Solutions manual for corporate finance european edition 2nd edition by hillier

SOLUTIONS MANUAL for Corporate Finance European Edition 2nd Edition by Hillier Download at: http://downloadlink.org/p/solutions-manual-for-corporate-financeeuropean-edition-2nd-edition-by-hillier/

CHAPTER 2 CORPORATE GOVE RNANC E 1. A so le pro prieto rship is a business owned by o ne perso n, a partnership is a business with shareho lder -managers called partners. M o st partners will hav e unlim itedliability althoughsomepartners will hav e lim ite d liability . A co rpo ratio nisabusinesswith limitedliability shareho lders who do no t no rm ally manage thefirm.Theweaknesses andstrengthsof each business form are as fo llows: Cor por atio n Partn ers hip Liq u id it y an d market ab il it y

S h ares can b e exch an ged wit h o u t termin ati o S h ares are su b ject to su b stan ti al n o f th e co rp o ratio n. Sh ares can b e li sted o restrictio n s o n tran sferab il it y. Th ere is u su all y n o estab li sh ed tradin n a sto ck exch an ge. g mark et fo r p artn ersh ip sh ares.

V o tin g righ ts In sin gle - ti er bo ard stru ctu res, u su all y ea ch sh are o S o me vo ti n g righ ts b y li mit ed p artn ers.

Ho we ver, gen eral p artn ers h ave f eq u it y en ti tl es th e h o ld er to on e vo te p exclu si ve co n tro l an d man age er sh are o n matt ers req u iri n g a vo te and on men t o f o p erati on s. the electi o n o f th e d irecto rs. Directo rs d etermin e to p man age men t.

P artn ersh ip s are n o t taxab le. P artn Ta xati o n Co rp orati on s ma y h a ve d o u ble t axati o n : Co rp o rate ers p ay p erso n al taxes o n p artn in co me is t axab le, an d d ivid en d s to sh areh ership p ro fit s. old ers are also taxab le. Each co un try h as it s o wn ap p ro ach to h o w it d eals wit h do ub le t axati o n an d ma y gi ve a fu ll o r p artial reb ate o n th e co rp o rate t ax p aymen t .

Rein vest men t an d d ivid end p ayo ut

Co rp orati on s h ave b ro ad latitu d e o n d ivid end p ayo u t P artn ersh ip s are gen erall y p ro h ib ited fro m d ecisio n s.

rein vestin g p artn ersh ip p ro fit s. Al l p ro fit s are d istri bu ted to p artn ers.

Liab il it y S h areh o ld ers are n ot p erson all y li ab le fo r o b li gati on s Li mit ed p artn ers are n o t li ab le fo r o b li gati on s o f p artn ersh ip s. o f th e co rpo rati on .

Gen er al p artn ers ma y h a ve u n li mit ed li ab ili ty.

Co n tin u ity of existen ce

Co rp orati on s ma y h a ve a p erp etu al li fe. P artn ersh ip s h ave li mit ed li fe.

So le pro prieto rships hav e ro ughly the same weaknesses and stre ngths as partnerships primarily because shareho lders are no rm ally m anagers and have unlim ited liability .

2. Clearly the bidder thinks that the ÂŁ 35 is m o ney well spent and that y o ur firm has untapped v alue that the m arket do es no t appreciate. M anagers hav e m any agendas, including jo b safety . Howe ver, it is also po ssi ble that they do not believ e that the bidding c o m pany w ill be goo d fo r t he c om pany ov er t he lo nger t erm .

3. As firm s becom e m ore com plex, the agreements betwe en shareho lders and o perational considerationsnecessarily becom e m o re com plex and pro blem atic. Cle arly,sinceasole proprietorshiphaso nly one o wner, there is no nee d fo r an agreem entbetween shareholders.Thebig difference betwe en partnerships and co rporationsisthe separationofo wnership and co ntro l. Since partners also tendtomanageapartnership, thereare less gov ernance pro blems to deal w ith. T his is not the c ase in co rpo ratio ns.

