Solutions Manual m
Fundamentals of Corporate Finance 12th edition Ross
m m m m m m
, Westerfield, and Jordan
m m m
06-15-2018
Prepared mby
mBrad m Jorda
n
University m of m Kentucky
JoemSmoliramBelmo
ntmUniversity
Downloadedmbymdwfqmqegm(
,Downloadedmbymdwfqmqegm(
,CHAPTER 1 m
INTRODUCTION TO CORPORATE FINAN m m m
CE
AnswersmtomConceptsmReviewmandmCriticalmThinkingmQuestions
1. Capitalmbudgetingm(decidingmwhethermtom expandmammanufacturingmplant), mcapitalmstructurem(decidin
gmwhether mtomissuemnewm equitymandmusemthemproceedsmtomretiremoutstandingmdebt), mandmworkingmca
pitalmmanagementm(modifyingmthemfirm’smcreditmcollectionmpolicymwithmitsmcustomers).
2. Disadvantages:munlimitedmliability, mlimitedmlife, mdifficultyminmtransferringmownership, mdifficultyminm
raisingmcapitalmfunds. mSomemadvantages:msimpler, mlessmregulation, mthemownersm aremalsomthemmanage
rs, msometimesmpersonalmtaxmratesmarembettermthanmcorporatemtaxmrates.
3. Themprimarymdisadvantagemofmthem corporatemformmismthemdoublemtaxationmtomshareholdersmofmdistrib
utedmearningsmandmdividends. mSomemadvantagesminclude:mlimitedmliability, measemofmtransferability, m
abilitymtomraisemcapital, mandmunlimitedmlife.
4. InmresponsemtomSarbanes-
Oxley, msmallmfirmsmhavemelectedmtomgomdarkmbecausemofmthemcostsmofmcompliance. mThemcostsmtomcomp
lymwithmSarboxmcanmbemseveralmmillionmdollars, mwhichmcanmbemamlargempercentagemofmamsmallmfirm’s
mprofits. mAmmajor mcostmof mgoingmdarkmismlessmaccessmtomcapital. mSincemthemfirmmismnomlonger mpublicl
ymtraded, mitmcanmnomlongermraisemmoney minmthempublicmmarket. mAlthoughmthemcompany mwillmstillmha
vemaccessmtombankmloans mandmthemprivatem equitymmarket, mthemcosts massociatedm withmraisingmfundsmin
mthesemmarketsmaremusuallymhigher mthanmthemcostsmof mraisingmfundsminmthempublicmmarket.
5. Themtreasurer’smofficemandmthe mcontroller’smofficemaremthe mtwomprimarymorganizationalmgroupsmthatmre
portmdirectlymtomthemchiefmfinancialmofficer. mThemcontroller’smofficemhandlesmcostmandmfinancialmaccou
nting, mtaxmmanagement, mandmmanagementminformationmsystems, mwhilemthemtreasurer’smofficemismrespo
nsiblemformcashmandmcreditmmanagement, mcapitalmbudgeting, mandmfinancialmplanning. mTherefore, mthem
studymofmcorporatemfinancemismconcentratedmwithinmthemtreasurymgroup’smfunctions.
6. Tommaximizemthem currentmmarketmvaluem(sharemprice)mofmthem equitymofmthemfirmm(whether mit’smpubli
clymtradedmormnot).
7. Inmthemcorporatemformmofmownership, mthemshareholdersmaremthemownersmofmthemfirm.mThemshareholdersm
electmthemdirectorsmofmthemcorporation, mwhominmturnmappointmthemfirm’smmanagement. mThism separati
onmofmownershipmfrommcontrolminmthemcorporatemformmofmorganizationmis mwhatmcausesmagencymproble
msmtomexist. mManagementmmay mactmin mitsmown mormsomeone melse’smbest minterests, mrather mthan mthosemof
mthemshareholders. mIf msuchmeventsmoccur, mtheymmaymcontradictmthemgoalmof mmaximizingmthem sharempr
icemofmthemequitymofmthemfirm.
8. Amprimarymmarketmtransaction.
Downloadedmbymdwfqmqegm(
, 2m SOLUTIONSmMANUAL
9. InmauctionmmarketsmlikemthemNYSE, mbrokersmandmagentsmmeet matmamphysicalmlocationm(them exchange
)mtommatchmbuyersmandm sellersmofmassets. mDealermmarkets mlikemNASDAQmconsistmofmdealersmoperati
ngmatmdispersed mlocales mwhombuymand msellmassetsmthemselves, mcommunicatingmwithmother mdealersme
ithermelectronicallymormliterallymover-the-counter.
