{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

IFM10 Ch31 Solutions Manual

IFM10 Ch31 Solutions Manual - Chapter 31 Financial...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 31 Financial Management in Not-for-Profit Businesses ANSWERS TO END-OF-CHAPTER QUESTIONS 31-1 The major difference in ownership structure is that investor-owned firms have well- defined owners, who own stock in the business and exercise control over the firm through the proxy mechanism. Conversely, not-for-profit firms do not have stockholders. Control rests in a board of trustees comprised mostly of community leaders who have no direct economic interest in the firm. Because of this ownership structure difference, the goals of investor-owned and not-for-profit firms are quite different as well. 31-2 No. The asymmetric information theory refers to a preferred "pecking order" of financing by corporate managers, with new common stock being the least preferred because of the negative signals that new stock issues typically send to investors. Since not-for-profit firms have no common stock, this theory is not applicable. 31-3 No. The break in an investor-owned firm's MCC schedule is due to the higher cost involved with issuing new common stock once the firm's retained earnings has been exhausted. Since not-for-profit firms do not have common stock, there are no such breaks in their MCC schedules. In fact, all of a not-for-profit firm's fund capital, which includes retained earnings, grants from government entities, and private contributions, have a common opportunity cost to the firm, which is the return that could be expected from investing in the stock of a similar type investor-owned company. 31-4 a. Without access to tax-exempt debt, all of the benefits to using debt for a not-for-profit firm would disappear. Thus, in accordance with MM capital structure theory, and considering financial distress and agency costs related to debt, the firm's optimal capital structure would be zero debt. b. No. Managers of not-for-profit firms do not have the same degree of flexibility as investor-owned firms in raising equity capital. Thus, it is often necessary for not-for- profit firms to use more than the theoretically optimal amount of debt when new fund capital cannot be obtained for needed services. 31-5 Since not-for-profit businesses are expected to provide a social value in addition to an economic benefit, project analysis must consider social value along with expected cash flows. The summation of a project's net present social and cash flow values is its total net present value (TNPV). If the TNPV is 0, then the project is deemed acceptable. To perform this analysis, the social value of a project must be quantified in some manner for each year of the project's life, and then discounted back to Year 0. This requires the not-for-profit firm to quantify the social value of the services provided by the project in each year, and to determine the discount rate that is to be applied to those services.
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern