Solutions Manual Fundamentals of Corporate Finance
13th Edition Ross, Westerfield, and Jordan
Chapters 1 - 27
,CHAPTERz1:zIntroductionztozCorporatezFinance
CHAPTERz2:zFinancialzStatements,zTaxes,zAndzCashzFlow
CHAPTERz3:zWorkingzwithzFinancialzStatements
CHAPTERz4:zLong-TermzFinancialzPlanningzandzGrowth
CHAPTERz5:zIntroductionztozValuation:zThezTimezValuezofzMoney
CHAPTERz6:zDiscountedzCashzFlowzValuation
CHAPTERz7:zInterestzRateszandzBondzValuation
CHAPTERz8:zStockzValuation
CHAPTERz9:zNetzPresentzValuezandzOtherzInvestmentzCriteria
CHAPTERz10:zMakingzCapitalzInvestmentzDecisions
CHAPTERz11:zProjectzAnalysiszandzEvaluation
CHAPTERz12:zSomezLessonszfromzCapitalzMarketzHistory
CHAPTERz13:zReturn,zRisk,zAndzthezSecurityzMarketzLine
CHAPTERz14:zCostzofzCapital
CHAPTERz15:zRaisingzCapital
CHAPTERz16:zFinancialzLeveragezandzCapitalzStructurezPolicy
CHAPTERz17:zDividendszandzPayoutzPolicy
CHAPTERz18:zShort-TermzFinancezandzPlanning
CHAPTERz19:zCashzandzLiquidityzManagement
CHAPTERz20:zCreditzandzInventoryzManagement
CHAPTERz21:zInternationalzCorporatezFinance
CHAPTERz22:zBehavioralzFinance:zImplicationszforzFinancialzManage
CHAPTERz23:zEnterprisezRiskzManagement
CHAPTERz24:OptionszandzCorporatezFinance
CHAPTERz25:zOptionzValuation
CHAPTERz26:zMergerszandzAcquisitions
CHAPTERz27:zLeasing
,CHAPTER 1 z
INTRODUCTION TO CORPORATE z z z
FINANCE
AnswersztozConceptszReviewzandzCriticalzThinkingzQuestions
1. Capitalzbudgetingz(decidingzwhetherztozexpandzazmanufacturingzplant),zcapitalzstructurez(decidingzwh
etherztozissueznewzequityzandzusezthezproceedsztozretirezoutstandingzdebt),zandzworkingzcapitalzmanag
ementz(modifyingzthezfirm’szcreditzcollectionzpolicyzwithzitszcustomers).
2. Disadvantages:zunlimitedzliability,zlimitedzlife,zdifficultyzinztransferringzownership,zhardztozraisezcapi
talzfunds.zSomezadvantages:zsimpler,zlesszregulation,zthezownerszarezalsozthezmanagers,zsometimeszpe
rsonalztaxzrateszarezbetterzthanzcorporateztaxzrates.
3. Thezprimaryzdisadvantagezofzthezcorporatezformziszthezdoubleztaxationztozshareholderszofzdistributedze
arningszandzdividends.zSomezadvantageszinclude:zlimitedzliability,zeasezofztransferability,zabilityztozra
isezcapital,zunlimitedzlife,zandzsozforth.
4. InzresponseztozSarbanes-
Oxley,zsmallzfirmszhavezelectedztozgozdarkzbecausezofzthezcostszofzcompliance.zThezcostsztozcomplyz
withzSarboxzcanzbezseveralzmillionzdollars,zwhichzcanzbezazlargezpercentagez ofz az smallz firmsz profits.
z Az majorz costz ofz goingz darkz isz lessz accessz toz capital.z Sincez thezfirmzisznozlongerzpubliclyztraded,zitzc
anznozlongerzraisezmoneyzinzthezpubliczmarket.zAlthoughzthezcompanyzwillzstillzhavezaccessztozbankzl
oanszandzthezprivatezequityzmarket,zthezcostszassociatedzwithzraisingzfundszinzthesezmarketszarezusuall
yzhigherzthanzthezcostszofzraisingzfundszinzthezpubliczmarket.
