1、1Solutions ManualCorporate FinanceRoss, Westerfield, and Jaffe9th editionCHAPTER 1INTRODUCTION TO CORPORATE FINANCEAnswers to Concept Questions1. In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect the directors of the corporation, who in turn appo
2、int the firms management. This separation of ownership from control in the corporate form of organization is what causes agency problems to exist. Management may act in its own or someone elses best interests, rather than those of the shareholders. If such events occur, they may contradict the goal
3、of maximizing the share price of the equity of the firm.22. Such organizations frequently pursue social or political missions, so many different goals are conceivable. One goal that is often cited is revenue minimization; i.e., provide whatever goods and services are offered at the lowest possible c
4、ost to society. A better approach might be to observe that even a not-for-profit business has equity. Thus, one answer is that the appropriate goal is to maximize the value of the equity.3. Presumably, the current stock value reflects the risk, timing, and magnitude of all future cash flows, both sh
5、ort-term and long-term. If this is correct, then the statement is false.4. An argument can be made either way. At the one extreme, we could argue that in a market economy, all of these things are priced. There is thus an optimal level of, for example, ethical and/or illegal behavior, and the framewo
6、rk of stock valuation explicitly includes these. At the other extreme, we could argue that these are non-economic phenomena and are best handled through the political process. A classic (and highly relevant) thought question that illustrates this debate goes something like this: A firm has estimated
7、 that the cost of improving the safety of one of its products is $30 million. However, the firm believes that improving the safety of the product will only save $20 million in product liability claims. What should the firm do?5. The goal will be the same, but the best course of action toward that go
8、al may be different because of differing social, political, and economic institutions.6. The goal of management should be to maximize the share price for the current shareholders. If management believes that it can improve the profitability of the firm so that the share price will exceed $35, then t
9、hey should fight the offer from the outside company. If management believes that this bidder or other unidentified bidders will actually pay more than $35 per share to acquire the company, then they should still fight the offer. However, if the current management cannot increase the value of the fir
10、m beyond the bid price, and no other higher bids come in, then management is not acting in the interests of the shareholders by fighting the offer. Since current managers often lose their jobs when the corporation is acquired, poorly monitored managers have an incentive to fight corporate takeovers
11、in situations such as this.37. We would expect agency problems to be less severe in other countries, primarily due to the relatively small percentage of individual ownership. Fewer individual owners should reduce the number of diverse opinions concerning corporate goals. The high percentage of insti
12、tutional ownership might lead to a higher degree of agreement between owners and managers on decisions concerning risky projects. In addition, institutions may be better able to implement effective monitoring mechanisms on managers than can individual owners, based on the institutions deeper resourc
13、es and experiences with their own management.8. The increase in institutional ownership of stock in the United States and the growing activism of these large shareholder groups may lead to a reduction in agency problems for U.S. corporations and a more efficient market for corporate control. However
14、, this may not always be the case. If the managers of the mutual fund or pension plan are not concerned with the interests of the investors, the agency problem could potentially remain the same, or even increase since there is the possibility of agency problems between the fund and its investors.9.
15、How much is too much? Who is worth more, Ray Irani or Tiger Woods? The simplest answer is that there is a market for executives just as there is for all types of labor. Executive compensation is the price that clears the market. The same is true for athletes and performers. Having said that, one asp
16、ect of executive compensation deserves comment. A primary reason executive compensation has grown so dramatically is that companies have increasingly moved to stock-based compensation. Such movement is obviously consistent with the attempt to better align stockholder and management interests. In rec
17、ent years, stock prices have soared, so management has cleaned up. It is sometimes argued that much of this reward is simply due to rising stock prices in general, not managerial performance. Perhaps in the future, executive compensation will be designed to reward only differential performance, i.e.