10. Suchmorganizationsmfrequentlympursuem socialmormpoliticalmmissions, msommany mdifferentmgoalsmaremco
nceivable. mOnemgoal mthatmis moftenmcited mismrevenuemminimization;mthatmis, mprovidemwhatevermgoodsma
ndmservicesmaremofferedmatmthemlowestmpossiblemcostmtomsociety. mAmbettermapproachmmightmbemtomobs
ervemthatmevenma mnot-for-
profitmbusinessmhas mequity. mThus, monemanswermismthatmthe mappropriatemgoal mismto mmaximizemthemvalue
mof mthemequity.
11. Presumably, mthemcurrentmstockmvaluemreflectsmthemrisk, mtiming, mandmmagnitudemofmallmfuturemcashmfl
ows, mbothmshort-termmandmlong-term. mIfmthismismcorrect, mthenmthemstatementmismfalse.
12. Anmargumentmcanmbemmademeithermway. mAtmthemonemextreme,mwemcouldmarguemthatminmammarketmecon
omy, mallmofmthesemthingsmarempriced. m Theremismthusmanmoptimalmlevelmof, mformexample, methicalmand/o
rmillegalmbehavior, mandmthemframeworkmofmstockmvaluationmexplicitlymincludesmthese. mAtmthemotherme
xtreme, mwemcouldmarguemthatmthesemaremnoneconomicmphenomenamandmarembestmhandledmthroughmthem
politicalmprocess. mAmclassicm(andmhighlymrelevant) mthoughtmquestionmthatmillustratesmthismdebate mgoe
smsomethingmlikemthis:m“Amfirmmhasm estimatedmthatmthemcostmofmimprovingmthem safetymofmonemofmitsm
productsmism$30mmillion. mHowever, mthemfirmmbelievesmthatmimprovingmthem safetymofmthemproductmwi
llmonlymsavem$20mmillionminmproductmliabilitymclaims. mWhatmshouldmthemfirmmdo?”
13. Themgoalmwillmbemthemsame, mbutmthembestmcoursemofmactionmtowardmthatmgoalmmaymbemdifferentmbeca
usemofmdifferingmsocial, mpolitical, mandmeconomicminstitutions.
14. Themgoalmofmmanagementmshouldmbemtommaximizemthe msharemprice mformthemcurrentmshareholders. mIfm
managementmbelievesmthatmitmcanmimprovemthemprofitabilitymofmthemfirmmsomthatmthemsharempricemwillme
xceed
$35, mthenmtheymshouldmfightmthemoffermfrommthemoutsidemcompany. mIfmmanagementmbelievesmthatmthismbi
ddermormothermunidentifiedmbiddersmwillmactuallympaymmoremthanm$35mpermsharemtomacquiremthemcom
pany, mthenmtheymshouldmstillmfightmthemoffer. mHowever, mifmthemcurrentmmanagementmcannotmincreasem
themvaluemofmthemfirmmbeyondmthembidmprice, mandmnomothermhighermbidsmcomemin, mthenmmanagement
mismnotmactingminmthe minterestsmof mthem shareholdersmbymfightingmthemoffer. mSincemcurrentmmanagersmo
ftenmlosemtheirmjobsmwhenmthemcorporationmismacquired, mpoorlymmonitoredmmanagersmhave manmincenti
vemtomfightmcorporatemtakeoversminmsituationsmsuchmasmthis.
15. Wemwouldmexpect magency mproblemsmto mbe mlessmseveremin mcountries mwithma mrelativelymsmallmpercenta
gemofmindividualmownership. mFewermindividualmownersm shouldmreduce mthemnumbermofmdiversemopini
onsmconcerningmcorporatemgoals. mThemhighmpercentagemofminstitutionalmownershipmmightmleadmtoma m
highermdegreemofmagreementmbetweenmownersmandmmanagersmonmdecisionsmconcerningmriskymprojects. m
Inmaddition, minstitutionsmmaymbembettermablemtomimplementmeffectivemmonitoringmmechanismsmonmma
nagersmthanmcanmindividualmowners, mbasedmonmtheminstitutions’ mdeepermresourcesm andmexperiencesm
withmtheirmownmmanagement. mThemincrease minminstitutionalmownershipmofm stockminmthemUnited mStat
esmandmthe mgrowingmactivismmofmthesemlargem shareholder mgroupsmmaymleadmtomamreductionminm agenc
ymproblemsmformU.S. mcorporationsmandmammoremefficientmmarketmformcorporatemcontrol.
