinking Questions
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1. Capital budgeting (deciding whether to expand a manufacturing plant), capital structure (deciding
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whether to issue new equity and use the proceeds to retire outstanding debt), and working capital
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management (modifying the firm’s credit collection policy with its customers).
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2. Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, hard to raise capital
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funds. Some advantages: simpler, less regulation, the owners are also the managers, sometimes personal
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tax rates are better than corporate tax rates.
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3. The primary disadvantage of the corporate form is the double taxation to shareholders of distributed
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earnings and dividends. Some advantages include: limited liability, ease of transferability, ability to
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raise capital, unlimited life, and so forth.
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4. In response to Sarbanes-Oxley, small firms have elected to go dark because of the costs of compliance.
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The costs to comply with Sarbox can be several million dollars, which can be a large percentage of a
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ksmall firms profits. A major cost of going dark is less access to capital. Since thefirm is no longer
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publicly traded, it can no longer raise money in the public market. Although the company will still have
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access to bank loans and the private equity market, the costs associated with raising funds in these
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markets are usually higher than the costs of raising funds in the public market.
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5. The treasurer’s office and the controller’s office are the two primary organizational groups
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kthat report directly to the chief financial officer. The controller’s office handles cost and financial
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accounting, tax management, and management information systems, while the treasurer’s office is
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responsible for cash and credit management, capital budgeting, and financial planning.
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Therefore,the study of corporate finance is concentrated within the treasury group’s functions.
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6. To maximize the current market value (share price) of the equity of the firm (whether it’s publicly- traded
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or not).
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7. In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect
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the directors of the corporation, who in turn appoint the firm’s management. This separation of
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ownership from control in the corporate form of organization is what causes agency problems to exist.
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Management may act in its own or someone else’s best interests, rather than those of the shareholders. If
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such events occur, they may contradict the goal of maximizing the share price of the equity of the firm.
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8. A primary market transaction.
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, B-2 SOLUTIONS
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9. In auction markets like the NYSE, brokers and agents meet at a physical location (the exchange) to match
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buyers and sellers of assets. Dealer markets like NASDAQ consist of dealers operating at dispersed
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locales who buy and sell assets themselves, communicating with other dealers either electronically or
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literally over-the-counter.
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10. Such organizations frequently pursue social or political missions, so many different goals are
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conceivable. One goal that is often cited is revenue minimization; i.e., provide whatever goods and
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services are offered at the lowest possible cost to society. A better approach might be to observe that even
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a not-for-profit business has equity. Thus, one answer is that the appropriate goal is to maximize the
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value of the equity.
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11. Presumably, the current stock value reflects the risk, timing, and magnitude of all future cash flows, both k k k k k k k k k k k k k k k k




short-term and long-term. If this is correct, then the statement is false.
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12. An argument can be made either way. At the one extreme, we could argue that in a market economy,all of
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these things are priced. There is thus an optimal level of, for example, ethical and/or illegal behavior, and
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the framework of stock valuation explicitly includes these. At the other extreme, we could argue that
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these are non-economic phenomena and are best handled through the political process. A classic (and
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highly relevant) thought question that illustrates this debate goes something like this: “A firm has
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estimated that the cost of improving the safety of one of its products is $30 million. However, the firm
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believes that improving the safety of the product will only save $20 million in product liability claims.
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What should the firm do?”
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13. The goal will be the same, but the best course of action toward that goal may be different because of
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differing social, political, and economic institutions.
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14. The goal of management should be to maximize the share price for the current shareholders. If
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management believes that it can improve the profitability of the firm so that the share price will exceed
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$35, then they should fight the offer from the outside company. If management believes that this bidder
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or other unidentified bidders will actually pay more than $35 per share to acquire the company, then they
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should still fight the offer. However, if the current management cannot increase the value of the firm
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beyond the bid price, and no other higher bids come in, then management is not acting in the interests of
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the shareholders by fighting the offer. Since current managers often lose their jobs when the corporation
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is acquired, poorly monitored managers have an incentive to fight corporate takeovers in situations such
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as this.
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15. We would expect agency problems to be less severe in other countries, primarily due to the relatively
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small percentage of individual ownership. Fewer individual owners should reduce the number of diverse
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opinions concerning corporate goals. The high percentage of institutional ownership might lead to a
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higher degree of agreement between owners and managers on decisions concerning risky projects. In
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addition, institutions may be better able to implement effective monitoring mechanisms on managers
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than can individual owners, based on the institutions’ deeper resources and experiences with their own
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management. The increase in institutional ownership of stock in the United States and the growing
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activism of these large shareholder groups may lead to a reduction in agency problems for U.S.
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corporations and a more efficient market for corporate control.
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