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Corp orat e Financ e

In st ru ctor ’s M anu al

Corporate Finance 1st Edition Booth Solutions Manual Download:http://testbanklive.com/download/corporate-finance-1st-editionbooth-solutions-manual/ Corporate Finance 1st Edition Booth Test Bank Download:http://testbanklive.com/download/corporate-finance-1st-editionbooth-test-bank/

Chapter 2 Financial Management Syn opsis The p urp ose of this chap te r is to int roduce the readertotheformsofbusiness,andthe rela ti on b et wee n the forms of b usine ss an d the obj ectivesoffinancialmanagement.We focuson agency issues an d the ali gnmen t of in cen ti ves withtheobjectivesofshareholders and other sta keholders. This is imp orta nt groundwor k to help studen ts understan din g the framewor k in which in vest ment an d fin an cing decisi ons are made.

Le arning Ou tcome s L O 2.1 L ist the a dvan ta ges a nd disa dvan ta ges of the p r imary for ms of a b

usine ss organ izat ion. L O 2.2 Describ e t he ulti mate ob j ect ive of a compa ny and exp lai n why this i s a

logical obj ect ive. L O 2.3 L ist an d describ e a gen cy costs an d how they m ay affect owne rs’ wea

lt h.

L O 2.4 Discuss t he p rimary type s of decisi ons made b y b usine ss en titi es regardin

g the fina ncia l man agement of asse ts, as well as the associat ed fin an cin g decisi ons.

Ch apt er Outline 2.1 Forms of bus iness orga niza t ions A. S ole p ropriet orship


Corp orat e Financ e B. Part ne rship s C. Corp orat ions D. L imit ed L ia bili ty comp ani es E. S ubchap te r S corp orat ions F. Prevale nce 2.2 Th e goa ls of t h e business ent erprise A. S ta keholders B. The goal of the b usine ss en te rp rise 2.3 Th e role of ma na gement a nd a gency issu es A. The a gen cy rela ti onship an d agency costs

In st ru ctor ’s M anu al


Corp orat e Financ e

In st ru ctor ’s M anu al

B. Aligni ng man agers’ and owne rs’ in te rest s 2.4 Fina ncia l ma na gement A. Investmen t decisions B. F in an cin g decisi ons

Discus sion Ques tions f or Sp ecial F eatu res F eature Opening vignett e: Soci al Res pons i bi li ty

L earn in g out come Discussion quest ion s 2.2 1. Is Green Mou ntai n’s busi nes s ethi cs reflec ted i n i ts m arket value ? How woul d you know? 2. If the com pany were to buy produc ts from envi ronmentally sensi ti ve areas , but doi ng so s aves mo ney, i s this consis tent with m aximi zi ng s ha reh older weal th? Explai n. 3. Do Green Mountai n’s ethic al pri nc i ples put the c om pany at a c om parati ve disadvantage relati ve to its c om peti tors ? Loo k up the s toc k: GMCR

Gl obal Perspect ives : Forms of Bus i ness

2.1 1. S om e fam ili ar c om panies are ac tua lly he adquartered i n other c ountri es . Whic h c ou ntry is Bayer AG headqua rtered? 2. T he lim i ted li abi li ty com pany ori gi nated i n Germa ny in 1892, and its us e i n the U.S . i s relati vely new (s i nc e the 1970s ). Why would the li mi ted li abi li ty com pany be a popul ar form both i n the U.S . and els ewhe re?

Lessons to be l earned: Econom ic V alue Added

2.2 1. Wh y is foc us i ng on earni ngs per share sho rt- s i ghted? 2. If a c om pany generates negati ve economic profi t, wha t does thi s m ean?

Finance in th e News: General Elec tri c S heds Li ght on i ts S moo th Earni ngs

2.3 1. Wh o m ay be harm ed by the earni ngs s moo thi ng? 2. Wh at type of agency c os t is involved i n this c ase? Ch ec k ou t the s toc k: GE

Ethi cs: T he c os t of frau d


2.4

Corp orat e Financ e

1. Wh o, i f anyone, i s ha rm ed in the c as e of the m anipul ati on of ac cou nting ati on? Ininform st ru ctor ’s M 2. Wh ic h m anagers shoul d beanu heldalac cou ntable for ac cou nti ng fraud? 3. Wh y is a c lawbac k us ed i n the s e c as es ? Ch ec k ou t the s toc k: BZH


