Fundamentals of Corporate
Finance, 5th Canadian Edition by
Jonathan Berk
Complete Chapter Solutions Manual
are included (Ch 1 to 25)
** Immediate Download
** Swift Response
** All Chapters included
** Data Case Solutions
** Excel Solutions
** Integrative Case Solutions
,Table of Contents are given below
1.Corporate Finance and the Financial Manager
2.Introduction to Financial Statement Analysis
3.The Valuation Principle: The Foundation of Financial Decision Making
4.The Time Value of Money
5.Interest Rates
6.Bonds
7.Valuing Stocks
8.Investment Decision Rules
9.Fundamentals of Capital Budgeting
10.Risk and Return in Capital Markets
11.Systematic Risk and the Equity Risk Premium
12.Determining the Cost of Capital
13.Risk and the Pricing of Options
14.Raising Equity Capital
15.Debt Financing
16.Capital Structure
17.Payout Policy
18.Financial Modeling and Pro Forma Analysis
19.Working Capital Management
20.Short-Term Financial Planning
21.Risk Management
22.International Corporate Finance
23.Leasing
24.Mergers and Acquisitions
25.Corporate Governance
,Solutions Manual organized in reverse order, with the last chapter displayed first, to ensure that all
chapters are included in this document. (Complete Chapters included Ch25-1)
Chapter 25
Corporate Governance
Note: All problems in this chapter are available in MyLab Finance. An asterisk (*) indicates
problems with a higher level of difficulty. For a breakdown of the difficulty ratings of all
of the problems in this Solutions Manual, please see the Preface – Question Difficulty
Ratings.
1. The corporation allows for the separation of management and ownership. Thus, those who
control the operations of the corporation and how its money is spent are not the same ones as
those who have invested in the corporation. This creates a clear conflict of interest, and this
conflict between the investors and managers creates the need for investors to devise a system
of checks on managers—the system of corporate governance.
2. Examples of principal-agent problems are excessive perquisite consumption (more
company jets/company jet travel than needed, nicer office than necessary, etc.) and shirking
(management putting in less effort than desirable by shareholders). Another example is
value-destroying acquisitions that nonetheless increase the pecuniary or non-pecuniary
benefits to the CEO on net.
3. The corporate organizational form allows those who have the capital to fund an enterprise
to be different from those who have the expertise to manage the enterprise. This critical
separation allows a wide class of investors to share the risk of the enterprise. However, as
mentioned in the answer to Question 1, this separation comes at a cost—the managers
may act in their own best interests, not in the best interests of the shareholders who own
the firm.
4. The board of directors is the primary internal control mechanism and the first line of
defence to prevent fraud, agency conflicts, and mismanagement. The board is empowered
to hire and fire managers, set compensation contracts, approve major investment
decisions, etc.
5. Over time, a long-standing CEO can maneuver the nomination process so that his or her
associates and friends are nominated to the board. Additionally, board members
representing customers, suppliers, or others who have the potential for business
relationships with the firm will sometimes compromise their fiduciary duty in order to
keep the management of the firm happy. This desire to keep the CEO happy or a
reluctance to challenge him or her interferes with the board’s primary function of
monitoring the management.
6. By knowing a company and its industry as well as possible, security analysts are in a
position to uncover irregularities. They also participate in earnings calls with the CEO
and CFO, and sometimes ask difficult and probing questions.
312
, Chapter 25: Corporate Governance 313
7. Lenders are exposed to the firm as creditors and so are motivated to carefully monitor the
firm. They often include covenants in their loans that require the company to maintain
certain profitability and liquidity levels. Breaking these covenants can be a warning sign
of deeper trouble.
8. Whistle-blowers can be anyone but are typically employees who uncover outright
wrongdoing and “blow the whistle” on the fraud by reporting it to the authorities.
9. The advantages are that, since options increase in value when the firm’s stock price
increases, the CEO’s wealth and incentives will be more closely tied to the shareholders’
wealth. The disadvantage is that option grants can increase a CEO’s incentives to game
the system by timing the release of information to fit the option granting schedule or to
artificially smooth earnings.
10. No. There are two counterarguments here. First, as Demsetz and Lehn (1985) argue, there
is no reason to expect a simple relation between ownership and value or performance.
There are many dimensions to the corporate governance system and a one-size-fits-all
approach is too simplistic; the correct ownership level for one firm may not be the correct
level for another. Second, some studies have shown a non-linear relationship between firm
valuation and ownership—specifically, that increasing ownership is good at first, but that,
in a certain range, managers can use their ownership level to partially block efforts to
constrain them, even though they still own a minority of the shares. In this “entrenching”
range, increasing ownership could reduce performance.
11. Proxy contests are simply contested elections for directors. In a proxy contest, two
competing slates of directors rather than just one slate are proposed for the company. If a
board has become captured or is unresponsive to shareholder demands, shareholders can
put their own slate of new directors up for election in competition to the slate put up by
incumbent management. If the dissident slate wins, then shareholders will have
succeeded in placing new directors, presumably not beholden to the CEO, on the board.
12. A say-on-pay vote is a non-binding vote whereby the shareholders indicate whether they
approve of an executive’s pay package or not.
13. When confronted with a dissident shareholder, a board can do either of the following:
• Ignore the shareholder, which will result in the shareholder either going away or
launching a proxy fight, in which case the board will need to expend resources in an
attempt to convince shareholders not to side with the dissident; or
• Negotiate with the dissident shareholder to come to a solution on which the board
and the shareholder can agree.
14. The government should be trying to maximize societal welfare. Thus, in designing
regulation, it must trade off the effects of direct and indirect enforcement, compliance,
and other costs associated with regulation against the aggregate benefits that accrue to
shareholders and the economy as a whole.