4. The ability o f co rpo rate executives to trade the shares o f their o wn com pany im pinges uponseveralprinciples.P rinciple 1 is affecte d because it deals withregulationandthe fairnessofthe gov ernance sy stem . P rinciple 2 is clearly involvedbecausethetradingof shares inv o lv es shareho lders and their rights. P rinciple3isimportantbecause corpo rate ex ecutives who are also shareho lders willhavemoreinformationaboutthe firm than o ther o utside shareho lders. Co rpo rate insider trading affect s principle 5 because the insider transactio ns should be prom ptly disclo sed to o utside stakeho lders.

Corporateexecutivesareonthebo ard o f directo rs and t his is co ve red under principle 6 .

5. The Co rpo rate Gov ernance do cum ent will change every year, so the instructo r sho uldgo throughthedocumentandshowwhat, if any principle, is not co vered.

6. A lim ited co m pany c an either be public o r priv ate .

The m ain sim ilarities a re: inv esto r l iability is lim ited to t he am o unt o f mo ney he o r she has invested. a company is a se parate legal perso n/ entity s hares c an be transferred witho ut affecting t he ex istence o f t he com pany m ain goal is to create v alue t o the equity owners The differences bet wee n private and public co m panies are; P ublic corpo ratio ns are perm itted to o ffer shares for sale o r advertise to the public.

P ublic co rpo ratio ns require m inim um share capital to be issued and allo tted in o rder to carry o ut business P ublic co rpo ratio ns are subjec t to rigo ro us re gulato ry requirements In private co m panies directo rs are mo re likely to be majo r shareho lders. A good exampleofaprivatecorporatio n is a fam ily firm . In public firm s, directorsare lesslikelytobemajor shareho ld ers.

In public co rpo ratio ns, the shareho lders and m anagers are like ly to be two distinct gro ups. That is, there will be som e separation o f ownership o f the firm andcontrolofthefirm.In private co rpo ratio ns, this is significantlylesslikelyto bethe case.

P ublic listing is no t neces sarily an o ptim al situatio n fo r a firm to be in. The co sts o f listing o n an ex change are po te ntially higher than other fo rm s o f financing. In addition, manyemergingmarket countries do no t have eno ugh public inv estmentcapitaltofund lotsofpublicly liste d firms. This is bo rne o ut by the sm all numberofpubliccompanies thatareliste d in em erging m arket s.

7. Co rpo rate behav io ur in bank -based financial system s wo uld be different from marketbasedfinancialsystemsbecause o f the nature o f financing bet ween the two financial systems.Inabankbased financial sy stem , com panies will striv e tomeetthe requirementssetoutbytheir chief financiers, which are banks. Banks, asamajorsource offunding,will influence co rpo rate risk taking behavio urandencouragelonger

investmentho rizo ns. On the o ther hand, co rpo rations in marketbasedenvironment mustsatisfy the nee ds o f the inv esting public, who naturallyfocusonshareprice perform ance.

8. Co rpo rate go vernance is im po rt ant to the shareho lders o f a firm because o f different interestsbetweenshareho lders and m anagem ent in principal -agent relationship.

Corporategovernance aligns the inte rest o f these parties, and o ther gro up s/ stak eho lders. Co rpo rate go vernance is no t a o ne -sho e -fits -all co ncept.Firmshave differentcorporate gov ernance requirem ents based o n their sizes,forms,cultures,and com plexities. Im posing the sam e gov ernance structuresonallfirmswouldhinder gro wt h and t he risk -taking o ppo rtunities that determ ine the ret urn to the s hareho lders.

9. In a so le pro prieto rship there is no real need fo r fo rm al gov ernance structures sinceall businessactivitiesareco ncentrated o n o ne individual. That is, the stakeholders,the shareholders,andthe managers are all o ne individual. In a partnershipsemi-formal corporategov ernance structures are prese nt, such as a P artnershipAgreementor PartnershipDee d. These are designed to ensure that each partnercarriesouthisorher dutiesasex pecte d. A lim ited co rpo ratio n is a separate legal entity that is different from asoleproprietorshipand partnership. Co rpo rate gov ernance structures are required.

10. While a co rpo ratio n’s go al rem ains the sam e (maxim izatio n o f share v alue) , different institutional,economic, legal, f inancial, and cultural characteristicsmeansthatthe corpo rate gov ernance env ironm ent will v ary across co untries. Sim ilarly , co rpo rate go v ernance co des fo r emerging m arket firm s should co nsider the real issues in each co untry such as poo r quality o f law e nfo rcement and lim ite d ability to o btain independent directo rs. Thus, co rpo rate go vernance structures that are bo rrowed from developedmarketssuchastheUS,UK, Japan, Germ any and o thers m ust be adjuste d in amannerthatsuitstheenvironmentin emerging m arket s.

