✅
Complete Chapters Solutions Included
Excel Solutions Included
Instant PDF Download
Instructor Manuals Included
, CHAPTER 1: INTRODUCTION TO CORPORATE FINANCE
Concept Questions:
1.1 • What are the three basic questions of key corporate finance decisions?
a. Investment decision (capital budgeting): What long-term investment strategy should a
firm adopt?
b. Financing decision (capital structure): How much cash must be raised for the
required investments?
c. Short-term finance decision (working capital): How much short-term cash flow does
company need to pay its bills.
• Describe capital structure.
Capital structure is the mix of different securities used to finance a firm's investments.
• Describe the interplay of the firm’s finance with the financial markets.
The firm raises capital by selling debt and equity shares to participants in the financial
markets. This cash is used by the firm’s management to fund the investment activities.
The cash generated by the firm is paid to shareholders and bondholders. Shareholders
receive cash from the firm in the form of dividends or as share repurchases; bondholders
who lent funds to the firm receive interest and, when the initial loan is repaid, principal.
Not all the firm’s cash is paid out to shareholders and bondholders. Some is retained, and
some is paid to governments as taxes.
• List three reasons why value creation is difficult.
Value creation is difficult because it is not easy to observe cash flows directly. The
reasons are:
a. Cash flows are sometimes difficult to identify.
b. The timing of cash flows is difficult to determine.
c. Cash flows are uncertain and therefore risky.
• What are two important considerations when analyzing cash flows?
When analyzing cash flows, one needs to take into consideration both the timing and risk
of cash flows.
1.2 • What is a contingent claim?
A contingent claim is a claim whose payoffs are dependent on the value of the firm at the
end of the year. In more general terms, contingent claims depend on the value of an
underlying asset.
• Describe equity and debt as contingent claims.
Both debt and equity depend on the value of the firm. If the value of the firm is greater
than the amount owed to debt holders, they will get what the firm owes them, while
stockholders will get the difference. But if the value of the firm is less than equity,
bondholders will get the value of the firm and equity holders nothing.
Ross et al, Corporate Finance 10th Canadian Edition Solutions Manual
© 2025
1-1
,1.3 • Define a proprietorship, a partnership and a corporation.
A proprietorship is a business owned by a single individual with unlimited liability. A
partnership is a business owned by two or more individuals with unlimited liability. A
corporation is a business which is a "legal person" with many limited liability owners.
• What are the advantages of the corporate form of business organization?
Limited liability, ease of ownership transfer and perpetual succession.
1.4 • What are the two types of agency costs?
Monitoring costs of the shareholders and the incentive fees paid to the managers.
• How are managers bonded to shareholders?
a. Shareholders determine the membership to the board of directors, which selects
management.
b. Management contracts and incentives are built into compensation arrangements.
c. If a firm is taken over because the firm's price dropped, managers could lose their
jobs.
d. Competition in the managerial labor market makes managers perform in the best
interest of stockholders.
• What are some managerial goals?
Maximization of corporate wealth, growth and company size.
• What is the set-of-contracts perspective?
The view of the corporation as a set of contracting relationships among individuals who
have conflicting objectives.
• What is socially responsible investing?
Investors are becoming increasingly concerned about social issues such as preserving the
environment or avoiding alcohol, tobacco, gambling, nuclear power, and military
weapons. Ethical or socially responsible funds offer an opportunity to buy shares in a
portfolio of companies that meet stated criteria.
1.5 • Distinguish between money markets and capital markets.
Money markets are markets for debt securities that pay off in less than one year, while
capital markets are markets for long-term debt and equity shares.
• What is listing?
Listing refers to the procedures by which a company applies and qualifies so that its stock
can be traded on an organized exchange such as the Toronto Stock Exchange (TSE) or
the New York Stock Exchange (NYSE).
• What is the difference between a primary market and a secondary market?
The primary market is the market where issuers of securities sell them for the first time to
investors, while a secondary market is a market for securities previously issued.
Ross et al, Corporate Finance 10th Canadian Edition Solutions Manual
© 2025
1-2
, • What are the principal financial institutions in Canada? What is the principal role
of each?
Canadian financial institutions include chartered banks and other depository institutions-
trust companies and credit unions as well as non-depository institutions-investment
dealers, insurance companies, pension funds and mutual funds. The principal role of
chartered banks, trust companies and credit unions is accepting deposits and making
loans. Investment dealers assist firms in issuing new securities in exchange for fee
income and aid investors in buying and selling securities. Life insurance companies
engage in indirect finance by accepting funds in a form similar to deposits and making
loans. Pension Funds invest contributions in securities offered by financial markets.
Mutual funds pool individual investments to purchase a diversified portfolio of securities.
• What are direct and indirect finance? How do they differ?
Direct finance is when a funds demander borrows directly from a funds supplier with the
help of a financial intermediary. Indirect finance is when the financial intermediary
accepts deposits from funds suppliers and engages in separate lending contracts with
funds demanders. The key difference between direct finance and indirect finance is that
in direct finance funds do not pass through the financial intermediary’s balance sheet in
the form of a deposit and loan.
• What is a dealer market? How do dealer and auction markets differ?
A dealer market is a secondary market with no central location; the many dealers are
connected electronically. An auction market or exchange has a physical location. In a
dealer market most of the buying and selling is done by the dealer. The primary purpose
of an auction market is to match those who wish to sell with those who wish to buy.
Dealers play a limited role.
• What is the largest auction market in Canada?
The largest stock market in Canada is the Toronto Stock Exchange. The TSE has
computerized its floor trading, replacing the trading floor with a wide-area computer
network, making it a hybrid of auction and dealer markets.
1.6 • How do key trends in financial markets affect Canadian financial institutions?
Canadian financial markets, like all markets, are experiencing rapid globalization. The
toolkit of available financial management techniques has expanded. Computer
technology improvements make new financial engineering applications practical and
create opportunities to combine different types of financial institutions. Financial
institutions pressure authorities to deregulate, allowing the institutions almost unlimited
scope to enter each other’s traditional business. These trends have made financial
management in Canada much more complex and technical.
Ross et al, Corporate Finance 10th Canadian Edition Solutions Manual
© 2025
1-3
Complete Chapters Solutions Included
Excel Solutions Included
Instant PDF Download
Instructor Manuals Included
, CHAPTER 1: INTRODUCTION TO CORPORATE FINANCE
Concept Questions:
1.1 • What are the three basic questions of key corporate finance decisions?
a. Investment decision (capital budgeting): What long-term investment strategy should a
firm adopt?
b. Financing decision (capital structure): How much cash must be raised for the
required investments?
c. Short-term finance decision (working capital): How much short-term cash flow does
company need to pay its bills.
• Describe capital structure.
Capital structure is the mix of different securities used to finance a firm's investments.
• Describe the interplay of the firm’s finance with the financial markets.
The firm raises capital by selling debt and equity shares to participants in the financial
markets. This cash is used by the firm’s management to fund the investment activities.
The cash generated by the firm is paid to shareholders and bondholders. Shareholders
receive cash from the firm in the form of dividends or as share repurchases; bondholders
who lent funds to the firm receive interest and, when the initial loan is repaid, principal.
Not all the firm’s cash is paid out to shareholders and bondholders. Some is retained, and
some is paid to governments as taxes.
• List three reasons why value creation is difficult.
Value creation is difficult because it is not easy to observe cash flows directly. The
reasons are:
a. Cash flows are sometimes difficult to identify.
b. The timing of cash flows is difficult to determine.
c. Cash flows are uncertain and therefore risky.
• What are two important considerations when analyzing cash flows?
When analyzing cash flows, one needs to take into consideration both the timing and risk
of cash flows.
1.2 • What is a contingent claim?
A contingent claim is a claim whose payoffs are dependent on the value of the firm at the
end of the year. In more general terms, contingent claims depend on the value of an
underlying asset.
• Describe equity and debt as contingent claims.
Both debt and equity depend on the value of the firm. If the value of the firm is greater
than the amount owed to debt holders, they will get what the firm owes them, while
stockholders will get the difference. But if the value of the firm is less than equity,
bondholders will get the value of the firm and equity holders nothing.