Corp orat e Financ e

In st ru ctor ’s M anu al

Concep t Rev iew Qu es tions 2.1 Forms of bus iness orga niza t ions 1. Sol e pro pri et o rs hips ’ a dva nt a ges inc l ud e c on trol of th e m a na gem ent of the e nt er pris e, on e l a ye r of ta xa tio n. Sol e p rop rie tors hips ’ disa dva n ta ges i nc l ude l a c k of a c c es s to c a pita l ma rk ets , l imi ted ext er na l fina nc ing, a nd l im it ed l if e o f th e en te rp rise, Pa r tne rs hips ha v e s imil a r a dva nta ges a nd disa dva nta ges a s s ol e p rop ri eto rs hips , but a l s o r e quir e a pa rtn ers hi p a gr e em ent to de ter min e the d ivis ion of c ont rol a nd in c ome. 2. The a dva nta ge of a n L L C is t ha t the re is l imit ed l ia bil ity f or its ow n ers , whe r ea s for p a rtn ers hips ther e is unl imi te d l ia bil ity fo r ea c h pa rtn e r. 3. The pri ma ry a dva n ta ge of th e c or po ra te s t ruc tur e is tha t it ha s a c c es s to c a pita l ma rk ets a nd c a n ther efo r e iss ue d ebt or e quit y. A no the r a dva nta g e is tha t the e nt erp rise ha s a n u nl imi ted l if e. On e disa dva nta g e of th e c o r pora t e s truc tu r e is tha t the r e a r e t wo ( or mor e) l a ye rs of ta xa tion. A noth er disa dva nta ge is tha t for l a rge c orp ora tio ns , th er e is a s e pa ra tion of ma na g em ent a nd own ers .

2.2 Th e goa ls of t h e business ent erprise 1. The pri ma ry g oa l of a c o rpo r a tion is to ma ximiz e s ha r eho l ders ’ w ea l th. 2. The s ta k eh ol de rs of a c ompa ny i nc l ude th e s ha r ehol d ers , the em pl oye es , a nd th e c om munity in whic h is d oes bus in es s .

2.3 Th e role of ma na gement a nd a gency issu es 1. In s ma l l bus in es s es , es p ec ia l l y in s ol e pr op ri e tors hi ps a n d pa rt ne rs hips , the ow n ers a re typic a l l y the ma na ge rs . F o r l a rg e ent erp ris es , a nd es p ec ia l l y c orp ora tions , th er e is a s epa ra ti o n of ow n ers a nd ma na g ers , ra isin g th e p oss ibil ity o f a ge nc y c osts / 2. A genc y c osts a re di rec t c osts , s uc h a s the mon ito ring c ost s of p roduc i ng a n nua l r epo rt s , a nd indi rec t c osts ( e.g. , ma na g er s ma k ing d ec isio ns tha t a r e s el f - s ervi ng) a s s oc ia ted wi th a ddres s i ng pote ntia l p ro bl ems with the s epa ra tio n o f ma na g em e nt a nd o wn ers hi p. 3. It ha s b ee n bel i ev ed tha t a l igning ma na g em ent ’ s i nt er es t s with thos e of s ha r ehol d ers by inc r ea s ing th e focu s o n s ha r e p ric e thr ough s toc k o ptio n s woul d re duc e a g enc y c osts . Ho wev er , thes e ha ve not wo rk ed a s w el l a s exp ec t ed b ec a us e th es e o ptio ns do no t a l wa ys r es u l t in s toc k own ers hi p a nd a l ong - t er m pers pec tiv e.

2.4 Fina ncia l ma na gement 1. The fina nc ia l ma na gem e nt o f a s s ets r e quir es ma k in g d ec isions r ega r din g l ong - t er m i nves t me nts ( c a pita l budge ting) a nd s ho r t - ter m, o pe ra ting a s s ets . 2. Key fina nc ing dec isio ns i nc l ude ma na gin g s hor t - te rm s o urces o f fi na nc i n g to m ee t s e a s ona l or c yc l ic al ne eds, a nd th e c a pit a l s truc ture dec isi on, whic h i s dec idi ng h ow muc h d eb t is a pprop ria t e, rel a tive to e qui ty.


