Solution manual for principles of
ppp ppp p p
p corporate finance 14th edition by
p p p p p
richard Brealey, stewart myers, fr
p p p p
anklin allen
p
PDF FORMAT p
p
p
, CHAPTERp1
IntroductionptopCorporatepFinance
Thepvaluespshownpinpthepsolutionspmaypbeproundedpforpdisplayppurposes.pHowever,pthepanswerspwerepderiv
edpusingpapspreadsheetpwithoutpanypintermediateprounding.
AnswersptopProblempSets
1. a. realp
b. executivepairplanesp
c. brandpnamesp
d. financialp
e. bondsp
*f. investmentporpcapitalpexpenditurep
*g.
capitalpbudgetingporpinvestment
ph. financingp
*Notepthatpfpandpgparepinterchangeablepinpthepquestion.p
Estptime:p01-05
2. Aptrademark,papfactory,pundevelopedpland,pandpyourpworkpforcep(c,pd,pe,pandpg)parepallprealpassets.p
Realpassetsparepidentifiablepaspitemspwithpintrinsicpvalue.pThepotherspinptheplistparepfinancialpassets,
pthatp is,pthesepassetspderivep valuepbecausep ofpapcontractual pclaim.p
Estptime:p01-05
3. a.
Financialpassets,psuchpaspstocksporpbankploans,parepclaimspheldpbypinvestors.pCorpo
rationspsellpfinancialpassetsptopraisepthepcashptopinvestpinprealpassetspsuchpaspplantpandpe
quipment.pSomeprealpassetsparepintangible.p
b. Capitalpexpenditurepmeanspinvestmentpinprealpassets.pFinancingpmeanspraisingpthepcash
pforpthispinvestment.p
c. Thepsharespofppublicpcorporationspareptradedponpstockpexchangespandpcanpbeppurchasedp
bypapwideprangepofpinvestors.pThepsharespofpcloselypheldpcorporationsparepnotppubliclyptra
dedpandparepheldpbypapsmallpgrouppofpprivatepinvestors.p
d. Unlimitedpliability:pInvestorsparepresponsiblepforpallpthepfirm‘spdebts.pApsolepproprietorphas
punlimitedpliability.pInvestorspinpcorporationsphaveplimitedpliability.pTheypcanploseptheirpinv
estment,pbutpnopmore.p
Estptime:p01-05
p
, 4. Itemspcpandpdpapplyptopcorporations.pBecausepcorporationsphavepperpetualplife,pownershippcanpbe
ptransferredpwithoutpaffectingpoperations,pandpmanagerspcanpbepfiredpwithpnopeffectponpownership.
pOtherpformsp ofpbusinesspmayphavepunlimitedpliabilitypandplimitedplife.p
Estptime:p01-05
5. Separationpofpownershippfacilitatespthepkeypattributespofpapcorporation,pincludingplimitedpliabilitypfor
pinvestors,ptransferabilitypofpownership,papseparateplegalppersonalitypofpthepcorporation,pandpdeleg
atedpcentralizedpmanagement.pThesepfourpattributespprovidepsubstantialpbenefitpforpinvestors,pincl
udingpthepabilityptop diversifyptheirpinvestmentpamongp manypuncorrelatedpreturns—
apverypvaluableptoolpexploredpinplaterpchapters.pAlso,pthesepattributespallowpinvestorsptopquicklypexi
t,penter,porpshortpsellpanpinvestment,ptherebypgeneratingpanpactivepliquidpmarketpforpcorporations.p
However,ptheseppositivepaspectspalsopintroducepsubstantialpnegativepexternalitiespaspwell.pThepsep
arationpofpownershippfrompmanagementptypicallypleadsptopagencypproblems,pwherepmanagersppref
erptopconsumepprivatepperksp orpmakepotherpdecisionspforptheirpprivatepbenefit—
ratherpthanpmaximizepshareholderpwealth.pShareholdersptendptopexerciseplesspoversightpofpeachpin
dividualpinvestmentpasptheirpdiversificationpincreases.pFinally,pthepcorporation‘spseparateplegalppers
onalitypmakespitpdifficultptopenforcepaccountabilitypifptheypexternalizepcostspontopsociety.p
Estptime:p01-05
6. Shareholderspwillponlypvoteptopmaximizepshareholderpwealth.pShareholderspcanpmodifyptheirpp
atternpofpconsumptionpthroughpborrowingpandplending,pmatchpriskppreferences,pandphopefullyp
balanceptheirpownpcheckbooksp(orphirepapqualifiedpprofessionalptophelppthempwithptheseptasks).p
Estptime:p01-05
7. Ifpthepinvestmentpincreasespthepfirm‘spwealth,pitpincreasespthepfirm‘spsharepvalue.pMs.pEspinoza
pcouldpthenpsellpsomeporpallpthesepmorepvaluablep sharesptopprovidepforpherpretirementpincome.p
Estptime:p01-05
8. a.
