Solution Manual for Principles of Corporate Finance 14th Edition b
Richard Brealey, Stewart Myers, Franklin Allen and Alex Edmans,
Complete Chapter 1 – 34 in pdf format
CHAPTER f1
Introduction fto fCorporate fFinance
The fvalues fshown fin fthe fsolutions fmay fbe frounded ffor fdisplay fpurposes. fHowever, fthe fanswers fwere
fderived fusing fa fspreadsheet fwithout fany fintermediate frounding.
Answers fto fProblem fSets
1. a. real
b. executive fairplanes
c. brand fnames
d. financial
e. bonds
*f. investment for fcapital fexpenditure
*g. capital fbudgeting for finvestment
h. financing
*Note fthat ff fand fg fare finterchangeable fin fthe fquestion.
Est ftime: f01-05
2. A ftrademark, fa ffactory, fundeveloped fland, fand fyour fwork fforce f(c, fd, fe, fand fg) fare fall freal fassets.
fReal fassets fare fidentifiable fas fitems fwith fintrinsic fvalue. fThe fothers fin fthe flist fare ffinancial fassets,
fthat fis, fthese fassets fderive fvalue fbecause fof fa fcontractual fclaim.
Est ftime: f01-05
© fMcGraw fHill fLLC. fAll frights freserved. fNo freproduction for fdistribution fwithout fthe fprior fwritten fconsent fof fMcGraw fHill
LLC.
,3. a. Financial fassets, fsuch fas fstocks for fbank floans, fare fclaims fheld fby finvestors.
fCorporations fsell ffinancial fassets fto fraise fthe fcash fto finvest fin freal fassets fsuch fas fplant
fand fequipment. fSome freal fassets fare fintangible.
b. Capital fexpenditure fmeans finvestment fin freal fassets. fFinancing fmeans fraising fthe fcash
ffor fthis finvestment.
c. The fshares fof fpublic fcorporations fare ftraded fon fstock fexchanges fand fcan fbe fpurchased
fby fa fwide frange fof finvestors. fThe fshares fof fclosely fheld fcorporations fare fnot fpublicly
ftraded fand fare fheld fby fa fsmall fgroup fof fprivate finvestors.
d. Unlimited fliability: fInvestors fare fresponsible ffor fall fthe ffirm‘s fdebts. fA fsole fproprietor fhas
funlimited fliability. fInvestors fin fcorporations fhave flimited fliability. f They fcan flose ftheir
finvestment, fbut fno fmore.
Est ftime: f01-05
© fMcGraw fHill fLLC. fAll frights freserved. fNo freproduction for fdistribution fwithout fthe fprior fwritten fconsent fof fMcGraw fHill
LLC.
,4. Items fc fand fd fapply fto fcorporations. f Because fcorporations fhave fperpetual flife, fownership fcan fbe
ftransferred fwithout faffecting foperations, fand fmanagers fcan fbe ffired fwith fno feffect fon fownership.
fOther fforms fof fbusiness fmay fhave funlimited fliability fand flimited flife.
Est ftime: f01-05
5. Separation fof fownership ffacilitates fthe fkey fattributes fof fa fcorporation, fincluding flimited fliability ffor
finvestors, ftransferability fof fownership, fa fseparate flegal fpersonality fof fthe fcorporation, fand
fdelegated fcentralized fmanagement. f These ffour fattributes fprovide fsubstantial fbenefit ffor
finvestors, fincluding fthe fability fto fdiversify ftheir finvestment famong fmany funcorrelated freturns—a
fvery fvaluable ftool fexplored fin flater fchapters. f Also, fthese fattributes fallow finvestors fto fquickly fexit,
fenter, for fshort fsell fan finvestment, fthereby fgenerating fan factive fliquid fmarket ffor fcorporations.
