Fundamentals of Corporate Finance 13th Edition Solution Manual | Ross, Westerfield, Jordan

Solutions Manual j




Fundamentals of Corporate Finance 13th edition R
j j j j j j

oss, Westerfield, and Jordan
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Preparedjbyj

BradjJordan
UniversityjofjFlorida

JoejSmolirajBelmo
ntjUniversity

,CHAPTER 1 j



INTRODUCTION TO CORPORATE FINAN j j j


CE
AnswersjtojConceptsjReviewjandjCriticaljThinkingjQuestions

1. Capitaljbudgetingj(decidingjwhetherjtojexpandjajmanufacturingjplant),jcapitaljstructurej(decidingjwhet
herjtojissuejnewjequityjandjusejthejproceedsjtojretirejoutstandingjdebt),jandjworkingjcapitaljmanageme
ntj(modifyingjthejfirm‘sjcreditjcollectionjpolicyjwithjitsjcustomers).

2. Disadvantages:junlimitedjliability,jlimitedjlife,jdifficultyjinjtransferringjownership,jdifficultyjinjraising
jcapitaljfunds.jSomejadvantages:jsimpler,jlessjregulation,jthejownersjarejalsojthejmanagers,jsometimesj
personaljtaxjratesjarejbetterjthanjcorporatejtaxjrates.

3. Thejprimaryjdisadvantagejofjthejcorporatejformjisjthejdoublejtaxationjtojshareholdersjofjdistributedjear
ningsjandjdividends.jSomejadvantagesjinclude:jlimitedjliability,jeasejofjtransferability,jabilityjtojraisejc
apital,jandjunlimitedjlife.

4. InjresponsejtojSarbanes-
Oxley,jsmalljfirmsjhavejelectedjtojgojdarkjbecausejofjthejcostsjofjcompliance.jThejcostsjtojcomplyjwith
jSarboxjcanjbejseveraljmillionjdollars,jwhichjcanjbejajlargejpercentagejofjajsmalljfirm‘sjprofits.jAjmajor
jcostjofjgoingjdarkjisjlessjaccessjtojcapital.jSincejthejfirmjisjnojlongerjpubliclyjtraded,jitjcanjnojlongerjra
isejmoneyjinjthejpublicjmarket.jAlthoughjthejcompanyjwilljstilljhavejaccessjtojbankjloansjandjthejprivat
ejequityjmarket,jthejcostsjassociatedjwithjraisingjfundsjinjthesejmarketsjarejusuallyjhigherjthanjthejcost
sjofjraisingjfundsjinjthejpublicjmarket.

5. Thejtreasurer‘sjofficejandjthejcontroller‘sjofficejarejthejtwojprimaryjorganizationaljgroupsjthatj reportjd
irectlyjtojthejchiefjfinancialjofficer.jThejcontroller‘sjofficejhandlesjcostjandjfinancialjaccounting,jtaxjm
anagement,jandjmanagementjinformationjsystems,jwhilejthejtreasurer‘sjofficejisjresponsiblejforjcashja
ndjcreditjmanagement,jcapitaljbudgeting,jandjfinancialjplanning.jTherefore,j thejstudyjofjcorporatejfina
ncejisjconcentratedjwithinjthejtreasuryjgroup‘sjfunctions.

6. Tojmaximizejthejcurrentjmarketjvaluej(sharejprice)jofjthejequityjofjthejfirmj(whetherjit‘sjpubliclyjtrade
djorjnot).

7. Injthejcorporatejformjofjownership,jthejshareholdersjarejthejownersjofjthejfirm.jThejshareholdersjelectjt
hejdirectorsjofjthejcorporation,jwhojinjturnjappointjthejfirm‘sjmanagement.jThisjseparationjofjownershi
pjfromjcontroljinjthejcorporatejformjofjorganizationjisjwhatjcausesjagencyjproblemsjtojexist.jManagem
entjmayjactjinjitsjownjorjsomeonejelse‘sjbestjinterests,jratherjthanjthosejofjthejshareholders.jIfjsuchjeve
ntsjoccur,jtheyjmayjcontradictjthejgoaljofjmaximizingjthejsharejpricejofjthejequityjofjthejfirm.

8. Ajprimaryjmarketjtransaction.

,2j SOLUTIONSjMANUAL


9. InjauctionjmarketsjlikejthejNYSE,jbrokersjandjagentsjmeetjatjajphysicaljlocationj(thejexchange)jtojmat
chjbuyersjandjsellersjofjassets.jDealerjmarketsjlikejNASDAQjconsistjofjdealersjoperatingjatjdispersedjl
ocalesjwhojbuyjandjselljassetsjthemselves,jcommunicatingjwithjotherjdealersjeitherjelectronicallyjorjlit
erallyjover-the-counter.

