CHAPTER1B-1CHAPTER1INTRODUCTIONTOCORPORATEFINANCEAnswerstoConceptsReviewandCriticalThinkingQuestions1.Capitalbudgeting(decidingwhethertoexpandamanufacturingplant),capitalstructure(decidingwhethertoissuenewequityandusetheproceedstoretireoutstandingdebt),andworkingcapitalmanagement(modifyingthefirm’screditcollectionpolicywithitscustomers).2.Disadvantages:unlimitedliability,limitedlife,difficultyintransferringownership,hardtoraisecapitalfunds.Someadvantages:simpler,lessregulation,theownersarealsothemanagers,sometimespersonaltaxratesarebetterthancorporatetaxrates.3.Theprimarydisadvantageofthecorporateformisthedoubletaxationtoshareholdersofdistributedearningsanddividends.Someadvantagesinclude:limitedliability,easeoftransferability,abilitytoraisecapital,unlimitedlife,andsoforth.4.Thetreasurer’sofficeandthecontroller’sofficearethetwoprimaryorganizationalgroupsthatreportdirectlytothechieffinancialofficer.Thecontroller’sofficehandlescostandfinancialaccounting,taxmanagement,andmanagementinformationsystems,whilethetreasurer’sofficeisresponsibleforcashandcreditmanagement,capitalbudgeting,andfinancialplanning.Therefore,thestudyofcorporatefinanceisconcentratedwithinthetreasurygroup’sfunctions.5.Tomaximizethecurrentmarketvalue(shareprice)oftheequityofthefirm(whetherit’spublicly-tradedornot).6.Inthecorporateformofownership,theshareholdersaretheownersofthefirm.Theshareholderselectthedirectorsofthecorporation,whointurnappointthefirm’smanagement.Thisseparationofownershipfromcontrolinthecorporateformoforganizationiswhatcausesagencyproblemstoexist.Managementmayactinitsownorsomeoneelse’sbestinterests,ratherthanthoseoftheshareholders.Ifsucheventsoccur,theymaycontradictthegoalofmaximizingthesharepriceoftheequityofthefirm.7.Aprimarymarkettransaction.8.InauctionmarketsliketheNYSE,brokersandagentsmeetataphysicallocation(theexchange)tomatchbuyersandsellersofassets.DealermarketslikeNASDAQconsistofdealersoperatingatdispersedlocaleswhobuyandsellassetsthemselves,communicatingwithotherdealerseitherelectronicallyorliterallyover-the-counter.9.Suchorganizationsfrequentlypursuesocialorpoliticalmissions,somanydifferentgoalsareconceivable.Onegoalthatisoftencitedisrevenueminimization;i.e.,providewhatevergoodsandservicesareofferedatthelowestpossiblecosttosociety.Abetterapproachmightbetoobservethatevenanot-for-profitbusinesshasequity.Thus,oneansweristhattheappropriategoalistomaximizethevalueoftheequity.CHAPTER2B-210.Presumably,thecurrentstockvaluereflectstherisk,timing,andmagnitudeofallfuturecashflows,bothshort-termandlong-term.Ifthisiscorrect,thenthestatementisfalse.11.Anargumentcanbemadeeitherway.Attheoneextreme,wecouldarguethatinamarketeconomy,allofthesethingsarepriced.Thereisthusanoptimallevelof,forexample,ethicaland/orillegalbehavior,andtheframeworkofstockvaluationexplicitlyincludesthese.Attheotherextreme,wecouldarguethatthesearenon-economicphenomenaandarebesthandledthroughthepoliticalprocess.Aclassic(andhighlyrelevant)thoughtquestionthatillustratesthisdebategoessomethinglikethis:“Afirmhasestimatedthatthecostofimprovingthesafetyofoneofitsproductsis$30million.However,thefirmbelievesthatimprovingthesafetyoftheproductwillonlysave$20millioninproductliabilityclaims.Whatshouldthefirmdo?”12.Thegoalwillbethesame,butthebestcourseofactiontowardthatgoalmaybedifferentbecauseofdifferingsocial,political,andec...
