Solutions ManualM
Corporate Finance
M
Ross, Westerfield, and Jaffe9t
M M M M
h
Medition
1
,CHAPTER 1 M
INTRODUCTION TO CORPORATE M M M
FINANCE
AnswersMtoMConceptMQuestions
1. InMtheMcorporateMformMofMownership,MtheMshareholdersMareMtheMownersMofMtheMfirm.MTheMsharehold
ersMelectMtheMdirectorsMofMtheMcorporation,MwhoMinMturnMappointMtheMfirm‘sMmanagement.MThisMsepa
rationMofMownershipMfromMcontrolMinMtheMcorporateMformMofMorganizationMisMwhatMcausesMagencyMp
roblemsMtoMexist.MManagementMmayMactMinMitsMownMorMsomeoneMelse‘sMbestMinterests,MratherMthanMt
hoseMofMtheMshareholders.MIfMsuchMeventsMoccur,MtheyMmayMcontradictMtheMgoalMofMmaximizingMtheM
shareMpriceMofMtheMequityMofMtheMfirm.
2. SuchMorganizationsMfrequentlyMpursueMsocialMorMpoliticalMmissions,MsoMmanyMdifferentMgoalsMareMco
nceivable.MOneMgoalMthatMisMoftenMcitedMisMrevenueMminimization;Mi.e.,MprovideMwhateverMgoodsMan
dMservicesMareMofferedMatMtheMlowestMpossibleMcostMtoMsociety.MAMbetterMapproachMmightMbeMtoMobse
rveMthatMevenMaMnot-for-
profitMbusinessMhasMequity.MThus,MoneManswerMisMthatMtheMappropriateMgoalMisM toMmaximizeMtheMval
ueMofMtheMequity.
3. Presumably,MtheMcurrentMstockMvalueMreflectsMtheMrisk,Mtiming,MandMmagnitudeMofMallMfutureMcashMfl
ows,MbothMshort-termMandMlong-term.MIfMthisMisMcorrect,MthenMtheMstatementMisMfalse.
4. AnMargumentMcanMbeMmadeMeitherMway.MAtMtheMoneMextreme,MweMcouldMargueMthatMinMaMmarketMec
onomy,MallMofMtheseMthingsMareMpriced.MThereMisMthusManMoptimalMlevelMof,MforMexample,MethicalMand
/orMillegalMbehavior,MandMtheMframeworkMofMstockMvaluationMexplicitlyMincludesMthese.MAtMtheMother
Mextreme,MweMcouldMargueMthatMtheseMareMnon-
economicMphenomenaMandMareMbestMhandledMthroughMtheMpoliticalMprocess.MAMclassicM(andMhighlyMr
elevant)MthoughtMquestionMthatMillustratesMthisMdebateMgoesMsomethingMlikeMthis:M―AMfirmMhasMesti
matedMthatMtheMcostMofMimprovingMtheMsafetyMofMoneMofMitsMproductsMisM$30Mmillion.MHowever,Mthe
MfirmMbelievesMthatMimprovingMtheMsafetyMofMtheMproductMwillMonlyMsaveM$20MmillionMinMproductMlia
bilityMclaims.MWhatMshouldMtheMfirmMdo?‖
5. TheMgoalMwillMbeMtheMsame,MbutMtheMbestMcourseMofMactionMtowardMthatMgoalMmayMbeMdifferentMbeca
useMofMdifferingMsocial,Mpolitical,MandMeconomicMinstitutions.
6. TheMgoalMofMmanagementMshouldMbeMtoMmaximizeMtheMshareMpriceMforMtheMcurrentMshareholders.MIfM
managementMbelievesMthatMitMcanMimproveMtheMprofitabilityMofMtheMfirmMsoMthatMtheMshareMpriceMwil
lMexceedM$35,MthenMtheyMshouldMfightMtheMofferMfromMtheMoutsideMcompany.MIfMmanagementMbeliev
esMthatMthisMbidderMorMotherMunidentifiedMbiddersMwillMactuallyMpayMmoreMthanM$35MperMshareMtoMac
quireMtheMcompany,MthenMtheyMshouldMstillMfightMtheMoffer.MHowever,MifMtheMcurrentMmanagementMc
annotMincreaseMtheMvalueMofMtheMfirmMbeyondMtheMbidMprice,MandMnoMotherMhigherMbidsMcomeMin,Mth
enMmanagementMisMnotMactingMinMtheMinterestsMofMtheMshareholdersMbyMfightingMtheMoffer.MSinceMcur
rentMmanagersMoftenMloseMtheirMjobsMwhenMtheMcorporationMisMacquired,MpoorlyMmonitoredMmanager
sMhaveManMincentiveMtoMfightMcorporateMtakeoversMinMsituationsMsuchMasMthis.
