Solutions Manual Fundamentals of Corporate Finance
13th Edition Ross, Westerfield, and Jordan
Chapters 1 - 27
,CHAPTERgi1:giIntroductiongitogiCorporategiFinance
CHAPTERgi2:giFinancialgiStatements,giTaxes,giAndgiCashgiFlow
CHAPTERgi3:giWorkinggiwithgiFinancialgiStatements
CHAPTERgi4:giLong-TermgiFinancialgiPlanninggiandgiGrowth
CHAPTERgi5:giIntroductiongitogiValuation:giThegiTimegiValuegiofgiMoney
CHAPTERgi6:giDiscountedgiCashgiFlowgiValuation
CHAPTERgi7:giInterestgiRatesgiandgiBondgiValuation
CHAPTERgi8:giStockgiValuation
CHAPTERgi9:giNetgiPresentgiValuegiandgiOthergiInvestmentgiCriteria
CHAPTERgi10:giMakinggiCapitalgiInvestmentgiDecisions
CHAPTERgi11:giProjectgiAnalysisgiandgiEvaluation
CHAPTERgi12:giSomegiLessonsgifromgiCapitalgiMarketgiHistory
CHAPTERgi13:giReturn,giRisk,giAndgithegiSecuritygiMarketgiLine
CHAPTERgi14:giCostgiofgiCapital
CHAPTERgi15:giRaisinggiCapital
CHAPTERgi16:giFinancialgiLeveragegiandgiCapitalgiStructuregiPolicy
CHAPTERgi17:giDividendsgiandgiPayoutgiPolicy
CHAPTERgi18:giShort-TermgiFinancegiandgiPlanning
CHAPTERgi19:giCashgiandgiLiquiditygiManagement
CHAPTERgi20:giCreditgiandgiInventorygiManagement
CHAPTERgi21:giInternationalgiCorporategiFinance
CHAPTERgi22:giBehavioralgiFinance:giImplicationsgiforgiFinancialgiManage
CHAPTERgi23:giEnterprisegiRiskgiManagement
CHAPTERgi24:OptionsgiandgiCorporategiFinance
CHAPTERgi25:giOptiongiValuation
CHAPTERgi26:giMergersgiandgiAcquisitions
CHAPTERgi27:giLeasing
,CHAPTER 1 gi
INTRODUCTION TO CORPORATE gi gi gi
FINANCE
AnswersgitogiConceptsgiReviewgiandgiCriticalgiThinkinggiQuestions
1. Capitalgibudgetinggi(decidinggiwhethergitogiexpandgiagimanufacturinggiplant),gicapitalgistructuregi(decidin
ggiwhethergitogiissueginewgiequitygiandgiusegithegiproceedsgitogiretiregioutstandinggidebt),giandgiworkinggica
pitalgimanagementgi(modifyinggithegifirm’sgicreditgicollectiongipolicygiwithgiitsgicustomers).
2. Disadvantages:giunlimitedgiliability,gilimitedgilife,gidifficultygiingitransferringgiownership,gihardgitogiraise
gicapitalgifunds.giSomegiadvantages:gisimpler,gilessgiregulation,githegiownersgiaregialsogithegimanagers,giso
metimesgipersonalgitaxgiratesgiaregibettergithangicorporategitaxgirates.
3. Thegiprimarygidisadvantagegiofgithegicorporategiformgiisgithegidoublegitaxationgitogishareholdersgiofgidistri
butedgiearningsgiandgidividends.giSomegiadvantagesgiinclude:gilimitedgiliability,gieasegiofgitransferability,
giabilitygitogiraisegicapital,giunlimitedgilife,giandgisogiforth.
