CHAPTER b1
IntroductionbtobCorporatebFinance
Thebvalues bshownbinbthebsolutions bmay bbebroundedbforbdisplay bpurposes. bHowever, bthebanswers bwerebderi
vedbusingbabspreadsheet bwithout bany bintermediatebrounding.
AnswersbtobProblem bSets
1. a. real
b. executivebairplanes
c. brandbnames
d. financial
e. bonds
*f. investment borbcapitalbexpenditure
*g. capitalbbudgetingborbinvestment
h. financing
*Notebthat bfbandbgbarebinterchangeablebinbthebquestion.
Est btime: b01-05
2. Abtrademark, babfactory, bundevelopedbland, bandbyourb work bforceb(c, bd,be,bandbg)b areb allbrealbassets. b
Realbassets barebidentifiablebas bitems bwithbintrinsic bvalue. bThebothers binbtheblist barebfinancialbassets,
bthat bis, bthesebassets bderivebvaluebbecausebof babcontractualbclaim.
Est btime: b01-05
3. a.
Financialbassets, bsuchbas bstocks borbbank bloans, barebclaims bheldbby binvestors. bCorp
orations bsellbfinancialbassets btobraisebthebcashbtobinvest binbrealbassets bsuchbas bplant band
bequipment. bSomebrealbassets barebintangible.
b. Capitalbexpenditurebmeans binvestment binbrealbassets. bFinancingbmeans braisingbthebcash
bforbthis binvestment.
c. Thebshares bofbpublic bcorporations barebtradedbonbstock bexchanges bandbcanbbebpurchas ed
bby babwidebrangebof binvestors. bThebshares bof bclosely bheldbcorporations barebnot bpublicly btr
adedbandbarebheldbby babsmallbgroupb ofbprivatebinvestors.
d. Unlimitedbliability: bInvestors barebresponsiblebforballbthebfirm‘s bdebts. bAbsolebproprietorbhas
bunlimitedbliability. bInvestors binbcorporations bhaveblimitedbliability. b They bcanblosebtheirbin
vestment, bbut bnobmore.
Est btime: b01-05
©b McGrawbHillbLLC.bAllbrightsbreserved.bNobreproduction bor bdistribution bwithoutbthebprior bwrittenbconsentbofbMcGrawbHillb LL
C.
,4. Items bc bandbdbapply btobcorporations. b Becausebcorporations bhavebperpetualblife, bownershipbcanbbe
btransferredbwithout baffectingboperations, bandbmanagers bcanbbebfiredbwithbnobeffect bonbownership.
bOtherbforms bof bbusiness bmay bhavebunlimitedbliability bandblimitedblife.
Est btime: b01-05
5. Separationbofbownershipbfacilitates bthebkey battributes bofbabcorporation, bincludingblimitedbliability bfor
binvestors, btransferability bof bownership, babseparateblegalbpersonality bof bthebcorporation, bandbdeleg
atedbcentralizedbmanagement. b Thesebfourbattributes bprovidebsubstantialbbenefit bforbinvestors, bincl
udingbthebability btobdiversify btheirbinvestment bamongbmany buncorrelatedb returns—
abvery bvaluablebtoolbexploredbinblaterbchapters. b Also, bthesebattributes ballowbinvestors btobquickly bex
it, benter, borbshort bsellbanbinvestment, bthereby bgeneratingbanbactivebliquidbmarket bforbcorporations.
However, bthesebpositivebaspects balsobintroducebsubstantialbnegativebexternalities bas bwell. b Thebse
parationbof bownershipbfrombmanagement btypically bleads btobagency bproblems, bwherebmanagers bpr
eferbtobconsumebprivatebperks borbmakebotherbdecisions bforbtheirbprivatebbenefit—
ratherbthanbmaximizebshareholderbwealth. b Shareholders btendbtobex ercisebless boversight bof beachbi
ndividualbinvestment bas btheirbdiversificationbincreases. b Finally, bthebcorporation‘s bseparateblegalbp
ersonality bmakes bitbdifficult btobenforcebaccountability bifbthey bexternalizebcosts bontobsociety.
Est btime: b01-05
6. Shareholders bwillbonly bvotebtobmaximizebshareholderb wealth. b Shareholders bcanbmodify btheirb
patternbofbconsumptionbthroughbborrowingbandblending, bmatchbrisk bpreferences, bandbhopefully
bbalancebtheirbownbcheckbooks b(orbhirebabqualifiedbprof essionalbtobhelpbthem bwit hbthesebtasks)
.
Est btime: b01-05
7. If bthebinvestment bincreases bthebfirm‘s bwealth, bitbincreases bthebfirm‘s bsharebvalue. b Ms. bEspinoza
bcouldbthenbsellbsomeborballbthesebmorebvaluablebshares btobprovidebforbherbretirement bincome.