However, fthese fpositive faspects falso fintroduce fsubstantial fnegative fexternalities fas fwell. f The
fseparation fof fownership ffrom fmanagement ftypically fleads fto fagency fproblems, fwhere fmanagers
fprefer fto fconsume fprivate fperks for fmake fother fdecisions ffor ftheir fprivate fbenefit—rather fthan
fmaximize fshareholder fwealth. f Shareholders ftend fto fexercise fless foversight fof feach findividual
finvestment fas ftheir fdiversification fincreases. f Finally, fthe fcorporation‘s fseparate flegal fpersonality
fmakes fit fdifficult fto fenforce faccountability fif fthey fexternalize fcosts fonto fsociety.
Est ftime: f01-05
6. Shareholders fwill fonly fvote fto fmaximize fshareholder fwealth. f Shareholders fcan fmodify ftheir
fpattern fof fconsumption fthrough fborrowing fand flending, fmatch frisk fpreferences, fand fhopefully
fbalance ftheir fown fcheckbooks f(or fhire fa fqualified fprofessional fto fhelp fthem fwith fthese ftasks).
Est ftime: f01-05
7. If fthe finvestment fincreases fthe ffirm‘s fwealth, fit fincreases fthe ffirm‘s fshare fvalue. f Ms. fEspinoza
fcould fthen fsell fsome for fall fthese fmore fvaluable fshares fto fprovide ffor fher fretirement fincome.
Est ftime: f01-05
8. a. Assuming fthat fthe fencabulator fmarket fis frisky, fan f8% fexpected freturn fon
fthe fF&H fencabulator finvestments fmay fbe finferior fto fa f4% freturn fon fU.S.
government fsecurities, fdepending fon fthe frelative frisk fbetween fthe ftwo fassets.
b. Unless fthe ffinancial fassets fare fas fsafe fas fU.S. fgovernment fsecurities, ftheir fcost fof fcapital
fwould fbe fhigher. fThe fCFO fcould fconsider fexpected freturns fon fassets fwith fsimilar frisk.
Est ftime: f06-10
9. Managers fwould fact fin fshareholders‘ finterests fbecause fthey fhave fa flegal fduty fto fact fin ftheir
finterests. f Managers fmay falso freceive fcompensation— fbonuses, fstock, fand foption fpayouts fwith
fvalue ftied f(roughly) fto ffirm fperformance. f Managers fmay ffear fpersonal freputational fdamage ffrom
fnot facting fin fshareholders‘ finterests. fAnd fmanagers fcan fbe ffired fby fthe fboard fof fdirectors f(elected
fby fshareholders). f If fmanagers fstill ffail fto fact fin fshareholders‘ finterests, fshareholders fmay fsell
ftheir fshares, flowering fthe fstock fprice fand fpotentially fcreating fthe fpossibility fof fa ftakeover, fwhich
fcan fagain flead fto fchanges fin fthe fboard fof fdirectors fand fsenior fmanagement.
Est ftime: f01-05
© fMcGraw fHill fLLC. fAll frights freserved. fNo freproduction for fdistribution fwithout fthe fprior fwritten fconsent fof fMcGraw fHill
LLC.
, 10. Managers fthat fare finsulated ffrom ftakeovers fmay fbe fmore fprone fto fagency fproblems fand
ftherefore fmore flikely fto fact fin ftheir fown finterests frather fthan fin fshareholders‘. f If fa ffirm finstituted
fa fnew ftakeover fdefense, fwe fmight fexpect fto fsee fthe fvalue fof fits fshares fdecline fas fagency
f problems fincrease fand fless fshareholder fvalue fmaximization foccurs. fThe fcounterargument fis
fthat fdefensive fmeasures fallow fmanagers fto fnegotiate ffor fa fhigher fpurchase fprice fin fthe fface fof fa
ftakeover fbid—to fthe fbenefit fof fshareholder fvalue.
