1、CHAPTER 1 B-1CHAPTER 1INTRODUCTION TO CORPORATE FINANCEAnswers to Concepts Review and Critical Thinking Questions1. Capital budgeting (deciding whether to expand a manufacturing plant), capital structure (deciding whether to issue new equity and use the proceeds to retire outstanding debt), and work
2、ing capital management (modifying the firms credit collection policy with its customers).2. Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, hard to raise capital funds. Some advantages: simpler, less regulation, the owners are also the managers, sometimes pers
3、onal tax rates are better than corporate tax rates.3. The primary disadvantage of the corporate form is the double taxation to shareholders of distributed earnings and dividends. Some advantages include: limited liability, ease of transferability, ability to raise capital, unlimited life, and so for
4、th.4. The treasurers office and the controllers office are the two primary organizational groups that report directly to the chief financial officer. The controllers office handles cost and financial accounting, tax management, and management information systems, while the treasurers office is respo
5、nsible for cash and credit management, capital budgeting, and financial planning. Therefore, the study of corporate finance is concentrated within the treasury groups functions.5. To maximize the current market value (share price) of the equity of the firm (whether its publicly-traded or not).6. In
6、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 firms management. This separation of ownership from control in the corporate form of organization is what causes agency problems to exist. Ma
7、nagement may act in its own or someone elses 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.7. A primary market transaction.8. In auction markets like the NYSE, brokers and agents meet
8、at a physical location (the exchange) to match buyers and sellers of assets. Dealer markets like NASDAQ consist of dealers operating at dispersed locales who buy and sell assets themselves, communicating with other dealers either electronically or literally over-the-counter.9. Such organizations fre
9、quently 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 b
10、usiness has equity. Thus, one answer is that the appropriate goal is to maximize the value of the equity.B-2 SOLUTIONS10. 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 fa
11、lse.11. 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 extre
12、me, 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 $
13、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?”12. The goal will be the same, but the best course of action toward that goal may be different because of differing social, political, and
14、economic institutions.13. 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 managem
15、ent 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
16、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.14. We would expect agency problems
17、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 b
18、etween 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 i
19、nstitutional 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.15. How much is too much? Who is worth more, Jack Welch or Tiger Woods? T
20、he 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 exe
21、cutive 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. I
22、t 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.CHAPTE
23、R 4 B-3CHAPTER 2FINANCIAL STATEMENTS, TAXES AND CASH FLOWAnswers to Concepts Review and Critical Thinking Questions1. Liquidity measures how quickly and easily an asset can be converted to cash without significant loss in value. Its desirable for firms to have high liquidity so that they have a larg
24、e factor of safety in meeting short-term creditor demands. However, since liquidity also has an opportunity cost associated with itnamely that higher returns can generally be found by investing the cash into productive assetslow liquidity levels are also desirable to the firm. Its up to the firms fi
25、nancial 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 nec
26、essarily when the cash is collected or bills are paid. Note that this way is not necessarily correct; its the way accountants have chosen to do it.3. Historical costs can be objectively and precisely measured whereas market values can be difficult to estimate, and different analysts would come up wi
27、th different numbers. Thus, there is a tradeoff between relevance (market values) and objectivity (book values).4. Depreciation is a non-cash deduction that reflects adjustments made in asset book values in accordance with the matching principle in financial accounting. Interest expense is a cash ou
28、tlay, but its a financing cost, not an operating cost.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 generall
29、y, 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 ne
30、gative 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. Its 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 compan
31、y 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 capi
32、tal spending would mean more long-lived assets were liquidated than purchased.B-4 SOLUTIONS9. 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, its ca
33、sh flow to creditors will be negative.10. The adjustments discussed were purely accounting changes; they had no cash flow or market value consequences unless the new accounting information caused stockholders to revalue the derivatives.Solutions to Questions and ProblemsNOTE: All end of chapter prob
34、lems 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
35、 any step in the problem.Basic1. To find owners equity, we must construct a balance sheet as follows:Balance SheetCA $5,000 CL $4,300NFA 23,000 LTD 13,000OE ?TA $28,000 TL it just has to be sure there is sufficient cash flow to make the dividend payments.Change in NWC = Net capital spending = Net ne
36、w equity = 0. (Given)Cash flow from assets = OCF Change in NWC Net capital spending Cash flow from assets = $100K 0 0 = $100KCash flow to stockholders = Dividends Net new equity = $30K 0 = $30KCash flow to creditors = Cash flow from assets Cash flow to stockholders = $100K 30K = $70KCash flow to cre
37、ditors = Interest Net new LTDNet new LTD = Interest Cash flow to creditors = $85K 70K = $15K21. a.Income StatementSales $12,800Cost of good sold 10,400Depreciation 1,900EBIT $ 500Interest 450Taxable income $ 50Taxes (34%) 17Net income $33b. OCF = EBIT + Depreciation Taxes= $500 + 1,900 17 = $2,383c.
