Solutions Manual
For
Corporate Finance
Ross, Westerfield, Jaffe,
and Jordan11th edition
consider the consequences of legal decisions on society.5.3. The Role of Mathematics ExamsMathematics exams, while also testing problem-solving and logical reasoning, have a
more defined and technical structure. Mathematics is both an abstract and practical discipline. In many ways, it is the foundation upon which fields like engineering, economics, computer science, and even social
sciences are built. Thus, mathematics exams serve to test not only a student‘s computational ability but also their understanding of mathematical concepts and their ability to apply them in real-world contexts.Exams
in mathematics are designed to test a student‘s fluency with numbers, algorithms, equations, and mathematical proofs. Problem-solving is at the heart of mathematics exams. Whether it's calculating the area of a
geometrical shape, solving algebraic equations, or analyzing a statistical dataset, the primary objective is to see how well students can use mathematical tools to approach and resolve problems. For higher-level
mathematics, exams often require students to demonstrate the ability to prove theorems or present formal mathematical arguments. This kind of rigorous, logical thinking is essential for students who plan to pursue
careers in fields that rely heavily on mathematics, such as finance, physics, computer science, and actuarial science.While business and law exams may emphasize analysis and application, mathematics exams focus
on the precise application of learned methods and the development of abstract reasoning. In mathematics, the solution to a problem often exists as a single correct answer, but the journey to that solution may involve
multiple steps that require a deep understanding of the underlying mathematical principles.6. Challenges Faced by Students in Business, Law, and Mathematics ExamsDespite the clear structure and purpose of
exams in business, law, and mathematics, students often face considerable challenges in preparing for and performing well in these exams. The challenges differ by discipline, reflecting the unique demands of each
field.6.1. Challenges in Business ExamsOne of the primary challenges in business exams is the need to balance theoretical understanding with practical application.
,INTRODUCTION TO CORPORATE
FINANCE
Answers to Concept Questions
1. 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.
2. 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.
consider the consequences of legal decisions on society.5.3. The Role of Mathematics ExamsMathematics exams, while also testing problem-solving and logical reasoning, have a more
defined and technical structure. Mathematics is both an abstract and practical discipline. In many ways, it is the foundation upon which fields like engineering, economics, computer
science, and even social sciences are built. Thus, mathematics exams serve to test not only a student‘s computational ability but also their understanding of mathematical concepts and
their ability to apply them in real-world contexts.Exams in mathematics are designed to test a student‘s fluency with numbers, algorithms, equations, and mathematical proofs. Problem-
solving is at the heart of mathematics exams. Whether it's calculating the area of a geometrical shape, solving algebraic equations, or analyzing a statistical dataset, the primary objective
is to see how well students can use mathematical tools to approach and resolve problems. For higher-level mathematics, exams often require students to demonstrate the ability to prove
theorems or present formal mathematical arguments. This kind of rigorous, logical thinking is essential for students who plan to pursue careers in fields that rely heavily on mathematics,
such as finance, physics, computer science, and actuarial science.While business and law exams may emphasize analysis and application, mathematics exams focus on the precise
application of learned methods and the development of abstract reasoning. In mathematics, the solution to a problem often exists as a single correct answer, but the journey to that
solution may involve multiple steps that require a deep understanding of the underlying mathematical principles.6. Challenges Faced by Students in Business, Law, and Mathematics
ExamsDespite the clear structure and purpose of exams in business, law, and mathematics, students often face considerable challenges in preparing for and performing well in these
exams. The challenges differ by discipline, reflecting the unique demands of each field.6.1. Challenges in Business ExamsOne of the primary challenges in business exams is the need to
balance theoretical understanding with practical application.
3. 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.
4. 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
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?‖
5. 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.
6. 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.
,7. 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.
