,ACCESS Test Bank for Essentials of Corporate Finance 11th Edition Ross
f f f f f f f f f f
Solutions Manual f
Essentials of Corporate Finance
f f f
Ross, Westerfield, and Jordan 11th
f f f f
editionf
01/05/2022
Prepared fby
Brad
f
fJordan
University fof fKentucky
Joe fSmolira
fBelmont
fUniversity
mynursytest.store
,ACCESS Test Bank for Essentials of Corporate Finance 11th Edition Ross
f f f f f f f f f f
CHAPTER 1 f
INTRODUCTION TO CORPORATE f f
FINANCE
f
Answers fto fConcepts fReview fand fCritical fThinking fQuestions
1. Capital fbudgeting f(deciding fon fwhether fto fexpand fa fmanufacturing fplant), fcapital fstructure f(deciding
fwhether fto fissue fnew fequity fand fuse fthe fproceeds fto fretire foutstanding fdebt), fand fworking fcapital
fmanagement f(modifying fthe ffirm’s fcredit fcollection fpolicy fwith fits fcustomers).
2. Disadvantages: funlimited fliability, flimited flife, fdifficulty fin ftransferring fownership, fdifficulty fin
fraising fcapital ffunds. fSome fadvantages: fsimpler, fless fregulation, fthe fowners fare falso fthe fmanagers,
fsometimes fpersonal ftax frates fare fbetter fthan fcorporate ftax frates.
3. The fprimary fdisadvantage fof fthe fcorporate fform fis fthe fdouble ftaxation fto fshareholders fof fdistributed
fearnings fand fdividends. fSome fadvantages finclude: flimited fliability, fease fof ftransferability, fability fto
fraise fcapital, fand funlimited flife.
4. The ftreasurer’s foffice fand fthe fcontroller’s foffice fare fthe ftwo fprimary forganizational fgroups fthat freport
fdirectly fto fthe fchief ffinancial fofficer. fThe fcontroller’s foffice fhandles fcost fand ffinancial faccounting, ftax
fmanagement, fand fmanagement finformation fsystems. fThe ftreasurer’s foffice fis fresponsible ffor fcash fand
fcredit fmanagement, fcapital fbudgeting, fand ffinancial fplanning. fTherefore, fthe fstudy fof fcorporate
ffinance fis fconcentrated fwithin fthe ffunctions fof fthe ftreasurer’s foffice.
5. To fmaximize fthe fcurrent fmarket fvalue f(share fprice) fof fthe fequity fof fthe ffirm f(whether fit’s fpublicly
ftraded for fnot).
6. In fthe fcorporate fform fof fownership, fthe fshareholders fare fthe fowners fof fthe ffirm. fThe fshareholders felect
fthe fdirectors fof fthe fcorporation, fwho fin fturn fappoint fthe ffirm’s fmanagement. fThis fseparation fof
fownership ffrom fcontrol fin fthe fcorporate fform fof forganization fis fwhat fcauses fagency fproblems fto fexist.
fManagement fmay fact fin fits fown for fsomeone felse’s fbest finterests, frather fthan fthose fof fthe fshareholders.
fIf fsuch fevents foccur, fthey fmay fcontradict fthe fgoal fof fmaximizing fthe fshare fprice fof fthe fequity fof fthe
ffirm.
7. A fprimary fmarket ftransaction.
8. In fauction fmarkets flike fthe fNYSE, fbrokers fand fagents fmeet fat fa fphysical flocation f(the fexchange) fto
fbuy fand fsell ftheir fassets. fDealer fmarkets flike fNASDAQ frepresent fdealers foperating fin fdispersed flocales
fwho fbuy fand fsell fassets fthemselves, fusually fcommunicating fwith fother fdealers felectronically for
fliterally fover fthe fcounter.
