, Solutions Manual nm
Fundamentals nmof nmCorporate nmFinance nm13th
nmeditionn
Ross, nmWesterfield, nmand nmJordan
m
Prepared
nmbynmBrad
nmJordan
University nmof nmFlorida
Joe nmSmolira
nmBelmont
nmUniversity
,CHAPTER 1 nm
INTRODUCTION TO nm
CORPORATE FINANCE
nm n
m
Answers nmto nmConcepts nmReview nmand nmCritical nmThinking nmQuestions
1. Capital nmbudgeting nm(deciding nmwhether nmto nmexpand nma nmmanufacturing nmplant), nmcapital
nmstructure nm(deciding nmwhether nmto nmissue nmnew nmequity nmand nmuse nmthe nmproceeds nmto
nmretire nmoutstanding nmdebt), nmand nmworking nmcapital nmmanagement nm(modifying nmthe
nmfirm‗s nmcredit nmcollection nmpolicy nmwith nmits nmcustomers).
2. Disadvantages: nmunlimited nmliability, nmlimited nmlife, nmdifficulty nmin nmtransferring nmownership,
nmdifficulty nmin nmraising nmcapital nmfunds. nmSome nmadvantages: nmsimpler, nmless nmregulation,
nmthe nmowners nmare nmalso nmthe nmmanagers, nmsometimes nmpersonal nmtax nmrates nmare nmbetter
nmthan nmcorporate nmtax nmrates.
3. The nmprimary nmdisadvantage nmof nmthe nmcorporate nmform nmis nmthe nmdouble nmtaxation nmto
nmshareholders nmof nmdistributed nmearnings nmand nmdividends. nmSome nmadvantages nminclude:
nmlimited nmliability, nmease nmof nmtransferability, nmability nmto nmraise nmcapital, nmand nmunlimited
nmlife.
4. In nmresponse nmto nmSarbanes-Oxley, nmsmall nmfirms nmhave nmelected nmto nmgo nmdark nmbecause
nmof nmthe nmcosts nmof nmcompliance. nmThe nmcosts nmto nmcomply nmwith nmSarbox nmcan nmbe
nmseveral nmmillion nmdollars, nmwhich nmcan nmbe nma nmlarge nmpercentage nmof nma nmsmall nmfirm‗s
nmprofits. nmA nmmajor nmcost nmof nmgoing nmdark nmis nmless nmaccess nmto nmcapital. nmSince nmthe
nmfirm nmis nmno nmlonger nmpublicly nmtraded, nmit nmcan nmno nmlonger nmraise nmmoney nmin nmthe
nmpublic nmmarket. nmAlthough nmthe nmcompany nmwill nmstill nmhave nmaccess nmto nmbank nmloans
nmand nmthe nmprivate nmequity nmmarket, nmthe nmcosts nmassociated nmwith nmraising nmfunds nmin
nmthese nmmarkets nmare nmusually nmhigher nmthan nmthe nmcosts nmof nmraising nmfunds nmin nmthe
nmpublic nmmarket.
5. The nmtreasurer‗s nmoffice nmand nmthe nmcontroller‗s nmoffice nmare nmthe nmtwo nmprimary
nmorganizational n m groups nmthat nmreport nmdirectly nmto nmthe nmchief nmfinancial nmofficer. nmThe
nmcontroller‗s nmoffice nmhandles nmcost nmand nmfinancial nmaccounting, nmtax nmmanagement, nmand
nmmanagement nminformation nmsystems, nmwhile nmthe nmtreasurer‗s nmoffice nmis nmresponsible
n m for n m cash n m and n m credit n m management, n m capital n m budgeting, n m and n m financial
n m planning. n m Therefore, nmthe nmstudy nmof nmcorporate nmfinance nmis nmconcentrated nmwithin nmthe
nmtreasury nmgroup‗s nmfunctions.
6. To nmmaximize nmthe nmcurrent nmmarket nmvalue nm(share nmprice) nmof nmthe nmequity nmof nmthe
nmfirm nm(whether nmit‗s nmpublicly nmtraded nmor nmnot).
7. In nmthe nmcorporate nmform nmof nmownership, nmthe nmshareholders nmare nmthe nmowners nmof nmthe
nmfirm. nmThe nmshareholders nmelect nmthe nmdirectors nmof nmthe nmcorporation, nmwho nmin nmturn
nmappoint nmthe nmfirm‗s nmmanagement. nmThis nmseparation nmof nmownership nmfrom nmcontrol nmin
nmthe nmcorporate nmform nmof nmorganization nmis nmwhat nmcauses nmagency nmproblems nmto
nmexist. nmManagement nmmay nmact nmin nmits nmown nmor nmsomeone nmelse‗s nmbest nminterests,
nmrather nmthan nmthose nmof nmthe nmshareholders. nmIf nmsuch nmevents nmoccur, nmthey nmmay
nmcontradict nmthe nmgoal nmof nmmaximizing nmthe nmshare nmprice nmof nmthe nmequity nmof nmthe
nmfirm.
, 8. A nmprimary nmmarket nmtransaction.