8. 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. However, this may not always be the case. If the managers of
the mutual fund or pension plan are not concerned with the interests of the investors, the agency
problem could potentially remain the same, or even increase since there is the possibility of agency
problems between the fund and its investors.
consider the consequences of legal decisions on society.5.3. The Role of Mathematics ExamsMathematics exams, while also testing problem-solving and logical reasoning, have a more
defined and technical structure. Mathematics is both an abstract and practical discipline. In many ways, it is the foundation upon which fields like engineering, economics, computer
science, and even social sciences are built. Thus, mathematics exams serve to test not only a student‘s computational ability but also their understanding of mathematical concepts and
their ability to apply them in real-world contexts.Exams in mathematics are designed to test a student‘s fluency with numbers, algorithms, equations, and mathematical proofs. Problem-
solving is at the heart of mathematics exams. Whether it's calculating the area of a geometrical shape, solving algebraic equations, or analyzing a statistical dataset, the primary objective
is to see how well students can use mathematical tools to approach and resolve problems. For higher-level mathematics, exams often require students to demonstrate the ability to prove
theorems or present formal mathematical arguments. This kind of rigorous, logical thinking is essential for students who plan to pursue careers in fields that rely heavily on mathematics,
such as finance, physics, computer science, and actuarial science.While business and law exams may emphasize analysis and application, mathematics exams focus on the precise
application of learned methods and the development of abstract reasoning. In mathematics, the solution to a problem often exists as a single correct answer, but the journey to that
solution may involve multiple steps that require a deep understanding of the underlying mathematical principles.6. Challenges Faced by Students in Business, Law, and Mathematics
ExamsDespite the clear structure and purpose of exams in business, law, and mathematics, students often face considerable challenges in preparing for and performing well in these
exams. The challenges differ by discipline, reflecting the unique demands of each field.6.1. Challenges in Business ExamsOne of the primary challenges in business exams is the need to
balance theoretical understanding with practical application.
9. 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 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. In recent years, stock prices have soared, so management has cleaned up. It is sometimes
argued that much of this reward is 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.
10. Maximizing the current share price is the same as maximizing the future share price at any future
period. The value of a share of stock depends on all of the future cash flows of company. Another way
to look at this is that, barring large cash payments to shareholders, the expected price of the stock must
be higher in the future than it is today. Who would buy a stock for $100 today when the share price in
one year is expected to be $80?
consider the consequences of legal decisions on society.5.3. The Role of Mathematics ExamsMathematics exams, while also testing problem-solving and logical reasoning, have a more
defined and technical structure. Mathematics is both an abstract and practical discipline. In many ways, it is the foundation upon which fields like engineering, economics, computer
science, and even social sciences are built. Thus, mathematics exams serve to test not only a student‘s computational ability but also their understanding of mathematical concepts and
their ability to apply them in real-world contexts.Exams in mathematics are designed to test a student‘s fluency with numbers, algorithms, equations, and mathematical proofs. Problem-
solving is at the heart of mathematics exams. Whether it's calculating the area of a geometrical shape, solving algebraic equations, or analyzing a statistical dataset, the primary objective
is to see how well students can use mathematical tools to approach and resolve problems. For higher-level mathematics, exams often require students to demonstrate the ability to prove
theorems or present formal mathematical arguments. This kind of rigorous, logical thinking is essential for students who plan to pursue careers in fields that rely heavily on mathematics,
such as finance, physics, computer science, and actuarial science.While business and law exams may emphasize analysis and application, mathematics exams focus on the precise
application of learned methods and the development of abstract reasoning. In mathematics, the solution to a problem often exists as a single correct answer, but the journey to that
solution may involve multiple steps that require a deep understanding of the underlying mathematical principles.6. Challenges Faced by Students in Business, Law, and Mathematics
ExamsDespite the clear structure and purpose of exams in business, law, and mathematics, students often face considerable challenges in preparing for and performing well in these
exams. The challenges differ by discipline, reflecting the unique demands of each field.6.1. Challenges in Business ExamsOne of the primary challenges in business exams is the need to
balance theoretical understanding with practical application.
, ACCOUNTING STATEMENTS, TAXES,
AND CASH FLOW
Answers to Concepts Review and Critical Thinking Questions
1. True. Every asset can be converted to cash at some price. However, when we are referring to a liquid
asset, the added assumption that the asset can be quickly converted to cash at or near market value is
important.