2
,7. WeMwouldMexpectMagencyMproblemsMtoMbeMlessMsevereMinMotherMcountries,MprimarilyMdueMtoMtheMrel
ativelyMsmallMpercentageMofMindividualMownership.MFewerMindividualMownersMshouldMreduceMtheMnu
mberMofMdiverseMopinionsMconcerningMcorporateMgoals.MTheMhighMpercentageMofMinstitutionalMowner
shipMmightMleadMtoMaMhigherMdegreeMofMagreementMbetweenMownersMandMmanagersMonMdecisionsMco
ncerningMriskyMprojects.MInMaddition,MinstitutionsMmayMbeMbetterMableMtoMimplementMeffectiveMmonit
oringMmechanismsMonMmanagersMthanMcanMindividualMowners,MbasedMonMtheMinstitutions‘MdeeperMre
sourcesMandMexperiencesMwithMtheirMownMmanagement.
8. TheMincreaseMinMinstitutionalMownershipMofMstockMinMtheMUnitedMStatesMandMtheMgrowingMactivismM
ofMtheseMlargeMshareholderMgroupsMmayMleadMtoMaMreductionMinMagencyMproblemsMforMU.S.Mcorporat
ionsMandMaMmoreMefficientMmarketMforMcorporateMcontrol.MHowever,MthisMmayMnotMalwaysMbeMtheMca
se.MIfMtheMmanagersMofMtheMmutualMfundMorMpensionMplanMareMnotMconcernedMwithMtheMinterestsMofMt
heMinvestors,MtheMagencyMproblemMcouldMpotentiallyMremainMtheMsame,MorMevenMincreaseMsinceMthere
MisMtheMpossibilityMofMagencyMproblemsMbetweenMtheMfundMandMitsMinvestors.
9. HowMmuchMisMtooMmuch?MWhoMisMworthMmore,MRayMIraniMorMTigerMWoods?MTheMsimplestManswerM
isMthatMthereMisMaMmarketMforMexecutivesMjustMasMthereMisMforMallMtypesMofMlabor.MExecutiveMcompen
sationMisMtheMpriceMthatMclearsMtheMmarket.MTheMsameMisMtrueMforMathletesMandMperformers.MHavingM
saidMthat,M oneMaspectMofMexecutiveMcompensationMdeservesMcomment.MAMprimaryMreasonMexecutiveM
compensationMhasMgrownMsoMdramaticallyMisMthatMcompaniesMhaveMincreasinglyMmovedMtoMstock-
basedM compensation.MSuchMmovementMisMobviouslyMconsistentMwithMtheMattemptMtoMbetterMalignMst
ockholderMandMmanagementMinterests.MInMrecentMyears,MstockMpricesMhaveMsoared,MsoMmanagementMh
asMcleanedMup.MItMisMsometimesMarguedMthatMmuchMofMthisMrewardMisMsimplyMdueMtoMrisingMstockMpr
icesMinMgeneral,MnotMmanagerialMperformance.MPerhapsMinMtheMfuture,MexecutiveMcompensationMwill
MbeMdesignedMtoMrewardMonlyMdifferentialMperformance,Mi.e.,MstockMpriceMincreasesMinMexcessMofMgen
eralMmarketMincreases.
10. MaximizingMtheMcurrentMshareMpriceMisMtheMsameMasMmaximizingMtheMfutureMshareMpriceMatManyMfut
ureMperiod.MTheMvalueMofMaMshareMofMstockMdependsMonMallMofMtheMfutureMcashMflowsMofMcompany.M
AnotherMwayMtoMlookMatMthisMisMthat,MbarringMlargeMcashMpaymentsMtoMshareholders,MtheMexpectedMp
riceMofMtheMstockMmustMbeMhigherMinMtheMfutureMthanMitMisMtoday.MWhoMwouldMbuyMaMstockMforM$10
0MtodayMwhenMtheMshareMpriceMinMoneMyearMisMexpectedMtoMbeM$80?