Est ftime: f01-05
Appendix fQuestions:
1. Both fwould fstill finvest fin ftheir ffriend‘s fbusiness. f A finvests fand freceives f$121,000 ffor fhis
finvestment fat fthe fend fof fthe fyear—which fis fgreater fthan fthe f$120,000 fthat fwould fbe freceived
ffrom flending fat f20% f($100,000 f× f1.20 f = f$120,000). f G falso finvests, fbut fborrows fagainst fthe
$121,000 fpayment, fand fthus freceives f$100,833 f($121,000 f/ f1.20) ftoday.
Est ftime: f01-05
2. a. fHe fcould fconsume fup fto f$200,000 fnow f(forgoing fall ffuture fconsumption) for fup fto f$216,000
fnext fyear f($200,000 f× f1.08, fforgoing fall fconsumption fthis fyear). fHe fshould finvest fall fof fhis fwealth
fto fearn f$216,000 fnext fyear. f To fchoose fthe fsame fconsumption f(C) fin fboth fyears, fC f=
f($200,000 f– fC) f× f1.08 f= f$103,846.
Dollars f Next f Year
220,000
216,000
203,704
200,000
Dollars f Now
b. He fshould finvest fall fof fhis fwealth fto fearn f$220,000 f($200,000 f× f1.10) fnext fyear. f If fhe
fconsumes fall fthis fyear, fhe fcan fnow fhave fa ftotal fof f$203,703.70 f($200,000 f × f1.10/1.08) fthis fyear
for f$220,000 fnext fyear. f If fhe fconsumes fC fthis fyear, fthe famount favailable ffor fnext fyear‘s
fconsumption fis f($203,703.70 f– fC) f× f1.08. f To fget fequal fconsumption fin fboth fyears, fset fthe
famount fconsumed ftoday fequal fto fthe famount fnext fyear:
C f= f ($203,703.70 f – f C) f × f 1.08
C f= f$105,769.20
Est ftime: f06-10
© fMcGraw fHill fLLC. fAll frights freserved. fNo freproduction for fdistribution fwithout fthe fprior fwritten fconsent fof fMcGraw fHill
LLC.
Richard Brealey, Stewart Myers, Franklin Allen and Alex Edmans,
Complete Chapter 1 – 34 in pdf format
CHAPTER f1
Introduction fto fCorporate fFinance
The fvalues fshown fin fthe fsolutions fmay fbe frounded ffor fdisplay fpurposes. fHowever, fthe fanswers fwere
fderived fusing fa fspreadsheet fwithout fany fintermediate frounding.
Answers fto fProblem fSets
1. a. real
b. executive fairplanes
c. brand fnames
d. financial
e. bonds
*f. investment for fcapital fexpenditure
*g. capital fbudgeting for finvestment
h. financing
*Note fthat ff fand fg fare finterchangeable fin fthe fquestion.
Est ftime: f01-05
2. A ftrademark, fa ffactory, fundeveloped fland, fand fyour fwork fforce f(c, fd, fe, fand fg) fare fall freal fassets.
fReal fassets fare fidentifiable fas fitems fwith fintrinsic fvalue. fThe fothers fin fthe flist fare ffinancial fassets,
fthat fis, fthese fassets fderive fvalue fbecause fof fa fcontractual fclaim.
Est ftime: f01-05
© fMcGraw fHill fLLC. fAll frights freserved. fNo freproduction for fdistribution fwithout fthe fprior fwritten fconsent fof fMcGraw fHill
LLC.
,3. a. Financial fassets, fsuch fas fstocks for fbank floans, fare fclaims fheld fby finvestors.
fCorporations fsell ffinancial fassets fto fraise fthe fcash fto finvest fin freal fassets fsuch fas fplant
fand fequipment. fSome freal fassets fare fintangible.
b. Capital fexpenditure fmeans finvestment fin freal fassets. fFinancing fmeans fraising fthe fcash
ffor fthis finvestment.
c. The fshares fof fpublic fcorporations fare ftraded fon fstock fexchanges fand fcan fbe fpurchased
fby fa fwide frange fof finvestors. fThe fshares fof fclosely fheld fcorporations fare fnot fpublicly
ftraded fand fare fheld fby fa fsmall fgroup fof fprivate finvestors.
d. Unlimited fliability: fInvestors fare fresponsible ffor fall fthe ffirm‘s fdebts. fA fsole fproprietor fhas
funlimited fliability. fInvestors fin fcorporations fhave flimited fliability. f They fcan flose ftheir
finvestment, fbut fno fmore.