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.
consider the consequences of legal decisions on society.5.3. The Role of Mathematics ExamsMathematics exams, while also testing problem-solving and logical reasoning, have a more
defined and technical structure. Mathematics is both an abstract and practical discipline. In many ways, it is the foundation upon which fields like engineering, economics, computer
science, and even social sciences are built. Thus, mathematics exams serve to test not only a student‘s computational ability but also their understanding of mathematical concepts and
their ability to apply them in real-world contexts.Exams in mathematics are designed to test a student‘s fluency with numbers, algorithms, equations, and mathematical proofs. Problem-
solving is at the heart of mathematics exams. Whether it's calculating the area of a geometrical shape, solving algebraic equations, or analyzing a statistical dataset, the primary objective
is to see how well students can use mathematical tools to approach and resolve problems. For higher-level mathematics, exams often require students to demonstrate the ability to prove
theorems or present formal mathematical arguments. This kind of rigorous, logical thinking is essential for students who plan to pursue careers in fields that rely heavily on mathematics,
such as finance, physics, computer science, and actuarial science.While business and law exams may emphasize analysis and application, mathematics exams focus on the precise
application of learned methods and the development of abstract reasoning. In mathematics, the solution to a problem often exists as a single correct answer, but the journey to that
solution may involve multiple steps that require a deep understanding of the underlying mathematical principles.6. Challenges Faced by Students in Business, Law, and Mathematics
ExamsDespite the clear structure and purpose of exams in business, law, and mathematics, students often face considerable challenges in preparing for and performing well in these
exams. The challenges differ by discipline, reflecting the unique demands of each field.6.1. Challenges in Business ExamsOne of the primary challenges in business exams is the need to
balance theoretical understanding with practical application.
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 cash flows treat 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 and 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 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
wisely, not whether cash flow from assets is positive or negative.
7. It‘s probably not a good sign for an established company to have negative cash flow from operations,
but it would be fairly ordinary for a start-up, so it depends.
For
Corporate Finance
Ross, Westerfield, Jaffe,
and Jordan11th edition
consider the consequences of legal decisions on society.5.3. The Role of Mathematics ExamsMathematics exams, while also testing problem-solving and logical reasoning, have a
more defined and technical structure. Mathematics is both an abstract and practical discipline. In many ways, it is the foundation upon which fields like engineering, economics, computer science, and even social
sciences are built. Thus, mathematics exams serve to test not only a student‘s computational ability but also their understanding of mathematical concepts and their ability to apply them in real-world contexts.Exams
in mathematics are designed to test a student‘s fluency with numbers, algorithms, equations, and mathematical proofs. Problem-solving is at the heart of mathematics exams. Whether it's calculating the area of a
geometrical shape, solving algebraic equations, or analyzing a statistical dataset, the primary objective is to see how well students can use mathematical tools to approach and resolve problems. For higher-level
mathematics, exams often require students to demonstrate the ability to prove theorems or present formal mathematical arguments. This kind of rigorous, logical thinking is essential for students who plan to pursue
careers in fields that rely heavily on mathematics, such as finance, physics, computer science, and actuarial science.While business and law exams may emphasize analysis and application, mathematics exams focus
on the precise application of learned methods and the development of abstract reasoning. In mathematics, the solution to a problem often exists as a single correct answer, but the journey to that solution may involve
multiple steps that require a deep understanding of the underlying mathematical principles.6. Challenges Faced by Students in Business, Law, and Mathematics ExamsDespite the clear structure and purpose of
exams in business, law, and mathematics, students often face considerable challenges in preparing for and performing well in these exams. The challenges differ by discipline, reflecting the unique demands of each
field.6.1. Challenges in Business ExamsOne of the primary challenges in business exams is the need to balance theoretical understanding with practical application.
,INTRODUCTION TO CORPORATE
FINANCE
Answers to Concept Questions
1. 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.