4. IngiresponsegitogiSarbanes-
Oxley,gismallgifirmsgihavegielectedgitogigogidarkgibecausegiofgithegicostsgiofgicompliance.giThegicostsgitogic
omplygiwithgiSarboxgicangibegiseveralgimilliongidollars,giwhichgicangibegiagilargegipercentageg i ofg i ag i smal
lg i firmsg i profits.g i Ag i majorg i costg i ofg i goingg i darkg i isg i lessg i accessg i tog i capital.g i Sinceg i thegifirmgiisgino
gilongergipubliclygitraded,giitgicanginogilongergiraisegimoneygiingithegipublicgimarket.giAlthoughgithegicomp
anygiwillgistillgihavegiaccessgitogibankgiloansgiandgithegiprivategiequitygimarket,githegicostsgiassociatedgiwit
hgiraisinggifundsgiingithesegimarketsgiaregiusuallygihighergithangithegicostsgiofgiraisinggifundsgiingithegipublic
gimarket.
5. Theg i treasurer’sg i officeg i andg i theg i controller’sg i officeg i areg i theg i twog i primaryg i organizationalg i
groupsg i thatgri eportgidirectlygitogithegichiefgifinancialgiofficer.giThegicontroller’sgiofficegihandlesgicostgian
dgifinancialgiaccounting,gitaxgimanagement,giandgimanagementgiinformationgisystems,giwhilegithegitreasur
er’sgiofficegiisgiresponsibleg i forg i cashg i andg i creditg i management,g i capitalg i budgeting,g i andg i financial
g i planning.g i Therefore,githegistudygiofgicorporategifinancegiisgiconcentratedgiwithingithegitreasurygigroup’s
gifunctions.
6. Togimaximizegithegicurrentgimarketgivaluegi(sharegiprice)giofgithegiequitygiofgithegifirmgi(whethergiit’sgipub
licly-gitradedgiorginot).
7. Ingithegicorporategiformgiofgiownership,githegishareholdersgiaregithegiownersgiofgithegifirm.giThegisharehold
ersgielectgithegidirectorsgiofgithegicorporation,giwhogiingiturngiappointgithegifirm’sgimanagement.giThisgisep
arationgiofgiownershipgifromgicontrolgiingithegicorporategiformgiofgiorganizationgiisgiwhatgicausesgiagencygi
problemsgitogiexist.giManagementgimaygiactgiingiitsgiowngiorgisomeonegielse’sgibestgiinterests,girathergithan
githosegiofgithegishareholders.giIfgisuchgieventsgioccur,githeygimaygicontradictgithegigoalgiofgimaximizinggith
egisharegipricegiofgithegiequitygiofgithegifirm.
8. Agiprimarygimarketgitransaction.
, B-2g i SOLUTIONS
9. IngiauctiongimarketsgilikegithegiNYSE,gibrokersgiandgiagentsgimeetgiatgiagiphysicalgilocationgi(thegiexchang
e)gitogimatchgibuyersgiandgisellersgiofgiassets.giDealergimarketsgilikegiNASDAQgiconsistgiofgidealersgioper
atinggiatgidispersedgilocalesgiwhogibuygiandgisellgiassetsgithemselves,gicommunicatinggiwithgiothergidealer
sgieithergielectronicallygiorgiliterallygiover-the-counter.
10. Suchgiorganizationsgifrequentlygipursuegisocialgiorgipoliticalgimissions,gisogimanygidifferentgigoalsgiaregic
onceivable.giOnegigoalgithatgiisgioftengicitedgiisgirevenuegiminimization;gii.e.,giprovidegiwhatevergigoodsgia
ndgiservicesgiaregiofferedgiatgithegilowestgipossiblegicostgitogisociety.giAgibettergiapproachgimightgibegitogio
bservegithatgievengiaginot-for-
profitgibusinessgihasgiequity.giThus,gionegianswergiisgithatgithegiappropriategigoalgiisg i togimaximizegithegiv
aluegiofgithegiequity.
11. Presumably,githegicurrentgistockgivaluegireflectsgithegirisk,gitiming,giandgimagnitudegiofgiallgifuturegicashgif
lows,gibothgishort-termgiandgilong-term.giIfgithisgiisgicorrect,githengithegistatementgiisgifalse.