18、, stock price increases in excess of general market increases.10. Maximizing the current share price is the same as maximizing the future share price at any future period. The value of a share of stock depends on all of the future cash flows of company. Another way to look at this is that, barring l
19、arge cash payments to shareholders, the expected price of the stock must be higher in the future than it is today. Who would buy a stock for $100 today when the share price in one year is expected to be $80?4CHAPTER 2FINANCIAL STATEMENTS AND CASH FLOWAnswers to Concepts Review and Critical Thinking
20、Questions1. True. Every asset can be converted to cash at some price. However, when we are referring to a liquid asset, the added assumption that the asset can be quickly converted to cash at or near market value is important.2. The recognition and matching principles in financial accounting call fo
21、r revenues, and the costs associated with producing those revenues, to be booked when the revenue process is essentially complete, not necessarily when the cash is collected or bills are paid. Note that this way is not necessarily correct; its the way accountants have chosen to do it.3. The bottom l
22、ine number shows the change in the cash balance on the balance sheet. As such, it is not a useful number for analyzing a company.4. The major difference is the treatment of interest expense. The accounting statement of cash flows treats interest as an operating cash flow, while the financial cash fl
23、ows treat interest as a financing cash flow. The logic of the accounting statement of cash flows is that since interest appears on the income statement, which shows the operations for the period, it is an operating cash flow. In reality, interest is a financing expense, which results from the compan
24、ys choice of debt and equity. We will have more to say about this in a later chapter. When comparing the two cash flow statements, the financial statement of cash flows is a more appropriate measure of the companys performance because of its treatment of interest.5. Market values can never be negati
25、ve. Imagine a share of stock selling for $20. This would mean that if you placed an order for 100 shares, you would get the stock along with a check for $2,000. How many shares do you want to buy? More generally, because of corporate and individual bankruptcy laws, net worth for a person or a corpor
26、ation cannot be negative, implying that liabilities cannot exceed assets in market value.6. For a successful company that is rapidly expanding, for example, capital outlays will be large, possibly leading to negative cash flow from assets. In general, what matters is whether the money is spent wisel
27、y, not whether cash flow from assets is positive or negative.7. Its probably not a good sign for an established company to have negative cash flow from operations, but it would be fairly ordinary for a start-up, so it depends.8. For example, if a company were to become more efficient in inventory ma
28、nagement, the amount of inventory needed would decline. The same might be true if the company becomes better at collecting its receivables. In general, anything that leads to a decline in ending NWC relative to beginning would have this effect. Negative net capital spending would mean more long-live
29、d assets were liquidated than purchased.59. If a company raises more money from selling stock than it pays in dividends in a particular period, its cash flow to stockholders will be negative. If a company borrows more than it pays in interest and principal, its cash flow to creditors will be negativ
30、e.10. The adjustments discussed were purely accounting changes; they had no cash flow or market value consequences unless the new accounting information caused stockholders to revalue the derivatives.Solutions to Questions and ProblemsNOTE: All end-of-chapter problems were solved using a spreadsheet
31、. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem.Basic1. To
32、find owners equity, we must construct a balance sheet as follows:Balance SheetCA $ 5,300 CL $ 3,900NFA 26,000 LTD 14,200OE ?TA $31,300 TL it just has to be sure there is sufficient cash flow to make the dividend payments.Change in NWC = Net capital spending = Net new equity = 0. (Given)Cash flow fro
33、m assets = OCF Change in NWC Net capital spendingCash flow from assets = $25,000 0 0 = $25,000Cash flow to stockholders = Dividends Net new equityCash flow to stockholders = $30,000 0 = $30,000Cash flow to creditors = Cash flow from assets Cash flow to stockholdersCash flow to creditors = $25,000 30
34、,000Cash flow to creditors = $5,000Cash flow to creditors is also:Cash flow to creditors = Interest Net new LTDSo:Net new LTD = Interest Cash flow to creditorsNet new LTD = $70,000 (5,000)Net new LTD = $75,00021. a. The income statement is:Income StatementSales$15,300Cost of good sold10,900Depreciat
