Full Solution Manual for Fundamentals of Corporate Finance 13th Edition Ross, Westerfield, Jordan – Complete Answers (Chapters 1-27).

Solutions Manual V




FundamentalsVofVCorporateVFinanceV13thVeditio
nVRoss,VWesterfield,VandVJordan

PreparedVb

yVBradVJor

dan
UniversityVofVFlorida

JoeVSmoliraVBelm
ontVUniversity

,CHAPTER 1 V


INTRODUCTION TO CORPORATE FINA V V V


NCE
AnswersVtoVConceptsVReviewVandVCriticalVThinkingVQuestions

1. CapitalVbudgetingV(decidingVwhetherVtoVexpandVaVmanufacturingVplant),VcapitalVstructureV(deci
dingVwhetherVtoVissueVnewVequityVandVuseVtheVproceedsVtoVretireVoutstandingVdebt),VandVwor
kingVcapitalVmanagementV(modifyingVtheVfirm‘sVcreditVcollectionVpolicyVwithVitsVcustomers).

2. Disadvantages:VunlimitedVliability,VlimitedVlife,VdifficultyVinVtransferringVownership,VdifficultyVi
nVraisingVcapitalVfunds.VSomeVadvantages:Vsimpler,VlessVregulation,VtheVownersVareValsoVtheV
managers,VsometimesVpersonalVtaxVratesVareVbetterVthanVcorporateVtaxVrates.

3. TheVprimaryVdisadvantageVofVtheVcorporateVformVisVtheVdoubleVtaxationVtoVshareholdersVofVdi
stributedVearningsVandVdividends.VSomeVadvantagesVinclude:VlimitedVliability,VeaseVofVtransfera
bility,VabilityVtoVraiseVcapital,VandVunlimitedVlife.

4. InVresponseVtoVSarbanes-
Oxley,VsmallVfirmsVhaveVelectedVtoVgoVdarkVbecauseVofVtheVcostsVofVcompliance.VTheVcostsVt
oVcomplyVwithVSarboxVcanVbeVseveralVmillionVdollars,VwhichVcanVbeVaVlargeVpercentageVofVa
VsmallVfirm‘sVprofits.VAVmajorVcostVofVgoingVdarkVisVlessVaccessVtoVcapital.VSinceVtheVfirmVi
sVnoVlongerVpubliclyVtraded,VitVcanVnoVlongerVraiseVmoneyVinVtheVpublicVmarket.VAlthoughVth
eVcompanyVwillVstillVhaveVaccessVtoVbankVloansVandVtheVprivateVequityVmarket,VtheVcostsVass
ociatedVwithVraisingVfundsVinVtheseVmarketsVareVusuallyVhigherVthanVtheVcostsVofVraisingVfund
sVinVtheVpublicVmarket.

5. TheVtreasurer‘sVofficeVandVtheVcontroller‘sVofficeVareVtheVtwoVprimaryVorganizationalVgroupsVt
hatV reportVdirectlyVtoVtheVchiefVfinancialVofficer.VTheVcontroller‘sVofficeVhandlesVcostVandVfin
ancialVaccounting,VtaxVmanagement,VandVmanagementVinformationVsystems,VwhileVtheVtreasurer
‘sVofficeVisVresponsibleVforVcashVandVcreditVmanagement,VcapitalVbudgeting,VandVfinancialVpla
nning.VTherefore,V theVstudyVofVcorporateVfinanceVisVconcentratedVwithinVtheVtreasuryVgroup‘sV
functions.

6. ToVmaximizeVtheVcurrentVmarketVvalueV(shareVprice)VofVtheVequityVofVtheVfirmV(whetherVit‘sV
publiclyVtradedVorVnot).

7. InVtheVcorporateVformVofVownership,VtheVshareholdersVareVtheVownersVofVtheVfirm.VTheVshare
holdersVelectVtheVdirectorsVofVtheVcorporation,VwhoVinVturnVappointVtheVfirm‘sVmanagement.VT
hisVseparationVofVownershipVfromVcontrolVinVtheVcorporateVformVofVorganizationVisVwhatVcaus
esVagencyVproblemsVtoVexist.VManagementVmayVactVinVitsVownVorVsomeoneVelse‘sVbestVintere
sts,VratherVthanVthoseVofVtheVshareholders.VIfVsuchVeventsVoccur,VtheyVmayVcontradictVtheVgoa
lVofVmaximizingVtheVshareVpriceVofVtheVequityVofVtheVfirm.

8. AVprimaryVmarketVtransaction.

,2V SOLUTIONSVMANUAL


9. InVauctionVmarketsVlikeVtheVNYSE,VbrokersVandVagentsVmeetVatVaVphysicalVlocationV(theVexch
ange)VtoVmatchVbuyersVandVsellersVofVassets.VDealerVmarketsVlikeVNASDAQVconsistVofVdealer
sVoperatingVatVdispersedVlocalesVwhoVbuyVandVsellVassetsVthemselves,VcommunicatingVwithVot
herVdealersVeitherVelectronicallyVorVliterallyVover-the-counter.

