Solutions Manual Corporate Finance 13th Edition By Ross, Westerfield, Jaffe, and Jordan -All Chapters (1-31) Latest Version 2024 A+

Solutions Manualv




For
Corporate Finance
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Ross, Westerfield, Jaffe and Jordan
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13th edition
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, CHAPTER 2 - 2 v v v




CHAPTER 1 v




INTRODUCTIONTOCORPORATE v v




FINANCE
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Answers to Concept Questions
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1. In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect
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vthe directors of the corporation, who in turn appoint the firm‟s management. This separation of
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vownership from control in the corporate form of organization is what causes agency problems to exist.
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vManagement may act in its own or someone else‟s best interests, rather than those of the shareholders.
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vIf such events occur, they may contradict the goal of maximizing the share price of the equity of the
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vfirm.

2. 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
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that even a not-for-profit business has equity. Thus, one answer is that the appropriate goal is to
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maximize the value of the equity.
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3. Presumably, the current stock value reflects the risk, timing, and magnitude of all future cash flows,
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both short-term and long-term. If this is correct, then the statement is false.
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4. An argument can be made either way. At the one extreme, we could argue that in a market
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economy, all of these things are priced. There is thus an optimal level of, for example, ethical
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and/or illegal behavior, and the framework of stock valuation explicitly includes these. At the other
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extreme, we could argue that these are non-economic phenomena and are best handled through the
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political process. A classic (and highly relevant) thought question that illustrates this debate goes
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something like this: “A firm has estimated that the cost of improving the safety of one of its
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products is $30 million. However, the firm believes that improving the safety of the product will
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only save $20 million in product liability claims. What should the firm do?”
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5. The goal will be the same, but the best course of action toward that goal may be different because
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of differing social, political, and economic institutions.
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6. 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
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bidder, or other unidentified bidders, will actually pay more than $35 per share to acquire the company,
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then they should still fight the offer. However, if the current management cannot increase the value of
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the firm beyond the bid price, and no other higher bids come in, then management is not acting in
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the interests of the shareholders by fighting the offer. Since current managers often lose their jobs
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when the corporation is acquired, poorly monitored managers have an incentive to fight corporate
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takeovers in situations such as this.
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, CHAPTER 2 - 3 v v v




7. We would expect agency problems to be less severe in other countries, primarily due to the
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relatively small percentage of individual ownership. Fewer individual owners should reduce the
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number of diverse opinions concerning corporate goals. The high percentage of institutional
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ownership might lead to a higher degree of agreement between owners and managers on decisions
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concerning risky projects. In addition, institutions may be better able to implement effective
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monitoring mechanisms on managers than can individual owners, based on the institutions‟ deeper
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resources and experiences with their own management.
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8. The increase in institutional ownership of stock in the United States and the growing activism of these
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large shareholder groups may lead to a reduction in agency problems for U.S. corporations and a more
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efficient market for corporate control. However, this may not always be the case. If the managers of
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the mutual fund or pension plan are not concerned with the interests of the investors, the agency
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problem could potentially remain the same, or even increase, since there is the possibility of agency
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problems between the fund and its investors.
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9. How much is too much? Who is worth more, Larry Ellison or Tiger Woods? The simplest answer is
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that there is a market for executives just as there is for all types of labor. Executive compensation is
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the price that clears the market. The same is true for athletes and performers. Having said that, one
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aspect of executive compensation deserves comment. A primary reason executive compensation has
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grown so dramatically is that companies have increasingly moved to stock-based compensation. Such
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movement is obviously consistent with the attempt to better align stockholder and management
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interests. In recent years, stock prices have soared, so management has cleaned up. It is sometimes
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argued that much of this reward is due to rising stock prices in general, not managerial
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performance. Perhaps in the future, executive compensation will be designed to reward only
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differential performance, i.e., stock price increases in excess of general market increases.
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10. Maximizing the current share price is the same as maximizing the future share price at any future
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period. The value of a share of stock depends on all of the future cash flows of company. Another way
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to look at this is that, barring large cash payments to shareholders, the expected price of the stock must
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be higher in the future than it is today. Who would buy a stock for $100 today when the share price
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in one year is expected to be $80?
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, CHAPTER 2 v




FINANCIAL STATEMENTS AND CASH v v v




FLOW
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Answers to Concepts Review and Critical Thinking Questions
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1. True. Every asset can be converted to cash at some price. However, when we are referring to a
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liquid asset, the added assumption that the asset can be quickly converted to cash at or near market
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value is important.
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2. The recognition and matching principles in financial accounting call for revenues, and the costs
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associated with producing those revenues, to be “booked” when the revenue process is essentially
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complete, not necessarily when the cash is collected or bills are paid. Note that this way is not
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necessarily correct; it‟s the way accountants have chosen to do it.
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3. The bottom line number shows the change in the cash balance on the balance sheet. As such, it is
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not a useful number for analyzing a company.
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4. The major difference is the treatment of interest expense. The accounting statement of cash flows
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treats interest as an operating cash flow, while the financial cash flows treat interest as a financing
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cash flow. The logic of the accounting statement of cash flows is that since interest appears on the
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income statement, which shows the operations for the period, it is an operating cash flow. In reality,
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interest is a financing expense, which results from the company‟s choice of debt and equity. We
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will have more to say about this in a later chapter. When comparing the two cash flow statements,
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the financial statement of cash flows is a more appropriate measure of the company‟s performance
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because of its treatment of interest.
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5. Market values can never be negative. Imagine a share of stock selling for –$20. This would mean that
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if you placed an order for 100 shares, you would get the stock along with a check for $2,000. How
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many shares do you want to buy? More generally, because of corporate and individual bankruptcy
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laws, net worth for a person or a corporation cannot be negative, implying that liabilities cannot exceed
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assets in market value.
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6. For a successful company that is rapidly expanding, for example, capital outlays will be large, possibly
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leading to negative cash flow from assets. In general, what matters is whether the money is spent
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wisely, not whether cash flow from assets is positive or negative.
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7. It‟s probably not a good sign for an established company to have negative cash flow from
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voperations, but it would be fairly ordinary for a start-up, so it depends.
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