Corp orat e Financ e

An sw ers to Multiple C h oice Qu es tions 1. A 2. C 3. A 4. A

In st ru ctor ’s M anu al


Corp orat e Financ e

In st ru ctor ’s M anu al

5. B 6. C 7. B 8. C 9. B 10. B

Solu tion s to Pr actice Qu es tions an d Problem s 2.1 Forms of bus iness ent erprise 11. Fo rm of bus Siness ole propri etorshi p

A cc es s to Li ability Li fe Taxatio n c ap ital U nlim i ted Li mi ted Flow Li mi ted throu gh

Partners hi p

U nlim i ted Li mi ted Flow Li mi ted throu gh

Co rporati on

Li mi ted U nlim i ted Dou ble Ca n iss ue taxati on debt and equi ty Li mi ted U nlim i ted Flow Li mi ted throu gh

Li mi ted liabili ty c om pany

Management and o wners relatio ns hip Manager and owner are the s am e Manager and owner are often the s am e S eparati on of m anagem ent and owners Depends on the s i ze of the c om pany and s truc ture

12. Primary dif feren ces: 1. Taxat ion (p artne rship income ta xed once, corp orat e i ncome ta xed at the corp orat e le vel an d at the owne rs’ level w hen dist rib uted). 2. L ia b ili ty (p artners have unlimit ed lia b ili ty; shareholders have limite d li ab ili ty). 3. L ife (p artne rship has a limit ed life; a corp orat ion i s p erpe tual). 13. F low-throu gh taxat ion i s ta xat ion on the i ncome a fter it flows throu gh the b usine ss to the owne rs. 14. Comp aring the two stra te gie s, the LL C is p referred to the S ubchap te r S excep t with resp e ct to t he life of the b usine ss en tity. The S ub chap te r S has the a dvant age that it has a p erpe tual life.


Corp orat e Financ e Charac teri s tic T axation Owners hi p

In st ru ctor ’s M anu al Sub S Pas s- throu gh Maxi mum of 75

LLC Pas s- throu gh N o maxim um

A dvantage to : LLC LLC


Corp orat e Financ e

In st ru ctor ’s M anu al

s ha reh olders Li abili ty Li mi ted liabili ty Li mi ted liabili ty -Li fe Perpetua l Li mi ted S ub S

15. Divi dend Co rp o Payou t rate Tax Rate

Shareholders ’ Tax on Divi dend Inc om e

E ffec tive Tax on Co rp o rate Inc om e

A. 40% 45% 15% 0.483 or 48.3% B. 20% 40% 0% 0.4 or 40% C. 25% 35% 15% 0.374375 or 37.44% D. 25% 40% 15% 0.4225 or 42.25% 16. Corp orat e t ax rat e = 40 %; in dividual ta x rat e = 32% Co rporate taxable i nc om e Co rporate tax Co rporate i nc om e after tax Di s tri buti on to s ha reh olders S ha reh olders ’ tax Inc om e after tax

17.

$ 5,000,000 2,000,000 $ 3,000,000 $ 750,000 240,000 $ 510,000

The e ffect ive ta x rat e i s ($240, 00 0 + 2, 0 00, 00 0) ÷ $ 5, 000, 00 0 = 4 4. 8% A. 36% B. effect ive rat e = 0. 36 + [ ( 1 -0. 36) × 1 × 0. 40] = 0. 3 6 + 0. 25 6 = 6 1.6% C. effect ive rat e = 0. 36 + [ ( 1 -0. 36) × 1 × 0. 20] = 0. 3 6 + 0. 12 8 = 4 8.8 %

2.2 Th e goa ls of t h e bu siness ent erprise 18. To maximize t he value of the owne rship in te rest . 19. A sta keholder is an y p a rty that i s affect ed b y th e b usine ss en tit y, in cludin g shareholders an d emp loyee s. 20. E arnin gs rep rese nt the results of the a sset s in place, as well as a ccounting princi p les select ed to reflect p ast p erformance . The valu e of eq uity is forwar d -lo okin g. 21. In a comp et it ive market , if a comp an y maximizes owne rs’ wea lth, this w ill result in an effici en t a llocat ion of resources b ecause the compa ny will w an t t o make those decisi ons – that in volve resources – that are the b est uses of these resources.


Corp orat e Financ e 2.3 Th e rol e of ma na gers a nd a gency issu es

In st ru ctor ’s M anu al

22. Agen cy costs are direct an d in direct costs resul ti ng from agent s (the m an agers) actin g in the b est int erests of th e p rin cip als (shareholders). E xamp les: the cost of crea ti ng an an nual rep ort; the costs of arran gin g b oar d of d irectors’ mee ti ngs; mana gers consumin g p erquisi te s (e. g. , count ry club membership p ai d b y the compa ny).