10. Suchjorganizationsjfrequentlyjpursuejsocialjorjpoliticaljmissions,jsojmanyjdifferentjgoalsjarejconceiva
ble.jOnejgoaljthatjisjoftenjcitedjisjrevenuejminimization;jthatjis,jprovidejwhateverjgoodsj andjservicesja
rejofferedjatjthejlowestjpossiblejcostjtojsociety.jAjbetterjapproachjmightjbejtojobservejthatjevenjajnot-
for-
profitjbusinessjhasjequity.jThus,jonejanswerjisjthatjthejappropriatejgoaljisjtojmaximizejthejvaluejofjtheje
quity.

11. Presumably,jthejcurrentjstockjvaluejreflectsjthejrisk,jtiming,jandjmagnitudejofjalljfuturejcashjflows,jbot
hjshort-termjandjlong-term.jIfjthisjisjcorrect,jthenjthejstatementjisjfalse.

12. Anjargumentjcanjbejmadejeitherjway.jAtjthejonejextreme,jwejcouldjarguejthatjinjajmarketjeconomy,jallj
ofjthesejthingsjarejpriced.jTherejisjthusjanjoptimaljleveljof,jforjexample,jethicaljand/orjillegaljbehavior,j
andjthejframeworkjofjstockjvaluationjexplicitlyjincludesjthese.jAtjthejotherjextreme,jwejcouldjarguejtha
tjthesejarejnoneconomicjphenomenajandjarejbestjhandledjthroughjthejpoliticaljprocess.jAjclassicj(andjh
ighlyjrelevant)jthoughtjquestionjthatjillustratesjthisjdebatejgoesjsomethingjlikejthis:j―Ajfirmjhasjestim
atedjthatjthejcostjofjimprovingjthejsafetyjofjonejofjitsjproductsjisj$30jmillion.jHowever,jthejfirmjbelieve
sjthatjimprovingjthejsafetyjofjthejproductjwilljonlyjsavej$20jmillionjinjproductjliabilityjclaims.jWhatjsh
ouldjthejfirmjdo?‖

13. Thejgoaljwilljbejthejsame,jbutjthejbestjcoursejofjactionjtowardjthatjgoaljmayjbejdifferentjbecausejofjdiff
eringjsocial,jpolitical,jandjeconomicjinstitutions.

14. Thejgoaljofjmanagementjshouldjbejtojmaximizejthejsharejpricejforjthejcurrentjshareholders.jIfjmanage
mentjbelievesjthatjitjcanjimprovejthejprofitabilityjofjthejfirmjsojthatjthejsharejpricejwilljexceedj$35,jthe
njtheyjshouldjfightjthejofferjfromjthejoutsidejcompany.jIfjmanagementjbelievesjthatjthisjbidderjorjotherj
unidentifiedjbiddersjwilljactuallyjpayjmorejthanj$35jperjsharejtojacquirejthejcompany,jthenjtheyjshould
jstilljfightjthejoffer.jHowever,jifjthejcurrentjmanagementjcannotjincreasejthejvaluejofjthejfirmjbeyondjth
ejbidjprice,jandjnojotherjhigherjbidsjcomejin,jthenjmanagementjisjnotjactingjinjthejinterestsjofjthejshare
holdersjbyjfightingjthejoffer.jSincejcurrentjmanagersjoftenjlosejtheirjjobsjwhenjthejcorporationjisjacqui
red,jpoorlyjmonitoredjmanagersjhavejanjincentivejtojfightjcorporatejtakeoversjinjsituationsjsuchjasjthis.

15. Wejwouldjexpectjagencyjproblemsjtojbejlessjseverejinjcountriesjwithjajrelativelyjsmalljpercentagej ofjin
dividualjownership.jFewerjindividualjownersjshouldjreducejthejnumberjofjdiversejopinionsjconcerning
jcorporatejgoals.jThejhighjpercentagejofjinstitutionaljownershipjmightjleadjtojajhigherjdegreejofjagree
mentjbetweenjownersjandjmanagersjonjdecisionsjconcerningjriskyjprojects.jInjaddition,jinstitutionsjma
yjbejbetterjablejtojimplementjeffectivejmonitoringjmechanismsjonjmanagersjthanjcanjindividualjowner
s,jbasedjonjthejinstitutions‘jdeeperjresourcesjandjexperiencesjwithjtheirjownjmanagement.jThejincrease
jinjinstitutionaljownershipjofjstockjinjthejUnitedjStatesjandjthejgrowingjactivismjofjthesejlargejsharehol
derjgroupsjmayjleadjtojajreductionjinjagencyjproblemsjfor
U.S.jcorporationsjandjajmorejefficientjmarketjforjcorporatejcontrol.