© fMcGraw fHill fLLC. fAll frights freserved. fNo freproduction for fdistribution fwithout fthe fprior fwritten fconsent fof fMcGraw fHill fLLC.
mynursytest.store
, ACCESS Test Bank for Essentials of Corporate Finance 11th Edition Ross
f f f f f f f f f f
CHAPTER f1 f– f2
9. Since fsuch forganizations ffrequently fpursue fsocial for fpolitical fmissions, fmany fdifferent fgoals fare
fconceivable. fOne fgoal fthat fis foften fcited fis frevenue fminimization; fi.e., fproviding ftheir fgoods fand
fservices fto fsociety fat fthe flowest fpossible fcost. fAnother fapproach fmight fbe fto fobserve fthat feven fa
fnot- ffor-profit fbusiness fhas fequity. fThus, fan fappropriate fgoal fwould fbe fto fmaximize fthe fvalue fof fthe
fequity.
10. An fargument fcan fbe fmade feither fway. fAt fone fextreme, fwe fcould fargue fthat fin fa fmarket feconomy, fall
fof fthese fthings fare fpriced. fThis fimplies fan foptimal flevel fof fethical fand/or fillegal fbehavior fand fthe
fframework fof fstock fvaluation fexplicitly fincludes fthese. fAt fthe fother fextreme, fwe fcould fargue fthat fthese
fare fnon-economic fphenomena fand fare fbest fhandled fthrough fthe fpolitical fprocess. fThe ffollowing fis fa
fclassic f(and fhighly frelevant) fthought fquestion fthat fillustrates fthis fdebate: f―A ffirm fhas festimated fthat
fthe fcost fof fimproving fthe fsafety fof fone fof fits fproducts fis f$30 fmillion. fHowever, fthe ffirm fbelieves
fthat fimproving fthe fsafety fof fthe fproduct fwill fonly fsave f$20 fmillion fin fproduct fliability fclaims. fWhat
fshould fthe ffirm fdo?‖
11. The fgoal fwill fbe fthe fsame, fbut fthe fbest fcourse fof faction ftoward fthat fgoal fmay frequire fadjustments fdue
fto fdifferent fsocial, fpolitical, fand feconomic fclimates.
12. The fgoal fof fmanagement fshould fbe fto fmaximize fthe fshare fprice ffor fthe fcurrent fshareholders. fIf
fmanagement fbelieves fthat fit fcan fimprove fthe fprofitability fof fthe ffirm fso fthat fthe fshare fprice fwill fexceed
$35, fthen fthey fshould ffight fthe foffer ffrom fthe foutside fcompany. fIf fmanagement fbelieves fthat fthis fbidder
for fother funidentified fbidders fwill factually fpay fmore fthan f$35 fper fshare fto facquire fthe fcompany, fthen
fthey fshould fstill ffight fthe foffer. fHowever, fif fthe fcurrent fmanagement fcannot fincrease fthe fvalue fof
fthe ffirm fbeyond fthe fbid fprice, fand fno fother fhigher fbids fcome fin, fthen fmanagement fis fnot facting fin
fthe finterests fof fthe fshareholders fby ffighting fthe foffer. fSince fcurrent fmanagers foften flose ftheir fjobs
fwhen fthe fcorporation fis facquired, fpoorly fmonitored fmanagers fhave fan fincentive fto ffight fcorporate
ftakeovers fin fsituations fsuch fas fthis.
13. We fwould fexpect fagency fproblems fto fbe fless fsevere fin fother fcountries, fprimarily fdue fto fthe frelatively
fsmall fpercentage fof findividual fownership. fFewer findividual fowners fshould freduce fthe fnumber fof
fdiverse fopinions fconcerning fcorporate fgoals. fThe fhigh fpercentage fof finstitutional fownership fmight
flead fto fa fhigher fdegree fof fagreement fbetween fowners fand fmanagers fon fdecisions fconcerning frisky
fprojects. fIn faddition, finstitutions fmay fbe fable fto fimplement fmore feffective fmonitoring fmechanisms
fthan fcan findividual fowners, fgiven finstitutions’ fdeeper fresources fand fexperiences fwith ftheir fown
fmanagement. fThe fincrease fin finstitutional fownership fof fstock fin fthe fUnited fStates fand fthe fgrowing
factivism fof fthese flarge fshareholder fgroups fmay flead fto fa freduction fin fagency fproblems ffor fU.S.
fcorporations fand fa fmore fefficient fmarket ffor fcorporate fcontrol.