5. Thez treasurer’sz officez andz thez controller’sz officez arez thez twoz primaryz organizationalz groupsz thatz
reportzdirectlyztozthezchiefzfinancialzofficer.zThezcontroller’szofficezhandleszcostzandzfinancialzaccounti
ng,ztaxzmanagement,zandzmanagementzinformationzsystems,zwhileztheztreasurer’szofficeziszresponsibl
ez forz cashz andz creditz management,z capitalz budgeting,z andz financialz planning.z Therefore,zthezstudyz
ofzcorporatezfinanceziszconcentratedzwithinztheztreasuryzgroup’szfunctions.
6. Tozmaximizezthezcurrentzmarketzvaluez(sharezprice)zofzthezequityzofzthezfirmz(whetherzit’szpublicly-
ztradedzorznot).
7. Inzthezcorporatezformzofzownership,zthezshareholderszarezthezownerszofzthezfirm.zThezshareholderszele
ctzthezdirectorszofzthezcorporation,zwhozinzturnzappointzthezfirm’szmanagement.zThiszseparationzofzow
nershipzfromzcontrolzinzthezcorporatezformzofzorganizationziszwhatzcauseszagencyzproblemsztozexist.z
Managementzmayzactzinzitszownzorzsomeonezelse’szbestzinterests,zratherzthanzthosezofzthezshareholders
.zIfzsuchzeventszoccur,ztheyzmayzcontradictzthezgoalzofzmaximizingzthezsharezpricezofzthezequityzofzthez
firm.
8. Azprimaryzmarketztransaction.
, B-2z SOLUTIONS
9. InzauctionzmarketszlikezthezNYSE,zbrokerszandzagentszmeetzatzazphysicalzlocationz(thezexchange)ztozm
atchzbuyerszandzsellerszofzassets.zDealerzmarketszlikezNASDAQzconsistzofzdealerszoperatingzatzdisper
sedzlocaleszwhozbuyzandzsellzassetszthemselves,zcommunicatingzwithzotherzdealerszeitherzelectronicall
yzorzliterallyzover-the-counter.
10. Suchzorganizationszfrequentlyzpursuezsocialzorzpoliticalzmissions,zsozmanyzdifferentzgoalszarezconceiv
able.zOnezgoalzthatziszoftenzcitedziszrevenuezminimization;zi.e.,zprovidezwhateverzgoodszandzservicesza
rezofferedzatzthezlowestzpossiblezcostztozsociety.zAzbetterzapproachzmightzbeztozobservezthatzevenzaznot
-for-
profitzbusinesszhaszequity.zThus,zonezanswerziszthatzthezappropriatezgoalzisz tozmaximizezthezvaluezofzt
hezequity.
11. Presumably,zthezcurrentzstockzvaluezreflectszthezrisk,ztiming,zandzmagnitudezofzallzfuturezcashzflows,z
bothzshort-termzandzlong-term.zIfzthisziszcorrect,zthenzthezstatementziszfalse.
12. Anzargumentzcanzbezmadezeitherzway.zAtzthezonezextreme,zwezcouldzarguezthatzinzazmarketzeconomy,z
allzofzthesezthingszarezpriced.zThereziszthuszanzoptimalzlevelzof,zforzexample,zethicalzand/orzillegalzbeh
avior,zandzthezframeworkzofzstockzvaluationzexplicitlyzincludeszthese.zAtzthezotherzextreme,zwezcouldz
arguezthatzthesezareznon-
economiczphenomenazandzarezbestzhandledzthroughzthezpoliticalzprocess.zAzclassicz(andzhighlyzreleva
nt)zthoughtzquestionzthatzillustrateszthiszdebatezgoeszsomethingzlikezthis:z“Azfirmzhaszestimatedzthatzth
ezcostzofzimprovingzthezsafetyzofzonezofzitszproductszisz$30zmillion.zHowever,zthezfirmzbelieveszthatzi
mprovingzthezsafetyzofzthezproductzwillzonlyzsavez$20zmillionzinzproductzliabilityzclaims.zWhatzshoul
dzthezfirmzdo?”
13. Thezgoalzwillzbezthezsame,zbutzthezbestzcoursezofzactionztowardzthatzgoalzmayzbezdifferentzbecausezofz
differingzsocial,zpolitical,zandzeconomiczinstitutions.
