1、1 Solutions Manual Corporate Finance Ross, Westerfield, and Jaffe 9 thedition CHAPTER 1 INTRODUCTION TO CORPORATE FINANCE Answers to Concept Questions 1. In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect the directors of the corporation, who in t
2、urn appoint 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 t
3、he goal of maximizing the share price of the equity of the firm. 2 2. 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
4、possible cost 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 flo
5、ws, both short-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
6、 the framework 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 h
7、as estimated 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 t
8、oward that goal 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 exce
9、ed $35, then they 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 va
10、lue of the firm 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 corpor
11、ate takeovers in situations such as this. 3 7. 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 per
12、centage of institutional 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 institution
13、s deeper resources 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
14、 control. However, 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
15、its investors. 9. 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
16、said that, one aspect 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
17、 interests. In recent 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
18、 performance, i.e., 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
19、 is that, barring large 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? 4 CHAPTER 2 FINANCIAL STATEMENTS AND CASH FLOW Answers to Concepts Review
20、 and Critical Thinking Questions 1. 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 fin
21、ancial accounting call for 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
22、 to do it. 3. The bottom line 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,
23、while the financial cash flows 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, wh
24、ich results from the companys 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. Marke
25、t values can never be negative. 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 wo
26、rth for a person or a corporation 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 whe
27、ther the money is spent wisely, 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
28、 more efficient in inventory management, 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 spe
29、nding would mean more long-lived assets were liquidated than purchased. 5 9. 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
30、flow to creditors will be negative. 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 Problems NOTE: All end-of-chapter prob
31、lems were solved using a spreadsheet. 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
32、 any step in the problem. Basic 1. To find owners equity, we must construct a balance sheet as follows: Balance Sheet CA $ 5,300 CL $ 3,900 NFA 26,000 LTD 14,200 OE ? TA $31,300 TL & OE $31,300 We know that total liabilities and owners equity (TL & OE) must equal total assets of $31,300. We also kno
33、w that TL & OE is equal to current liabilities plus long-term debt plus owners equity, so owners equity is: OE = $31,300 14,200 3,900 = $13,200 NWC = CA CL = $5,300 3,900 = $1,400 2. The income statement for the company is: Income Statement Sales $493,000 Costs 210,000 Depreciation 35,000 EBIT $248,
34、000 Interest 19,000 EBT $229,000 Taxes 80,150 Net income $148,850 6 One equation for net income is: Net income = Dividends + Addition to retained earnings Rearranging, we get: Addition to retained earnings = Net income Dividends Addition to retained earnings = $148,850 50,000 Addition to retained ea
35、rnings = $98,850 3. To find the book value of current assets, we use: NWC = CA CL. Rearranging to solve for current assets, we get: CA = NWC + CL = $800,000 + 2,100,000 = $2,900,000 The market value of current assets and net fixed assets is given, so: Book value CA = $2,900,000 Market value CA = $2,
36、800,000 Book value NFA = $5,000,000 Market value NFA = $6,300,000 Book value assets = $7,900,000 Market value assets = $9,100,000 4. Taxes = 0.15($50K) + 0.25($25K) + 0.34($25K) + 0.39($246K 100K) Taxes = $79,190 The average tax rate is the total tax paid divided by net income, so: Average tax rate
37、= $79,190 / $246,000 Average tax rate = 32.19% The marginal tax rate is the tax rate on the next $1 of earnings, so the marginal tax rate = 39%. 5. To calculate OCF, we first need the income statement: Income Statement Sales $14,900 Costs 5,800 Depreciation 1,300 EBIT $7,800 Interest 780 Taxable inc
38、ome $7,020 Taxes 2,808 Net income $4,212 OCF = EBIT + Depreciation Taxes OCF = $7,800 + 1,300 2,808 OCF = $6,292 6. Net capital spending = NFA end NFA beg+ Depreciation Net capital spending = $1,730,000 1,650,000 + 284,000 Net capital spending = $364,000 7 7. The long-term debt account will increase
39、 by $10 million, the amount of the new long-term debt issue. Since the company sold 10 million new shares of stock with a $1 par value, the common stock account will increase by $10 million. The capital surplus account will increase by $33 million, the value of the new stock sold above its par value
40、. Since the company had a net income of $9 million, and paid $2 million in dividends, the addition to retained earnings was $7 million, which will increase the accumulated retained earnings account. So, the new long-term debt and stockholders equity portion of the balance sheet will be: Long-term de
41、bt $ 82,000,000 Total long-term debt $ 82,000,000 Shareholders equity Preferred stock $ 9,000,000 Common stock ($1 par value) 30,000,000 Accumulated retained earnings 104,000,000 Capital surplus 76,000,000 Total equity $ 219,000,000 Total Liabilities & Equity $ 301,000,000 8. Cash flow to creditors
42、= Interest paid Net new borrowing Cash flow to creditors = $118,000 (LTD end LTD beg ) Cash flow to creditors = $118,000 ($1,390,000 1,340,000) Cash flow to creditors = $118,000 50,000 Cash flow to creditors = $68,000 9. Cash flow to stockholders = Dividends paid Net new equity Cash flow to stockhol
43、ders = $385,000 (Common end+ APIS end ) (Common beg+ APIS beg ) Cash flow to stockholders = $385,000 ($450,000 + 3,050,000) ($430,000 + 2,600,000) Cash flow to stockholders = $385,000 ($3,500,000 3,030,000) Cash flow to stockholders = $85,000 Note, APIS is the additional paid-in surplus. 10. Cash fl
44、ow from assets = Cash flow to creditors + Cash flow to stockholders = $68,000 85,000 = $17,000 Cash flow from assets = $17,000 = OCF Change in NWC Net capital spending $17,000 = OCF ($69,000) 875,000 Operating cash flow = $17,000 69,000 + 875,000 Operating cash flow = $789,000 8 Intermediate 11. a.
45、The accounting statement of cash flows explains the change in cash during the year. The accounting statement of cash flows will be: Statement of cash flows Operations Net income $105 Depreciation 90 Changes in other current assets (55) Accounts payable (10) Total cash flow from operations $170 Inves
46、ting activities Acquisition of fixed assets $(140) Total cash flow from investing activities $(140) Financing activities Proceeds of long-term debt $30 Dividends (45) Total cash flow from financing activities ($15) Change in cash (on balance sheet) $15 b. Change in NWC = NWC end NWC beg= (CA end CL
47、end ) (CA beg CL beg ) = ($50 + 155) 85 ($35 + 140) 95) = $120 80 = $40 c. To find the cash flow generated by the firms assets, we need the operating cash flow, and the capital spending. So, calculating each of these, we find: Operating cash flow Net income $105 Depreciation 90 Operating cash flow $
48、195 Note that we can calculate OCF in this manner since there are no taxes. 9 Capital spending Ending fixed assets $340 Beginning fixed assets (290) Depreciation 90 Capital spending $140 Now we can calculate the cash flow generated by the firms assets, which is: Cash flow from assets Operating cash
49、flow $195 Capital spending (140) Change in NWC (40) Cash flow from assets $ 15 12. With the information provided, the cash flows from the firm are the capital spending and the change in net working capital, so: Cash flows from the firm Capital spending $(15,000) Additions to NWC (1,500) Cash flows from the firm $(16,500) And the cash flows to the investors of the firm are: Cash flows to investors of the firm Sale of long-term debt (19,000) Sale of common stock (3,000) Dividends paid