10. SuchVorganizationsVfrequentlyVpursueVsocialVorVpoliticalVmissions,VsoVmanyVdifferentVgoalsVare
Vconceivable.VOneVgoalVthatVisVoftenVcitedVisVrevenueVminimization;VthatVis,VprovideVwhatever
VgoodsV andVservicesVareVofferedVatVtheVlowestVpossibleVcostVtoVsociety.VAVbetterVapproachVm
ightVbeVtoVobserveVthatVevenVaVnot-for-
profitVbusinessVhasVequity.VThus,VoneVanswerVisVthatVtheVappropriateVgoalVisVtoVmaximizeVthe
VvalueVofVtheVequity.


11. Presumably,VtheVcurrentVstockVvalueVreflectsVtheVrisk,Vtiming,VandVmagnitudeVofVallVfutureVca
shVflows,VbothVshort-termVandVlong-term.VIfVthisVisVcorrect,VthenVtheVstatementVisVfalse.

12. AnVargumentVcanVbeVmadeVeitherVway.VAtVtheVoneVextreme,VweVcouldVargueVthatVinVaVmarke
tVeconomy,VallVofVtheseVthingsVareVpriced.VThereVisVthusVanVoptimalVlevelVof,VforVexample,Ve
thicalVand/orVillegalVbehavior,VandVtheVframeworkVofVstockVvaluationVexplicitlyVincludesVthese.
VAtVtheVotherVextreme,VweVcouldVargueVthatVtheseVareVnoneconomicVphenomenaVandVareVbest
VhandledVthroughVtheVpoliticalVprocess.VAVclassicV(andVhighlyVrelevant)VthoughtVquestionVthat
VillustratesVthisVdebateVgoesVsomethingVlikeVthis:V―AVfirmVhasVestimatedVthatVtheVcostVofVim
provingVtheVsafetyVofVoneVofVitsVproductsVisV$30Vmillion.VHowever,VtheVfirmVbelievesVthatVi
mprovingVtheVsafetyVofVtheVproductVwillVonlyVsaveV$20VmillionVinVproductVliabilityVclaims.V
WhatVshouldVtheVfirmVdo?‖

13. TheVgoalVwillVbeVtheVsame,VbutVtheVbestVcourseVofVactionVtowardVthatVgoalVmayVbeVdifferent
VbecauseVofVdifferingVsocial,Vpolitical,VandVeconomicVinstitutions.


14. TheVgoalVofVmanagementVshouldVbeVtoVmaximizeVtheVshareVpriceVforVtheVcurrentVshareholders
.VIfVmanagementVbelievesVthatVitVcanVimproveVtheVprofitabilityVofVtheVfirmVsoVthatVtheVshareV
priceVwillVexceedV$35,VthenVtheyVshouldVfightVtheVofferVfromVtheVoutsideVcompany.VIfVmanag
ementVbelievesVthatVthisVbidderVorVotherVunidentifiedVbiddersVwillVactuallyVpayVmoreVthanV$3
5VperVshareVtoVacquireVtheVcompany,VthenVtheyVshouldVstillVfightVtheVoffer.VHowever,VifVtheV
currentVmanagementVcannotVincreaseVtheVvalueVofVtheVfirmVbeyondVtheVbidVprice,VandVnoVoth
erVhigherVbidsVcomeVin,VthenVmanagementVisVnotVactingVinVtheVinterestsVofVtheVshareholdersV
byVfightingVtheVoffer.VSinceVcurrentVmanagersVoftenVloseVtheirVjobsVwhenVtheVcorporationVisV
acquired,VpoorlyVmonitoredVmanagersVhaveVanVincentiveVtoVfightVcorporateVtakeoversVinVsituati
onsVsuchVasVthis.

15. WeVwouldVexpectVagencyVproblemsVtoVbeVlessVsevereVinVcountriesVwithVaVrelativelyVsmallVpe
rcentageV ofVindividualVownership.VFewerVindividualVownersVshouldVreduceVtheVnumberVofVdiv
erseVopinionsVconcerningVcorporateVgoals.VTheVhighVpercentageVofVinstitutionalVownershipVmig
htVleadVtoVaVhigherVdegreeVofVagreementVbetweenVownersVandVmanagersVonVdecisionsVconcer
ningVriskyVprojects.VInVaddition,VinstitutionsVmayVbeVbetterVableVtoVimplementVeffectiveVmonit
oringVmechanismsVonVmanagersVthanVcanVindividualVowners,VbasedVonVtheVinstitutions‘Vdeeper
VresourcesVandVexperiencesVwithVtheirVownVmanagement.VTheVincreaseVinVinstitutionalVowners
hipVofVstockVinVtheVUnitedVStatesVandVtheVgrowingVactivismVofVtheseVlargeVshareholderVgroup
sVmayVleadVtoVaVreductionVinVagencyVproblemsVfor
U.S.VcorporationsVandVaVmoreVefficientVmarketVforVcorporateVcontrol.