35、ion2,100EBIT$ 2,300Interest520Taxable income$ 1,780Taxes712Net income$1,068b. OCF = EBIT + Depreciation TaxesOCF = $2,300 + 2,100 712OCF = $3,68814c. Change in NWC = NWCend NWCbeg= (CAend CLend) (CAbeg CLbeg)= ($3,950 1,950) ($3,400 1,900)= $2,000 1,500 = $500Net capital spending = NFAend NFAbeg + D
36、epreciation= $12,900 11,800 + 2,100= $3,200CFA = OCF Change in NWC Net capital spending= $3,688 500 3,200= $12The cash flow from assets can be positive or negative, since it represents whether the firm raised funds or distributed funds on a net basis. In this problem, even though net income and OCF
37、are positive, the firm invested heavily in both fixed assets and net working capital; it had to raise a net $12 in funds from its stockholders and creditors to make these investments.d. Cash flow to creditors = Interest Net new LTD= $520 0= $520Cash flow to stockholders = Cash flow from assets Cash
38、flow to creditors= $12 520= $532We can also calculate the cash flow to stockholders as:Cash flow to stockholders = Dividends Net new equitySolving for net new equity, we get:Net new equity = $500 (532)= $1,032The firm had positive earnings in an accounting sense (NI 0) and had positive cash flow fro
39、m operations. The firm invested $500 in new net working capital and $3,200 in new fixed assets. The firm had to raise $12 from its stakeholders to support this new investment. It accomplished this by raising $1,032 in the form of new equity. After paying out $500 of this in the form of dividends to
40、shareholders and $520 in the form of interest to creditors, $12 was left to meet the firms cash flow needs for investment.22. a. Total assets 2009 = $780 + 3,480 = $4,260Total liabilities 2009 = $318 + 1,800 = $2,118Owners equity 2009 = $4,260 2,118 = $2,142Total assets 2010 = $846 + 4,080 = $4,926T
41、otal liabilities 2010 = $348 + 2,064 = $2,412Owners equity 2010 = $4,926 2,412 = $2,51415b. NWC 2009 = CA09 CL09 = $780 318 = $462NWC 2010 = CA10 CL10 = $846 348 = $498Change in NWC = NWC10 NWC09 = $498 462 = $36c. We can calculate net capital spending as:Net capital spending = Net fixed assets 2010
42、 Net fixed assets 2009 + DepreciationNet capital spending = $4,080 3,480 + 960Net capital spending = $1,560So, the company had a net capital spending cash flow of $1,560. We also know that net capital spending is:Net capital spending = Fixed assets bought Fixed assets sold$1,560 = $1,800 Fixed asset
43、s soldFixed assets sold = $1,800 1,560 = $240To calculate the cash flow from assets, we must first calculate the operating cash flow. The operating cash flow is calculated as follows (you can also prepare a traditional income statement):EBIT = Sales Costs DepreciationEBIT = $10,320 4,980 960EBIT = $
44、4,380EBT = EBIT InterestEBT = $4,380 259EBT = $4,121Taxes = EBT .35Taxes = $4,121 .35Taxes = $1,442OCF = EBIT + Depreciation TaxesOCF = $4,380 + 960 1,442OCF = $3,898Cash flow from assets = OCF Change in NWC Net capital spending.Cash flow from assets = $3,898 36 1,560Cash flow from assets = $2,302d.
45、 Net new borrowing = LTD10 LTD09Net new borrowing = $2,064 1,800Net new borrowing = $264Cash flow to creditors = Interest Net new LTDCash flow to creditors = $259 264Cash flow to creditors = $5Net new borrowing = $264 = Debt issued Debt retiredDebt retired = $360 264 = $961623.Balance sheet as of De
46、c. 31, 2009Cash$2,739Accounts payable$2,877Accounts receivable3,626Notes payable529Inventory6,447Current liabilities$3,406Current assets$12,812Long-term debt$9,173Net fixed assets$22,970Owners equity$23,203Total assets$35,782Total liab. X($100K) = $68K 22.25K = $45.75KX = $45.75K / $100KX = 45.75%20
47、CHAPTER 3FINANCIAL STATEMENTS ANALYSIS AND LONG-TERM PLANNINGAnswers to Concepts Review and Critical Thinking Questions1. Time trend analysis gives a picture of changes in the companys financial situation over time. Comparing a firm to itself over time allows the financial manager to evaluate whethe
48、r some aspects of the firms operations, finances, or investment activities have changed. Peer group analysis involves comparing the financial ratios and operating performance of a particular firm to a set of peer group firms in the same industry or line of business. Comparing a firm to its peers all
49、ows the financial manager to evaluate whether some aspects of the firms operations, finances, or investment activities are out of line with the norm, thereby providing some guidance on appropriate actions to take to adjust these ratios if appropriate. Both allow an investigation into what is different about a company from a financial perspective, but neither method gives an indication of whether the difference is positive or negative.