, CHAPTERj2j-j 3


16. Howjmuchjisjtoojmuch?jWhojisjworthjmore,jMarkjParkerjorjLeBronjJames?jThejsimplestjanswerjisjtha
tjtherejisjajmarketjforjexecutivesjjustjasjtherejisjforjalljtypesjofjlabor.jExecutivejcompensationjisjthejpric
ejthatjclearsjthejmarket.jThejsamejisjtruejforjathletesjandjperformers.jHavingjsaidjthat,jonejaspectjofjexe
cutivejcompensationjdeservesjcomment.jAjprimaryjreasonjexecutivejcompensationjhasjgrownjsojdram
aticallyjisjthatjcompaniesjhavejincreasinglyjmovedjtojstock-
basedjcompensation.j Suchjmovementjisjobviouslyjconsistentjwithjthejattemptjtojbetterjalignjstockhold
erjandjmanagementjinterests.jInjrecentjyears,jstockjpricesjhavejsoared,jsojmanagementjhasjcleanedjup.j
Itjisjsometimesjarguedjthatjmuchjofjthisjrewardjisjduejtojrisingjstockjpricesjinjgeneral,jnotjmanagerialjp
erformance.jPerhapsjinjthejfuture,jexecutivejcompensationjwilljbejdesignedjtojrewardjonlyjdifferentialj
performance,jthatjis,jstockjpricejincreasesjinjexcessjofjgeneraljmarketjincreases.



CHAPTER 2 j


FINANCIAL STATEMENTS, TAXES, AND CASH
j j j j j


FLOW
AnswersjtojConceptsjReviewjandjCriticaljThinkingjQuestions

1. Liquidityjmeasuresjhowjquicklyjandjeasilyjanjassetjcanjbejconvertedjtojcashjwithoutjsignificantjlossjinj
value.jIt‘sjdesirablejforjfirmsjtojhavejhighjliquidityjsojthatjtheyjhavejajlargejfactorjofjsafetyjinjmeetingjs
hort-termjcreditorjdemands.jHowever,jsincejliquidityjalsojhasjanjopportunityjcostjassociatedjwithjit—
namelyjthatjhigherjreturnsjcanjgenerallyjbejfoundjbyjinvestingjthejcashjintojproductivejassets—
lowjliquidityjlevelsjarejalsojdesirablejtojthejfirm.jIt‘sjupjtojthejfirm‘sjfinancialjmanagementjstaffjtojfind
jajreasonablejcompromisejbetweenjthesejopposingjneeds.


2. Thejrecognitionjandjmatchingjprinciplesjinjfinancialjaccountingjcalljforjrevenues,jandjthejcostsjassocia
tedjwithjproducingjthosejrevenues,jtojbej―booked‖jwhenjthejrevenuejprocessjisjessentiallyjcomplete,jn
otjnecessarilyjwhenjthejcashjisjcollectedjorjbillsjarejpaid.jNotejthatjthisjwayjisjnotjnecessarilyjcorrect;jit
‘sjthejwayjaccountantsjhavejchosenjtojdojit.

3. Historicaljcostsjcanjbejobjectivelyjandjpreciselyjmeasuredjwhereasjmarketjvaluesjcanjbejdifficultjtojest
imate,jandjdifferentjanalystsjwouldjcomejupjwithjdifferentjnumbers.jThus,jtherejisjajtrade-
offjbetweenjrelevancej(marketjvalues)jandjobjectivityj(bookjvalues).

4. Depreciationjisjajnoncashjdeductionjthatjreflectsjadjustmentsjmadejinjassetjbookjvaluesjinjaccordancej
withjthejmatchingjprinciplejinjfinancialjaccounting.jInterestjexpensejisjajcashjoutlay,jbutjit‘sjajfinancin
gjcost,jnotjanjoperatingjcost.

5. Marketjvaluesjcanjneverjbejnegative.jImaginejajsharejofjstockjsellingjforj–
$20.jThisjwouldjmeanj thatjifjyoujplacedjanjorderjforj100jshares,jyoujwouldjgetjthejstockjalongjwithjajc
heckjforj$2,000.jHowjmanyjsharesjdojyoujwantjtojbuy?jMorejgenerally,jbecausejofjcorporatejandjindiv
idualjbankruptcyjlaws,jnetjworthjforjajpersonjorjajcorporationjcannotjbejnegative,jimplyingjthatjliabiliti
esjcannotjexceedjassetsjinjmarketjvalue.