Finance, 5th Canadian Edition by
Jonathan Berk
Complete Chapter Solutions Manual
are included (Ch 1 to 25)
** Immediate Download
** Swift Response
** All Chapters included
** Data Case Solutions
** Excel Solutions
** Integrative Case Solutions
,Table of Contents are given below
1.Corporate Finance and the Financial Manager
2.Introduction to Financial Statement Analysis
3.The Valuation Principle: The Foundation of Financial Decision Making
4.The Time Value of Money
5.Interest Rates
6.Bonds
7.Valuing Stocks
8.Investment Decision Rules
9.Fundamentals of Capital Budgeting
10.Risk and Return in Capital Markets
11.Systematic Risk and the Equity Risk Premium
12.Determining the Cost of Capital
13.Risk and the Pricing of Options
14.Raising Equity Capital
15.Debt Financing
16.Capital Structure
17.Payout Policy
18.Financial Modeling and Pro Forma Analysis
19.Working Capital Management
20.Short-Term Financial Planning
21.Risk Management
22.International Corporate Finance
23.Leasing
24.Mergers and Acquisitions
25.Corporate Governance
,Solutions Manual organized in reverse order, with the last chapter displayed first, to ensure that all
chapters are included in this document. (Complete Chapters included Ch25-1)
Chapter 25
Corporate Governance
Note: All problems in this chapter are available in MyLab Finance. An asterisk (*) indicates
problems with a higher level of difficulty. For a breakdown of the difficulty ratings of all
of the problems in this Solutions Manual, please see the Preface – Question Difficulty
Ratings.
1. The corporation allows for the separation of management and ownership. Thus, those who
control the operations of the corporation and how its money is spent are not the same ones as
those who have invested in the corporation. This creates a clear conflict of interest, and this
conflict between the investors and managers creates the need for investors to devise a system
of checks on managers—the system of corporate governance.
2. Examples of principal-agent problems are excessive perquisite consumption (more
company jets/company jet travel than needed, nicer office than necessary, etc.) and shirking
(management putting in less effort than desirable by shareholders). Another example is
value-destroying acquisitions that nonetheless increase the pecuniary or non-pecuniary
benefits to the CEO on net.
3. The corporate organizational form allows those who have the capital to fund an enterprise
to be different from those who have the expertise to manage the enterprise. This critical
separation allows a wide class of investors to share the risk of the enterprise. However, as
mentioned in the answer to Question 1, this separation comes at a cost—the managers
may act in their own best interests, not in the best interests of the shareholders who own
the firm.
4. The board of directors is the primary internal control mechanism and the first line of
defence to prevent fraud, agency conflicts, and mismanagement. The board is empowered
to hire and fire managers, set compensation contracts, approve major investment
decisions, etc.
5. Over time, a long-standing CEO can maneuver the nomination process so that his or her
associates and friends are nominated to the board. Additionally, board members
representing customers, suppliers, or others who have the potential for business
relationships with the firm will sometimes compromise their fiduciary duty in order to
keep the management of the firm happy. This desire to keep the CEO happy or a
reluctance to challenge him or her interferes with the board’s primary function of
monitoring the management.
6. By knowing a company and its industry as well as possible, security analysts are in a
position to uncover irregularities. They also participate in earnings calls with the CEO
and CFO, and sometimes ask difficult and probing questions.
312
, Chapter 25: Corporate Governance 313
7. Lenders are exposed to the firm as creditors and so are motivated to carefully monitor the
firm. They often include covenants in their loans that require the company to maintain
certain profitability and liquidity levels. Breaking these covenants can be a warning sign
of deeper trouble.
8. Whistle-blowers can be anyone but are typically employees who uncover outright
wrongdoing and “blow the whistle” on the fraud by reporting it to the authorities.
9. The advantages are that, since options increase in value when the firm’s stock price
increases, the CEO’s wealth and incentives will be more closely tied to the shareholders’
wealth. The disadvantage is that option grants can increase a CEO’s incentives to game
the system by timing the release of information to fit the option granting schedule or to
artificially smooth earnings.
10. No. There are two counterarguments here. First, as Demsetz and Lehn (1985) argue, there
is no reason to expect a simple relation between ownership and value or performance.
There are many dimensions to the corporate governance system and a one-size-fits-all
approach is too simplistic; the correct ownership level for one firm may not be the correct
level for another. Second, some studies have shown a non-linear relationship between firm
valuation and ownership—specifically, that increasing ownership is good at first, but that,
in a certain range, managers can use their ownership level to partially block efforts to
constrain them, even though they still own a minority of the shares. In this “entrenching”
range, increasing ownership could reduce performance.
11. Proxy contests are simply contested elections for directors. In a proxy contest, two
competing slates of directors rather than just one slate are proposed for the company. If a
board has become captured or is unresponsive to shareholder demands, shareholders can
put their own slate of new directors up for election in competition to the slate put up by
incumbent management. If the dissident slate wins, then shareholders will have
succeeded in placing new directors, presumably not beholden to the CEO, on the board.
12. A say-on-pay vote is a non-binding vote whereby the shareholders indicate whether they
approve of an executive’s pay package or not.
13. When confronted with a dissident shareholder, a board can do either of the following:
• Ignore the shareholder, which will result in the shareholder either going away or
launching a proxy fight, in which case the board will need to expend resources in an
attempt to convince shareholders not to side with the dissident; or
• Negotiate with the dissident shareholder to come to a solution on which the board
and the shareholder can agree.
14. The government should be trying to maximize societal welfare. Thus, in designing
regulation, it must trade off the effects of direct and indirect enforcement, compliance,
and other costs associated with regulation against the aggregate benefits that accrue to
shareholders and the economy as a whole.
