,
, Solutions Manual il
FundamentalsilofilCorporateilFinanceil13thileditionlR
i os
s,ilWesterfield,ilandilJordan
Preparedilb
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UniversityilofilFlorida
JoeilSmolirailBelmo
ntilUniversity
, CHAPTER 1 il
INTRODUCTION TO CORPORATE il il li
FINANCE
AnswersiltoilConceptsilReviewilandilCriticalilThinkingilQuestions
1. Capitalilbudgetingil(decidingilwhetheriltoilexpandilailmanufacturingilplant),ilcapitalilstructureil(decidin
gilwhetheriltoilissueilnewilequityilandiluseiltheilproceedsiltoilretireiloutstandingildebt),ilandilworkingilca
pitalilmanagementil(modifyingiltheilfirm‗silcreditilcollectionilpolicyilwithilitsilcustomers).
2. Disadvantages:ilunlimitedilliability,illimitedillife,ildifficultyiliniltransferringilownership,ildifficultyilinil
raisingilcapitalilfunds.ilSomeiladvantages:ilsimpler,illessilregulation,iltheilownersilareilalsoiltheilmanage
rs,ilsometimesilpersonaliltaxilratesilareilbetterilthanilcorporateiltaxilrates.
3. Theilprimaryildisadvantageilofiltheilcorporateilformilisiltheildoubleiltaxationiltoilshareholdersilofildistrib
utedilearningsilandildividends.ilSomeiladvantagesilinclude:illimitedilliability,ileaseilofiltransferability,il
abilityiltoilraiseilcapital,ilandilunlimitedillife.
4. InilresponseiltoilSarbanes-
Oxley,ilsmallilfirmsilhaveilelectediltoilgoildarkilbecauseilofiltheilcostsilofilcompliance.ilTheilcostsiltoilco
mplyilwithilSarboxilcanilbeilseveralilmillionildollars,ilwhichilcanilbeilaillargeilpercentageilofilailsmallilfir
m‗silprofits.ilAilmajorilcostilofilgoingildarkilisillessilaccessiltoilcapital.ilSinceiltheilfirmilisilnoillongerilpu
bliclyiltraded,ilitilcanilnoillongerilraiseilmoneyiliniltheilpublicilmarket.ilAlthoughiltheilcompanyilwillilsti
llilhaveilaccessiltoilbankilloansilandiltheilprivateilequityilmarket,iltheilcostsilassociatedilwithilraisingilfun
dsiliniltheseilmarketsilareilusuallyilhigherilthaniltheilcostsilofilraisingilfundsiliniltheilpublicilmarket.
5. Theiltreasurer‗silofficeilandiltheilcontroller‗silofficeilareiltheiltwoilprimaryilorganizationali l groupsilthat
ilreportildirectlyiltoiltheilchiefilfinancialilofficer.ilTheilcontroller‗silofficeilhandlesilcostilandilfinancialla i
ccounting,iltaxilmanagement,ilandilmanagementilinformationilsystems,ilwhileiltheiltreasurer‗silofficeilis
ilresponsiblei l fori l cashi l andi l crediti l management,i l capitali l budgeting,i l andi l financiali l planning.i l T
herefore,litheilstudyilofilcorporateilfinanceilisilconcentratedilwithiniltheiltreasuryilgroup‗silfunctions.
6. Toilmaximizeiltheilcurrentilmarketilvalueil(shareilprice)ilofiltheilequityilofiltheilfirmil(whetherilit‗silpubli
clyiltradedilorilnot).
7. Iniltheilcorporateilformilofilownership,iltheilshareholdersilareiltheilownersilofiltheilfirm.ilTheilsharehold
ersilelectiltheildirectorsilofiltheilcorporation,ilwhoilinilturnilappointiltheilfirm‗silmanagement.ilThisilsepa
rationilofilownershipilfromilcontroliliniltheilcorporateilformilofilorganizationilisilwhatilcausesilagencyilp
roblemsiltoilexist.ilManagementilmayilactilinilitsilownilorilsomeoneilelse‗silbestilinterests,ilratherilthanilt
hoseilofiltheilshareholders.ilIfilsuchileventsiloccur,iltheyilmayilcontradictiltheilgoalilofilmaximizingiltheil
shareilpriceilofiltheilequityilofiltheilfirm.
8. Ailprimaryilmarketiltransaction.
