CHAPTER 1 .................................................................................................................................................. 1
INTRODUCTION TO CORPORATE FINANCE ................................................................................... 1
CHAPTER 2 .................................................................................................................................................. 4
FINANCIAL STATEMENTS, TAXES AND CASH FLOW .................................................................. 4
CHAPTER 3 ................................................................................................................................................ 15
WORKING WITH FINANCIAL STATEMENTS ................................................................................ 15
CHAPTER 4 ................................................................................................................................................ 29
LONG-TERM FINANCIAL PLANNING AND GROWTH ................................................................. 29
CHAPTER 5 ................................................................................................................................................ 57
INTRODUCTION TO VALUATION: THE TIME VALUE OF MONEY ......................................... 57
CHAPTER 6 ................................................................................................................................................ 68
DISCOUNTED CASH FLOW VALUATION ........................................................................................ 68
CHAPTER 7 .............................................................................................................................................. 118
INTEREST RATES AND BOND VALUATION ................................................................................. 118
CHAPTER 8 .............................................................................................................................................. 141
STOCK VALUATION ............................................................................................................................ 141
CHAPTER 9 .............................................................................................................................................. 153
NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA ............................................... 153
CHAPTER 10 ............................................................................................................................................ 177
MAKING CAPITAL INVESTMENT DECISIONS ............................................................................ 177
CHAPTER 11 ............................................................................................................................................ 201
PROJECT ANALYSIS AND EVALUATION ...................................................................................... 201
CHAPTER 12 ............................................................................................................................................ 224
SOME LESSONS FROM CAPITAL MARKET HISTORY .............................................................. 224
CHAPTER 13 ............................................................................................................................................ 236
RISK, RETURN, AND THE SECURITY MARKET LINE ............................................................... 236
CHAPTER 14 ............................................................................................................................................ 251
COST OF CAPITAL ............................................................................................................................... 251
CHAPTER 15 ............................................................................................................................................ 267
RAISING CAPITAL ............................................................................................................................... 267
CHAPTER 16 ............................................................................................................................................ 276
FINANCIAL LEVERAGE AND CAPITAL STRUCTURE POLICY .............................................. 276
CHAPTER 17 ............................................................................................................................................ 292
DIVIDENDS AND DIVIDEND POLICY ............................................................................................. 292
CHAPTER 18 ............................................................................................................................................ 303
SHORT-TERM FINANCE AND PLANNING ..................................................................................... 303
CHAPTER 19 ............................................................................................................................................ 318
CASH AND LIQUIDITY MANAGEMENT......................................................................................... 318
CHAPTER 20 ............................................................................................................................................ 330
CREDIT AND INVENTORY MANAGEMENT ................................................................................. 330
CHAPTER 21 ............................................................................................................................................ 344
INTERNATIONAL CORPORATE FINANCE ................................................................................... 344
CHAPTER 22 ............................................................................................................................................ 354
BEHAVIORAL FINANCE: IMPLICATIONS FOR FINANCIAL MANAGEMENT .................... 354
CHAPTER 23 ............................................................................................................................................ 356
RISK MANAGEMENT: AN INTRODUCTION TO FINANCIAL ENGINEERING ..................... 356
CHAPTER 24 ............................................................................................................................................ 362
OPTIONS AND CORPORATE FINANCE .......................................................................................... 362
CHAPTER 25 ............................................................................................................................................ 376
OPTION VALUATION .......................................................................................................................... 376
CHAPTER 26 ............................................................................................................................................ 390
,MERGERS AND ACQUISITIONS ....................................................................................................... 390
CHAPTER 27 ............................................................................................................................................ 401
LEASING ................................................................................................................................................. 401
,B-2 SOLUTIONS
Solutions Manual
Fundamentals of Corporate Finance 9th edition
Ross, Westerfield, and Jordan
Updated 12-20-2008
, CHAPTER 1
INTRODUCTION TO CORPORATE
FINANCE
Answers to Concepts Review and Critical Thinking Questions
1. Capital budgeting (deciding whether to expand a manufacturing plant), capital structure (deciding
whether to issue new equity and use the proceeds to retire outstanding debt), and working capital
management (modifying the firm’s credit collection policy with its customers).
2. Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, hard to raise
capital funds. Some advantages: simpler, less regulation, the owners are also the managers,
sometimes personal tax rates are better than corporate tax rates.
3. The primary disadvantage of the corporate form is the double taxation to shareholders of distributed
earnings and dividends. Some advantages include: limited liability, ease of transferability, ability to
raise capital, and unlimited life.
4. In response to Sarbanes-Oxley, small firms have elected to go dark because of the costs of
compliance. The costs to comply with Sarbox can be several million dollars, which can be a large
percentage of a small firms profits. A major cost of going dark is less access to capital. Since the
firm is no longer publicly traded, it can no longer raise money in the public market. Although the
company will still have access to bank loans and the private equity market, the costs associated with
raising funds in these markets are usually higher than the costs of raising funds in the public market.
5. The treasurer’s office and the controller’s office are the two primary organizational groups that
report directly to the chief financial officer. The controller’s office handles cost and financial
accounting, tax management, and management information systems, while the treasurer’s office is
responsible for cash and credit management, capital budgeting, and financial planning. Therefore,
the study of corporate finance is concentrated within the treasury group’s functions.
6. To maximize the current market value (share price) of the equity of the firm (whether it’s publicly-
traded or not).
7. In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders
elect the directors of the corporation, who in turn appoint the firm’s management. This separation of
ownership from control in the corporate form of organization is what causes agency problems to
exist. Management may act in its own or someone else’s best interests, rather than those of the
shareholders. If such events occur, they may contradict the goal of maximizing the share price of the
equity of the firm.