12. Angiargumentgicangibegimadegieithergiway.giAtgithegionegiextreme,giwegicouldgiarguegithatgiingiagimarketgiec
onomy,giallgiofgithesegithingsgiaregipriced.giTheregiisgithusgiangioptimalgilevelgiof,giforgiexample,giethicalgian
d/orgiillegalgibehavior,giandgithegiframeworkgiofgistockgivaluationgiexplicitlygiincludesgithese.giAtgithegioth
ergiextreme,giwegicouldgiarguegithatgithesegiareginon-
economicgiphenomenagiandgiaregibestgihandledgithroughgithegipoliticalgiprocess.giAgiclassicgi(andgihighlygi
relevant)githoughtgiquestiongithatgiillustratesgithisgidebategigoesgisomethinggilikegithis:gi“Agifirmgihasgiesti
matedgithatgithegicostgiofgiimprovinggithegisafetygiofgionegiofgiitsgiproductsgiisgi$30gimillion.giHowever,githe
gifirmgibelievesgithatgiimprovinggithegisafetygiofgithegiproductgiwillgionlygisavegi$20gimilliongiingiproductgili
abilitygiclaims.giWhatgishouldgithegifirmgido?”
13. Thegigoalgiwillgibegithegisame,gibutgithegibestgicoursegiofgiactiongitowardgithatgigoalgimaygibegidifferentgibec
ausegiofgidifferinggisocial,gipolitical,giandgieconomicgiinstitutions.
14. Thegigoalgiofgimanagementgishouldgibegitogimaximizegithegisharegipricegiforgithegicurrentgishareholders.giIf
gimanagementgibelievesgithatgiitgicangiimprovegithegiprofitabilitygiofgithegifirmgisogithatgithegisharegipricegi
willgiexceedgi$35,githengitheygishouldgifightgithegioffergifromgithegioutsidegicompany.giIfgimanagementgibe
lievesgithatgithisgibiddergiorgiothergiunidentifiedgibiddersgiwillgiactuallygipaygimoregithangi$35gipergisharegit
ogiacquiregithegicompany,githengitheygishouldgistillgifightgithegioffer.giHowever,giifgithegicurrentgimanagem
entgicannotgiincreasegithegivaluegiofgithegifirmgibeyondgithegibidgiprice,giandginogiothergihighergibidsgicomegi
in,githengimanagementgiisginotgiactinggiingithegiinterestsgiofgithegishareholdersgibygifightinggithegioffer.giSin
cegicurrentgimanagersgioftengilosegitheirgijobsgiwhengithegicorporationgiisgiacquired,gipoorlygimonitoredgim
anagersgihavegiangiincentivegitogifightgicorporategitakeoversgiingisituationsgisuchgiasgithis.
15. Wegiwouldgiexpectgiagencygiproblemsgitogibegilessgiseveregiingiothergicountries,giprimarilygiduegitogithegire
lativelygismallgipercentagegiofgiindividualgiownership.giFewergiindividualgiownersgishouldgireducegitheginu
mbergiofgidiversegiopinionsgiconcerninggicorporategigoals.giThegihighgipercentagegiofgiinstitutionalgiowne
rshipgimightgileadgitogiagihighergidegreegiofgiagreementgibetweengiownersgiandgimanagersgiongidecisionsgic
oncerninggiriskygiprojects.giIngiaddition,giinstitutionsgimaygibegibettergiablegitogiimplementgieffectivegimo
nitoringgimechanismsgiongimanagersgithangicangiindividualgiowners,gibasedgiongithegiinstitutions’gideeperg
iresourcesgiandgiexperiencesgiwithgitheirgiowngimanagement.giThegiincreasegiingiinstitutionalgiownershipgi
ofgistockgiingithegiUnitedgiStatesgiandgti hegigrowinggiactivismgiofgithesegilargegishareholdergigroupsgimaygile
adgitogiagireductiongiingiagencygiproblemsgiforgiU.S.gicorporationsgiandgiagimoregiefficientgimarketgiforgicor
porategicontrol.
13th Edition Ross, Westerfield, and Jordan
Chapters 1 - 27
,CHAPTERgi1:giIntroductiongitogiCorporategiFinance
CHAPTERgi2:giFinancialgiStatements,giTaxes,giAndgiCashgiFlow
CHAPTERgi3:giWorkinggiwithgiFinancialgiStatements
CHAPTERgi4:giLong-TermgiFinancialgiPlanninggiandgiGrowth
CHAPTERgi5:giIntroductiongitogiValuation:giThegiTimegiValuegiofgiMoney
CHAPTERgi6:giDiscountedgiCashgiFlowgiValuation
CHAPTERgi7:giInterestgiRatesgiandgiBondgiValuation
CHAPTERgi8:giStockgiValuation
CHAPTERgi9:giNetgiPresentgiValuegiandgiOthergiInvestmentgiCriteria
CHAPTERgi10:giMakinggiCapitalgiInvestmentgiDecisions
CHAPTERgi11:giProjectgiAnalysisgiandgiEvaluation
CHAPTERgi12:giSomegiLessonsgifromgiCapitalgiMarketgiHistory
CHAPTERgi13:giReturn,giRisk,giAndgithegiSecuritygiMarketgiLine
CHAPTERgi14:giCostgiofgiCapital
CHAPTERgi15:giRaisinggiCapital
CHAPTERgi16:giFinancialgiLeveragegiandgiCapitalgiStructuregiPolicy
CHAPTERgi17:giDividendsgiandgiPayoutgiPolicy
CHAPTERgi18:giShort-TermgiFinancegiandgiPlanning
CHAPTERgi19:giCashgiandgiLiquiditygiManagement
CHAPTERgi20:giCreditgiandgiInventorygiManagement
CHAPTERgi21:giInternationalgiCorporategiFinance
CHAPTERgi22:giBehavioralgiFinance:giImplicationsgiforgiFinancialgiManage
CHAPTERgi23:giEnterprisegiRiskgiManagement
CHAPTERgi24:OptionsgiandgiCorporategiFinance
CHAPTERgi25:giOptiongiValuation
CHAPTERgi26:giMergersgiandgiAcquisitions
CHAPTERgi27:giLeasing
,CHAPTER 1 gi
INTRODUCTION TO CORPORATE gi gi gi
FINANCE
AnswersgitogiConceptsgiReviewgiandgiCriticalgiThinkinggiQuestions
1. Capitalgibudgetinggi(decidinggiwhethergitogiexpandgiagimanufacturinggiplant),gicapitalgistructuregi(decidin
ggiwhethergitogiissueginewgiequitygiandgiusegithegiproceedsgitogiretiregioutstandinggidebt),giandgiworkinggica
pitalgimanagementgi(modifyinggithegifirm’sgicreditgicollectiongipolicygiwithgiitsgicustomers).
2. Disadvantages:giunlimitedgiliability,gilimitedgilife,gidifficultygiingitransferringgiownership,gihardgitogiraise
gicapitalgifunds.giSomegiadvantages:gisimpler,gilessgiregulation,githegiownersgiaregialsogithegimanagers,giso
metimesgipersonalgitaxgiratesgiaregibettergithangicorporategitaxgirates.
3. Thegiprimarygidisadvantagegiofgithegicorporategiformgiisgithegidoublegitaxationgitogishareholdersgiofgidistri
butedgiearningsgiandgidividends.giSomegiadvantagesgiinclude:gilimitedgiliability,gieasegiofgitransferability,
giabilitygitogiraisegicapital,giunlimitedgilife,giandgisogiforth.