2. 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.
consider the consequences of legal decisions on society.5.3. The Role of Mathematics ExamsMathematics exams, while also testing problem-solving and logical reasoning, have a more
defined and technical structure. Mathematics is both an abstract and practical discipline. In many ways, it is the foundation upon which fields like engineering, economics, computer
science, and even social sciences are built. Thus, mathematics exams serve to test not only a student‘s computational ability but also their understanding of mathematical concepts and
their ability to apply them in real-world contexts.Exams in mathematics are designed to test a student‘s fluency with numbers, algorithms, equations, and mathematical proofs. Problem-
solving is at the heart of mathematics exams. Whether it's calculating the area of a geometrical shape, solving algebraic equations, or analyzing a statistical dataset, the primary objective
is to see how well students can use mathematical tools to approach and resolve problems. For higher-level mathematics, exams often require students to demonstrate the ability to prove
theorems or present formal mathematical arguments. This kind of rigorous, logical thinking is essential for students who plan to pursue careers in fields that rely heavily on mathematics,
such as finance, physics, computer science, and actuarial science.While business and law exams may emphasize analysis and application, mathematics exams focus on the precise
application of learned methods and the development of abstract reasoning. In mathematics, the solution to a problem often exists as a single correct answer, but the journey to that
solution may involve multiple steps that require a deep understanding of the underlying mathematical principles.6. Challenges Faced by Students in Business, Law, and Mathematics
ExamsDespite the clear structure and purpose of exams in business, law, and mathematics, students often face considerable challenges in preparing for and performing well in these
exams. The challenges differ by discipline, reflecting the unique demands of each field.6.1. Challenges in Business ExamsOne of the primary challenges in business exams is the need to
balance theoretical understanding with practical application.
3. 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.
4. 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
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?‖
5. 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.
6. 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.
,7. 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.
8. 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. However, this may not always be the case. If the managers of
the mutual fund or pension plan are not concerned with the interests of the investors, the agency
problem could potentially remain the same, or even increase since there is the possibility of agency
problems between the fund and its investors.
consider the consequences of legal decisions on society.5.3. The Role of Mathematics ExamsMathematics exams, while also testing problem-solving and logical reasoning, have a more
defined and technical structure. Mathematics is both an abstract and practical discipline. In many ways, it is the foundation upon which fields like engineering, economics, computer
science, and even social sciences are built. Thus, mathematics exams serve to test not only a student‘s computational ability but also their understanding of mathematical concepts and
their ability to apply them in real-world contexts.Exams in mathematics are designed to test a student‘s fluency with numbers, algorithms, equations, and mathematical proofs. Problem-
solving is at the heart of mathematics exams. Whether it's calculating the area of a geometrical shape, solving algebraic equations, or analyzing a statistical dataset, the primary objective
is to see how well students can use mathematical tools to approach and resolve problems. For higher-level mathematics, exams often require students to demonstrate the ability to prove
theorems or present formal mathematical arguments. This kind of rigorous, logical thinking is essential for students who plan to pursue careers in fields that rely heavily on mathematics,
such as finance, physics, computer science, and actuarial science.While business and law exams may emphasize analysis and application, mathematics exams focus on the precise
application of learned methods and the development of abstract reasoning. In mathematics, the solution to a problem often exists as a single correct answer, but the journey to that
solution may involve multiple steps that require a deep understanding of the underlying mathematical principles.6. Challenges Faced by Students in Business, Law, and Mathematics
ExamsDespite the clear structure and purpose of exams in business, law, and mathematics, students often face considerable challenges in preparing for and performing well in these
exams. The challenges differ by discipline, reflecting the unique demands of each field.6.1. Challenges in Business ExamsOne of the primary challenges in business exams is the need to
balance theoretical understanding with practical application.
9. 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 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. In recent years, stock prices have soared, so management has cleaned up. It is sometimes
argued that much of this reward is 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.