Assumingpthatpthepencabulatorpmarketpisprisky,panp8%pexpectedpretur
nponpthepF&Hpencabulatorpinvestmentspmaypbepinferiorptopap4%preturnponp
U.S.p
governmentpsecurities,pdependingponptheprelativepriskpbetweenptheptwopassets.p
b.
UnlesspthepfinancialpassetsparepaspsafepaspU.S.pgovernmentpsecurities,ptheirpcostpofpca
pitalpwouldpbephigher.pThepCFOpcouldpconsiderpexpectedpreturnsponpassetspwithpsimilarpris
k.p
Estptime:p06-10
9. Managerspwouldpactpinpshareholders‘pinterestspbecauseptheyphavepaplegalpdutyptopactpinptheirpintere
sts.p Managerspmaypalsopreceivep compensation—
pbonuses,pstock,p andp optionppayoutsp withpvalueptiedp(roughly)ptopfirmpperformance.pManagerspmayp
fearppersonalpreputationalpdamagepfrompnotpactingpinpshareholders‘pinterests.pAndpmanagerspcanpb
epfiredpbypthepboardpofpdirectorsp(electedpbypshareholders).p Ifpmanagersp stillpfailptop actp inpsharehol
ders‘pinterests,p shareholderspmaypsellptheirpshares,ploweringpthepstockppricepandppotentiallypcreatin
gptheppossibilitypofpaptakeover,pwhichpcanpagainpleadptopchangespinpthepboardpofp directorspandpseni
p
, orpmanagement.p
Estptime:p01-05
p
ppp ppp p p
p corporate finance 14th edition by
p p p p p
richard Brealey, stewart myers, fr
p p p p
anklin allen
p
PDF FORMAT p
p
p
, CHAPTERp1
IntroductionptopCorporatepFinance
Thepvaluespshownpinpthepsolutionspmaypbeproundedpforpdisplayppurposes.pHowever,pthepanswerspwerepderiv
edpusingpapspreadsheetpwithoutpanypintermediateprounding.
AnswersptopProblempSets
1. a. realp
b. executivepairplanesp
c. brandpnamesp
d. financialp
e. bondsp
*f. investmentporpcapitalpexpenditurep
*g.
capitalpbudgetingporpinvestment
ph. financingp
*Notepthatpfpandpgparepinterchangeablepinpthepquestion.p
Estptime:p01-05
2. Aptrademark,papfactory,pundevelopedpland,pandpyourpworkpforcep(c,pd,pe,pandpg)parepallprealpassets.p
Realpassetsparepidentifiablepaspitemspwithpintrinsicpvalue.pThepotherspinptheplistparepfinancialpassets,
pthatp is,pthesepassetspderivep valuepbecausep ofpapcontractual pclaim.p
Estptime:p01-05
3. a.
Financialpassets,psuchpaspstocksporpbankploans,parepclaimspheldpbypinvestors.pCorpo
rationspsellpfinancialpassetsptopraisepthepcashptopinvestpinprealpassetspsuchpaspplantpandpe
quipment.pSomeprealpassetsparepintangible.p
b. Capitalpexpenditurepmeanspinvestmentpinprealpassets.pFinancingpmeanspraisingpthepcash
pforpthispinvestment.p
c. Thepsharespofppublicpcorporationspareptradedponpstockpexchangespandpcanpbeppurchasedp
bypapwideprangepofpinvestors.pThepsharespofpcloselypheldpcorporationsparepnotppubliclyptra
dedpandparepheldpbypapsmallpgrouppofpprivatepinvestors.p
d. Unlimitedpliability:pInvestorsparepresponsiblepforpallpthepfirm‘spdebts.pApsolepproprietorphas
punlimitedpliability.pInvestorspinpcorporationsphaveplimitedpliability.pTheypcanploseptheirpinv
estment,pbutpnopmore.p
Estptime:p01-05
p
, 4. Itemspcpandpdpapplyptopcorporations.pBecausepcorporationsphavepperpetualplife,pownershippcanpbe
ptransferredpwithoutpaffectingpoperations,pandpmanagerspcanpbepfiredpwithpnopeffectponpownership.