Downloadedmbymdwfqmqegm(
Fundamentals of Corporate Finance 12th edition Ross
m m m m m m
, Westerfield, and Jordan
m m m
06-15-2018
Prepared mby
mBrad m Jorda
n
University m of m Kentucky
JoemSmoliramBelmo
ntmUniversity
Downloadedmbymdwfqmqegm(
,Downloadedmbymdwfqmqegm(
,CHAPTER 1 m
INTRODUCTION TO CORPORATE FINAN m m m
CE
AnswersmtomConceptsmReviewmandmCriticalmThinkingmQuestions
1. Capitalmbudgetingm(decidingmwhethermtom expandmammanufacturingmplant), mcapitalmstructurem(decidin
gmwhether mtomissuemnewm equitymandmusemthemproceedsmtomretiremoutstandingmdebt), mandmworkingmca
pitalmmanagementm(modifyingmthemfirm’smcreditmcollectionmpolicymwithmitsmcustomers).
2. Disadvantages:munlimitedmliability, mlimitedmlife, mdifficultyminmtransferringmownership, mdifficultyminm
raisingmcapitalmfunds. mSomemadvantages:msimpler, mlessmregulation, mthemownersm aremalsomthemmanage
rs, msometimesmpersonalmtaxmratesmarembettermthanmcorporatemtaxmrates.
3. Themprimarymdisadvantagemofmthem corporatemformmismthemdoublemtaxationmtomshareholdersmofmdistrib
utedmearningsmandmdividends. mSomemadvantagesminclude:mlimitedmliability, measemofmtransferability, m
abilitymtomraisemcapital, mandmunlimitedmlife.
4. InmresponsemtomSarbanes-
Oxley, msmallmfirmsmhavemelectedmtomgomdarkmbecausemofmthemcostsmofmcompliance. mThemcostsmtomcomp
lymwithmSarboxmcanmbemseveralmmillionmdollars, mwhichmcanmbemamlargempercentagemofmamsmallmfirm’s
mprofits. mAmmajor mcostmof mgoingmdarkmismlessmaccessmtomcapital. mSincemthemfirmmismnomlonger mpublicl
ymtraded, mitmcanmnomlongermraisemmoney minmthempublicmmarket. mAlthoughmthemcompany mwillmstillmha
vemaccessmtombankmloans mandmthemprivatem equitymmarket, mthemcosts massociatedm withmraisingmfundsmin
mthesemmarketsmaremusuallymhigher mthanmthemcostsmof mraisingmfundsminmthempublicmmarket.
5. Themtreasurer’smofficemandmthe mcontroller’smofficemaremthe mtwomprimarymorganizationalmgroupsmthatmre
portmdirectlymtomthemchiefmfinancialmofficer. mThemcontroller’smofficemhandlesmcostmandmfinancialmaccou
nting, mtaxmmanagement, mandmmanagementminformationmsystems, mwhilemthemtreasurer’smofficemismrespo
nsiblemformcashmandmcreditmmanagement, mcapitalmbudgeting, mandmfinancialmplanning. mTherefore, mthem
studymofmcorporatemfinancemismconcentratedmwithinmthemtreasurymgroup’smfunctions.
6. Tommaximizemthem currentmmarketmvaluem(sharemprice)mofmthem equitymofmthemfirmm(whether mit’smpubli
clymtradedmormnot).
7. Inmthemcorporatemformmofmownership, mthemshareholdersmaremthemownersmofmthemfirm.mThemshareholdersm
electmthemdirectorsmofmthemcorporation, mwhominmturnmappointmthemfirm’smmanagement. mThism separati
onmofmownershipmfrommcontrolminmthemcorporatemformmofmorganizationmis mwhatmcausesmagencymproble
msmtomexist. mManagementmmay mactmin mitsmown mormsomeone melse’smbest minterests, mrather mthan mthosemof
mthemshareholders. mIf msuchmeventsmoccur, mtheymmaymcontradictmthemgoalmof mmaximizingmthem sharempr
icemofmthemequitymofmthemfirm.
8. Amprimarymmarketmtransaction.
Downloadedmbymdwfqmqegm(
, 2m SOLUTIONSmMANUAL
9. InmauctionmmarketsmlikemthemNYSE, mbrokersmandmagentsmmeet matmamphysicalmlocationm(them exchange
)mtommatchmbuyersmandm sellersmofmassets. mDealermmarkets mlikemNASDAQmconsistmofmdealersmoperati
ngmatmdispersed mlocales mwhombuymand msellmassetsmthemselves, mcommunicatingmwithmother mdealersme
ithermelectronicallymormliterallymover-the-counter.