3
, CHAPTER 2 M
FINANCIAL STATEMENTS AND CASH M M M M
FLOW
AnswersMtoMConceptsMReviewMandMCriticalMThinkingMQuestions
1. True.MEveryMassetMcanMbeMconvertedMtoMcashMatMsomeMprice.MHowever,MwhenMweMareMreferringMtoMa
MliquidM
asset,MtheMaddedMassumptionMthatMtheMassetMcanMbeMquicklyMconvertedMtoMcashMatMorMnearMm
arketMvalueMisMimportant.
2. TheMrecognitionMandMmatchingMprinciplesMinMfinancialMaccountingMcallMforMrevenues,MandMtheMcosts
MassociatedMwithMproducingMthoseMrevenues,MtoMbeM―booked‖MwhenMtheMrevenueMprocessMisMessenti
allyMcomplete,MnotMnecessarilyMwhenMtheMcashMisMcollectedMorMbillsMareMpaid.MNoteMthatMthisMwayMis
MnotMnecessarilyMcorrect;Mit‘sMtheMwayMaccountantsMhaveMchosenMtoMdoMit.
3. TheMbottomMlineMnumberMshowsMtheMchangeMinMtheMcashMbalanceMonMtheMbalanceMsheet.MAsMsuch,Mi
tMisMnotMaMusefulMnumberMforManalyzingMaMcompany.
4. TheMmajorMdifferenceMisMtheMtreatmentMofMinterestMexpense.MTheMaccountingMstatementMofMcashMflo
wsMtreatsMinterestMasManMoperatingMcashMflow,MwhileMtheMfinancialMcashMflowsMtreatMinterestMasMaMfi
nancingMcashMflow.MTheMlogicMofMtheMaccountingMstatementMofMcashMflowsMisMthatMsinceMinterestMap
pearsMonMtheMincomeMstatement,MwhichMshowsMtheMoperationsMforMtheMperiod,MitMisManMoperatingMca
shMflow.MInMreality,MinterestMisMaMfinancingMexpense,MwhichMresultsMfromMtheMcompany‘sMchoiceMofM
debtMandMequity.MWeMwillMhaveMmoreMtoMsayMaboutMthisMinMaMlaterMchapter.MWhenMcomparingMtheMt
woMcashMflowMstatements,MtheMfinancialMstatementMofMcashMflowsMisMaMmoreMappropriateMmeasureMo
fMtheMcompany‘sMperformanceMbecauseMofMitsMtreatmentMofMinterest.
5. MarketMvaluesMcanMneverMbeMnegative.MImagineMaMshareMofMstockMsellingMforM –
$20.MThisMwouldMmeanMthatMifMyouMplacedManMorderMforM100Mshares,MyouMwouldMgetMtheMstockMalon
gMwithMaMcheckMforM$2,000.MHowMmanyMsharesMdoMyouMwantMtoMbuy?MMoreMgenerally,MbecauseMofM
corporateMandMindividualMbankruptcyMlaws,MnetMworthMforMaMpersonMorMaMcorporationMcannotMbeMne
gative,MimplyingMthatMliabilitiesMcannotMexceedMassetsMinMmarketMvalue.
6. ForMaMsuccessfulMcompanyMthatMisMrapidlyMexpanding,MforMexample,McapitalMoutlaysMwillMbeMlarge,M
possiblyMleadingMtoMnegativeMcashMflowMfromMassets.MInMgeneral,MwhatMmattersMisMwhetherMtheMmon
eyMisMspentMwisely,MnotMwhetherMcashMflowMfromMassetsMisMpositiveMorMnegative.
7. It‘sMprobablyMnotMaMgoodMsignMforManMestablishedMcompanyMtoMhaveMnegativeMcashMflowM fromMope
rations,MbutMitMwouldMbeMfairlyMordinaryMforMaMstart-up,MsoMitMdepends.
8. ForMexample,MifMaMcompanyMwereMtoMbecomeMmoreMefficientMinMinventoryMmanagement,MtheMamou
ntMofMinventoryMneededMwouldMdecline.MTheMsameMmightMbeMtrueMifMtheMcompanyMbecomesMbetterM
atMcollectingMitsMreceivables.MInMgeneral,ManythingMthatMleadsMtoMaMdeclineMinMendingMNWCMrelative
MtoMbeginningMwouldMhaveMthisMeffect.MNegativeMnetMcapitalMspendingMwouldMmeanMmoreMlong-
livedMassetsMwereMliquidatedMthanMpurchased.