14. How fmuch fis ftoo fmuch? fWho fis fworth fmore, fMichael fRapino for fLeBron fJames? fThe fsimplest fanswer
fis fthat fthere fis fa fmarket ffor fexecutives fjust fas fthere fis ffor fall ftypes fof flabor. fExecutive fcompensation fis
fthe fprice fthat fclears fthe fmarket. fThe fsame fis ftrue ffor fathletes fand fperformers. fHaving fsaid fthat, fone
faspect fof fexecutive fcompensation fdeserves fcomment. fA fprimary freason fexecutive fcompensation fhas
fgrown fso fdramatically fis fthat fcompanies fhave fincreasingly fmoved fto fstock-based fcompensation. fSuch
fmovement fis fobviously fconsistent fwith fthe fattempt fto fbetter falign fstockholder fand fmanagement
finterests. fIn frecent fyears, fstock fprices fhave fsoared, fso fmanagement fhas fcleaned fup. fIt fis fsometimes
fargued fthat fmuch fof fthis freward fis fdue fto frising fstock fprices fin fgeneral, fnot fmanagerial fperformance.
fPerhaps fin fthe ffuture, fexecutive fcompensation fwill fbe fdesigned fto freward fonly fdifferential
fperformance, fi.e., fstock fprice fincreases fin fexcess fof fgeneral fmarket fincreases.
© fMcGraw fHill fLLC. fAll frights freserved. fNo freproduction for fdistribution fwithout fthe fprior fwritten fconsent fof fMcGraw fHill
fLLC.
mynursytest.store
f f f f f f f f f f
Solutions Manual f
Essentials of Corporate Finance
f f f
Ross, Westerfield, and Jordan 11th
f f f f
editionf
01/05/2022
Prepared fby
Brad
f
fJordan
University fof fKentucky
Joe fSmolira
fBelmont
fUniversity
mynursytest.store
,ACCESS Test Bank for Essentials of Corporate Finance 11th Edition Ross
f f f f f f f f f f
CHAPTER 1 f
INTRODUCTION TO CORPORATE f f
FINANCE
f
Answers fto fConcepts fReview fand fCritical fThinking fQuestions
1. Capital fbudgeting f(deciding fon fwhether fto fexpand fa fmanufacturing fplant), fcapital fstructure f(deciding
fwhether fto fissue fnew fequity fand fuse fthe fproceeds fto fretire foutstanding fdebt), fand fworking fcapital
fmanagement f(modifying fthe ffirm’s fcredit fcollection fpolicy fwith fits fcustomers).
2. Disadvantages: funlimited fliability, flimited flife, fdifficulty fin ftransferring fownership, fdifficulty fin
fraising fcapital ffunds. fSome fadvantages: fsimpler, fless fregulation, fthe fowners fare falso fthe fmanagers,
fsometimes fpersonal ftax frates fare fbetter fthan fcorporate ftax frates.
3. The fprimary fdisadvantage fof fthe fcorporate fform fis fthe fdouble ftaxation fto fshareholders fof fdistributed
fearnings fand fdividends. fSome fadvantages finclude: flimited fliability, fease fof ftransferability, fability fto
fraise fcapital, fand funlimited flife.
