Corporate Finance 11th Edition Ross SOLUTIONS MANUAL So lution s Manual PDF

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Corporate Finance 11th Edition Ross SOLUTIONS MANUAL Full download: http://testbanklive.com/download/corporate-finance- 11th-edition-ross-solutions-manual/ Corporate Finance 11th Edition Ross TEST BANK Full download: http://testbanklive.com/download/corporate-finance- 11th-edition-ross-test-bank/ So...

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Corporate Finance 11th Edition Ross SOLUTIONS MANUAL Full download: http://testbanklive.com/download/corporate-finance11th-edition-ross-solutions-manual/ Corporate Finance 11th Edition Ross TEST BANK Full download: http://testbanklive.com/download/corporate-finance11th-edition-ross-test-bank/

So lution s Manual Corporate Finan ce Ro ss, Westerfield, Jaffe , and Jordan 11 th edition 10/ 20/ 20 15 P repare d by: B rad Jordan Unive rsi ty of K ent ucky Joe Smoli ra B el m ont Universit y

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CHAPTER 1 INTRODU CTION TO CORPOR ATE FINANCE Answ ers to Concept Q uest i ons 1. In t he cor por at e f or m of owner shi p, t he shar ehol der s ar e t he owner s of t he f irm. T he shar eholders electthedirectorsofthecorporati on, who i n t ur n appoi nt t he f ir m’ s mana ge ment . T hisseparationof ownershipfromcontrolint he cor por at e f or m of or gani zati on i s what ca use sagencyproblemsto exist.Managementmayact i n it s own or someon e el se’ s best int er est s, r at herthanthoseofthe shareholders.Ifsuch events occ ur , t hey may cont r adict t he goal of maximizingthesharepriceofthe equityofthe fi r m. 2. Such or gani zati ons f requent l y pur sue soci al or polit i cal mi ss ions, so many di ff e rent goals are conceivable.Onegoalthatisoftencitedi s revenue mi ni mi zat i on; i .e., provi de what evergoodsand servicesareofferedatthe lowes t possi bl e cost t o soci et y. A bett er appr oachmightbetoobservethat evenanot-for-pr of i t busines s has eq uit y. T hus, one answer i s thattheappropriategoalisto maximizethe val ue of t he equi t y. 3. Pre sumabl y, t he curr ent st ock val ue refl ect s t he r isk, t imi ng, and ma gni t ude of al l f ut ure cas hflows, bothshort-termandlong-term.Ifthi s i s c or rec t, t hen t he s tat ement i s f alse . 4. An ar gument ca n be made ei ther way. At t he one ext reme, we coul d ar gue t hat i n a mar ket ec onomy, al l of these t hi ngs are pr i ced. T her e is t hus an opt i mal l evel of , f or exa mpl e, ethi cal and/or illegal behavior,andtheframeworkofstock val uati on explici tl y i ncludes t hese . At t he ot her extr eme, we coul d ar gue that t hese ar e non -ec onomi c phenomena and ar e best handl ed t hr oughthepolitical process.Aclassic(andhi ghl y r el evant) t hought questi on t hat i ll ust r atesthisdebategoessomething likethis:“Af ir m has es timat ed t hat t he cost of i mpr ovi ng t he safetyofoneofitsproductsis$30 million. However , t he f irm bel i eves t hat i mpr ovi ng t he safetyoftheproductwillonlysave$20 milli on i n pr oduct l i abil it y cl ai ms. W hat shoul d t he f irm do?” 5. T he goal wil l be t he sa me, but t he best cour se of act i on t owar d that goal may be di ff erent becauseof differingsocial,political,and ec onomi c i nst it uti ons. 6. T he goal of mana ge ment should be to maxi mi ze t he shar e pri ce for t he cur rent sharehol ders. If mana ge ment bel i eves t hat i t can i mpr ove t he pr ofi tabi li t y of t he f ir m so t hat the sha re pri ce will exceed$35,thentheyshouldfighttheoff er f rom t he out si de company. If mana gement bel i evesthat thisbidderorotherunidentifiedbi dders wi ll act uall y pay mor e t han $35 per shar e t oacquirethe company,thentheyshouldstill fi ght t he of fer . However , i f t he cur r ent mana gementcannotincrease thevalueofthefirm beyond t he bi d pri ce, and no ot her hi gher bi ds comein,thenmanagementisnot actinginthei nt eres ts of the shar ehol der s by f i ght ing t he offer.Sincecurrentmanagersoftenlose thei r j obs when the cor porat ion i s ac qui red, poorl y moni t or ed mana ger s have an ince nt i ve t o f i ght cor por at e t akeover s i n sit uat i ons s uch a s t hi s.

