Solution Manual For Corporate Finance 9CE Stephen A. Ross, Randolph W. Westerfield, Jeffrey Jaffe, Bradford D. Jordan, Hamdi Driss Chapter 1-32 Chapter 1: Introduction to Corporate Finance Questions and Problems: 1.1
In the absence of agency problems, managers act in the best interest of shareholders and make decisions to maximize shareholders‟ wealth. They create value from the capital budgeting, financing, and liquidity activities. For example, managers create value by buying assets that generate more cash than they cost.
1.2
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 shareholders‟ wealth.
1.3
We would expect agency problems to be less severe in countries with a 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.
1.4
Canadian financial institutions include chartered banks and other depository institutions––trust companies and credit unions as well as nondepository institutions––investment dealers, insurance companies, pension funds and mutual funds. Financial markets can be classified as either money markets or capital markets. Short–term debt securities are bought and sold in money markets. Capital markets are the markets for long–term debt and shares of stock, for example the TSX.
1.5
Canadian Financial Markets, like all markets, are experiencing rapid globalization. The toolkit of available financial management techniques has expanded in response to a need to control volatility risk and to track complex dealing in many countries. Computer technology improvements make new financial engineering applications practical and create opportunities to combine different types of financial institutions. Financial institutions pressure authorities to deregulate in a process called the regulatory dialectic. Increased uncertainty during the COVID-19 pandemic and other disruptive events led Canadian companies to delay their investments and to hold more cash for precautionary
Ross et al, Corporate Finance 9th Canadian Edition Solutions Manual © 2022 McGraw–Hill Education Ltd.
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