公司理财英文版第10版课后习题答案.docx

公司理财英文版第10版课后习题答案.docx

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SolutionsManual

FundamentalsofCorporateFinance10theditionRoss,Westerfield,andJordan

06-25-2013

PreparedbyBradJordan

UniversityofKentucky

JoeSmoliraBelmontUniversity

CHAPTER1

INTRODUCTIONTOCORPORATEFINANCE

AnswerstoConceptsReviewandCriticalThinkingQuestions

1.Capitalbudgeting（decidingwhethertoexpandamanufacturingplant）,capitalstructure（decidingwhethertoissuenewequityandusetheproceedstoretireoutstandingdebt）,andworkingcapitalmanagement（modifyingthefirm’screditcollectionpolicywithitscustomers）.

2.Disadvantages:

unlimitedliability,limitedlife,difficultyintransferringownership,difficultyinraisingcapitalfunds.Someadvantages:

simpler,lessregulation,theownersarealsothemanagers,sometimespersonaltaxratesarebetterthancorporatetaxrates.

3.Theprimarydisadvantageofthecorporateformisthedoubletaxationtoshareholdersofdistributedearningsanddividends.Someadvantagesinclude:

limitedliability,easeoftransferability,abilitytoraisecapital,andunlimitedlife.

4.InresponsetoSarbanes-Oxley,smallfirmshaveelectedtogodarkbecauseofthecostsofcompliance.ThecoststocomplywithSarboxcanbeseveralmilliondollars,whichcanbealargepercentageofasmallfirm’sprofits.Amajorcostofgoingdarkislessaccesstocapital.Sincethefirmisnolongerpubliclytraded,itcannolongerraisemoneyinthepublicmarket.Althoughthecompanywillstillhaveaccesstobankloansandtheprivateequitymarket,thecostsassociatedwithraisingfundsinthesemarketsareusuallyhigherthanthecostsofraisingfundsinthepublicmarket.

5.Thetreasurer’sofficeandthecontroller’sofficearethetwoprimaryorganizationalgroupsthatreportdirectlytothechieffinancialofficer.Thecontroller’sofficehandlescostandfinancialaccounting,taxmanagement,andmanagementinformationsystems,whilethetreasurer’sofficeisresponsibleforcashandcreditmanagement,capitalbudgeting,andfinancialplanning.Therefore,thestudyofcorporatefinanceisconcentratedwithinthetreasurygroup’sfunctions.

6.Tomaximizethecurrentmarketvalue（shareprice）oftheequityofthefirm（whetherit’spubliclytradedornot）.

7.Inthecorporateformofownership,theshareholdersaretheownersofthefirm.Theshareholderselectthedirectorsofthecorporation,whointurnappointthefirm’smanagement.Thisseparationofownershipfromcontrolinthecorporateformoforganizationiswhatcausesagencyproblemstoexist.Managementmayactinitsownorsomeoneelse’sbestinterests,ratherthanthoseoftheshareholders.Ifsucheventsoccur,theymaycontradictthegoalofmaximizingthesharepriceoftheequityofthefirm.

8.Aprimarymarkettransaction.

2SOLUTIONSMANUAL

9.InauctionmarketsliketheNYSE,brokersandagentsmeetataphysicallocation（theexchange）tomatchbuyersandsellersofassets.DealermarketslikeNASDAQconsistofdealersoperatingatdispersedlocaleswhobuyandsellassetsthemselves,communicatingwithotherdealerseitherelectronicallyorliterallyover-the-counter.

10.Suchorganizationsfrequentlypursuesocialorpoliticalmissions,somanydifferentgoalsareconceivable.Onegoalthatisoftencitedisrevenueminimization;thatis,providewhatevergoodsandservicesareofferedatthelowestpossiblecosttosociety.Abetterapproachmightbetoobservethatevenanot-for-profitbusinesshasequity.Thus,oneansweristhattheappropriategoalistomaximizethevalueoftheequity.

11.Presumably,thecurrentstockvaluereflectstherisk,timing,andmagnitudeofallfuturecashflows,bothshort-termandlong-term.Ifthisiscorrect,thenthestatementisfalse.

12.Anargumentcanbemadeeitherway.Attheoneextreme,wecouldarguethatinamarketeconomy,allofthesethingsarepriced.Thereisthusanoptimallevelof,forexample,ethicaland/orillegalbehavior,andtheframeworkofstockvaluationexplicitlyincludesthese.Attheotherextreme,wecouldarguethatthesearenoneconomicphenomenaandarebesthandledthroughthepoliticalprocess.Aclassic（andhighlyrelevant）thoughtquestionthatillustratesthisdebategoessomethinglikethis:

“Afirmhasestimatedthatthecostofimprovingthesafetyofoneofitsproductsis$30million.However,thefirmbelievesthatimprovingthesafetyoftheproductwillonlysave$20millioninproductliabilityclaims.Whatshouldthefirmdo?

”

13.Thegoalwillbethesame,butthebestcourseofactiontowardthatgoalmaybedifferentbecauseofdifferingsocial,political,andeconomicinstitutions.

