Solutions to Chapter 1
Goals and Governance of the Firm
1.
a. Investment decision
b. Financial asset
c. Public corporation
d. Corporation
e. Treasurer
f. The cost resulting from conflicts of interest between managers and shareholders
Est time: 01–05
Introduction to corporate finance
2. Investment decisions, typically called capital budgeting, relate to investments in
tangible and intangible assets. Financing decisions relate to the raising of money
through debt and equity. Repayment of that money as well as interest and dividends
are also financing decisions.
a. Investment decision
b. Financing decision
c. Investment decision
d. Investment decision
e. Financing decision
f. Financing decision: On the surface, this may appear similar to a dividend
decision, but in reality retiring debt is a change in capital structure and more
closely aligned with a financing decision.
Est time: 01–05
Financial management decisions
1. Both capital budgeting decisions and capital structure decisions are long-term
financial decisions. However, capital budgeting decisions are long-term investment
decisions, while capital structure decisions are long-term financing decisions. Capital
structure decisions essentially involve selecting between equity financing and long-
term debt financing.
Est time: 01–05
,Introduction to corporate finance
1.
a. A share of stock financial
b. A personal IOU financial
c. A trademark real
d. A truck real
e. Undeveloped land real
f. The balance in the firm’s checking account financial
g. An experienced and hardworking sales force real
h. A bank loan agreement financial
Est time: 01–05
Introduction to corporate finance
2. “Companies usually buy real assets. These include both tangible assets such as
executive airplanes and intangible assets such as brand names. To pay for these
assets, they sell financial assets such as bonds. The decision about which assets to buy
is usually termed the capital budgeting or investment decision. The decision about
how to raise the money is usually termed the financing decision.”
Est time: 01–05
Financial management decisions
3.
a. Private corporation
b. Partnership
c. Public corporation
d. Public corporation
Est time: 01–05
Forms of business organization
,4. Double taxation means that a corporation’s income is taxed first at the corporate tax
rate, and then, when the income is distributed to shareholders as dividends, the
income is taxed again at each shareholder’s personal tax rate.
Est time: 01–05
Forms of business organization
5. C. Ownership can be transferred without affecting operations and D. Managers can be
fired with no effect on ownership.
Est time: 01–05
Forms of business organization
6. The individual stockholders of a corporation (i.e., the owners) are legally distinct from the
corporation itself, which is a separate legal entity. Consequently, the stockholders are not
personally liable for the debts of the corporation; the stockholders’ liability for the debts
of the corporation is limited to the investment each stockholder has made in the shares of
the corporation.
Est time: 01–05
Forms of business organization
7. B. The corporation survives even if managers are dismissed and C. Shareholders can
sell their holdings without disrupting the business.
Est time: 01–05
Forms of business organization
8. Limited liability is generally advantageous to large corporations. Large corporations
would not be able to obtain financing from thousands or even millions of shareholders if
those shareholders were not protected by the fact that the corporation is a distinct legal
entity, conferring the benefit of limited liability on its shareholders. On the other hand,
lenders do not view limited liability as advantageous to them. In some situations, lenders
are not willing to lend to a corporation without personal guarantees from shareholders,
promising repayment of a loan in the event that the corporation does not have the
financial resources to repay the loan. Typically, these situations involve small
, corporations, with only a few shareholders; often these corporations can obtain debt
financing only if the shareholders provide these personal guarantees.
Est time: 01–05
Forms of business organization
9. B. Responsible for investing the firm’s spare cash and C. Responsible for arranging any
issue of common stock.
Est time: 01–05
Management organization and roles
10. The responsibilities of the treasurer include the following: supervising cash
management, raising capital, and banking relationships. The controller’s
responsibilities include supervision of accounting, preparation of financial statements,
and tax matters. The CFO of a large corporation supervises both the treasurer and the
controller. The CFO is responsible for large-scale corporate planning and financial
policy.
Est time: 01–05
Management organization and roles
11. A corporation might cut its labor force dramatically, which could reduce immediate
expenses and increase profits in the short term. Over the long term, however, the firm
might not be able to serve its customers properly, or it might alienate its remaining
workers; if so, future profits will decrease, and the stock price, and the market value of the
firm, will decrease in anticipation of these problems.
Similarly, a corporation can boost profits over the short term by using less costly
materials even if this reduces the quality of the product. Once customers catch on, sales
will decrease and profits will fall in the future. The stock price will fall.
The moral of these examples is that, because stock prices reflect present and future
profitability, the corporation should not necessarily sacrifice future prospects for short-
term gains.