, CHAPTERV2V-V 3


16. HowVmuchVisVtooVmuch?VWhoVisVworthVmore,VMarkVParkerVorVLeBronVJames?VTheVsimplest
VanswerVisVthatVthereVisVaVmarketVforVexecutivesVjustVasVthereVisVforVallVtypesVofVlabor.VExe
cutiveVcompensationVisVtheVpriceVthatVclearsVtheVmarket.VTheVsameVisVtrueVforVathletesVandVp
erformers.VHavingVsaidVthat,VoneVaspectVofVexecutiveVcompensationVdeservesVcomment.VAVpri
maryVreasonVexecutiveVcompensationVhasVgrownVsoVdramaticallyVisVthatVcompaniesVhaveVincre
asinglyVmovedVtoVstock-
basedVcompensation.V SuchVmovementVisVobviouslyVconsistentVwithVtheVattemptVtoVbetterValign
VstockholderVandVmanagementVinterests.VInVrecentVyears,VstockVpricesVhaveVsoared,VsoVmanage
mentVhasVcleanedVup.VItVisVsometimesVarguedVthatVmuchVofVthisVrewardVisVdueVtoVrisingVstoc
kVpricesVinVgeneral,VnotVmanagerialVperformance.VPerhapsVinVtheVfuture,VexecutiveVcompensati
onVwillVbeVdesignedVtoVrewardVonlyVdifferentialVperformance,VthatVis,VstockVpriceVincreasesVin
VexcessVofVgeneralVmarketVincreases.




CHAPTER 2 V


FINANCIAL STATEMENTS, TAXES, AND CAS
V V V V


H FLOW
V




AnswersVtoVConceptsVReviewVandVCriticalVThinkingVQuestions

1. LiquidityVmeasuresVhowVquicklyVandVeasilyVanVassetVcanVbeVconvertedVtoVcashVwithoutVsignif
icantVlossVinVvalue.VIt‘sVdesirableVforVfirmsVtoVhaveVhighVliquidityVsoVthatVtheyVhaveVaVlarge
VfactorVofVsafetyVinVmeetingVshort-
termVcreditorVdemands.VHowever,VsinceVliquidityValsoVhasVanVopportunityVcostVassociatedVwith
Vit—
namelyVthatVhigherVreturnsVcanVgenerallyVbeVfoundVbyVinvestingVtheVcashVintoVproductiveVass
ets—
lowVliquidityVlevelsVareValsoVdesirableVtoVtheVfirm.VIt‘sVupVtoVtheVfirm‘sVfinancialVmanageme
ntVstaffVtoVfindVaVreasonableVcompromiseVbetweenVtheseVopposingVneeds.

2. TheVrecognitionVandVmatchingVprinciplesVinVfinancialVaccountingVcallVforVrevenues,VandVtheVc
ostsVassociatedVwithVproducingVthoseVrevenues,VtoVbeV―booked‖VwhenVtheVrevenueVprocessVis
VessentiallyVcomplete,VnotVnecessarilyVwhenVtheVcashVisVcollectedVorVbillsVareVpaid.VNoteVthat
VthisVwayVisVnotVnecessarilyVcorrect;Vit‘sVtheVwayVaccountantsVhaveVchosenVtoVdoVit.


3. HistoricalVcostsVcanVbeVobjectivelyVandVpreciselyVmeasuredVwhereasVmarketVvaluesVcanVbeVdif
ficultVtoVestimate,VandVdifferentVanalystsVwouldVcomeVupVwithVdifferentVnumbers.VThus,Vthere
VisVaVtrade-offVbetweenVrelevanceV(marketVvalues)VandVobjectivityV(bookVvalues).


4. DepreciationVisVaVnoncashVdeductionVthatVreflectsVadjustmentsVmadeVinVassetVbookVvaluesVinV
accordanceVwithVtheVmatchingVprincipleVinVfinancialVaccounting.VInterestVexpenseVisVaVcashVo
utlay,VbutVit‘sVaVfinancingVcost,VnotVanVoperatingVcost.

5. MarketVvaluesVcanVneverVbeVnegative.VImagineVaVshareVofVstockVsellingVforV–
$20.VThisVwouldVmeanV thatVifVyouVplacedVanVorderVforV100Vshares,VyouVwouldVgetVtheVstoc
kValongVwithVaVcheckVforV$2,000.VHowVmanyVsharesVdoVyouVwantVtoVbuy?VMoreVgenerally,V
becauseVofVcorporateVandVindividualVbankruptcyVlaws,VnetVworthVforVaVpersonVorVaVcorporatio
nVcannotVbeVnegative,VimplyingVthatVliabilitiesVcannotVexceedVassetsVinVmarketVvalue.