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7. W e would expect agenc y pr oblems t o be l ess sever e i n ot her count ri es , pri mar i l y due t o t he r elatively smallpercentageofindividual owner shi p. Fewer indi vi dual owner s shoul d r educethenumberof diverseopinionsconcerni ng cor por at e goal s. T he hi gh per cent age of i nst itutionalownershipmight leadtoahigher degr ee of agr ee ment bet ween owner s and mana ger sondecisionsconcerningrisky projects.In addit i on, i nsti tut i ons may be bet ter able to i mplementeffectivemonitoringmechanisms on mana ger s t han ca n i ndi vi dual owner s, bas ed on t he i nst it uti ons’ dee per res our ces and exper iences wi t h t hei r own mana gement . 8. T he i ncr eas e i n i nst it uti onal owner shi p of st ock i n the Unit ed St ates and t he gr owi ng ac ti vi smof theselargeshareholdergroupsmayleadt o a r educt i on i n agenc y pr obl ems f or U.S. cor por ationsand amoreefficientmarketforcorpor at e contr ol . However , t h i s may not al ways be the case.Ifthe managersofthemutualfundor pensi on pl an are not conce r ned wit h t he i nt er estsoftheinvestors,the agencyproblemcoul d potent iall y r emai n t he sa me, or even i ncr eas e sincethereisthepossibilityof agencyprobl ems be t wee n the f und and i ts i nvest ors. 9. How much i s t oo much? Who i s wort h mor e, Lar r y Elli son or Tiger Woods? T he si mpl es t ans wer i s t hat t her e is a mar ket f or exe cuti ves j ust as t here i s for all t ypes of l abor . Exec ut ive co mpensationis thepricethatclearsthemarket . T he sa me i s t rue f or at hlet es and per f or mer s. Havingsaidthat,one aspectofexecutive compens ati on dese r ves comment . A pr i mar y r easonexecutivecompensationhas grownsodr amat i cal l y i s that compani es have i ncr easi ngl ymovedtostock-basedcompensation. Such move ment i s obvi ously cons i stent wi t h t he a tt empt t o bett er ali gn st ockholder and mana gement interests.Inrecentyears,stockpri ces have soared, so mana ge ment has cl eane d up. Itissometimes arguedthatmuchofthisreward is due t o ri si ng st ock pr i ces i n gene ral , not managerialperformance. Perhapsinthefut ure, exec uti ve compens ati on wi ll be desi gned t orewardonlydifferential performance,i .e., st ock price i ncr eas es in exces s of gener al mar ket i ncr eas es. 10. Ma xi mi zi ng t he curr ent shar e pri ce i s t he sa me as maxi mi zi ng t he f ut ur e shar e pr i ce at any f uture period.Thevalueofashareofstockdepe nds on all of t he f utur e cas h f l ows of company. Another waytolookatthisisthat,barringlar ge ca sh payment s t o shar ehol der s, t he expec ted priceofthe stockmustbehigherinthefuturet han i t i s t oday. Who woul d buy a st ock f or $100 t odaywhenthe sharepriceinoneyearisexpec ted to be $80?