Est btime: b01-05
8. a.
Assumingbthat bthebencabulatorbmarket bis brisky, banb8% bexpectedbretur
nbonbthebF&Hbencabulatorbinvestments bmay bbebinferiorbtobab4% bret urnb onb
U.S.
government bsecurities, bdependingbonbthebrelativebrisk bbetweenbthebtwobassets.
b. Unless bthebfinancialbassets barebas bsafebas bU.S. bgovernment bsecurities, btheirbcost bof bcapital
bwouldbbebhigher. bThebCFObcouldbconsiderbexpectedbreturns bonbassets bwithbsimilarbrisk.
Est btime: b06-10
9. Managers bwouldbact binbshareholders‘binterests bbecausebthey bhaveb ablegalbduty btobact binbtheirbinter
ests. b Managers bmay balsobreceivebcompensation—
bbonuses, bstock, bandboptionbpayouts bwithbvaluebtiedb(roughly)btobfirm bperformance. b Managers bmay
bfearbpersonalbreputationalbdamagebfrom bnot bactingbinbshareholders‘ binterests. bAndbmanagers bcanb
bebfiredbby bthebboardbofbdirectors b(electedbby bshareholders). b If bmanagers bstillbfailbtobact binbshareho
lders‘binterests, bshareholders bmay bsellbtheirbshares, bloweringbthebstock bpricebandbpotentially bcreati
ngbthebpossibility bof babtakeover, bwhichbcanbagainbleadbtobchanges binbtheb boardbofbdirectors bandbsen
iorbmanagement.
©b McGrawbHillbLLC.bAllbrightsbreserved.bNobreproduction bor bdistribution bwithoutbthebprior bwrittenbconsentbofbMcGrawbHillb LL
C.
,Est btime: b01-05
©b McGrawbHillbLLC.bAllbrightsbreserved.bNobreproduction bor bdistribution bwithoutbthebprior bwrittenbconsentbofbMcGrawbHillb LL
C.
, 10. Managers bthat barebinsulatedbfrombtakeovers bmay bbebmorebpronebtobagency bproblems bandbtherefo
rebmoreblikely btobact binbtheirbownbinterests bratherbthanbinbshareholders‘. b Ifbabfirmbinstitutedbabnewbt
akeoverbdefense, bwebmight bexpect btobseebthebvaluebof bits bshares bdeclinebas bagency b problems binc
reasebandbless bshareholderbvaluebmaximizationboccurs. bThebcounterargument bis bthat bdefensivebm
easures ballowbmanagers btobnegotiatebforbabhigherbpurchasebpricebinbthebfacebofbabtakeov erbbid—
tobthebbenefit bof bshareholderbvalue.
Est btime: b01-05
AppendixbQuestions:
1. Bothbwouldbstillbinvest binbtheirbfriend‘s bbusiness. b Abinvests bandbreceives b$121,000bforb his binve
stment batbthebendbof bthebyear—
whichbis bgreaterbthanbtheb$120,000bthat bwouldb bebreceivedbfromblendingb atb20% b($100,000b× b
1.20b= b$120,000). b Gbalsobinvests, bbutbborrows bagainst bthe
$121,000bpayment, bandbthus breceives b$100,833b($121, 000b/b1.20)btoday.
Est btime: b01-05
2. a. bHebcouldbconsumebupbtob$200,000bnowb(f orgoingballbfuturebconsumption)borbupbtob$216,000bne
xt byearb($200,000b× b1.08, bforgoingballbconsumptionbthis byear). bHebshouldbinvest ballbofbhis bwealt hbto
bearnb$216,000bnext byear. b Tobchoosebthebsamebconsumptionb (C)binbbot hbyears, bCb= b($200,000 b–
bC)b× b1.08b= b$103,846.
Dollars bNextbYear
220,000
216,000
203,704
200,000
Dollars bNow
b. Hebshouldbinvest ballbof bhis bwealthbtobearnb$220,000b($200, 000b× b1.10)bnext byear. b If bhebconsu
mes ballbthis byear, bhebcanbnowbhavebabtotalbof b$203,703.70b($200, 000b× b1.10/1. 08)bthis byearb orb$2
20,000bnext byear. b If bhebconsumes bCbthis byear, bthebamount bavailablebforbnext byear‘s bconsumption
bis b($203,703.70b–
bC)b× b1.08. b Tobget bequalbconsumptionbinbbothbyears, bset bthebamount bconsumedbtoday bequalbtobt
hebamount bnext byear:
Cb= b($203,703.70b –b C)b × b1.08
Cb= b$105,769.20
Est btime: b06-10
©b McGrawbHillbLLC.bAllbrightsbreserved.bNobreproduction bor bdistribution bwithoutbthebprior bwrittenbconsentbofbMcGrawbHillb LL
C.