4. IngiresponsegitogiSarbanes-
Oxley,gismallgifirmsgihavegielectedgitogigogidarkgibecausegiofgithegicostsgiofgicompliance.giThegicostsgitogic
omplygiwithgiSarboxgicangibegiseveralgimilliongidollars,giwhichgicangibegiagilargegipercentageg i ofg i ag i smal
lg i firmsg i profits.g i Ag i majorg i costg i ofg i goingg i darkg i isg i lessg i accessg i tog i capital.g i Sinceg i thegifirmgiisgino
gilongergipubliclygitraded,giitgicanginogilongergiraisegimoneygiingithegipublicgimarket.giAlthoughgithegicomp
anygiwillgistillgihavegiaccessgitogibankgiloansgiandgithegiprivategiequitygimarket,githegicostsgiassociatedgiwit
hgiraisinggifundsgiingithesegimarketsgiaregiusuallygihighergithangithegicostsgiofgiraisinggifundsgiingithegipublic
gimarket.
5. Theg i treasurer’sg i officeg i andg i theg i controller’sg i officeg i areg i theg i twog i primaryg i organizationalg i
groupsg i thatgri eportgidirectlygitogithegichiefgifinancialgiofficer.giThegicontroller’sgiofficegihandlesgicostgian
dgifinancialgiaccounting,gitaxgimanagement,giandgimanagementgiinformationgisystems,giwhilegithegitreasur
er’sgiofficegiisgiresponsibleg i forg i cashg i andg i creditg i management,g i capitalg i budgeting,g i andg i financial
g i planning.g i Therefore,githegistudygiofgicorporategifinancegiisgiconcentratedgiwithingithegitreasurygigroup’s
gifunctions.
6. Togimaximizegithegicurrentgimarketgivaluegi(sharegiprice)giofgithegiequitygiofgithegifirmgi(whethergiit’sgipub
licly-gitradedgiorginot).
7. Ingithegicorporategiformgiofgiownership,githegishareholdersgiaregithegiownersgiofgithegifirm.giThegisharehold
ersgielectgithegidirectorsgiofgithegicorporation,giwhogiingiturngiappointgithegifirm’sgimanagement.giThisgisep
arationgiofgiownershipgifromgicontrolgiingithegicorporategiformgiofgiorganizationgiisgiwhatgicausesgiagencygi
problemsgitogiexist.giManagementgimaygiactgiingiitsgiowngiorgisomeonegielse’sgibestgiinterests,girathergithan
githosegiofgithegishareholders.giIfgisuchgieventsgioccur,githeygimaygicontradictgithegigoalgiofgimaximizinggith
egisharegipricegiofgithegiequitygiofgithegifirm.
8. Agiprimarygimarketgitransaction.
, B-2g i SOLUTIONS
9. IngiauctiongimarketsgilikegithegiNYSE,gibrokersgiandgiagentsgimeetgiatgiagiphysicalgilocationgi(thegiexchang
e)gitogimatchgibuyersgiandgisellersgiofgiassets.giDealergimarketsgilikegiNASDAQgiconsistgiofgidealersgioper
atinggiatgidispersedgilocalesgiwhogibuygiandgisellgiassetsgithemselves,gicommunicatinggiwithgiothergidealer
sgieithergielectronicallygiorgiliterallygiover-the-counter.
10. Suchgiorganizationsgifrequentlygipursuegisocialgiorgipoliticalgimissions,gisogimanygidifferentgigoalsgiaregic
onceivable.giOnegigoalgithatgiisgioftengicitedgiisgirevenuegiminimization;gii.e.,giprovidegiwhatevergigoodsgia
ndgiservicesgiaregiofferedgiatgithegilowestgipossiblegicostgitogisociety.giAgibettergiapproachgimightgibegitogio
bservegithatgievengiaginot-for-
profitgibusinessgihasgiequity.giThus,gionegianswergiisgithatgithegiappropriategigoalgiisg i togimaximizegithegiv
aluegiofgithegiequity.
11. Presumably,githegicurrentgistockgivaluegireflectsgithegirisk,gitiming,giandgimagnitudegiofgiallgifuturegicashgif
lows,gibothgishort-termgiandgilong-term.giIfgithisgiisgicorrect,githengithegistatementgiisgifalse.
