Solution manual for
principles of corporate finance
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14th edition by richard Brealey,
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stewart myers, franklin allen
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, 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 f f
b. executive fairplanes f f
c. brand fnames f f
d. financial f f
e. bonds f f
*f. investment for fcapital fexpenditure f f
*g. capital fbudgeting for
finvestment fh. financing f f
*Note fthat ff fand fg fare finterchangeable fin fthe fquestion. f f
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. f f
Est ftime: f01-05
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. f f
b. Capital fexpenditure fmeans finvestment fin freal fassets. fFinancing fmeans fraising fthe
fcash ffor fthis finvestment. f f
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. f f
d. Unlimited fliability: fInvestors fare fresponsible ffor fall fthe ffirm‘s fdebts. fA fsole fproprietor
fhas funlimited fliability. fInvestors fin fcorporations fhave flimited fliability. fThey fcan flose
ftheir finvestment, fbut f no fmore. f f
Est ftime: f01-05
f f
, 4. Items fc fand fd fapply fto fcorporations. fBecause 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. f f
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. fThese 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. fAlso, fthese
fattributes fallow finvestors fto fquickly fexit, fenter, for fshort fsell fan finvestment, fthereby
fgenerating fan factive fliquid fmarket ffor fcorporations. f f
However, fthese fpositive faspects falso fintroduce fsubstantial fnegative fexternalities fas fwell. fThe
fseparation fof fownership ffrom fmanagement ftypically fleads fto fagency fproblems, fwhere
fmanagers fprefer fto fconsume fprivate fperks f or fmake fother fdecisions ffor ftheir fprivate fbenefit—
rather fthan fmaximize fshareholder fwealth. fShareholders ftend fto fexercise fless foversight fof
feach findividual finvestment fas ftheir fdiversification fincreases. fFinally, fthe fcorporation‘s
fseparate flegal fpersonality fmakes fit fdifficult fto fenforce faccountability fif fthey fexternalize fcosts
fonto fsociety. f f
Est ftime: f01-05
6. Shareholders fwill fonly fvote fto fmaximize fshareholder fwealth. fShareholders 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). f f
Est ftime: f01-05
7. If fthe finvestment fincreases fthe ffirm‘s fwealth, fit fincreases fthe ffirm‘s fshare fvalue. fMs.
fEspinoza fcould fthen fsell fsome for fall fthese fmore fvaluable fshares fto fprovide ffor fher
fretirement fincome. f f
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. f f
government fsecurities, fdepending fon fthe frelative frisk fbetween fthe ftwo fassets. f f
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. f f
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 f compensation— fbonuses, fstock, fand foption fpayouts
f with fvalue ftied f(roughly) fto ffirm fperformance. fManagers 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 f still ffail fto f act f in fshareholders‘ finterests,
f shareholders fmay fsell ftheir fshares, flowering fthe fstock fprice fand fpotentially fcreating fthe
f f
, fpossibility fof fa ftakeover, fwhich fcan fagain flead fto fchanges fin fthe fboard fof f directors fand
fsenior fmanagement. f f
Est ftime: f01-05
f f