IntroductionbtobCorporatebFinance
Thebvalues bshownbinbthebsolutions bmay bbebroundedbforbdisplay bpurposes. bHowever, bthebanswers bwerebderi
vedbusingbabspreadsheet bwithout bany bintermediatebrounding.
AnswersbtobProblem bSets
1. a. real
b. executivebairplanes
c. brandbnames
d. financial
e. bonds
*f. investment borbcapitalbexpenditure
*g. capitalbbudgetingborbinvestment
h. financing
*Notebthat bfbandbgbarebinterchangeablebinbthebquestion.
Est btime: b01-05
2. Abtrademark, babfactory, bundevelopedbland, bandbyourb work bforceb(c, bd,be,bandbg)b areb allbrealbassets. b
Realbassets barebidentifiablebas bitems bwithbintrinsic bvalue. bThebothers binbtheblist barebfinancialbassets,
bthat bis, bthesebassets bderivebvaluebbecausebof babcontractualbclaim.
Est btime: b01-05
3. a.
Financialbassets, bsuchbas bstocks borbbank bloans, barebclaims bheldbby binvestors. bCorp
orations bsellbfinancialbassets btobraisebthebcashbtobinvest binbrealbassets bsuchbas bplant band
bequipment. bSomebrealbassets barebintangible.
b. Capitalbexpenditurebmeans binvestment binbrealbassets. bFinancingbmeans braisingbthebcash
bforbthis binvestment.
c. Thebshares bofbpublic bcorporations barebtradedbonbstock bexchanges bandbcanbbebpurchas ed
bby babwidebrangebof binvestors. bThebshares bof bclosely bheldbcorporations barebnot bpublicly btr
adedbandbarebheldbby babsmallbgroupb ofbprivatebinvestors.
d. Unlimitedbliability: bInvestors barebresponsiblebforballbthebfirm‘s bdebts. bAbsolebproprietorbhas
bunlimitedbliability. bInvestors binbcorporations bhaveblimitedbliability. b They bcanblosebtheirbin
vestment, bbut bnobmore.
Est btime: b01-05
©b McGrawbHillbLLC.bAllbrightsbreserved.bNobreproduction bor bdistribution bwithoutbthebprior bwrittenbconsentbofbMcGrawbHillb LL
C.
,4. Items bc bandbdbapply btobcorporations. b Becausebcorporations bhavebperpetualblife, bownershipbcanbbe
btransferredbwithout baffectingboperations, bandbmanagers bcanbbebfiredbwithbnobeffect bonbownership.
bOtherbforms bof bbusiness bmay bhavebunlimitedbliability bandblimitedblife.
Est btime: b01-05
5. Separationbofbownershipbfacilitates bthebkey battributes bofbabcorporation, bincludingblimitedbliability bfor
binvestors, btransferability bof bownership, babseparateblegalbpersonality bof bthebcorporation, bandbdeleg
atedbcentralizedbmanagement. b Thesebfourbattributes bprovidebsubstantialbbenefit bforbinvestors, bincl
udingbthebability btobdiversify btheirbinvestment bamongbmany buncorrelatedb returns—
abvery bvaluablebtoolbexploredbinblaterbchapters. b Also, bthesebattributes ballowbinvestors btobquickly bex
it, benter, borbshort bsellbanbinvestment, bthereby bgeneratingbanbactivebliquidbmarket bforbcorporations.
However, bthesebpositivebaspects balsobintroducebsubstantialbnegativebexternalities bas bwell. b Thebse
parationbof bownershipbfrombmanagement btypically bleads btobagency bproblems, bwherebmanagers bpr
eferbtobconsumebprivatebperks borbmakebotherbdecisions bforbtheirbprivatebbenefit—
ratherbthanbmaximizebshareholderbwealth. b Shareholders btendbtobex ercisebless boversight bof beachbi
ndividualbinvestment bas btheirbdiversificationbincreases. b Finally, bthebcorporation‘s bseparateblegalbp
ersonality bmakes bitbdifficult btobenforcebaccountability bifbthey bexternalizebcosts bontobsociety.
Est btime: b01-05
6. Shareholders bwillbonly bvotebtobmaximizebshareholderb wealth. b Shareholders bcanbmodify btheirb
patternbofbconsumptionbthroughbborrowingbandblending, bmatchbrisk bpreferences, bandbhopefully
bbalancebtheirbownbcheckbooks b(orbhirebabqualifiedbprof essionalbtobhelpbthem bwit hbthesebtasks)
.
Est btime: b01-05
7. If bthebinvestment bincreases bthebfirm‘s bwealth, bitbincreases bthebfirm‘s bsharebvalue. b Ms. bEspinoza
bcouldbthenbsellbsomeborballbthesebmorebvaluablebshares btobprovidebforbherbretirement bincome.