Corp orat e Financ e

In st ru ctor ’s M anu al

23. Exam ple 1: If an other c omp an y p ropose s an acq uisit ion, mana gers that a re se lf servin g may rej ect a b id that p rovides sharehol ders wit h a p rice a b ove t he curren t market value. Exam ple 2: M anagers may use comp an y p rope rty, such as a corp orat e j et, for p ersona l be ne fit. 24. S hareholders electi ng membe r s of the b oard o f directors who will b e dili gen t i n moni torin g mana gemen t; devise a comp en sat ion scheme that rela te s p erformance to p ay (e. g. , rest rict ed stock gran ts); b ecoming a p ublicly -trade d corp orat ion, wit h moni torin g b y an alysts a nd the disclosure req u irement s of the S E C. 25. E arnin gs can b e manipulate d or mana ged ; the relat ion b et wee n e arnings and value i s not st rong b ecause ea rni ngs are hist orical (that is, b ased on p ast decisions) and value i s forwar d-loo kin g. 26. The reasoni ng is that if the e xecuti ve h as st ock opt ion, he/she will want t o maximize t he p rice of the comp an y’s stock. 27. S hareholders elect a b oard of directors, who m onit or mana gemen t. 2.4 Fina ncia l m a na gement 28. Cap it al st ructure i s how a compa ny fin an ces it s asse ts t hrough deb t a nd eq uity. 29. The focus in evaluat in g an in vest ment p roject is the risk of the p roje ct an d how the in vest ment p roje ct will affect the compa ny’s futures ca sh flows. 30. Dec isio n Inves tm ent Fin anc ing Buyi ng a new plant Ac qui ri ng anothe r c om pany Is sui ng a bond  A c orporati on buying back i ts own s toc k Borrowi ng from a bank 

31. H ewlett- Pack ard B o ein g Ver izon Proportion of current as sets 43% 59% 10%

H ewlet t -Pa ckard an d B oein g are b oth man ufact urers, s o they ne ed to main ta in an in ven tory of raw mate ria ls sufficien t t o sup p ort t he p roducti on p rocess, as well as in ven tory in p rocess and fin ished goo ds. Boein g manufact ures a ircraft, which are b uilt t o sp ecifica ti ons and have a long p rod ucti on p rocess; hence Boein g has a grea te r ne ed for w orkin g cap it al. Veri zon is a t ele commu ni cat ions compa ny, which is, in large p art, a se rvice comp an y. The in ven tory an d recei vab les for th is compa ny would b e m uch smaller than that of the other two comp an ie s.


Corp orat e Financ e

In st ru ctor ’s M anu al

Solu tions t o C ases Ca se 2.1 Th e Tex Tech Compa ny A. Dan should choose Proj ect B, which woul d in cr ea se t he value of the firm by more than Proj ect A. If Dan i s self -servin g, he woul d b e t emp te d to sele ct p roje ct A, which p rovides a higher bonu s for him. B. The owne r likely p refer s Proj ect B, the p roje ct that p roduces t he grea te r value. C. Alte rin g the b onus scheme, such that the b onus is a functi on of the value of Tex Tech. Ca se 2.2 To Invest or not t o Invest A. F act ors to consider: 1. H ow many yea rs will th e n ew syste m be ne fit t he compa ny? 2. What is t he risk that t he savings will b e le ss than exp ect ed? 3. What is t he cost of cap ital for the comp an y? Co nsi derati ons: the cost of eq uity, the a mount of deb t a nd eq uity the comp an y uses (i. e. , it s cap ital structure), an d ta x rat e (be cause the $ 10, 000 in in te rest is t ax deducti ble). B. The det ermin at i on cannot b e made on t he b asis of this i nformati on. If the compa ny p ays taxes, the cost of the deb t will be less than $ 10, 000 an d there wo uld b e p rofit b efore consi dering the cost of eq uity for the co mpa ny.


Corp orat e Financ e

In st ru ctor ’s M anu al

Corporate Finance 1st Edition Booth Solutions Manual Download:http://testbanklive.com/download/corporate-finance-1st-editionbooth-solutions-manual/ Corporate Finance 1st Edition Booth Test Bank Download:http://testbanklive.com/download/corporate-finance-1st-editionbooth-test-bank/ handbook of corporate finance pdf handbook of empirical corporate finance volume 2 pdf handbook of corporate finance a business companion to financial markets decisions & techniques the econometrics of event studies handbook of finance pdf essentials of corporate finance parrino essentials of corporate finance pdf empirical corporate finance definition

Corporate finance 1st edition booth solutions manual  

Download: http://testbanklive.com/download/corporate-finance-1st-edition-booth-test-bank/ Corporate Finance 1st Edition Booth Test Bank han...

Corporate finance 1st edition booth solutions manual  

Download: http://testbanklive.com/download/corporate-finance-1st-edition-booth-test-bank/ Corporate Finance 1st Edition Booth Test Bank han...

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