Search This Blog(textbook name or author as the keywords)You can cantact me by the Contact Form

8/16/14

solutions manual and test bank for Corporate Finance: Core Principles and Applications - 4e Ross

Ross - Corporate Finance: Core Principles and Applications - 4e,  solutions manual and test bank 0077861655

 

End of Chapter Solutions

Corporate Finance: Core Principles and Applications

4th edition

Ross, Westerfield, Jaffe, and Jordan

06-08-2013

Prepared by

Brad Jordan

University of Kentucky

Joe Smolira

Belmont University

CHAPTER 1

INTRODUCTION TO CORPORATE FINANCE

Answers to Concept Questions

1. The three basic forms are sole proprietorships, partnerships, and corporations. Some disadvantages of sole proprietorships and partnerships are: unlimited liability, limited life, difficulty in transferring ownership, and hard to raise capital funds. Some advantages are: simpler, less regulation, the owners are also the managers, and sometimes personal tax rates are better than corporate tax rates. The primary disadvantage of the corporate form is the double taxation to shareholders on distributed earnings and dividends. Some advantages include: limited liability, ease of transferability, ability to raise capital, and unlimited life. When a business is started, most take the form of a sole proprietorship or partnership because of the relative simplicity of starting these forms of businesses.

2. To maximize the current market value (share price) of the equity of the firm (whether it’s publicly traded or not).

3. 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 ownership from control in the corporate form of organization is what causes agency problems to exist. Management may act in its own or someone else’s best interests, rather than those of the shareholders. If such events occur, they may contradict the goal of maximizing the share price of the equity of the firm.

4. 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 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.

5. Presumably, the current stock value reflects the risk, timing, and magnitude of all future cash flows, both short-term and long-term. If this is correct, then the statement is false.

6. 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, unethical and/or illegal behavior, and 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 has 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?”

7. The goal will be the same, but the best course of action toward that goal may be different because of differing social, political, and economic institutions.


8. 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 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 value 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 corporate takeovers in situations such as this.

9. 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 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 institutions’ deeper resources and experiences with their own management. 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.

10. How much is too much? Who is worth more, Larry Ellison 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 aspect of executive compensation deserves comment. A primary reason that 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. When stock prices soar, management cleans 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., stock price increases in excess of general market increases.

CHAPTER 2

FINANCIAL STATEMENTS AND CASH FLOW

Answers to Concept Questions

1. Liquidity measures how quickly and easily an asset can be converted to cash without significant loss in value. It’s desirable for firms to have high liquidity so that they have a large factor of safety in meeting short-term creditor demands. However, since liquidity also has an opportunity cost associated with it - namely that higher returns can generally be found by investing the cash into productive assets - low liquidity levels are also desirable to the firm. It’s up to the firm’s financial management staff to find a reasonable compromise between these opposing needs

2. The recognition and matching principles in financial 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; it’s the way accountants have chosen 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, while the financial statement of cash flows treats 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 company’s choice of debt/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 company’s operating performance because of its treatment of interest.

5. Market 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 worth 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 whether the money is spent productively, not whether cash flow from assets is positive or negative.

7. It’s probably not a good sign for an established company, 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 management, the amount of inventory needed would decline. The same might be true if it 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-lived assets were liquidated than purchased.

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 flow to creditors will be negative.

10. The adjustments discussed were purely accounting changes; they had no cash flow or market value consequences.

Solutions to Questions and Problems

NOTE: All end-of-chapter problems 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 any step in the problem.

Basic

1. To find owner’s equity, we must construct a balance sheet as follows:

Balance Sheet

CA $7,300 CL $5,700

NFA 26,200 LTD 12,900

OE ??

TA $33,500 TL & OE $33,500

We know that total liabilities and owners’ equity (TL & OE) must equal total assets of $33,500. We also know that TL & OE is equal to current liabilities plus long-term debt plus owners’ equity, so owners’ equity is:

OE = $33,500 –12,900 – 5,700 = $14,900

NWC = CA – CL = $7,300 – 5,700 = $1,600

2. The income statement for the company is:

Income Statement

Sales $675,300

Costs 297,800

Depreciation 45,100

 

 

 

test  bank

 

test bank

 

ch2 Key

1.

Assume both current and deferred taxes are positive values. Given this, deferred taxes will: 

A.

reduce the current tax expense and thus increase net income.

B.

increase expenses and increase operating cash flows.

C.

increase expenses and lower operating cash flows.

D.

reduce net income but not affect the operating cash flows.

E.

reduce both net income and operating cash flows.

Difficulty Level: 2 Medium
Ross - Chapter 02 #1
Topic: Deferred Taxes

2.

Which one of these is handled differently in calculating cash flows for accounting versus financial purposes? 

A.

Change in net working capital

B.

Depreciation expense

C.

Interest expense

D.

Deferred taxes

E.

Dividends paid

Difficulty Level: 1 Easy
Ross - Chapter 02 #2
Topic: Accounting versus Financial Cash Flows

3.

Which one of these will increase earnings per share? 

A.

Decreasing deferred taxes

B.

Increasing depreciation expense

C.

Lowering the operating income

D.

Increasing the corporate tax rate

E.

Lowering the percentage of net income added to retained earnings

Difficulty Level: 2 Medium
Ross - Chapter 02 #3
Topic: Earnings per share

4.

A current asset is best defined as: 

A.

the market value of all assets currently owned by the firm.

B.

an asset the firm expects to purchase within the next year.