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CHAPTER 2 ACCOUNT ING STAT EMENTS , TAXES, AND CAS H FLOW Answ ers to Concept s Review and Crit i cal Thi nki ng Q uest ions 1. T rue. Ever y as set ca n be conver t ed t o cas h at some pr ice . However , when we are r eferr i ng to a l iquid asset,theaddedassumptionthatthe asset ca n be qui ckly conver t ed t o cash at or near mar ket val ue i s i mpor t ant . 2. T he r ecogni ti on and mat chi ng pr i nci pl es i n fi nancial ac counti ng ca ll f or revenue s, and t he costs associatedwithproducingthoser evenues , t o be “booked” when t he revenue proce ssisessentially complete,notnecessarily when t he cas h i s col l ected or bi ll s are pai d. Not ethatthiswayisnot necessarilycorrect;it’ s the way ac countants ha ve c hosen t o do it . 3. T he bot t om l ine number shows t he change i n the c as h bal ance on t he bal ance sheet . As s uch, it i s not a us ef ul number f or anal yzi ng a c ompany. 4. T he maj or dif fer ence i s the t rea t ment of i nt er est expens e. T he account i ng stat ement of ca sh f lows treatsinterestasanoperatingcashfl ow, whil e t he fi nanc ial cas h fl ows t r eat i nter estasafinancing cashflow.Thelogicoftheac counti ng st at ement of cas h fl ows i s t hat si nce i nterestappearsonthe incomestatement,whi ch shows t he oper at i ons f or t he peri od, i t i s an operatingcashflow.Inreality, interestisa fi nanci ng expense , whi ch r esult s fr om t he company’ s choice of debt and equi t y. We wi ll have mor e t o sa y about t his i n a later chapt er. When compar i ng t he t wo cas h f low st at ement s, t he financialstatementofcashflowsisamore appr opr i at e mea sur e of the company’ s per f or mance bec ause of it s t r eat ment of int erest . 5. Ma r ket values ca n never be negat i ve. Imagi ne a sha re of st ock sel li ng f or – $20. T hi s woul d mean t hat i f you plac ed an or der f or 100 shares , you would get t he stock along wi t h a check f or $2,000. Howmanysharesdoyouwanttobuy?More gener al l y, beca use of corpor ate and i ndi vi dual bankruptcylaws,networthforapersonor a cor por ation ca nnot be negati ve, i mpl yi ng t hatliabilities cannotexceedassetsin market val ue. 6. For a succe ssf ul company t hat i s r api dl y expandi ng, f or exampl e, ca pi tal outlays wi l l belarge, possiblyleadingtonegativecashfl ow fr om as set s. In gene r al , what matt ers is whet herthemoneyis spentwisely,notwhethercash fl ow fr om as set s i s posit i ve or negat i ve. 7. It ’ s pr obabl y not a good si gn f or an est abl i shed company t o have ne gat i ve ca sh fl ow f rom oper at ions, but i t woul d be f air l y or di nar y f or a st art -u p, so it depe nds.

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8. For exampl e, i f a company wer e t o b ecome mor e ef fici ent i n i nvent or y mana ge ment , t he amount of i nvent or y nee ded would decl ine. T he s ame mi ght be t rue i f t he c ompany bec omes bet ter at coll ect ing itsreceivables.Ingeneral,anythingt hat l eads t o a dec li ne i n endi ng NWC r el ati ve t o beginning wouldhavethiseffect.Negative net ca pit al spending woul d mea n mor e l ong -l i ved as se ts were l i qui dat ed t han pur chase d. 9. If a company r ai se s mor e mone y f r om se ll i ng st ock than i t pays i n di vi dends i n a par ti cul ar per iod, itscashflowtostockholderswillbene gati ve. If a c o mpany bor r ows mor e t han it pays i n interestand principal,itscashflowto credit or s wi ll be ne gati ve. 10. T he adj ust ment s di sc uss ed wer e pur el y ac counti ng changes ; t hey had no cash flow or mar ketvalue consequencesunlessthenewaccount ing i nf or mat i on caus ed st ockhol der s t o revalue t he asse ts. Soluti ons t o Q uest ions and P roblem s NOTE: All end- of - chapter problems were sol ved usi ng a spre adshe et . M any probl ems re qui re mult iple steps.Duetospaceandreadabilityconst rai nt s, when t hese i nt er medi at e st eps are i ncl udedinthis solutionsmanual,roundingmay appear t o have occurre d. Howev er, t he f i nal answerforeachproblemis foundwithoutroundi ng duri ng any st ep i n the problem. Basi c 1. T o f i nd owner s’ equi t y, we must cons tr uc t a balanc e shee t as foll ows:

CA NFA

Bal ance Sheet $ 4,900 CL 25,000 LT D OE $29,900 T L & OE

$ 4, 1 00 1 0,3 00 ?? TA $29,9 00 We know t hat tot al l i abil it ies and owners’ equit y (T L & OE) must equa l t ot al asset s of $ 29,900.We alsoknowthatTL&OEisequaltocurr ent l iabil it ies pl us l ong -t er m debt pl us owner s’ equit y, so owner s’ equi t y is: Owner s’ equi t y = $ 29,900 –10,300 – 4,1 00 Owner s’ equi t y = $15, 500 And net wor ki ng ca pit al i s cur rent as sets mi nus c ur r ent li abi li ti es, so: NWC = Curr ent asse ts – Cur r ent l iabil it ies NWC = $ 4,900 – 4,100 NWC = $ 800

CHAPT CHAPTER ER22- -7 7

2. T he i ncome s t at ement f or the c ompany i s: Inco me St at Sal es ement Cost s Depr eci at i on EB IT Int er es t EBT T axes Net i ncome

$ 435,000 216,000 40,000 $179 ,000 21,000 $158 ,000 55,300 $102,700

One e quat ion f or net i ncome i s: Net i ncome = Divi dends + Addi ti on t o retai ned e ar ni ngs Rea r rangi ng, we get : Addi ti on t o retai ned e ar ni ngs = Net i ncome – Di vi dends Addi ti on t o retai ned e ar ni ngs = $ 102,700 – 30,000 Addi ti on t o retai ned e ar ni ngs = $ 72,700 3. T o fi nd the book val ue of cur r ent asset s, we use: NWC = CA – CL. Rea r r angi ng t o sol ve f or curr ent as set s, we get: Cur r ent ass et s = Net wor ki ng ca pi tal + Curr ent li abi li ti es Cur r ent ass et s = $800,000 + 2, 400,000 = $3, 200,000 T he mar ket val ue of curr ent as set s and net f i xed a sset s is gi ven, s o: Book val ue CA = $3, Ma r ket value CA = $2,600,000 Book val ue NFA 200,000 =$ Ma r ket value NFA = $6,500,000 5,200,000 Book val ue a ss = $ Ma r ket value ass et = $9, et s 8,400,000 s 100,000 4. T axes = .15($50,000) + .25( $25,000) + .34($25,000) + .39( $ 198 ,000 – 100,000) T axes = $ 60,470 T he aver age tax rat e i s t he tot al t ax pai d di vi ded by t axabl e i ncome, s o: Aver age t ax r at e = $ 60,470 / $ 198,000 Aver age t ax r at e = .3054, or 30.54% T he mar gi nal tax rate i s t he t ax r ate on t he next $1 of ear nings, s o the mar gi nal t ax r ate = 39% .

CHAPT CHAPTER ER22- -8 8

5. T o ca lculate OCF, we fi r st nee d t he i ncome s tat ement: Inco me St at ement Sal es Cost s Depr eci at i on EB IT Int er es t T axable income T axes Net i ncome

$19,800 10,900 2,100 $6,800 1,250 $5,550 2, 220 $3,330

OCF = EB IT + Depr eci at i on – Taxes OCF = $6,800 + 2,100 – 2,220 OCF = $6,680 6. Net capit al spe ndi ng = NFA e nd – NFA be g + Depr eci at ion Net capit al spe ndi ng = $1, 51 0,000 – 1,320,000 + 1 37,000 Net capit al spe ndi ng = $ 327 ,000 7. T he l ong-t er m debt ac count wi ll i ncr ease by $3 0 million,theamountofthenewlong-termdebt i ss ue. Si nce t he company sol d 5 mi l l ion new shar es of st ock wi t h a $1 p ar val ue, t he common st ock ac count will i ncrea se by $ 5 mi l l i on. T he ca pi tal surpl us ac count wi ll i ncrea se by $ 5 8 mi l l i on,the valueofthenewstocksoldaboveitspar val ue. Since t he company had a net i ncome of $ 8 mi llion, andpaid$1.8millionindividends,the addi ti on t o ret ained ear nings was $ 6.2 mi l l i on,whichwill increasetheaccumulatedretai ned ea rni ngs acc ount . So, t he new l ong -t er m debtandstockholders’ equityportionofthe bal ance s heet wil l be: Long-t er m debt $ 85,000,000 T ot al l ong -t er m debt $ 85,000,000 Shar ehol der s’ equit y Pre ferr ed st ock Common st ock ( $1 par value) Acc umul at ed r et ai ned ea r nings Capi tal sur pl us T ot al equi t y