11. Superv iso ry bo ards, like the Sharia bo ard, can be o f use when the o bjec tiv es of a firm aretiedtosocial,environmentalor et hical issues. The purpo se of such a board isto guideexecutivesinmakingtheco rrect decisio ns with respect to the c om pany’sremit.

Anexampleofasupervisory bo ard that may wo rk in a separate area is thatoffootball teams.Inthissituatio n, the superv iso ry bo ard wo uld co nsist o f fanrepresentativesand theywouldguide the ex ecutiv e bo ard o n fo otball decisio ns.Otherareasincludefirms where public ov ersight is required, such as t he banking se cto r.

12. In a general partnership all partners agree to pro v ide some fractio n o f the work and cashandtosharetheprofitsand losses. Each partner is liable fo r all o f thedebtsofthe partnership.A partnership agreem ent s pecifies t he nature of t he arrangem ent.

L im ited part nerships permit so me o f the partners to hav e lim ited liability and who are legallyliableonlytotheamountof cash each has co ntribute d to the partnersh ip.

L im ited partnerships usually require that (1 ) at least o ne partner be a general partner and(2)thelimitedpartnersdono t participate in m anaging t he business.

Firm s cho o se to be partnerships inste ad o f lim ited liability co rpo ratio ns because itis inexpensiveandeasytosetupa partnership rather sett ing up a lim ited liability co rpo ratio n.

13. Altho ugh a so le pro prieto rship is the cheapest to set up , it has disadv antages suchasa limitedabilitytoraisefunds,a lim ited life , and unlim ited liability . Thesoleproprietor mayreducethesepro blems by fo rm ing a partnership. Ot her partnersareexpectedto bringinextra cash to finance business activ ities, and the sco pe o f the firm can be

widened. Ho wever, a partnership do es not reso lve all the pro blems such as transferability o f ownership, unlim ited liability and the ability to raise mo ney fromthe public.Inordertoremovethese hurdles a partner ship m ay co nv ert to a lim ited co rpo ratio n.

14. All the go vernance principles are im po rtant. However, clearly yo ur ro le in a co m pany wouldmakeyoufeeloneprincipleism o re im po rtant than any o ther. Fo r exam ple, if youareaminorityshareholder,P rinciple 3 (20 04 OECD P rinciples o f Corpo rate Governance)wouldbeimportant.If yo u are an internatio nal inv esto r , then P rincipleI (2004OECDPrinciplesofCorpo rate Gov ernance) wo uld be mo re im po rtant.

15. Ye s, it is po ssible to im pro ve o ne gov ernance principle and we aken ano ther. For ex am ple, P rinciple II ( 200 4 OECD P rinciples o f Co rpo rate Gov ernance ) enco uragesfirms toensurethattherightsof shareho lders are m aintained and promo te d.However,that mayweakentherightsofo ther stakeho lders (P rinciple IV -2 00 4 OECDPrinciplesof CorporateGov ernance) such as em plo yee s and comm unities.Manyexamplescanbe givenhere and lect urers should enco urage students to com e up with their own so lutio ns.

16. Co rpo rate gov ernance is the trust entruste d into t ho se running the co rpo rationwhether directlyorindirectly that they will treat all stakeholders fairly.Thisisanextremely important functio n in business as if no t pro perly fo llowedthecorporategoalto maximize shareho lders’ wealth canno t be achieved. Yes,corporategovernancereduces co nflicting inte rest s that are co stly to shareho lders and o ther stake ho lders. It also encouragesimprovementincorpo rate perfo rm ance and enterprise within firms.

AlthoughStarbucksappearstobe serio us with co rpo rate gov ernance within the organisation,itdoesnotplacethe sam e em phasise on o ne o f its key stakeho lders,the farmersfrompoorcountries. The farm ers are indeed no t rece iv ing a fair returnfortheir contributiontothe success o f the com pany . Therefore, a ‘goo d’corporategovernance systemshould address other stake ho lders’ interests.