4
Corporate Finance
M
Ross, Westerfield, and Jaffe9t
M M M M
h
Medition
1
,CHAPTER 1 M
INTRODUCTION TO CORPORATE M M M
FINANCE
AnswersMtoMConceptMQuestions
1. InMtheMcorporateMformMofMownership,MtheMshareholdersMareMtheMownersMofMtheMfirm.MTheMsharehold
ersMelectMtheMdirectorsMofMtheMcorporation,MwhoMinMturnMappointMtheMfirm‘sMmanagement.MThisMsepa
rationMofMownershipMfromMcontrolMinMtheMcorporateMformMofMorganizationMisMwhatMcausesMagencyMp
roblemsMtoMexist.MManagementMmayMactMinMitsMownMorMsomeoneMelse‘sMbestMinterests,MratherMthanMt
hoseMofMtheMshareholders.MIfMsuchMeventsMoccur,MtheyMmayMcontradictMtheMgoalMofMmaximizingMtheM
shareMpriceMofMtheMequityMofMtheMfirm.
2. SuchMorganizationsMfrequentlyMpursueMsocialMorMpoliticalMmissions,MsoMmanyMdifferentMgoalsMareMco
nceivable.MOneMgoalMthatMisMoftenMcitedMisMrevenueMminimization;Mi.e.,MprovideMwhateverMgoodsMan
dMservicesMareMofferedMatMtheMlowestMpossibleMcostMtoMsociety.MAMbetterMapproachMmightMbeMtoMobse
rveMthatMevenMaMnot-for-
profitMbusinessMhasMequity.MThus,MoneManswerMisMthatMtheMappropriateMgoalMisM toMmaximizeMtheMval
ueMofMtheMequity.
3. Presumably,MtheMcurrentMstockMvalueMreflectsMtheMrisk,Mtiming,MandMmagnitudeMofMallMfutureMcashMfl
ows,MbothMshort-termMandMlong-term.MIfMthisMisMcorrect,MthenMtheMstatementMisMfalse.
4. AnMargumentMcanMbeMmadeMeitherMway.MAtMtheMoneMextreme,MweMcouldMargueMthatMinMaMmarketMec
onomy,MallMofMtheseMthingsMareMpriced.MThereMisMthusManMoptimalMlevelMof,MforMexample,MethicalMand
/orMillegalMbehavior,MandMtheMframeworkMofMstockMvaluationMexplicitlyMincludesMthese.MAtMtheMother
Mextreme,MweMcouldMargueMthatMtheseMareMnon-
economicMphenomenaMandMareMbestMhandledMthroughMtheMpoliticalMprocess.MAMclassicM(andMhighlyMr
elevant)MthoughtMquestionMthatMillustratesMthisMdebateMgoesMsomethingMlikeMthis:M―AMfirmMhasMesti
matedMthatMtheMcostMofMimprovingMtheMsafetyMofMoneMofMitsMproductsMisM$30Mmillion.MHowever,Mthe
MfirmMbelievesMthatMimprovingMtheMsafetyMofMtheMproductMwillMonlyMsaveM$20MmillionMinMproductMlia
bilityMclaims.MWhatMshouldMtheMfirmMdo?‖
5. TheMgoalMwillMbeMtheMsame,MbutMtheMbestMcourseMofMactionMtowardMthatMgoalMmayMbeMdifferentMbeca
useMofMdifferingMsocial,Mpolitical,MandMeconomicMinstitutions.
6. TheMgoalMofMmanagementMshouldMbeMtoMmaximizeMtheMshareMpriceMforMtheMcurrentMshareholders.MIfM
managementMbelievesMthatMitMcanMimproveMtheMprofitabilityMofMtheMfirmMsoMthatMtheMshareMpriceMwil
lMexceedM$35,MthenMtheyMshouldMfightMtheMofferMfromMtheMoutsideMcompany.MIfMmanagementMbeliev
esMthatMthisMbidderMorMotherMunidentifiedMbiddersMwillMactuallyMpayMmoreMthanM$35MperMshareMtoMac
quireMtheMcompany,MthenMtheyMshouldMstillMfightMtheMoffer.MHowever,MifMtheMcurrentMmanagementMc
annotMincreaseMtheMvalueMofMtheMfirmMbeyondMtheMbidMprice,MandMnoMotherMhigherMbidsMcomeMin,Mth
enMmanagementMisMnotMactingMinMtheMinterestsMofMtheMshareholdersMbyMfightingMtheMoffer.MSinceMcur
rentMmanagersMoftenMloseMtheirMjobsMwhenMtheMcorporationMisMacquired,MpoorlyMmonitoredMmanager
sMhaveManMincentiveMtoMfightMcorporateMtakeoversMinMsituationsMsuchMasMthis.