8. A primary market transaction.
INTRODUCTION TO CORPORATE FINANCE ................................................................................... 1
CHAPTER 2 .................................................................................................................................................. 4
FINANCIAL STATEMENTS, TAXES AND CASH FLOW .................................................................. 4
CHAPTER 3 ................................................................................................................................................ 15
WORKING WITH FINANCIAL STATEMENTS ................................................................................ 15
CHAPTER 4 ................................................................................................................................................ 29
LONG-TERM FINANCIAL PLANNING AND GROWTH ................................................................. 29
CHAPTER 5 ................................................................................................................................................ 57
INTRODUCTION TO VALUATION: THE TIME VALUE OF MONEY ......................................... 57
CHAPTER 6 ................................................................................................................................................ 68
DISCOUNTED CASH FLOW VALUATION ........................................................................................ 68
CHAPTER 7 .............................................................................................................................................. 118
INTEREST RATES AND BOND VALUATION ................................................................................. 118
CHAPTER 8 .............................................................................................................................................. 141
STOCK VALUATION ............................................................................................................................ 141
CHAPTER 9 .............................................................................................................................................. 153
NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA ............................................... 153
CHAPTER 10 ............................................................................................................................................ 177
MAKING CAPITAL INVESTMENT DECISIONS ............................................................................ 177
CHAPTER 11 ............................................................................................................................................ 201
PROJECT ANALYSIS AND EVALUATION ...................................................................................... 201
CHAPTER 12 ............................................................................................................................................ 224
SOME LESSONS FROM CAPITAL MARKET HISTORY .............................................................. 224
CHAPTER 13 ............................................................................................................................................ 236
RISK, RETURN, AND THE SECURITY MARKET LINE ............................................................... 236
CHAPTER 14 ............................................................................................................................................ 251
COST OF CAPITAL ............................................................................................................................... 251
CHAPTER 15 ............................................................................................................................................ 267
RAISING CAPITAL ............................................................................................................................... 267
CHAPTER 16 ............................................................................................................................................ 276
FINANCIAL LEVERAGE AND CAPITAL STRUCTURE POLICY .............................................. 276
CHAPTER 17 ............................................................................................................................................ 292
DIVIDENDS AND DIVIDEND POLICY ............................................................................................. 292
CHAPTER 18 ............................................................................................................................................ 303
SHORT-TERM FINANCE AND PLANNING ..................................................................................... 303
CHAPTER 19 ............................................................................................................................................ 318
CASH AND LIQUIDITY MANAGEMENT......................................................................................... 318
CHAPTER 20 ............................................................................................................................................ 330
CREDIT AND INVENTORY MANAGEMENT ................................................................................. 330
CHAPTER 21 ............................................................................................................................................ 344
INTERNATIONAL CORPORATE FINANCE ................................................................................... 344
CHAPTER 22 ............................................................................................................................................ 354
BEHAVIORAL FINANCE: IMPLICATIONS FOR FINANCIAL MANAGEMENT .................... 354
CHAPTER 23 ............................................................................................................................................ 356
RISK MANAGEMENT: AN INTRODUCTION TO FINANCIAL ENGINEERING ..................... 356
CHAPTER 24 ............................................................................................................................................ 362
OPTIONS AND CORPORATE FINANCE .......................................................................................... 362
CHAPTER 25 ............................................................................................................................................ 376
OPTION VALUATION .......................................................................................................................... 376
CHAPTER 26 ............................................................................................................................................ 390
,MERGERS AND ACQUISITIONS ....................................................................................................... 390
CHAPTER 27 ............................................................................................................................................ 401
LEASING ................................................................................................................................................. 401
,B-2 SOLUTIONS
Solutions Manual
Fundamentals of Corporate Finance 9th edition
Ross, Westerfield, and Jordan
Updated 12-20-2008
, CHAPTER 1
INTRODUCTION TO CORPORATE
FINANCE
Answers to Concepts Review and Critical Thinking Questions
1. Capital budgeting (deciding whether to expand a manufacturing plant), capital structure (deciding
whether to issue new equity and use the proceeds to retire outstanding debt), and working capital
management (modifying the firm’s credit collection policy with its customers).
2. Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, hard to raise
capital funds. Some advantages: simpler, less regulation, the owners are also the managers,
sometimes personal tax rates are better than corporate tax rates.
3. The primary disadvantage of the corporate form is the double taxation to shareholders of distributed
earnings and dividends. Some advantages include: limited liability, ease of transferability, ability to
raise capital, and unlimited life.
4. In response to Sarbanes-Oxley, small firms have elected to go dark because of the costs of
compliance. The costs to comply with Sarbox can be several million dollars, which can be a large
percentage of a small firms profits. A major cost of going dark is less access to capital. Since the
firm is no longer publicly traded, it can no longer raise money in the public market. Although the
company will still have access to bank loans and the private equity market, the costs associated with
raising funds in these markets are usually higher than the costs of raising funds in the public market.
5. The treasurer’s office and the controller’s office are the two primary organizational groups that
report directly to the chief financial officer. The controller’s office handles cost and financial
accounting, tax management, and management information systems, while the treasurer’s office is
responsible for cash and credit management, capital budgeting, and financial planning. Therefore,
the study of corporate finance is concentrated within the treasury group’s functions.
6. To maximize the current market value (share price) of the equity of the firm (whether it’s publicly-
traded or not).
7. In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders
elect the directors of the corporation, who in turn appoint the firm’s management. This separation of
ownership from control in the corporate form of organization is what causes agency problems to
exist. Management may act in its own or someone else’s best interests, rather than those of the
shareholders. If such events occur, they may contradict the goal of maximizing the share price of the
equity of the firm.
8. A primary market transaction.