17. Students should take mo st o f their answ er fro m sect io n 2 .4, which goes into the OECD principlesinalotofdetail.They should also be encouraged to dev elo p their ownideas astothemostimportant principle and c ome up w ith their own e xam ples.

18. Students should co nsider the different princip les o f co rpo rate gov ernance that are discussedinSection2.4andreflecto n the m ain issues pertaining to a poo r co untry.In theseenvironments,gov ernance at the gov ernm ent level is just as (andevenmore) importantasgovernance in co rpo ratio ns. As su ch, P rinciple I is likelytobeofmost importanceinthe first instance.

19. The Audit comm ittee is one o f the sub-comm itte es o f the Bo ard o f D irecto rs andwill normallyreporttoit.Itisrespo nsible fo r o v ers ight o f financial repo rtingdisclosure, regulatorycom pliance, and risk management . M embers o f thecommitteearedrawn

frommembersof the company 's bo ard o f directo rs. The c hairpersonofthecommittee isalso electe d from amo ng the m em bers. a. The duties o f an a udit comm ittee include: b. Ov ersee and promo te risk m anagem ent

c. Ensure appro priate audit wo rk is undertaken and o f high quality d. Rev iew internal and ext ernal audit re po rts e. Rev iew co rpo rate gov ernance statem ents f. R epo rt to t he gov erning body .

Students are expected to co me up with their own exam ples o f f lawed audit pro cesses.

Rec ent years hav e pro v ided m any goo d exam ples!

20. In the co rpo rate fo rm o f ownership, the shareho lders are the o wners of the firm . The shareholderselectthedirectorsof the corpo ratio n, who in turn appo int the firm’s management.Thisseparationofo wnership from co ntro l in the co rpo rate fo rmof organizationiswhatcausesagency pro blem s to ex ist. M anagem ent m ay act in itsown orsomeoneelse’sbestinterests, rather than tho se of the shareho lders. If suchevents occur,theymaycontradict the go al o f m axim izing the share price o f the equity o f the firm .

21. We wo uld ex pect agency pro blem s to be less sev ere in co untries with a relatively small percentageofindividual ownership. Fewer individual o wners sho uldreducethenumber ofdiverseopinions co ncerning co rpo rate goals. The high percentageofinstitutional ownershipm ight lead to a higher degree o f agreem ent betweenownersandmanagers ondecisions co ncerning risky pro jects. In additio n, institutionsmaybebetterableto implem ent ef fectiv e mo nito ring m echanism s o n m anagers than can individual o wners, based o n the institutions’ dee per reso urcesandexperienceswiththeirown m anagem ent. The increase in institutio nal o wnership o f equity in the United Kingdo m and the gro wing activ ism o f these large shareho lder gro ups m ay lead to a reductio n in agencyproblemsforU.K.corporations and a mo re efficient m arke t fo r corpo rate co ntro l.

22. Go vernments hav e different o bjectiv es to shareho lders. Whereas shareho lders wishto maximisethevalueoftheirown investm ent, gov ernm ents are mo re co ncernedwith maximisingsocialwelfare. This can som et imes co ntradict that o f shareholders.For example,severalgov ernments purchased the shares o f financially stricke n banks in 2 00 8 . Sho rtly afterw ards, the y put pressure o n the banks to lend to sm aller com panies andgivemortgages,eventhough the banks themselv es felt that the lending decisio ns we re no t v alue m axim ising.

23. A stakeho lder is any party which has an interest in the o peratio ns o f the co m pany , e ither directly o r indirectly . Exam ples include shareho lders, em plo yee s, creditors, customers,suppliers,no rmal citizens, et c.

In a two t ier bo ard sy stem , the bo ard structure is div ided into two parts co nsistingofthe supervisoryandex ecutive bo ard. The superv iso ry bo ard is composedofoutside shareholdersando ther stake ho lders, such as em ployee gro ups(tradeunions)andbanks (capitalpro v iders). A goo d ex am ple o f a superv iso ry bo ardisDaimlerChryslerAG,which wascom prise d o f 2 0 m em bers - half o f whi ch were electedbyshareholdersatthe AnnualM eeting. The o ther half com prises m embers electedbythecompany’s

employeeswhowo rk in Germ any (Annual repo rt, 2 008 ). The supervisoryboardcanhire orfireanymem ber o f the ex ecutive bo ard. The latte r is co mposedofexecutive directorswhodirect the day to day o peratio ns o f the firm . In a unitary bo ard, the

ex ecutiv e and no n -exe cutiv e directo rs sit o n the sam e bo ard and it is very rare fo r stak eho lders such as em plo yee s to be represented.