12. Angiargumentgicangibegimadegieithergiway.giAtgithegionegiextreme,giwegicouldgiarguegithatgiingiagimarketgiec
onomy,giallgiofgithesegithingsgiaregipriced.giTheregiisgithusgiangioptimalgilevelgiof,giforgiexample,giethicalgian
d/orgiillegalgibehavior,giandgithegiframeworkgiofgistockgivaluationgiexplicitlygiincludesgithese.giAtgithegioth
ergiextreme,giwegicouldgiarguegithatgithesegiareginon-
economicgiphenomenagiandgiaregibestgihandledgithroughgithegipoliticalgiprocess.giAgiclassicgi(andgihighlygi
relevant)githoughtgiquestiongithatgiillustratesgithisgidebategigoesgisomethinggilikegithis:gi“Agifirmgihasgiesti
matedgithatgithegicostgiofgiimprovinggithegisafetygiofgionegiofgiitsgiproductsgiisgi$30gimillion.giHowever,githe
gifirmgibelievesgithatgiimprovinggithegisafetygiofgithegiproductgiwillgionlygisavegi$20gimilliongiingiproductgili
abilitygiclaims.giWhatgishouldgithegifirmgido?”
13. Thegigoalgiwillgibegithegisame,gibutgithegibestgicoursegiofgiactiongitowardgithatgigoalgimaygibegidifferentgibec
ausegiofgidifferinggisocial,gipolitical,giandgieconomicgiinstitutions.
14. Thegigoalgiofgimanagementgishouldgibegitogimaximizegithegisharegipricegiforgithegicurrentgishareholders.giIf
gimanagementgibelievesgithatgiitgicangiimprovegithegiprofitabilitygiofgithegifirmgisogithatgithegisharegipricegi
willgiexceedgi$35,githengitheygishouldgifightgithegioffergifromgithegioutsidegicompany.giIfgimanagementgibe
lievesgithatgithisgibiddergiorgiothergiunidentifiedgibiddersgiwillgiactuallygipaygimoregithangi$35gipergisharegit
ogiacquiregithegicompany,githengitheygishouldgistillgifightgithegioffer.giHowever,giifgithegicurrentgimanagem
entgicannotgiincreasegithegivaluegiofgithegifirmgibeyondgithegibidgiprice,giandginogiothergihighergibidsgicomegi
in,githengimanagementgiisginotgiactinggiingithegiinterestsgiofgithegishareholdersgibygifightinggithegioffer.giSin
cegicurrentgimanagersgioftengilosegitheirgijobsgiwhengithegicorporationgiisgiacquired,gipoorlygimonitoredgim
anagersgihavegiangiincentivegitogifightgicorporategitakeoversgiingisituationsgisuchgiasgithis.
15. Wegiwouldgiexpectgiagencygiproblemsgitogibegilessgiseveregiingiothergicountries,giprimarilygiduegitogithegire
lativelygismallgipercentagegiofgiindividualgiownership.giFewergiindividualgiownersgishouldgireducegitheginu
mbergiofgidiversegiopinionsgiconcerninggicorporategigoals.giThegihighgipercentagegiofgiinstitutionalgiowne
rshipgimightgileadgitogiagihighergidegreegiofgiagreementgibetweengiownersgiandgimanagersgiongidecisionsgic
oncerninggiriskygiprojects.giIngiaddition,giinstitutionsgimaygibegibettergiablegitogiimplementgieffectivegimo
nitoringgimechanismsgiongimanagersgithangicangiindividualgiowners,gibasedgiongithegiinstitutions’gideeperg
iresourcesgiandgiexperiencesgiwithgitheirgiowngimanagement.giThegiincreasegiingiinstitutionalgiownershipgi
ofgistockgiingithegiUnitedgiStatesgiandgti hegigrowinggiactivismgiofgithesegilargegishareholdergigroupsgimaygile
adgitogiagireductiongiingiagencygiproblemsgiforgiU.S.gicorporationsgiandgiagimoregiefficientgimarketgiforgicor
porategicontrol.
