Principles of Corporate Finance 14th Edition Brealey, Myers, Allen, Edmans – Complete Solution Manual

Solution ManualV


PrinciplesVofVCorporateVFinance

byVRichardVA.VBreadley,VStewartVC.VMyers,VFranklinVAllen,VAlexVEdmans
14thVEdition




SOLUTION MANUAL!!! V

, CHAPTERV1
IntroductionVtoVCorporateVFinance


TheVvaluesVshownVinVtheVsolutionsVmayVbeVroundedVforVdisplayVpurposes.VHowever,VtheVanswersV
wereVderivedVusingVaVspreadsheetVwithoutVanyVintermediateVrounding.


AnswersVtoVProblemVSets

1. a. real

b. executiveVairplanes

c. brandVnames

d. financial

e. bonds

*f. investmentVorVcapitalVexpenditure

*g. capitalVbudgetingVorVinvestment

h. financing

*NoteVthatVfVandVgVareVinterchangeableVinVtheVquestion.
EstVtime:V01-05



2. AVtrademark,VaVfactory,VundevelopedVland,VandVyourVworkVforceV(c,Vd,Ve,VandVg)VareVallVr
ealVassets.VRealVassetsVareVidentifiableVasVitemsVwithVintrinsicVvalue.VTheVothersVinVtheVlist
VareVfinancialVassets,VthatVis,VtheseVassetsVderiveVvalueVbecauseVofVaVcontractualVclaim.
EstVtime:V01-05



3. a.
FinancialVassets,VsuchVasVstocksVorVbankVloans,VareVclaimsVheldVbyVinvestor
s.VCorporationsVsellVfinancialVassetsVtoVraiseVtheVcashVtoVinvestVinVrealVassetsVsu
chVasVplantVandVequipment.VSomeVrealVassetsVareVintangible.

b. CapitalVexpenditureVmeansVinvestmentVinVrealVassets.VFinancingVmeansVraisingVth
eVcashVforVthisVinvestment.

c. TheVsharesVofVpublicVcorporationsVareVtradedVonVstockVexchangesVandVcanVbeVpu
rchasedVbyVaVwideVrangeVofVinvestors.VTheVsharesVofVcloselyVheldVcorporationsVa
reVnotVpubliclyVtradedVandVareVheldVbyVaVsmallVgroupVofVprivateVinvestors.

d. UnlimitedVliability:VInvestorsVareVresponsibleVforVallVtheVfirm‘sVdebts.VAVsoleVproprie
torVhasVunlimitedVliability.VInvestorsVinVcorporationsVhaveVlimitedVliability.V TheyVca
nVloseVtheirVinvestment,VbutVnoVmore.
EstVtime:V01-05

,4. ItemsVcVandVdVapplyVtoVcorporations.V BecauseVcorporationsVhaveVperpetualVlife,Vownership
VcanVbeVtransferredVwithoutVaffectingVoperations,VandVmanagersVcanVbeVfiredVwithVnoVeffe
ctVonVownership.VOtherVformsVofVbusinessVmayVhaveVunlimitedVliabilityVandVlimitedVlife.
EstVtime:V01-05



5. SeparationVofVownershipVfacilitatesVtheVkeyVattributesVofVaVcorporation,VincludingVlimitedVlia
bilityVforVinvestors,VtransferabilityVofVownership,VaVseparateVlegalVpersonalityVofVtheVcorpora
tion,VandVdelegatedVcentralizedVmanagement.V TheseVfourVattributesVprovideVsubstantialVbe
nefitVforVinvestors,VincludingVtheVabilityVtoVdiversifyVtheirVinvestmentVamongVmanyVuncorrel
atedVreturns—
aVveryVvaluableVtoolVexploredVinVlaterVchapters.V Also,VtheseVattributesVallowVinvestorsVtoVq
uicklyVexit,Venter,VorVshortVsellVanVinvestment,VtherebyVgeneratingVanVactiveVliquidVmarketV
forVcorporations.

However,VtheseVpositiveVaspectsValsoVintroduceVsubstantialVnegativeVexternalitiesVasVwell.V
TheVseparationVofVownershipVfromVmanagementVtypicallyVleadsVtoVagencyVproblems,Vwhere
VmanagersVpreferVtoVconsumeVprivateVperksVorVmakeVotherVdecisionsVforVtheirVprivateVben
efit—
ratherVthanVmaximizeVshareholderVwealth.V ShareholdersVtendVtoVexerciseVlessVoversightVof
VeachVindividualVinvestmentVasVtheirVdiversificationVincreases.V Finally,VtheVcorporation‘sVsep
arateVlegalVpersonalityVmakesVitVdifficultVtoVenforceVaccountabilityVifVtheyVexternalizeVcostsV
ontoVsociety.
EstVtime:V01-05



6. ShareholdersVwillVonlyVvoteVtoVmaximizeVshareholderVwealth.V ShareholdersVcanVmodify
VtheirVpatternVofVconsumptionVthroughVborrowingVandVlending,VmatchVriskVpreferences,V
andVhopefullyVbalanceVtheirVownVcheckbooksV(orVhireVaVqualifiedVprofessionalVtoVhelpVt
hemVwithVtheseVtasks).
EstVtime:V01-05



7. IfVtheVinvestmentVincreasesVtheVfirm‘sVwealth,VitVincreasesVtheVfirm‘sVshareVvalue.V Ms.V
EspinozaVcouldVthenVsellVsomeVorVallVtheseVmoreVvaluableVsharesVtoVprovideVforVherVr
etirementVincome.
EstVtime:V01-05



8. a.
AssumingVthatVtheVencabulatorVmarketVisVrisky,VanV8%Vexpected
VreturnVonVtheVF&HVencabulatorVinvestmentsVmayVbeVinferiorVtoVaV
4%VreturnVonVU.S.
governmentVsecurities,VdependingVonVtheVrelativeVriskVbetweenVtheVtwoVassets.

b. UnlessVtheVfinancialVassetsVareVasVsafeVasVU.S.VgovernmentVsecurities,VtheirVcostVo
fVcapitalVwouldVbeVhigher.VTheVCFOVcouldVconsiderVexpectedVreturnsVonVassetsVwit
hVsimilarVrisk.
EstVtime:V06-10



9. ManagersVwouldVactVinVshareholders‘VinterestsVbecauseVtheyVhaveVaVlegalVdutyVtoVactVinVt
heirVinterests.V ManagersVmayValsoVreceiveVcompensation—
Vbonuses,Vstock,VandVoptionVpayoutsVwithVvalueVtiedV(roughly)VtoVfirmVperformance.V Manag
ersVmayVfearVpersonalVreputationalVdamageVfromVnotVactingVinVshareholders‘Vinterests.VAnd
VmanagersVcanVbeVfiredVbyVtheVboardVofVdirectorsV(electedVbyVshareholders).V IfVmanagers

, VstillVfailVtoVactVinVshareholders‘Vinterests,VshareholdersVmayVsellVtheirVshares,VloweringVthe
VstockVpriceVandVpotentiallyVcreatingVtheVpossibilityVofVaVtakeover,VwhichVcanVagainVleadVto
VchangesVinVtheVboardVofVdirectorsVandVseniorVmanagement.
EstVtime:V01-05