4. The ftreasurer’s foffice fand fthe fcontroller’s foffice fare fthe ftwo fprimary forganizational fgroups fthat freport
fdirectly fto fthe fchief ffinancial fofficer. fThe fcontroller’s foffice fhandles fcost fand ffinancial faccounting, ftax
fmanagement, fand fmanagement finformation fsystems. fThe ftreasurer’s foffice fis fresponsible ffor fcash fand
fcredit fmanagement, fcapital fbudgeting, fand ffinancial fplanning. fTherefore, fthe fstudy fof fcorporate
ffinance fis fconcentrated fwithin fthe ffunctions fof fthe ftreasurer’s foffice.
5. To fmaximize fthe fcurrent fmarket fvalue f(share fprice) fof fthe fequity fof fthe ffirm f(whether fit’s fpublicly
ftraded for fnot).
6. In fthe fcorporate fform fof fownership, fthe fshareholders fare fthe fowners fof fthe ffirm. fThe fshareholders felect
fthe fdirectors fof fthe fcorporation, fwho fin fturn fappoint fthe ffirm’s fmanagement. fThis fseparation fof
fownership ffrom fcontrol fin fthe fcorporate fform fof forganization fis fwhat fcauses fagency fproblems fto fexist.
fManagement fmay fact fin fits fown for fsomeone felse’s fbest finterests, frather fthan fthose fof fthe fshareholders.
fIf fsuch fevents foccur, fthey fmay fcontradict fthe fgoal fof fmaximizing fthe fshare fprice fof fthe fequity fof fthe
ffirm.
7. A fprimary fmarket ftransaction.
8. In fauction fmarkets flike fthe fNYSE, fbrokers fand fagents fmeet fat fa fphysical flocation f(the fexchange) fto
fbuy fand fsell ftheir fassets. fDealer fmarkets flike fNASDAQ frepresent fdealers foperating fin fdispersed flocales
fwho fbuy fand fsell fassets fthemselves, fusually fcommunicating fwith fother fdealers felectronically for
fliterally fover fthe fcounter.
© fMcGraw fHill fLLC. fAll frights freserved. fNo freproduction for fdistribution fwithout fthe fprior fwritten fconsent fof fMcGraw fHill fLLC.
mynursytest.store
, ACCESS Test Bank for Essentials of Corporate Finance 11th Edition Ross
f f f f f f f f f f
CHAPTER f1 f– f2
9. Since fsuch forganizations ffrequently fpursue fsocial for fpolitical fmissions, fmany fdifferent fgoals fare
fconceivable. fOne fgoal fthat fis foften fcited fis frevenue fminimization; fi.e., fproviding ftheir fgoods fand
fservices fto fsociety fat fthe flowest fpossible fcost. fAnother fapproach fmight fbe fto fobserve fthat feven fa
fnot- ffor-profit fbusiness fhas fequity. fThus, fan fappropriate fgoal fwould fbe fto fmaximize fthe fvalue fof fthe
fequity.
10. An fargument fcan fbe fmade feither fway. fAt fone fextreme, fwe fcould fargue fthat fin fa fmarket feconomy, fall
fof fthese fthings fare fpriced. fThis fimplies fan foptimal flevel fof fethical fand/or fillegal fbehavior fand fthe
fframework fof fstock fvaluation fexplicitly fincludes fthese. fAt fthe fother fextreme, fwe fcould fargue fthat fthese
fare fnon-economic fphenomena fand fare fbest fhandled fthrough fthe fpolitical fprocess. fThe ffollowing fis fa
fclassic f(and fhighly frelevant) fthought fquestion fthat fillustrates fthis fdebate: f―A ffirm fhas festimated fthat
fthe fcost fof fimproving fthe fsafety fof fone fof fits fproducts fis f$30 fmillion. fHowever, fthe ffirm fbelieves
fthat fimproving fthe fsafety fof fthe fproduct fwill fonly fsave f$20 fmillion fin fproduct fliability fclaims. fWhat
fshould fthe ffirm fdo?‖
11. The fgoal fwill fbe fthe fsame, fbut fthe fbest fcourse fof faction ftoward fthat fgoal fmay frequire fadjustments fdue
fto fdifferent fsocial, fpolitical, fand feconomic fclimates.