14. Thezgoalzofzmanagementzshouldzbeztozmaximizezthezsharezpricezforzthezcurrentzshareholders.zIfzmana
gementzbelieveszthatzitzcanzimprovezthezprofitabilityzofzthezfirmzsozthatzthezsharezpricezwillzexceedz$3
5,zthenztheyzshouldzfightzthezofferzfromzthezoutsidezcompany.zIfzmanagementzbelieveszthatzthiszbidderz
orzotherzunidentifiedzbidderszwillzactuallyzpayzmorezthanz$35zperzshareztozacquirezthezcompany,zthenzt
heyzshouldzstillzfightzthezoffer.zHowever,zifzthezcurrentzmanagementzcannotzincreasezthezvaluezofzthezf
irmzbeyondzthezbidzprice,zandznozotherzhigherzbidszcomezin,zthenzmanagementzisznotzactingzinzthezinte
restszofzthezshareholderszbyzfightingzthezoffer.zSincezcurrentzmanagerszoftenzloseztheirzjobszwhenzthezc
orporationziszacquired,zpoorlyzmonitoredzmanagerszhavezanzincentiveztozfightzcorporateztakeoverszinzs
ituationszsuchzaszthis.
15. Wezwouldzexpectzagencyzproblemsztozbezlesszseverezinzotherzcountries,zprimarilyzdueztozthezrelativelyz
smallzpercentagezofzindividualzownership.zFewerzindividualzownerszshouldzreduceztheznumberzofzdive
rsezopinionszconcerningzcorporatezgoals.zThezhighzpercentagezofzinstitutionalzownershipzmightzleadzto
zazhigherzdegreezofzagreementzbetweenzownerszandzmanagerszonzdecisionszconcerningzriskyzprojects.z
Inzaddition,zinstitutionszmayzbezbetterzableztozimplementzeffectivezmonitoringzmechanismszonzmanag
erszthanzcanzindividualzowners,zbasedzonzthezinstitutions’zdeeperzresourceszandzexperienceszwithztheir
zownzmanagement.zThezincreasezinzinstitutionalzownershipzofzstockzinzthezUnitedzStateszandzthezgrowi
ngzactivismzofzthesezlargezshareholderzgroupszmayzleadztozazreductionzinzagencyzproblemszforzU.S.zco
rporationszandzazmorezefficientzmarketzforzcorporatezcontrol.
13th Edition Ross, Westerfield, and Jordan
Chapters 1 - 27
,CHAPTERz1:zIntroductionztozCorporatezFinance
CHAPTERz2:zFinancialzStatements,zTaxes,zAndzCashzFlow
CHAPTERz3:zWorkingzwithzFinancialzStatements
CHAPTERz4:zLong-TermzFinancialzPlanningzandzGrowth
CHAPTERz5:zIntroductionztozValuation:zThezTimezValuezofzMoney
CHAPTERz6:zDiscountedzCashzFlowzValuation
CHAPTERz7:zInterestzRateszandzBondzValuation
CHAPTERz8:zStockzValuation
CHAPTERz9:zNetzPresentzValuezandzOtherzInvestmentzCriteria
CHAPTERz10:zMakingzCapitalzInvestmentzDecisions
CHAPTERz11:zProjectzAnalysiszandzEvaluation
CHAPTERz12:zSomezLessonszfromzCapitalzMarketzHistory
CHAPTERz13:zReturn,zRisk,zAndzthezSecurityzMarketzLine
CHAPTERz14:zCostzofzCapital
CHAPTERz15:zRaisingzCapital
CHAPTERz16:zFinancialzLeveragezandzCapitalzStructurezPolicy
CHAPTERz17:zDividendszandzPayoutzPolicy
CHAPTERz18:zShort-TermzFinancezandzPlanning
CHAPTERz19:zCashzandzLiquidityzManagement
CHAPTERz20:zCreditzandzInventoryzManagement
CHAPTERz21:zInternationalzCorporatezFinance
CHAPTERz22:zBehavioralzFinance:zImplicationszforzFinancialzManage
CHAPTERz23:zEnterprisezRiskzManagement
CHAPTERz24:OptionszandzCorporatezFinance
CHAPTERz25:zOptionzValuation
CHAPTERz26:zMergerszandzAcquisitions
CHAPTERz27:zLeasing
,CHAPTER 1 z
INTRODUCTION TO CORPORATE z z z
FINANCE
AnswersztozConceptszReviewzandzCriticalzThinkingzQuestions
1. Capitalzbudgetingz(decidingzwhetherztozexpandzazmanufacturingzplant),zcapitalzstructurez(decidingzwh
etherztozissueznewzequityzandzusezthezproceedsztozretirezoutstandingzdebt),zandzworkingzcapitalzmanag
ementz(modifyingzthezfirm’szcreditzcollectionzpolicyzwithzitszcustomers).