14.Thegoalofmanagementshouldbetomaximizethesharepriceforthecurrentshareholders.Ifmanagementbelievesthatitcanimprovetheprofitabilityofthefirmsothatthesharepricewillexceed$35,thentheyshouldfighttheofferfromtheoutsidecompany.Ifmanagementbelievesthatthisbidderorotherunidentifiedbidderswillactuallypaymorethan$35persharetoacquirethecompany,thentheyshouldstillfighttheoffer.However,ifthecurrentmanagementcannotincreasethevalueofthefirmbeyondthebidprice,andnootherhigherbidscomein,thenmanagementisnotactingintheinterestsoftheshareholdersbyfightingtheoffer.Sincecurrentmanagersoftenlosetheirjobswhenthecorporationisacquired,poorlymonitoredmanagershaveanincentivetofightcorporatetakeoversinsituationssuchasthis.

15.Wewouldexpectagencyproblemstobelesssevereincountrieswitharelativelysmallpercentageofindividualownership.Fewerindividualownersshouldreducethenumberofdiverseopinionsconcerningcorporategoals.Thehighpercentageofinstitutionalownershipmightleadtoahigherdegreeofagreementbetweenownersandmanagersondecisionsconcerningriskyprojects.Inaddition,institutionsmaybebetterabletoimplementeffectivemonitoringmechanismsonmanagersthancanindividualowners,basedontheinstitutions’deeperresourcesandexperienceswiththeirownmanagement.TheincreaseininstitutionalownershipofstockintheUnitedStatesandthegrowingactivismoftheselargeshareholdergroupsmayleadtoareductioninagencyproblemsfor

U.S.corporationsandamoreefficientmarketforcorporatecontrol.

16.Howmuchistoomuch?

Whoisworthmore,LawrenceEllisonorTigerWoods?

Thesimplestansweristhatthereisamarketforexecutivesjustasthereisforalltypesoflabor.Executivecompensationisthepricethatclearsthemarket.Thesameistrueforathletesandperformers.Havingsaidthat,oneaspectofexecutivecompensationdeservescomment.Aprimaryreasonexecutivecompensationhasgrownsodramaticallyisthatcompanieshaveincreasinglymovedtostock-basedcompensation.Suchmovementisobviouslyconsistentwiththeattempttobetteralignstockholderandmanagementinterests.Inrecentyears,stockpriceshavesoared,somanagementhascleanedup.Itissometimesarguedthatmuchofthisrewardissimplyduetorisingstockpricesingeneral,notmanagerialperformance.Perhapsinthefuture,executivecompensationwillbedesignedtorewardonlydifferentialperformance,thatis,stockpriceincreasesinexcessofgeneralmarketincreases.

CHAPTER2

FINANCIALSTATEMENTS,TAXES,ANDCASHFLOW

AnswerstoConceptsReviewandCriticalThinkingQuestions

1.Liquiditymeasureshowquicklyandeasilyanassetcanbeconvertedtocashwithoutsignificantlossinvalue.It’sdesirableforfirmstohavehighliquiditysothattheyhavealargefactorofsafetyinmeetingshort-termcreditordemands.However,sinceliquidityalsohasanopportunitycostassociatedwithit—namelythathigherreturnscangenerallybefoundbyinvestingthecashintoproductiveassets—lowliquiditylevelsarealsodesirabletothefirm.It’suptothefirm’sfinancialmanagementstafftofindareasonablecompromisebetweentheseopposingneeds.

2.Therecognitionandmatchingprinciplesinfinancialaccountingcallforrevenues,andthecostsassociatedwithproducingthoserevenues,tobe“booked”whentherevenueprocessisessentiallycomplete,notnecessarilywhenthecashiscollectedorbillsarepaid.Notethatthiswayisnotnecessarilycorrect;it’sthewayaccountantshavechosentodoit.

3.Historicalcostscanbeobjectivelyandpreciselymeasuredwhereasmarketvaluescanbedifficulttoestimate,anddifferentanalystswouldcomeupwithdifferentnumbers.Thus,thereisatrade-offbetweenrelevance（marketvalues）andobjectivity（bookvalues）.

4.Depreciationisanoncashdeductionthatreflectsadjustmentsmadeinassetbookvaluesinaccordancewiththematchingprincipleinfinancialaccounting.Interestexpenseisacashoutlay,butit’safinancingcost,notanoperatingcost.

5.Marketvaluescanneverbenegative.Imagineashareofstocksellingfor–$20.Thiswouldmeanthatifyouplacedanorderfor100shares,youwouldgetthestockalongwithacheckfor$2,000.Howmanysharesdoyouwanttobuy?

Moregenerally,becauseofcorporateandindividualbankruptcylaws,networthforapersonoracorporationcannotbenegative,implyingthatliabilitiescannotexceedassetsinmarketvalue.

6.Forasuccessfulcompanythatisrapidlyexpanding,forexample,capitaloutlayswillbelarge,possiblyleadingtonegativecashflowfromassets.Ingeneral,whatmattersiswhetherthemoneyisspentwisely,notwhethercashflowfromassetsispositiveornegative.

7.It’sprobablynotagoodsignforanestablishedcompany,butitwouldbefairlyordinaryforastart-up,soitdepends.

8.Forexample,ifacompanyweretobecomemoreefficientininventorymanagement,the