38、 Change in NWC = NWCend NWCbeg= (CAend CLend) (CAbeg CLbeg)= ($3,850 2,100) ($3,200 1,800)= $1,750 1,400 = $350Net capital spending = NFAend NFAbeg + Depreciation= $9,700 9,100 + 1,900 = $2,500CFA = OCF Change in NWC Net capital spending= $2,383 350 2,500 = $467The cash flow from assets can be posit
39、ive or negative, since it represents whether the firm raised funds or distributed funds on a net basis. In this problem, even though net income and OCF are positive, the firm invested heavily in both fixed assets and net working capital; it had to raise a net $467 in funds from its stockholders and
40、creditors to make these investments.B-10 SOLUTIONSd. Cash flow to creditors = Interest Net new LTD = $450 0 = $450Cash flow to stockholders = Cash flow from assets Cash flow to creditors = $467 450 = $917 We can also calculate the cash flow to stockholders as:Cash flow to stockholders = Dividends Ne
41、t new equity Solving for net new equity, we get:Net new equity = $500 (917) = $1,417The firm had positive earnings in an accounting sense (NI 0) and had positive cash flow from operations. The firm invested $350 in new net working capital and $2,500 in new fixed assets. The firm had to raise $467 fr
42、om its stakeholders to support this new investment. It accomplished this by raising $1,417 in the form of new equity. After paying out $500 of this in the form of dividends to shareholders and $450 in the form of interest to creditors, $467 was left to meet the firms cash flow needs for investment.2
43、2. a. Total assets 2004 = $650 + 2,900 = $3,550; Total liabilities 2004 = $265 + 1,500 = $1,765Owners equity 2004 = $3,550 1,765 = $1,785Total assets 2005 = $705 + 3,400 = $4,105 Total liabilities 2005 = $290 + 1,720 = $2,010Owners equity 2005 = $4,105 2,010 = $2,095b. NWC 2004 = CA04 CL04 = $650 26
44、5 = $385NWC 2005 = CA05 CL05 = $705 290 = $415Change in NWC = NWC05 NWC04 = $415 385 = $30 c. We can calculate net capital spending as:Net capital spending = Net fixed assets 2005 Net fixed assets 2004 + Depreciation Net capital spending = $3,400 2,900 + 800 = $1,300So, the company had a net capital
45、 spending cash flow of $1,300. We also know that net capital spending is:Net capital spending = Fixed assets bought Fixed assets sold$1,300 = $1,500 Fixed assets soldFixed assets sold = $1,500 1,300 = $200CHAPTER 2 B-11To calculate the cash flow from assets, we must first calculate the operating cas
46、h flow. The operating cash flow is calculated as follows (you can also prepare a traditional income statement):EBIT = Sales Costs Depreciation = $8,600 4,150 800 = $3,650EBT = EBIT Interest = $3,650 216 = $3,434; Taxes = EBT .35 = $3,434 .35 = $1,202OCF = EBIT + Depreciation Taxes = $3,650 + 800 1,2
47、02 = $3,248Cash flow from assets = OCF Change in NWC Net capital spending. = $3,248 30 1,300 = $1,918d. Net new borrowing = LTD05 LTD04 = $1,720 1,500 = $220Cash flow to creditors = Interest Net new LTD = $216 220 = $4Net new borrowing = $220 = Debt issued Debt retired Debt retired = $300 220 = $80C
48、hallenge23. Net capital spending = NFAend NFAbeg + Depreciation= (NFAend NFAbeg) + (Depreciation + ADbeg) ADbeg= (NFAend NFAbeg)+ ADend ADbeg= (NFAend + ADend) (NFAbeg + ADbeg) = FAend FAbeg24. a. The tax bubble causes average tax rates to catch up to marginal tax rates, thus eliminating the tax adv
49、antage of low marginal rates for high income corporations.b. Taxes = 0.15($50K) + 0.25($25K) + 0.34($25K) + 0.39($235K) = $113.9KAverage tax rate = $113.9K / $335K = 34%The marginal tax rate on the next dollar of income is 34 percent.For corporate taxable income levels of $335K to $10M, average tax rates are equal to marginal tax rates.Taxes = 0.34($10M) + 0.35($5M) + 0.38($3.333M) = $6,416,667Average tax