C.

the amount of cash on hand the firm currently shows on its balance sheet.

D.

cash and other assets owned by the firm that will convert to cash within the next year.

E.

the value of fixed assets the firm expects to sell within the next year.

Difficulty Level: 1 Easy
Ross - Chapter 02 #4
Topic: Current Asset

5.

The long-term debts of a firm are liabilities: 

A.

owed to the firm's shareholders.

B.

that do not come due for at least 12 months.

C.

owed to the firm's suppliers.

D.

that come due within the next 12 months.

E.

the firm expects to incur within the next 12 months.

Difficulty Level: 1 Easy
Ross - Chapter 02 #5
Topic: Long-Term Debt

6.

A(n) ____ asset is one which can be quickly converted into cash without significant loss in value. 

A.

tangible

B.

fixed

C.

intangible

D.

liquid

E.

long-term

Difficulty Level: 1 Easy
Ross - Chapter 02 #6
Topic: Liquid Assets

7.

Noncash items refer to: 

A.

the credit sales of a firm.

B.

the accounts payable of a firm.

C.

all accounts on the balance sheet other than cash on hand.

D.

the costs incurred for the purchase of intangible fixed assets.

E.

expenses charged against revenues that do not directly affect cash flow.

Difficulty Level: 1 Easy
Ross - Chapter 02 #7
Topic: Noncash Items

8.

Your _____ tax rate is the percentage of the next taxable dollar of income you earn that is payable as a tax. 

A.

deductible

B.

residual

C.

marginal

D.

average

E.

total

Difficulty Level: 1 Easy
Ross - Chapter 02 #8
Topic: Marginal Tax Rate

9.

Your _____ tax rate measures the total taxes you pay divided by your total taxable income. 

A.

average

B.

marginal

C.

total

D.

deductible

E.

residual

Difficulty Level: 1 Easy
Ross - Chapter 02 #9
Topic: Average Tax Rates

10.

_____ refers to the cash flow resulting from a firm's ongoing, normal business activities. 

A.

Cash flow from assets

B.

Net working capital

C.

Capital spending

D.

Cash flow from operating activities

E.

Cash flow to creditors

Difficulty Level: 2 Medium
Ross - Chapter 02 #10
Topic: Cash Flow from Operating Activities

11.

_____ refers to the changes in net capital assets. 

A.

Cash flow from assets

B.

Net working capital

C.

Cash flow from investing

D.

Operating cash flow

E.

Cash flow to creditors

Difficulty Level: 2 Medium
Ross - Chapter 02 #11
Topic: Cash Flow from Investing

12.

_____ refers to the difference between a firm's current assets and its current liabilities. 

A.

Operating cash flow

B.

Capital spending

C.

Net working capital

D.

Cash flow from assets

E.

Cash flow to creditors

Difficulty Level: 1 Easy
Ross - Chapter 02 #12
Topic: Net Working Capital

13.

_____ is calculated by adding back noncash expenses to earnings before interest and taxes, subtracting taxes, and adjusting for any changes in total assets or current liabilities that affect cash flows. 

A.

Distributable cash flow

B.

Capital spending

C.

Cash flow from assets

D.

Cash flow from investing activities

E.

Cash flow to creditors

Difficulty Level: 2 Medium
Ross - Chapter 02 #13
Topic: Distributable cash flow

14.

_____ refers to a firm's interest payments minus any net new borrowing. 

A.

Operating cash flow

B.

Distributable cash flow

C.

Net working capital

D.

Cash flow to equity investors

E.

Cash flow to creditors

Difficulty Level: 1 Easy
Ross - Chapter 02 #14
Topic: Cash Flow to Creditors

15.

_____ refers to a firm's dividend payments minus any net new equity raised. 

A.

Operating cash flow

B.

Capital spending

C.

Net working capital

D.

Cash flow to equity investors

E.

Cash flow from creditors

Difficulty Level: 1 Easy
Ross - Chapter 02 #15
Topic: Cash Flow to Equity Investors

16.

Which of the following are included in current assets?
I. Equipment
II. Inventory
III. Accounts payable
IV. Cash 

A.

II and IV only

B.

I and III only

C.

I, II, and IV only

D.

III and IV only

E.

II, III, and IV only

Difficulty Level: 1 Easy
Ross - Chapter 02 #16
Topic: Current Asset

17.

Which of the following are included in current liabilities?
I. Debt payable to a mortgage company in nine months
II. Note payable to a supplier in eighteen months
III. Accounts payable to suppliers
IV. Loan payable to a bank in fourteen months 

A.

I and III only

B.

II and III only

C.

III and IV only

D.

II, III, and IV only

E.

I, II, and III only

Difficulty Level: 2 Medium
Ross - Chapter 02 #17
Topic: Current Liabilities

18.

Which one of the following accounts is generally the most liquid? 

A.

Patent

B.

Building

C.

Accounts receivable

D.

Equipment

E.

Inventory

Difficulty Level: 1 Easy
Ross - Chapter 02 #18
Topic: Liquidity

19.

Which one of the following statements concerning liquidity is correct? 

A.

Fixed assets are more liquid than current assets.

B.

Balance sheet accounts are listed in order of decreasing liquidity.

C.

Liquid assets tend to be highly profitable.

D.

The less liquidity a firm has, the lower the probability the firm will encounter financial difficulties.

E.

Trademarks and patents are highly liquid.

No comments:

Post a Comment

Linkwithin

Related Posts Plugin for WordPress, Blogger...