10. Suchmorganizationsmfrequentlympursuem socialmormpoliticalmmissions, msommany mdifferentmgoalsmaremco
nceivable. mOnemgoal mthatmis moftenmcited mismrevenuemminimization;mthatmis, mprovidemwhatevermgoodsma
ndmservicesmaremofferedmatmthemlowestmpossiblemcostmtomsociety. mAmbettermapproachmmightmbemtomobs
ervemthatmevenma mnot-for-
profitmbusinessmhas mequity. mThus, monemanswermismthatmthe mappropriatemgoal mismto mmaximizemthemvalue
mof mthemequity.
11. Presumably, mthemcurrentmstockmvaluemreflectsmthemrisk, mtiming, mandmmagnitudemofmallmfuturemcashmfl
ows, mbothmshort-termmandmlong-term. mIfmthismismcorrect, mthenmthemstatementmismfalse.
12. Anmargumentmcanmbemmademeithermway. mAtmthemonemextreme,mwemcouldmarguemthatminmammarketmecon
omy, mallmofmthesemthingsmarempriced. m Theremismthusmanmoptimalmlevelmof, mformexample, methicalmand/o
rmillegalmbehavior, mandmthemframeworkmofmstockmvaluationmexplicitlymincludesmthese. mAtmthemotherme
xtreme, mwemcouldmarguemthatmthesemaremnoneconomicmphenomenamandmarembestmhandledmthroughmthem
politicalmprocess. mAmclassicm(andmhighlymrelevant) mthoughtmquestionmthatmillustratesmthismdebate mgoe
smsomethingmlikemthis:m“Amfirmmhasm estimatedmthatmthemcostmofmimprovingmthem safetymofmonemofmitsm
productsmism$30mmillion. mHowever, mthemfirmmbelievesmthatmimprovingmthem safetymofmthemproductmwi
llmonlymsavem$20mmillionminmproductmliabilitymclaims. mWhatmshouldmthemfirmmdo?”
13. Themgoalmwillmbemthemsame, mbutmthembestmcoursemofmactionmtowardmthatmgoalmmaymbemdifferentmbeca
usemofmdifferingmsocial, mpolitical, mandmeconomicminstitutions.
14. Themgoalmofmmanagementmshouldmbemtommaximizemthe msharemprice mformthemcurrentmshareholders. mIfm
managementmbelievesmthatmitmcanmimprovemthemprofitabilitymofmthemfirmmsomthatmthemsharempricemwillme
xceed
$35, mthenmtheymshouldmfightmthemoffermfrommthemoutsidemcompany. mIfmmanagementmbelievesmthatmthismbi
ddermormothermunidentifiedmbiddersmwillmactuallympaymmoremthanm$35mpermsharemtomacquiremthemcom
pany, mthenmtheymshouldmstillmfightmthemoffer. mHowever, mifmthemcurrentmmanagementmcannotmincreasem
themvaluemofmthemfirmmbeyondmthembidmprice, mandmnomothermhighermbidsmcomemin, mthenmmanagement
mismnotmactingminmthe minterestsmof mthem shareholdersmbymfightingmthemoffer. mSincemcurrentmmanagersmo
ftenmlosemtheirmjobsmwhenmthemcorporationmismacquired, mpoorlymmonitoredmmanagersmhave manmincenti
vemtomfightmcorporatemtakeoversminmsituationsmsuchmasmthis.
15. Wemwouldmexpect magency mproblemsmto mbe mlessmseveremin mcountries mwithma mrelativelymsmallmpercenta
gemofmindividualmownership. mFewermindividualmownersm shouldmreduce mthemnumbermofmdiversemopini
onsmconcerningmcorporatemgoals. mThemhighmpercentagemofminstitutionalmownershipmmightmleadmtoma m
highermdegreemofmagreementmbetweenmownersmandmmanagersmonmdecisionsmconcerningmriskymprojects. m
Inmaddition, minstitutionsmmaymbembettermablemtomimplementmeffectivemmonitoringmmechanismsmonmma
nagersmthanmcanmindividualmowners, mbasedmonmtheminstitutions’ mdeepermresourcesm andmexperiencesm
withmtheirmownmmanagement. mThemincrease minminstitutionalmownershipmofm stockminmthemUnited mStat
esmandmthe mgrowingmactivismmofmthesemlargem shareholder mgroupsmmaymleadmtomamreductionminm agenc
ymproblemsmformU.S. mcorporationsmandmammoremefficientmmarketmformcorporatemcontrol.
Downloadedmbymdwfqmqegm(