2
,7. WeMwouldMexpectMagencyMproblemsMtoMbeMlessMsevereMinMotherMcountries,MprimarilyMdueMtoMtheMrel
ativelyMsmallMpercentageMofMindividualMownership.MFewerMindividualMownersMshouldMreduceMtheMnu
mberMofMdiverseMopinionsMconcerningMcorporateMgoals.MTheMhighMpercentageMofMinstitutionalMowner
shipMmightMleadMtoMaMhigherMdegreeMofMagreementMbetweenMownersMandMmanagersMonMdecisionsMco
ncerningMriskyMprojects.MInMaddition,MinstitutionsMmayMbeMbetterMableMtoMimplementMeffectiveMmonit
oringMmechanismsMonMmanagersMthanMcanMindividualMowners,MbasedMonMtheMinstitutions‘MdeeperMre
sourcesMandMexperiencesMwithMtheirMownMmanagement.
8. TheMincreaseMinMinstitutionalMownershipMofMstockMinMtheMUnitedMStatesMandMtheMgrowingMactivismM
ofMtheseMlargeMshareholderMgroupsMmayMleadMtoMaMreductionMinMagencyMproblemsMforMU.S.Mcorporat
ionsMandMaMmoreMefficientMmarketMforMcorporateMcontrol.MHowever,MthisMmayMnotMalwaysMbeMtheMca
se.MIfMtheMmanagersMofMtheMmutualMfundMorMpensionMplanMareMnotMconcernedMwithMtheMinterestsMofMt
heMinvestors,MtheMagencyMproblemMcouldMpotentiallyMremainMtheMsame,MorMevenMincreaseMsinceMthere
MisMtheMpossibilityMofMagencyMproblemsMbetweenMtheMfundMandMitsMinvestors.
9. HowMmuchMisMtooMmuch?MWhoMisMworthMmore,MRayMIraniMorMTigerMWoods?MTheMsimplestManswerM
isMthatMthereMisMaMmarketMforMexecutivesMjustMasMthereMisMforMallMtypesMofMlabor.MExecutiveMcompen
sationMisMtheMpriceMthatMclearsMtheMmarket.MTheMsameMisMtrueMforMathletesMandMperformers.MHavingM
saidMthat,M oneMaspectMofMexecutiveMcompensationMdeservesMcomment.MAMprimaryMreasonMexecutiveM
compensationMhasMgrownMsoMdramaticallyMisMthatMcompaniesMhaveMincreasinglyMmovedMtoMstock-
basedM compensation.MSuchMmovementMisMobviouslyMconsistentMwithMtheMattemptMtoMbetterMalignMst
ockholderMandMmanagementMinterests.MInMrecentMyears,MstockMpricesMhaveMsoared,MsoMmanagementMh
asMcleanedMup.MItMisMsometimesMarguedMthatMmuchMofMthisMrewardMisMsimplyMdueMtoMrisingMstockMpr
icesMinMgeneral,MnotMmanagerialMperformance.MPerhapsMinMtheMfuture,MexecutiveMcompensationMwill
MbeMdesignedMtoMrewardMonlyMdifferentialMperformance,Mi.e.,MstockMpriceMincreasesMinMexcessMofMgen
eralMmarketMincreases.
10. MaximizingMtheMcurrentMshareMpriceMisMtheMsameMasMmaximizingMtheMfutureMshareMpriceMatManyMfut
ureMperiod.MTheMvalueMofMaMshareMofMstockMdependsMonMallMofMtheMfutureMcashMflowsMofMcompany.M
AnotherMwayMtoMlookMatMthisMisMthat,MbarringMlargeMcashMpaymentsMtoMshareholders,MtheMexpectedMp
riceMofMtheMstockMmustMbeMhigherMinMtheMfutureMthanMitMisMtoday.MWhoMwouldMbuyMaMstockMforM$10
0MtodayMwhenMtheMshareMpriceMinMoneMyearMisMexpectedMtoMbeM$80?