10. Maximizing the current share price is the same as maximizing the future share price at any future
period. The value of a share of stock depends on all of the future cash flows of company. Another way
to look at this is that, barring large cash payments to shareholders, the expected price of the stock must
be higher in the future than it is today. Who would buy a stock for $100 today when the share price in
one year is expected to be $80?
consider the consequences of legal decisions on society.5.3. The Role of Mathematics ExamsMathematics exams, while also testing problem-solving and logical reasoning, have a more
defined and technical structure. Mathematics is both an abstract and practical discipline. In many ways, it is the foundation upon which fields like engineering, economics, computer
science, and even social sciences are built. Thus, mathematics exams serve to test not only a student‘s computational ability but also their understanding of mathematical concepts and
their ability to apply them in real-world contexts.Exams in mathematics are designed to test a student‘s fluency with numbers, algorithms, equations, and mathematical proofs. Problem-
solving is at the heart of mathematics exams. Whether it's calculating the area of a geometrical shape, solving algebraic equations, or analyzing a statistical dataset, the primary objective
is to see how well students can use mathematical tools to approach and resolve problems. For higher-level mathematics, exams often require students to demonstrate the ability to prove
theorems or present formal mathematical arguments. This kind of rigorous, logical thinking is essential for students who plan to pursue careers in fields that rely heavily on mathematics,
such as finance, physics, computer science, and actuarial science.While business and law exams may emphasize analysis and application, mathematics exams focus on the precise
application of learned methods and the development of abstract reasoning. In mathematics, the solution to a problem often exists as a single correct answer, but the journey to that
solution may involve multiple steps that require a deep understanding of the underlying mathematical principles.6. Challenges Faced by Students in Business, Law, and Mathematics
ExamsDespite the clear structure and purpose of exams in business, law, and mathematics, students often face considerable challenges in preparing for and performing well in these
exams. The challenges differ by discipline, reflecting the unique demands of each field.6.1. Challenges in Business ExamsOne of the primary challenges in business exams is the need to
balance theoretical understanding with practical application.
, ACCOUNTING STATEMENTS, TAXES,
AND CASH FLOW
Answers to Concepts Review and Critical Thinking Questions
1. True. Every asset can be converted to cash at some price. However, when we are referring to a liquid
asset, the added assumption that the asset can be quickly converted to cash at or near market value is
important.
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.
consider the consequences of legal decisions on society.5.3. The Role of Mathematics ExamsMathematics exams, while also testing problem-solving and logical reasoning, have a more
defined and technical structure. Mathematics is both an abstract and practical discipline. In many ways, it is the foundation upon which fields like engineering, economics, computer
science, and even social sciences are built. Thus, mathematics exams serve to test not only a student‘s computational ability but also their understanding of mathematical concepts and
their ability to apply them in real-world contexts.Exams in mathematics are designed to test a student‘s fluency with numbers, algorithms, equations, and mathematical proofs. Problem-
solving is at the heart of mathematics exams. Whether it's calculating the area of a geometrical shape, solving algebraic equations, or analyzing a statistical dataset, the primary objective
is to see how well students can use mathematical tools to approach and resolve problems. For higher-level mathematics, exams often require students to demonstrate the ability to prove
theorems or present formal mathematical arguments. This kind of rigorous, logical thinking is essential for students who plan to pursue careers in fields that rely heavily on mathematics,
such as finance, physics, computer science, and actuarial science.While business and law exams may emphasize analysis and application, mathematics exams focus on the precise
application of learned methods and the development of abstract reasoning. In mathematics, the solution to a problem often exists as a single correct answer, but the journey to that
solution may involve multiple steps that require a deep understanding of the underlying mathematical principles.6. Challenges Faced by Students in Business, Law, and Mathematics
ExamsDespite the clear structure and purpose of exams in business, law, and mathematics, students often face considerable challenges in preparing for and performing well in these
exams. The challenges differ by discipline, reflecting the unique demands of each field.6.1. Challenges in Business ExamsOne of the primary challenges in business exams is the need to
balance theoretical understanding with practical application.
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 cash flows treat 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 and 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 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
wisely, not whether cash flow from assets is positive or negative.
7. It‘s probably not a good sign for an established company to have negative cash flow from operations,
but it would be fairly ordinary for a start-up, so it depends.