2. Disadvantages:zunlimitedzliability,zlimitedzlife,zdifficultyzinztransferringzownership,zhardztozraisezcapi
talzfunds.zSomezadvantages:zsimpler,zlesszregulation,zthezownerszarezalsozthezmanagers,zsometimeszpe
rsonalztaxzrateszarezbetterzthanzcorporateztaxzrates.
3. Thezprimaryzdisadvantagezofzthezcorporatezformziszthezdoubleztaxationztozshareholderszofzdistributedze
arningszandzdividends.zSomezadvantageszinclude:zlimitedzliability,zeasezofztransferability,zabilityztozra
isezcapital,zunlimitedzlife,zandzsozforth.
4. InzresponseztozSarbanes-
Oxley,zsmallzfirmszhavezelectedztozgozdarkzbecausezofzthezcostszofzcompliance.zThezcostsztozcomplyz
withzSarboxzcanzbezseveralzmillionzdollars,zwhichzcanzbezazlargezpercentagez ofz az smallz firmsz profits.
z Az majorz costz ofz goingz darkz isz lessz accessz toz capital.z Sincez thezfirmzisznozlongerzpubliclyztraded,zitzc
anznozlongerzraisezmoneyzinzthezpubliczmarket.zAlthoughzthezcompanyzwillzstillzhavezaccessztozbankzl
oanszandzthezprivatezequityzmarket,zthezcostszassociatedzwithzraisingzfundszinzthesezmarketszarezusuall
yzhigherzthanzthezcostszofzraisingzfundszinzthezpubliczmarket.
5. Thez treasurer’sz officez andz thez controller’sz officez arez thez twoz primaryz organizationalz groupsz thatz
reportzdirectlyztozthezchiefzfinancialzofficer.zThezcontroller’szofficezhandleszcostzandzfinancialzaccounti
ng,ztaxzmanagement,zandzmanagementzinformationzsystems,zwhileztheztreasurer’szofficeziszresponsibl
ez forz cashz andz creditz management,z capitalz budgeting,z andz financialz planning.z Therefore,zthezstudyz
ofzcorporatezfinanceziszconcentratedzwithinztheztreasuryzgroup’szfunctions.
6. Tozmaximizezthezcurrentzmarketzvaluez(sharezprice)zofzthezequityzofzthezfirmz(whetherzit’szpublicly-
ztradedzorznot).
7. Inzthezcorporatezformzofzownership,zthezshareholderszarezthezownerszofzthezfirm.zThezshareholderszele
ctzthezdirectorszofzthezcorporation,zwhozinzturnzappointzthezfirm’szmanagement.zThiszseparationzofzow
nershipzfromzcontrolzinzthezcorporatezformzofzorganizationziszwhatzcauseszagencyzproblemsztozexist.z
Managementzmayzactzinzitszownzorzsomeonezelse’szbestzinterests,zratherzthanzthosezofzthezshareholders
.zIfzsuchzeventszoccur,ztheyzmayzcontradictzthezgoalzofzmaximizingzthezsharezpricezofzthezequityzofzthez
firm.
8. Azprimaryzmarketztransaction.
, B-2z SOLUTIONS
9. InzauctionzmarketszlikezthezNYSE,zbrokerszandzagentszmeetzatzazphysicalzlocationz(thezexchange)ztozm
atchzbuyerszandzsellerszofzassets.zDealerzmarketszlikezNASDAQzconsistzofzdealerszoperatingzatzdisper
sedzlocaleszwhozbuyzandzsellzassetszthemselves,zcommunicatingzwithzotherzdealerszeitherzelectronicall
yzorzliterallyzover-the-counter.