24. Institutio nal shareho lders are increasingly becom ing instrum ental in demandinggood corporategovernancein co m panies in which they inv est, (e.g. NAPF inUKandCalPERS inUS).Themainreason why institutio ns are im po rtant in co rpo rategovernanceis becausetheyarenorm ally the largest shareho lders in the firm . Asrepresentativesof theirinvestee base, they should take the ro le o f owners in monitoringfirms.With respecttoco untry specific regulatio ns, the student shouldreviewtheirowncountries corpo rate gov ernanc e co de and t ake a v iew o n t he e ffect iveness o f t he co de.

25. In agency theo ry, the underlying co ntract betwee n the principal (shareho lders)and agent(management)isbasedin m axim ising the principal’s we alth. One aspectof corporategovernanceisto align t he inte rests o f m anagers and shareholders.Giventhat bondholders’ interests may not be fully co nv ergent with shareholderinterests, bondholders prote ct their inte rest s thro ugh bo nd indentures that rest rict the activ ities o f m anagem ent.

We wo uld ex pect m a nagers to pursue the o bjectiv es o f shareho lders o nly if their inte rest s are the same as that o f the shareho lders. This can be do ne thro ugh appro priate exe cutiv e compensatio n co ntracts. In mo st situatio ns, the shareho lderand bondholderobjectiveswillbe the sam e. Ho wev er, when a firm is in financialdistress, thesemaydifferand then shareho lder o bject iv es will naturallytakeprecedence.Thisis whywe hav e bo nd indentures.

26. The student wo uld be ex pecte d to carry o ut this research t hem selv es.

27. The bo ard is a supreme body t hat represe nts shareholders’ inte rest within t he co m pany .

It sets strategies and the directio n o f the com pany . An effective bo ard is mo re likely to influencemajordecisionswhich enhance shareho lders v alue. In ev aluatingboard performance,thefollo wing issues should be take n into acco unt; boardattendance, independenceofboard mem bers, co ntributio n o f each mem ber, ability o f m em bers to wo rk as a t eam et c.

Bo ards pro v ide lo ng term strate gic directio n o f the com pany which c an influ enceitslong termwellbeing.Hiringan independent and o bject iv e co nsultant can giveconfidenceto theshareholdersthat t he bo ard is perfo rm ing e fficiently and m aking t he right decisio ns.

28. As m anagers build up their shareho ldings, they becom e mo re like equity ho lders.This effectwillgrowinstrength as m anagers’ shareho ldings get larger. At moderatelevelsof shareholdings,m anagers will have a significant stake in thecompanybutcanalsomake moremoneyor po we r o ut o f e xt racting wealth from the co m panythroughthepurchase ofexecutive jet s, com pany cars, exces siv e adm inistrative suppo rt and other we alth dest roy ing behav io ur. When this happens, wesaythatmanagersareentrenched. Exam

ples are in abundance fo r m anagerial entrenchm ent in co rpo ratio ns and it is up to thestudenttofindtheseintheirown rese arch activ ities.

29. Ho w m uch is too m uch? Who is wo rth mo re, Cristiano Ro naldo o r L io nel Messi? The sim plest answer is that there is a m arket fo r exe cutiv es just as there is fo r all ty pes of

labo ur. Exe cutiv e com pensatio n is the price that clears the m arke t. The same is true fo r athlet es and perfo rmers.

30. State shareho lders hav e different o bjectives to private com panies. Whereas private firmshaveanoverridingobjec tiv e to earn pro fits fo r the ir shareho lders,thegovernment tendstohavepo litical o bject ives such as m axim izing so cialwelfare.Thesecanconflict whenthe gov ernm ent wishes to dev elo p infrastructure that is no t nece ssarily consistent withmaximizingshareholder v alue. In the YP F case, the Argentinian government surprisedtheshareholders by natio nalizing the firm suddenly . Only timewilltellhow thisaffectsthe shareho lders o f the firm .

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