Est btime: b01-05
8. a.
Assumingbthat bthebencabulatorbmarket bis brisky, banb8% bexpectedbretur
nbonbthebF&Hbencabulatorbinvestments bmay bbebinferiorbtobab4% bret urnb onb
U.S.
government bsecurities, bdependingbonbthebrelativebrisk bbetweenbthebtwobassets.
b. Unless bthebfinancialbassets barebas bsafebas bU.S. bgovernment bsecurities, btheirbcost bof bcapital
bwouldbbebhigher. bThebCFObcouldbconsiderbexpectedbreturns bonbassets bwithbsimilarbrisk.
Est btime: b06-10
9. Managers bwouldbact binbshareholders‘binterests bbecausebthey bhaveb ablegalbduty btobact binbtheirbinter
ests. b Managers bmay balsobreceivebcompensation—
bbonuses, bstock, bandboptionbpayouts bwithbvaluebtiedb(roughly)btobfirm bperformance. b Managers bmay
bfearbpersonalbreputationalbdamagebfrom bnot bactingbinbshareholders‘ binterests. bAndbmanagers bcanb
bebfiredbby bthebboardbofbdirectors b(electedbby bshareholders). b If bmanagers bstillbfailbtobact binbshareho
lders‘binterests, bshareholders bmay bsellbtheirbshares, bloweringbthebstock bpricebandbpotentially bcreati
ngbthebpossibility bof babtakeover, bwhichbcanbagainbleadbtobchanges binbtheb boardbofbdirectors bandbsen
iorbmanagement.
©b McGrawbHillbLLC.bAllbrightsbreserved.bNobreproduction bor bdistribution bwithoutbthebprior bwrittenbconsentbofbMcGrawbHillb LL
C.
,Est btime: b01-05
©b McGrawbHillbLLC.bAllbrightsbreserved.bNobreproduction bor bdistribution bwithoutbthebprior bwrittenbconsentbofbMcGrawbHillb LL
C.
, 10. Managers bthat barebinsulatedbfrombtakeovers bmay bbebmorebpronebtobagency bproblems bandbtherefo
rebmoreblikely btobact binbtheirbownbinterests bratherbthanbinbshareholders‘. b Ifbabfirmbinstitutedbabnewbt
akeoverbdefense, bwebmight bexpect btobseebthebvaluebof bits bshares bdeclinebas bagency b problems binc
reasebandbless bshareholderbvaluebmaximizationboccurs. bThebcounterargument bis bthat bdefensivebm
easures ballowbmanagers btobnegotiatebforbabhigherbpurchasebpricebinbthebfacebofbabtakeov erbbid—
tobthebbenefit bof bshareholderbvalue.
Est btime: b01-05
AppendixbQuestions:
1. Bothbwouldbstillbinvest binbtheirbfriend‘s bbusiness. b Abinvests bandbreceives b$121,000bforb his binve
stment batbthebendbof bthebyear—
whichbis bgreaterbthanbtheb$120,000bthat bwouldb bebreceivedbfromblendingb atb20% b($100,000b× b
1.20b= b$120,000). b Gbalsobinvests, bbutbborrows bagainst bthe
$121,000bpayment, bandbthus breceives b$100,833b($121, 000b/b1.20)btoday.
Est btime: b01-05
2. a. bHebcouldbconsumebupbtob$200,000bnowb(f orgoingballbfuturebconsumption)borbupbtob$216,000bne
xt byearb($200,000b× b1.08, bforgoingballbconsumptionbthis byear). bHebshouldbinvest ballbofbhis bwealt hbto
bearnb$216,000bnext byear. b Tobchoosebthebsamebconsumptionb (C)binbbot hbyears, bCb= b($200,000 b–
bC)b× b1.08b= b$103,846.
Dollars bNextbYear
220,000
216,000
203,704
200,000
Dollars bNow
b. Hebshouldbinvest ballbof bhis bwealthbtobearnb$220,000b($200, 000b× b1.10)bnext byear. b If bhebconsu
mes ballbthis byear, bhebcanbnowbhavebabtotalbof b$203,703.70b($200, 000b× b1.10/1. 08)bthis byearb orb$2
20,000bnext byear. b If bhebconsumes bCbthis byear, bthebamount bavailablebforbnext byear‘s bconsumption
bis b($203,703.70b–
bC)b× b1.08. b Tobget bequalbconsumptionbinbbothbyears, bset bthebamount bconsumedbtoday bequalbtobt
hebamount bnext byear:
Cb= b($203,703.70b –b C)b × b1.08
Cb= b$105,769.20
Est btime: b06-10
©b McGrawbHillbLLC.bAllbrightsbreserved.bNobreproduction bor bdistribution bwithoutbthebprior bwrittenbconsentbofbMcGrawbHillb LL
C.