pOtherpformsp ofpbusinesspmayphavepunlimitedpliabilitypandplimitedplife.p
Estptime:p01-05
5. Separationpofpownershippfacilitatespthepkeypattributespofpapcorporation,pincludingplimitedpliabilitypfor
pinvestors,ptransferabilitypofpownership,papseparateplegalppersonalitypofpthepcorporation,pandpdeleg
atedpcentralizedpmanagement.pThesepfourpattributespprovidepsubstantialpbenefitpforpinvestors,pincl
udingpthepabilityptop diversifyptheirpinvestmentpamongp manypuncorrelatedpreturns—
apverypvaluableptoolpexploredpinplaterpchapters.pAlso,pthesepattributespallowpinvestorsptopquicklypexi
t,penter,porpshortpsellpanpinvestment,ptherebypgeneratingpanpactivepliquidpmarketpforpcorporations.p
However,ptheseppositivepaspectspalsopintroducepsubstantialpnegativepexternalitiespaspwell.pThepsep
arationpofpownershippfrompmanagementptypicallypleadsptopagencypproblems,pwherepmanagersppref
erptopconsumepprivatepperksp orpmakepotherpdecisionspforptheirpprivatepbenefit—
ratherpthanpmaximizepshareholderpwealth.pShareholdersptendptopexerciseplesspoversightpofpeachpin
dividualpinvestmentpasptheirpdiversificationpincreases.pFinally,pthepcorporation‘spseparateplegalppers
onalitypmakespitpdifficultptopenforcepaccountabilitypifptheypexternalizepcostspontopsociety.p
Estptime:p01-05
6. Shareholderspwillponlypvoteptopmaximizepshareholderpwealth.pShareholderspcanpmodifyptheirpp
atternpofpconsumptionpthroughpborrowingpandplending,pmatchpriskppreferences,pandphopefullyp
balanceptheirpownpcheckbooksp(orphirepapqualifiedpprofessionalptophelppthempwithptheseptasks).p
Estptime:p01-05
7. Ifpthepinvestmentpincreasespthepfirm‘spwealth,pitpincreasespthepfirm‘spsharepvalue.pMs.pEspinoza
pcouldpthenpsellpsomeporpallpthesepmorepvaluablep sharesptopprovidepforpherpretirementpincome.p
Estptime:p01-05
8. a.
Assumingpthatpthepencabulatorpmarketpisprisky,panp8%pexpectedpretur
nponpthepF&Hpencabulatorpinvestmentspmaypbepinferiorptopap4%preturnponp
U.S.p
governmentpsecurities,pdependingponptheprelativepriskpbetweenptheptwopassets.p
b.
UnlesspthepfinancialpassetsparepaspsafepaspU.S.pgovernmentpsecurities,ptheirpcostpofpca
pitalpwouldpbephigher.pThepCFOpcouldpconsiderpexpectedpreturnsponpassetspwithpsimilarpris
k.p
Estptime:p06-10
9. Managerspwouldpactpinpshareholders‘pinterestspbecauseptheyphavepaplegalpdutyptopactpinptheirpintere
sts.p Managerspmaypalsopreceivep compensation—
pbonuses,pstock,p andp optionppayoutsp withpvalueptiedp(roughly)ptopfirmpperformance.pManagerspmayp
fearppersonalpreputationalpdamagepfrompnotpactingpinpshareholders‘pinterests.pAndpmanagerspcanpb
epfiredpbypthepboardpofpdirectorsp(electedpbypshareholders).p Ifpmanagersp stillpfailptop actp inpsharehol
ders‘pinterests,p shareholderspmaypsellptheirpshares,ploweringpthepstockppricepandppotentiallypcreatin
gptheppossibilitypofpaptakeover,pwhichpcanpagainpleadptopchangespinpthepboardpofp directorspandpseni
p
, orpmanagement.p
Estptime:p01-05
p
