Solutions Manual
Fundamentals of Corporate Finance 12th edition
Ross, Westerfield, and Jordan
06-15-2018
Prepared by
Brad Jordan
University of Kentucky
Joe SmoliraBelmont University
CHAPTER 1
INTRODUCTION TO CORPORATE
FINANCE
Answers to Concepts Review and Critical Thinking Questions
1. Capital budgeting (deciding whether to expand a manufacturing plant), capital structure (deciding
2. Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, difficulty in
3. The primary disadvantage of the corporate form is the double taxation to shareholders of distributed
4. In response to Sarbanes-Oxley, small firms have elected to go dark because of the costs of
compliance. The costs to comply with Sarbox can be several million dollars, which can be a large
5. The treasurer’s office and the controller’s office are the two primary organizational groups that
report directly to the chief financial officer. The controller’s office handles cost and financial
6. To maximize the current market value (share price) of the equity of the firm (whether it’s publicly
7. 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 appoint the firm’s management. This separation of
CHAPTER 1 – 2
9. In auction markets like the NYSE, brokers and agents meet at a physical location (the exchange) to
10. Such organizations frequently pursue social or political missions, so many different goals are
11. Presumably, the current stock value reflects the risk, timing, and magnitude of all future cash flows,
12. 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 framework of stock valuation explicitly includes these. At the other extreme, we
13. The goal will be the same, but the best course of action toward that goal may be different because of
14. 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
15. We would expect agency problems to be less severe in countries with a relatively small percentage of
individual ownership. Fewer individual owners should reduce the number of diverse opinions
concerning corporate goals. The high percentage of institutional ownership might lead to a higher
CHAPTER 1 – 3
16. How much is too much? Who is worth more, Mark Parker or LeBron James? 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