Est ftime: f01-05
© fMcGraw fHill fLLC. fAll frights freserved. fNo freproduction for fdistribution fwithout fthe fprior fwritten fconsent fof fMcGraw fHill
LLC.
,4. Items fc fand fd fapply fto fcorporations. f Because fcorporations fhave fperpetual flife, fownership fcan fbe
ftransferred fwithout faffecting foperations, fand fmanagers fcan fbe ffired fwith fno feffect fon fownership.
fOther fforms fof fbusiness fmay fhave funlimited fliability fand flimited flife.
Est ftime: f01-05
5. Separation fof fownership ffacilitates fthe fkey fattributes fof fa fcorporation, fincluding flimited fliability ffor
finvestors, ftransferability fof fownership, fa fseparate flegal fpersonality fof fthe fcorporation, fand
fdelegated fcentralized fmanagement. f These ffour fattributes fprovide fsubstantial fbenefit ffor
finvestors, fincluding fthe fability fto fdiversify ftheir finvestment famong fmany funcorrelated freturns—a
fvery fvaluable ftool fexplored fin flater fchapters. f Also, fthese fattributes fallow finvestors fto fquickly fexit,
fenter, for fshort fsell fan finvestment, fthereby fgenerating fan factive fliquid fmarket ffor fcorporations.
However, fthese fpositive faspects falso fintroduce fsubstantial fnegative fexternalities fas fwell. f The
fseparation fof fownership ffrom fmanagement ftypically fleads fto fagency fproblems, fwhere fmanagers
fprefer fto fconsume fprivate fperks for fmake fother fdecisions ffor ftheir fprivate fbenefit—rather fthan
fmaximize fshareholder fwealth. f Shareholders ftend fto fexercise fless foversight fof feach findividual
finvestment fas ftheir fdiversification fincreases. f Finally, fthe fcorporation‘s fseparate flegal fpersonality
fmakes fit fdifficult fto fenforce faccountability fif fthey fexternalize fcosts fonto fsociety.
Est ftime: f01-05
6. Shareholders fwill fonly fvote fto fmaximize fshareholder fwealth. f Shareholders fcan fmodify ftheir
fpattern fof fconsumption fthrough fborrowing fand flending, fmatch frisk fpreferences, fand fhopefully
fbalance ftheir fown fcheckbooks f(or fhire fa fqualified fprofessional fto fhelp fthem fwith fthese ftasks).
Est ftime: f01-05
7. If fthe finvestment fincreases fthe ffirm‘s fwealth, fit fincreases fthe ffirm‘s fshare fvalue. f Ms. fEspinoza
fcould fthen fsell fsome for fall fthese fmore fvaluable fshares fto fprovide ffor fher fretirement fincome.
Est ftime: f01-05
8. a. Assuming fthat fthe fencabulator fmarket fis frisky, fan f8% fexpected freturn fon
fthe fF&H fencabulator finvestments fmay fbe finferior fto fa f4% freturn fon fU.S.
government fsecurities, fdepending fon fthe frelative frisk fbetween fthe ftwo fassets.
b. Unless fthe ffinancial fassets fare fas fsafe fas fU.S. fgovernment fsecurities, ftheir fcost fof fcapital
fwould fbe fhigher. fThe fCFO fcould fconsider fexpected freturns fon fassets fwith fsimilar frisk.