12. The fgoal fof fmanagement fshould fbe fto fmaximize fthe fshare fprice ffor fthe fcurrent fshareholders. fIf
fmanagement fbelieves fthat fit fcan fimprove fthe fprofitability fof fthe ffirm fso fthat fthe fshare fprice fwill fexceed
$35, fthen fthey fshould ffight fthe foffer ffrom fthe foutside fcompany. fIf fmanagement fbelieves fthat fthis fbidder
for fother funidentified fbidders fwill factually fpay fmore fthan f$35 fper fshare fto facquire fthe fcompany, fthen
fthey fshould fstill ffight fthe foffer. fHowever, fif fthe fcurrent fmanagement fcannot fincrease fthe fvalue fof
fthe ffirm fbeyond fthe fbid fprice, fand fno fother fhigher fbids fcome fin, fthen fmanagement fis fnot facting fin
fthe finterests fof fthe fshareholders fby ffighting fthe foffer. fSince fcurrent fmanagers foften flose ftheir fjobs
fwhen fthe fcorporation fis facquired, fpoorly fmonitored fmanagers fhave fan fincentive fto ffight fcorporate
ftakeovers fin fsituations fsuch fas fthis.
13. We fwould fexpect fagency fproblems fto fbe fless fsevere fin fother fcountries, fprimarily fdue fto fthe frelatively
fsmall fpercentage fof findividual fownership. fFewer findividual fowners fshould freduce fthe fnumber fof
fdiverse fopinions fconcerning fcorporate fgoals. fThe fhigh fpercentage fof finstitutional fownership fmight
flead fto fa fhigher fdegree fof fagreement fbetween fowners fand fmanagers fon fdecisions fconcerning frisky
fprojects. fIn faddition, finstitutions fmay fbe fable fto fimplement fmore feffective fmonitoring fmechanisms
fthan fcan findividual fowners, fgiven finstitutions’ fdeeper fresources fand fexperiences fwith ftheir fown
fmanagement. fThe fincrease fin finstitutional fownership fof fstock fin fthe fUnited fStates fand fthe fgrowing
factivism fof fthese flarge fshareholder fgroups fmay flead fto fa freduction fin fagency fproblems ffor fU.S.
fcorporations fand fa fmore fefficient fmarket ffor fcorporate fcontrol.
14. How fmuch fis ftoo fmuch? fWho fis fworth fmore, fMichael fRapino for fLeBron fJames? fThe fsimplest fanswer
fis fthat fthere fis fa fmarket ffor fexecutives fjust fas fthere fis ffor fall ftypes fof flabor. fExecutive fcompensation fis
fthe fprice fthat fclears fthe fmarket. fThe fsame fis ftrue ffor fathletes fand fperformers. fHaving fsaid fthat, fone
faspect fof fexecutive fcompensation fdeserves fcomment. fA fprimary freason fexecutive fcompensation fhas
fgrown fso fdramatically fis fthat fcompanies fhave fincreasingly fmoved fto fstock-based fcompensation. fSuch
fmovement fis fobviously fconsistent fwith fthe fattempt fto fbetter falign fstockholder fand fmanagement
finterests. fIn frecent fyears, fstock fprices fhave fsoared, fso fmanagement fhas fcleaned fup. fIt fis fsometimes
fargued fthat fmuch fof fthis freward fis fdue fto frising fstock fprices fin fgeneral, fnot fmanagerial fperformance.
fPerhaps fin fthe ffuture, fexecutive fcompensation fwill fbe fdesigned fto freward fonly fdifferential
fperformance, fi.e., fstock fprice fincreases fin fexcess fof fgeneral fmarket fincreases.
© fMcGraw fHill fLLC. fAll frights freserved. fNo freproduction for fdistribution fwithout fthe fprior fwritten fconsent fof fMcGraw fHill
fLLC.
mynursytest.store