$ 3,10 0,000 17,000,000 125,2 00,000 114,000,000 $ 259,3 00,000

T ot al Liabil it ies & Equi t y $ 344,3 00,000 8. Cas h fl ow t o credit or s = Int er est pai d – Net new borr owi ng Cas h fl ow t o credit or s = $185 ,000 – ( LT De nd – LT Dbe g) Cas h fl ow t o credit or s = $185 ,000 – ( $1, 730 ,000 – 1, 625 ,000) Cas h fl ow t o credit or s = $185 ,000 – 105 ,000 Cas h fl ow t o credit or s = $80,000

CHAPT CHAPTER ER22- -9 9

9. Cas h fl ow t o stockhol der s = Di vi dends pai d – Net new equit y Cas h fl ow t o stockhol der s = $ 275,000 – [( Common e nd + APISe nd ) – ( Common be g + AP IS be g)] Cas h fl ow t o stockhol der s = $ 275,000 – [( $ 545 ,000 + 3, 850,000) – ($510,000 + 3, 600,000)] Cashflowtostockholders=$ 275,000 – ($4, 395,000 – 4,100 ,000) Cas h fl ow t o stockhol der s = – $10,000 Not e, APIS is t he addi ti onal pai d -i n sur pl us. 10. Cas h fl ow fr om as se ts = Cash f l ow t o cr edi t or s + Cas h fl ow t o stockhol der s = $ 80 ,000 – 10,000 = $ 70 ,000 Cas h fl ow fr om as se ts = OCF – Change i n NWC – Net capit al spending $70,000 = OCF – ( –$132 ,000) – 975 ,000 Oper at i ng ca sh fl ow = $ 70 ,000 – 132 ,000 + 975 ,000 Oper at i ng ca sh fl ow = $ 913,000 I nt ermedi ate 11. a. T he account i ng st at ement of ca sh fl ows explai ns the change i n ca sh dur i ng t he yea r . T he ac count ing st at ement of ca sh f l ows will be: Sta tement of ca sh f lows Oper ati ons Net income $120 Depr eci at ion 90 Changes i n ot her cur rent ass ets Change i n acc ount s payabl e T ot al cash fl ow fr om oper ati ons

(1 5)15 $210

I nvesti ng acti vit ies Acqui sit i on of f i xed ass et s $( 110) T ot al cash fl ow fr om i nves ti ng ac ti vi t ies $( 110) Financi ng acti vi ti es Proc eeds of l ong-t er m deb t Di vi dends T ot al cash fl ow fr om f i nanci ng ac ti vi t ies Change i n cash (on bal ance she et ) $ 15

$ (10 9 5) ($85)

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b. Change i n NWC = NWCe nd – NWCbe g = ( CAe nd – CLe nd ) – ( CAbe g – CLbe g) = [ ( $80 + 185 ) – 1 40] – [( $60 + 1 70) – 1 25) = $1 25 – 105 = $ 20 c. T o f ind the cas h f low gene r ated by t he fi r m’ s asset s, we nee d t he oper at i ng cash f l ow, and t he ca pit al spending. So, calculat ing ea ch of t hes e, we fi nd: Oper ati ng cas h f l ow Net i ncome Depr eci at i on Oper at i ng cash fl ow

$ 12090 $ 210 Not e that we c an cal cul at e OCF in t hi s manne r si nce ther e ar e no taxes. Capi t al spendi ng Ending f i xed ass et s $ 405 Begi nni ng f i xed a sset s – 385 Depr eci at i on 90 Capit al spe ndi ng $110 Now we c an cal cul at e t he cas h fl ow gene rat ed by t he f ir m’ s a ss et s, whi ch i s:

Cash fl ow from assets Oper at i ng ca sh fl ow $ 210 Capi tal spe ndi ng – 110 Change i n NWC –20 Cas h fl ow fr om as set s $ 80 12. Wit h t he i nf or mat i on pr ovided, t he cash f lows f r om t he fi r m are t he ca pi tal spendi ng and t he change i n net wor ki ng ca pi tal , so: Cash fl ows f rom the f i rm Capi tal spe ndi ng Addi ti ons t o NWC Cas h fl ows f r om t he f ir m

$( 2 7,000) ( 2,3 $( 00) 2 9,3 00) And t he ca sh f lows to t he inves t or s of t he f ir m ar e: Cash fl ows t o inve st ors of the fi rm Sal e of long -t er m debt Sal e of common st ock Di vi dends pai d Cas h fl ows t o i nves t or s of t he f ir m

$( 17, 800) ( 5,000) 1 5,2 $(00 7,6 00)

CHAPT CHAPTER ER22- 11 11

13. a. T he i nt er est expens e f or t he company i s t he amount of debt ti mes t he i nteres t r ate on t he debt . So, the i ncome s t atement f or t he c ompany i s: Inco me St at ement Sal es Cost of goods s ol d Sel li ng cost s Depr eci at i on EB IT $ 95,000 Int er es t T axable income T axes Net i ncome

$925 ,000 490 ,000 220,000 120,000 29,600 $ 65,400 22,890 $ 42,510

b. And t he operati ng ca sh f low i s: OCF = EB IT + Depr eci at i on – Taxes OCF = $ 95,000 + 1 20,000 – 22,890 OCF = $ 192,110 14. T o f i nd t he OCF, we fi rst cal cul at e net i ncome. Inco me St at ement Sal es $215,000 Cost s 117 ,000 Ot her expe nse s 6, 700 Depr eci at i on 18,400 EB IT $72,900 Int er es t 10,000 T axable income $62,900 T axes 25,370 Net i ncome $37,530 Di vi dends $9,500 Addi ti ons t o RE $28,030 a. OCF = EB IT + Depr eci at i on – Taxes OCF = $ 72,900 + 1 8,400 – 25,370 OCF = $6 5,930 b. CFC = Int er es t – Net new LT D CFC = $ 10 ,000 – ( –$7, 200) CFC = $1 7,200 Not e that t he net new l ong-t er m debt i s negat i ve beca use t he c ompany r epai d par t of it s l ong - t er m debt . c. CFS = Di vi dends – Net new equit y

CHAPT CHAPTER ER22- 12 12 CFS = $9,500 – 8,10 0 CFS = $1, 400

CHAPT CHAPTER ER22- 13 13

d. We know t hat CFA = CFC + CFS, so: CFA = $1 7,200 + 1, 400 = $18, 600 CFA i s al so equal t o OCF – Net capit al spendi ng – Change i n NWC. We a lr eady know OCF. Net capit al spe ndi ng i s equal to: Net capit al spe ndi ng = Incr ea se i n NFA + Depr eci at ion Net capit al spe ndi ng = $2 8,400 + 1 8,4 00 Net capit al spe ndi ng = $4 6,800 Now we c an use: CFA = OCF – Net capit al spendi ng – Change i n NWC $18,600 = $6 5,930 – 46,800 – Change i n NWC Solvi ng f or t he change i n NWC gi ves $ 530, mea ni ng the c ompany i ncr eas ed it s NWC by $ 530. 15. T he sol uti on t o t his questi on wor ks t he i ncome s tatement backwar ds. Start ing at t he bott om: Net i ncome = Divi dends + Addi ti on t o ret ai ned ear ni ngs Net i ncome = $1, 670 + 5,200 Net i ncome = $ 6,870 Now, l ooki ng at t he income s t at ement : EBT – ( EBT × T ax r at e) = Net i ncome Rec ogni ze t hat EBT × t ax rat e i s t he ca lculati on f or t axes . Sol vi ng t hi s f or EBT yiel ds: EBT = NI / ( 1 – Tax rat e) EBT = $6, 870 / (1 – .40) EBT = $11,450 Now we c an cal cul at e: EB IT = EBT + Int er est EB IT = $ 11,450 + 1,8 5 0 EB IT = $ 13,300 T he l ast st ep is t o use: EB IT = Sal es – Costs – Depr eci at i on $13,300 = $ 44,000 – 27,500 – Deprec iati on Depr eci at i on = $ 3,200