3
, CHAPTER 2 M
FINANCIAL STATEMENTS AND CASH M M M M
FLOW
AnswersMtoMConceptsMReviewMandMCriticalMThinkingMQuestions
1. True.MEveryMassetMcanMbeMconvertedMtoMcashMatMsomeMprice.MHowever,MwhenMweMareMreferringMtoMa
MliquidM
asset,MtheMaddedMassumptionMthatMtheMassetMcanMbeMquicklyMconvertedMtoMcashMatMorMnearMm
arketMvalueMisMimportant.
2. TheMrecognitionMandMmatchingMprinciplesMinMfinancialMaccountingMcallMforMrevenues,MandMtheMcosts
MassociatedMwithMproducingMthoseMrevenues,MtoMbeM―booked‖MwhenMtheMrevenueMprocessMisMessenti
allyMcomplete,MnotMnecessarilyMwhenMtheMcashMisMcollectedMorMbillsMareMpaid.MNoteMthatMthisMwayMis
MnotMnecessarilyMcorrect;Mit‘sMtheMwayMaccountantsMhaveMchosenMtoMdoMit.
3. TheMbottomMlineMnumberMshowsMtheMchangeMinMtheMcashMbalanceMonMtheMbalanceMsheet.MAsMsuch,Mi
tMisMnotMaMusefulMnumberMforManalyzingMaMcompany.
4. TheMmajorMdifferenceMisMtheMtreatmentMofMinterestMexpense.MTheMaccountingMstatementMofMcashMflo
wsMtreatsMinterestMasManMoperatingMcashMflow,MwhileMtheMfinancialMcashMflowsMtreatMinterestMasMaMfi
nancingMcashMflow.MTheMlogicMofMtheMaccountingMstatementMofMcashMflowsMisMthatMsinceMinterestMap
pearsMonMtheMincomeMstatement,MwhichMshowsMtheMoperationsMforMtheMperiod,MitMisManMoperatingMca
shMflow.MInMreality,MinterestMisMaMfinancingMexpense,MwhichMresultsMfromMtheMcompany‘sMchoiceMofM
debtMandMequity.MWeMwillMhaveMmoreMtoMsayMaboutMthisMinMaMlaterMchapter.MWhenMcomparingMtheMt
woMcashMflowMstatements,MtheMfinancialMstatementMofMcashMflowsMisMaMmoreMappropriateMmeasureMo
fMtheMcompany‘sMperformanceMbecauseMofMitsMtreatmentMofMinterest.
5. MarketMvaluesMcanMneverMbeMnegative.MImagineMaMshareMofMstockMsellingMforM –
$20.MThisMwouldMmeanMthatMifMyouMplacedManMorderMforM100Mshares,MyouMwouldMgetMtheMstockMalon
gMwithMaMcheckMforM$2,000.MHowMmanyMsharesMdoMyouMwantMtoMbuy?MMoreMgenerally,MbecauseMofM
corporateMandMindividualMbankruptcyMlaws,MnetMworthMforMaMpersonMorMaMcorporationMcannotMbeMne
gative,MimplyingMthatMliabilitiesMcannotMexceedMassetsMinMmarketMvalue.
6. ForMaMsuccessfulMcompanyMthatMisMrapidlyMexpanding,MforMexample,McapitalMoutlaysMwillMbeMlarge,M
possiblyMleadingMtoMnegativeMcashMflowMfromMassets.MInMgeneral,MwhatMmattersMisMwhetherMtheMmon
eyMisMspentMwisely,MnotMwhetherMcashMflowMfromMassetsMisMpositiveMorMnegative.
7. It‘sMprobablyMnotMaMgoodMsignMforManMestablishedMcompanyMtoMhaveMnegativeMcashMflowM fromMope
rations,MbutMitMwouldMbeMfairlyMordinaryMforMaMstart-up,MsoMitMdepends.
8. ForMexample,MifMaMcompanyMwereMtoMbecomeMmoreMefficientMinMinventoryMmanagement,MtheMamou
ntMofMinventoryMneededMwouldMdecline.MTheMsameMmightMbeMtrueMifMtheMcompanyMbecomesMbetterM
atMcollectingMitsMreceivables.MInMgeneral,ManythingMthatMleadsMtoMaMdeclineMinMendingMNWCMrelative
MtoMbeginningMwouldMhaveMthisMeffect.MNegativeMnetMcapitalMspendingMwouldMmeanMmoreMlong-
livedMassetsMwereMliquidatedMthanMpurchased.
4