10. Suchzorganizationszfrequentlyzpursuezsocialzorzpoliticalzmissions,zsozmanyzdifferentzgoalszarezconceiv
able.zOnezgoalzthatziszoftenzcitedziszrevenuezminimization;zi.e.,zprovidezwhateverzgoodszandzservicesza
rezofferedzatzthezlowestzpossiblezcostztozsociety.zAzbetterzapproachzmightzbeztozobservezthatzevenzaznot
-for-
profitzbusinesszhaszequity.zThus,zonezanswerziszthatzthezappropriatezgoalzisz tozmaximizezthezvaluezofzt
hezequity.
11. Presumably,zthezcurrentzstockzvaluezreflectszthezrisk,ztiming,zandzmagnitudezofzallzfuturezcashzflows,z
bothzshort-termzandzlong-term.zIfzthisziszcorrect,zthenzthezstatementziszfalse.
12. Anzargumentzcanzbezmadezeitherzway.zAtzthezonezextreme,zwezcouldzarguezthatzinzazmarketzeconomy,z
allzofzthesezthingszarezpriced.zThereziszthuszanzoptimalzlevelzof,zforzexample,zethicalzand/orzillegalzbeh
avior,zandzthezframeworkzofzstockzvaluationzexplicitlyzincludeszthese.zAtzthezotherzextreme,zwezcouldz
arguezthatzthesezareznon-
economiczphenomenazandzarezbestzhandledzthroughzthezpoliticalzprocess.zAzclassicz(andzhighlyzreleva
nt)zthoughtzquestionzthatzillustrateszthiszdebatezgoeszsomethingzlikezthis:z“Azfirmzhaszestimatedzthatzth
ezcostzofzimprovingzthezsafetyzofzonezofzitszproductszisz$30zmillion.zHowever,zthezfirmzbelieveszthatzi
mprovingzthezsafetyzofzthezproductzwillzonlyzsavez$20zmillionzinzproductzliabilityzclaims.zWhatzshoul
dzthezfirmzdo?”
13. Thezgoalzwillzbezthezsame,zbutzthezbestzcoursezofzactionztowardzthatzgoalzmayzbezdifferentzbecausezofz
differingzsocial,zpolitical,zandzeconomiczinstitutions.
14. Thezgoalzofzmanagementzshouldzbeztozmaximizezthezsharezpricezforzthezcurrentzshareholders.zIfzmana
gementzbelieveszthatzitzcanzimprovezthezprofitabilityzofzthezfirmzsozthatzthezsharezpricezwillzexceedz$3
5,zthenztheyzshouldzfightzthezofferzfromzthezoutsidezcompany.zIfzmanagementzbelieveszthatzthiszbidderz
orzotherzunidentifiedzbidderszwillzactuallyzpayzmorezthanz$35zperzshareztozacquirezthezcompany,zthenzt
heyzshouldzstillzfightzthezoffer.zHowever,zifzthezcurrentzmanagementzcannotzincreasezthezvaluezofzthezf
irmzbeyondzthezbidzprice,zandznozotherzhigherzbidszcomezin,zthenzmanagementzisznotzactingzinzthezinte
restszofzthezshareholderszbyzfightingzthezoffer.zSincezcurrentzmanagerszoftenzloseztheirzjobszwhenzthezc
orporationziszacquired,zpoorlyzmonitoredzmanagerszhavezanzincentiveztozfightzcorporateztakeoverszinzs
ituationszsuchzaszthis.
15. Wezwouldzexpectzagencyzproblemsztozbezlesszseverezinzotherzcountries,zprimarilyzdueztozthezrelativelyz
smallzpercentagezofzindividualzownership.zFewerzindividualzownerszshouldzreduceztheznumberzofzdive
rsezopinionszconcerningzcorporatezgoals.zThezhighzpercentagezofzinstitutionalzownershipzmightzleadzto
zazhigherzdegreezofzagreementzbetweenzownerszandzmanagerszonzdecisionszconcerningzriskyzprojects.z
Inzaddition,zinstitutionszmayzbezbetterzableztozimplementzeffectivezmonitoringzmechanismszonzmanag
erszthanzcanzindividualzowners,zbasedzonzthezinstitutions’zdeeperzresourceszandzexperienceszwithztheir
zownzmanagement.zThezincreasezinzinstitutionalzownershipzofzstockzinzthezUnitedzStateszandzthezgrowi
ngzactivismzofzthesezlargezshareholderzgroupszmayzleadztozazreductionzinzagencyzproblemszforzU.S.zco
rporationszandzazmorezefficientzmarketzforzcorporatezcontrol.