Est ftime: f06-10
9. Managers fwould fact fin fshareholders‘ finterests fbecause fthey fhave fa flegal fduty fto fact fin ftheir
finterests. f Managers fmay falso freceive fcompensation— fbonuses, fstock, fand foption fpayouts fwith
fvalue ftied f(roughly) fto ffirm fperformance. f Managers fmay ffear fpersonal freputational fdamage ffrom
fnot facting fin fshareholders‘ finterests. fAnd fmanagers fcan fbe ffired fby fthe fboard fof fdirectors f(elected
fby fshareholders). f If fmanagers fstill ffail fto fact fin fshareholders‘ finterests, fshareholders fmay fsell
ftheir fshares, flowering fthe fstock fprice fand fpotentially fcreating fthe fpossibility fof fa ftakeover, fwhich
fcan fagain flead fto fchanges fin fthe fboard fof fdirectors fand fsenior fmanagement.
Est ftime: f01-05
© fMcGraw fHill fLLC. fAll frights freserved. fNo freproduction for fdistribution fwithout fthe fprior fwritten fconsent fof fMcGraw fHill
LLC.
, 10. Managers fthat fare finsulated ffrom ftakeovers fmay fbe fmore fprone fto fagency fproblems fand
ftherefore fmore flikely fto fact fin ftheir fown finterests frather fthan fin fshareholders‘. f If fa ffirm finstituted
fa fnew ftakeover fdefense, fwe fmight fexpect fto fsee fthe fvalue fof fits fshares fdecline fas fagency
f problems fincrease fand fless fshareholder fvalue fmaximization foccurs. fThe fcounterargument fis
fthat fdefensive fmeasures fallow fmanagers fto fnegotiate ffor fa fhigher fpurchase fprice fin fthe fface fof fa
ftakeover fbid—to fthe fbenefit fof fshareholder fvalue.
Est ftime: f01-05
Appendix fQuestions:
1. Both fwould fstill finvest fin ftheir ffriend‘s fbusiness. f A finvests fand freceives f$121,000 ffor fhis
finvestment fat fthe fend fof fthe fyear—which fis fgreater fthan fthe f$120,000 fthat fwould fbe freceived
ffrom flending fat f20% f($100,000 f× f1.20 f = f$120,000). f G falso finvests, fbut fborrows fagainst fthe
$121,000 fpayment, fand fthus freceives f$100,833 f($121,000 f/ f1.20) ftoday.
Est ftime: f01-05
2. a. fHe fcould fconsume fup fto f$200,000 fnow f(forgoing fall ffuture fconsumption) for fup fto f$216,000
fnext fyear f($200,000 f× f1.08, fforgoing fall fconsumption fthis fyear). fHe fshould finvest fall fof fhis fwealth
fto fearn f$216,000 fnext fyear. f To fchoose fthe fsame fconsumption f(C) fin fboth fyears, fC f=
f($200,000 f– fC) f× f1.08 f= f$103,846.
Dollars f Next f Year
220,000
216,000
203,704
200,000
Dollars f Now
b. He fshould finvest fall fof fhis fwealth fto fearn f$220,000 f($200,000 f× f1.10) fnext fyear. f If fhe
fconsumes fall fthis fyear, fhe fcan fnow fhave fa ftotal fof f$203,703.70 f($200,000 f × f1.10/1.08) fthis fyear
for f$220,000 fnext fyear. f If fhe fconsumes fC fthis fyear, fthe famount favailable ffor fnext fyear‘s
fconsumption fis f($203,703.70 f– fC) f× f1.08. f To fget fequal fconsumption fin fboth fyears, fset fthe
famount fconsumed ftoday fequal fto fthe famount fnext fyear:
C f= f ($203,703.70 f – f C) f × f 1.08
C f= f$105,769.20
Est ftime: f06-10
© fMcGraw fHill fLLC. fAll frights freserved. fNo freproduction for fdistribution fwithout fthe fprior fwritten fconsent fof fMcGraw fHill
LLC.