Est time: 01–05
Goal of financial management
Goals and Governance of the Firm
1.
a. Investment decision
b. Financial asset
c. Public corporation
d. Corporation
e. Treasurer
f. The cost resulting from conflicts of interest between managers and shareholders
Est time: 01–05
Introduction to corporate finance
2. Investment decisions, typically called capital budgeting, relate to investments in
tangible and intangible assets. Financing decisions relate to the raising of money
through debt and equity. Repayment of that money as well as interest and dividends
are also financing decisions.
a. Investment decision
b. Financing decision
c. Investment decision
d. Investment decision
e. Financing decision
f. Financing decision: On the surface, this may appear similar to a dividend
decision, but in reality retiring debt is a change in capital structure and more
closely aligned with a financing decision.
Est time: 01–05
Financial management decisions
1. Both capital budgeting decisions and capital structure decisions are long-term
financial decisions. However, capital budgeting decisions are long-term investment
decisions, while capital structure decisions are long-term financing decisions. Capital
structure decisions essentially involve selecting between equity financing and long-
term debt financing.
Est time: 01–05
,Introduction to corporate finance
1.
a. A share of stock financial
b. A personal IOU financial
c. A trademark real
d. A truck real
e. Undeveloped land real
f. The balance in the firm’s checking account financial
g. An experienced and hardworking sales force real
h. A bank loan agreement financial
Est time: 01–05
Introduction to corporate finance
2. “Companies usually buy real assets. These include both tangible assets such as
executive airplanes and intangible assets such as brand names. To pay for these
assets, they sell financial assets such as bonds. The decision about which assets to buy
is usually termed the capital budgeting or investment decision. The decision about
how to raise the money is usually termed the financing decision.”
Est time: 01–05
Financial management decisions
3.
a. Private corporation
b. Partnership
c. Public corporation
d. Public corporation
Est time: 01–05
Forms of business organization
,4. Double taxation means that a corporation’s income is taxed first at the corporate tax
rate, and then, when the income is distributed to shareholders as dividends, the
income is taxed again at each shareholder’s personal tax rate.
Est time: 01–05
Forms of business organization
5. C. Ownership can be transferred without affecting operations and D. Managers can be
fired with no effect on ownership.
Est time: 01–05
Forms of business organization
6. The individual stockholders of a corporation (i.e., the owners) are legally distinct from the
corporation itself, which is a separate legal entity. Consequently, the stockholders are not
personally liable for the debts of the corporation; the stockholders’ liability for the debts
of the corporation is limited to the investment each stockholder has made in the shares of
the corporation.
Est time: 01–05
Forms of business organization
7. B. The corporation survives even if managers are dismissed and C. Shareholders can
sell their holdings without disrupting the business.
Est time: 01–05
Forms of business organization
8. Limited liability is generally advantageous to large corporations. Large corporations
would not be able to obtain financing from thousands or even millions of shareholders if
those shareholders were not protected by the fact that the corporation is a distinct legal
entity, conferring the benefit of limited liability on its shareholders. On the other hand,
lenders do not view limited liability as advantageous to them. In some situations, lenders
are not willing to lend to a corporation without personal guarantees from shareholders,
promising repayment of a loan in the event that the corporation does not have the
financial resources to repay the loan. Typically, these situations involve small
, corporations, with only a few shareholders; often these corporations can obtain debt
financing only if the shareholders provide these personal guarantees.
Est time: 01–05
Forms of business organization
9. B. Responsible for investing the firm’s spare cash and C. Responsible for arranging any
issue of common stock.
Est time: 01–05
Management organization and roles
10. The responsibilities of the treasurer include the following: supervising cash
management, raising capital, and banking relationships. The controller’s
responsibilities include supervision of accounting, preparation of financial statements,
and tax matters. The CFO of a large corporation supervises both the treasurer and the
controller. The CFO is responsible for large-scale corporate planning and financial
policy.
Est time: 01–05
Management organization and roles
11. A corporation might cut its labor force dramatically, which could reduce immediate
expenses and increase profits in the short term. Over the long term, however, the firm
might not be able to serve its customers properly, or it might alienate its remaining
workers; if so, future profits will decrease, and the stock price, and the market value of the
firm, will decrease in anticipation of these problems.
Similarly, a corporation can boost profits over the short term by using less costly
materials even if this reduces the quality of the product. Once customers catch on, sales
will decrease and profits will fall in the future. The stock price will fall.
The moral of these examples is that, because stock prices reflect present and future
profitability, the corporation should not necessarily sacrifice future prospects for short-
term gains.
Est time: 01–05
Goal of financial management