Ross et al, Corporate Finance 10th Canadian Edition Solutions Manual
© 2025
1-1
,1.3 • Define a proprietorship, a partnership and a corporation.
A proprietorship is a business owned by a single individual with unlimited liability. A
partnership is a business owned by two or more individuals with unlimited liability. A
corporation is a business which is a "legal person" with many limited liability owners.
• What are the advantages of the corporate form of business organization?
Limited liability, ease of ownership transfer and perpetual succession.
1.4 • What are the two types of agency costs?
Monitoring costs of the shareholders and the incentive fees paid to the managers.
• How are managers bonded to shareholders?
a. Shareholders determine the membership to the board of directors, which selects
management.
b. Management contracts and incentives are built into compensation arrangements.
c. If a firm is taken over because the firm's price dropped, managers could lose their
jobs.
d. Competition in the managerial labor market makes managers perform in the best
interest of stockholders.
• What are some managerial goals?
Maximization of corporate wealth, growth and company size.
• What is the set-of-contracts perspective?
The view of the corporation as a set of contracting relationships among individuals who
have conflicting objectives.
• What is socially responsible investing?
Investors are becoming increasingly concerned about social issues such as preserving the
environment or avoiding alcohol, tobacco, gambling, nuclear power, and military
weapons. Ethical or socially responsible funds offer an opportunity to buy shares in a
portfolio of companies that meet stated criteria.
1.5 • Distinguish between money markets and capital markets.
Money markets are markets for debt securities that pay off in less than one year, while
capital markets are markets for long-term debt and equity shares.
• What is listing?
Listing refers to the procedures by which a company applies and qualifies so that its stock
can be traded on an organized exchange such as the Toronto Stock Exchange (TSE) or
the New York Stock Exchange (NYSE).
• What is the difference between a primary market and a secondary market?
The primary market is the market where issuers of securities sell them for the first time to
investors, while a secondary market is a market for securities previously issued.
Ross et al, Corporate Finance 10th Canadian Edition Solutions Manual
© 2025
1-2
, • What are the principal financial institutions in Canada? What is the principal role
of each?
Canadian financial institutions include chartered banks and other depository institutions-
trust companies and credit unions as well as non-depository institutions-investment
dealers, insurance companies, pension funds and mutual funds. The principal role of
chartered banks, trust companies and credit unions is accepting deposits and making
loans. Investment dealers assist firms in issuing new securities in exchange for fee
income and aid investors in buying and selling securities. Life insurance companies
engage in indirect finance by accepting funds in a form similar to deposits and making
loans. Pension Funds invest contributions in securities offered by financial markets.
Mutual funds pool individual investments to purchase a diversified portfolio of securities.
• What are direct and indirect finance? How do they differ?
Direct finance is when a funds demander borrows directly from a funds supplier with the
help of a financial intermediary. Indirect finance is when the financial intermediary
accepts deposits from funds suppliers and engages in separate lending contracts with
funds demanders. The key difference between direct finance and indirect finance is that
in direct finance funds do not pass through the financial intermediary’s balance sheet in
the form of a deposit and loan.
• What is a dealer market? How do dealer and auction markets differ?
A dealer market is a secondary market with no central location; the many dealers are
connected electronically. An auction market or exchange has a physical location. In a
dealer market most of the buying and selling is done by the dealer. The primary purpose
of an auction market is to match those who wish to sell with those who wish to buy.
Dealers play a limited role.
• What is the largest auction market in Canada?
The largest stock market in Canada is the Toronto Stock Exchange. The TSE has
computerized its floor trading, replacing the trading floor with a wide-area computer
network, making it a hybrid of auction and dealer markets.
1.6 • How do key trends in financial markets affect Canadian financial institutions?
Canadian financial markets, like all markets, are experiencing rapid globalization. The
toolkit of available financial management techniques has expanded. Computer
technology improvements make new financial engineering applications practical and
create opportunities to combine different types of financial institutions. Financial
institutions pressure authorities to deregulate, allowing the institutions almost unlimited
scope to enter each other’s traditional business. These trends have made financial
management in Canada much more complex and technical.
Ross et al, Corporate Finance 10th Canadian Edition Solutions Manual
© 2025
1-3
