Ross.Homework.Solutions.Chapters1-6.Ed6 - End of Chapter...

Download Document
Showing pages : 1 - 3 of 155
This preview has blurred sections. Sign up to view the full version! View Full Document
End of Chapter Solutions Essentials of Corporate Finance 6 th edition Ross, Westerfield, and Jordan Updated 08-01-2007
Background image of page 1
CHAPTER 1 INTRODUCTION TO CORPORATE FINANCE Answers to Concepts Review and Critical Thinking Questions 1. Capital budgeting (deciding on whether to expand a manufacturing plant), capital structure (deciding whether to issue new equity and use the proceeds to retire outstanding debt), and working capital management (modifying the firm’s 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 personal 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, and unlimited life. 4. The treasurer’s office and the controller’s office are the two primary organizational groups that report directly to the chief financial officer. The controller’s office handles cost and financial accounting, tax management, and management information systems. The treasurer’s office is responsible for cash and credit management, capital budgeting, and financial planning. Therefore, the study of corporate finance is concentrated within the functions of the treasurer’s office. 5. To maximize the current market value (share price) of the equity of the firm (whether it’s publicly traded or not). 6. In 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 firm’s management. This separation of ownership from control in the corporate form of organization is what causes agency problems to exist. Management may act in its own or someone else’s 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 at a physical location (the exchange) to buy and sell their assets. Dealer markets like Nasdaq represent dealers operating in
Background image of page 2
CHAPTER 2 B-3 dispersed locales who buy and sell assets themselves, usually communicating with other dealers electronically or literally over the counter. 9. Since such organizations frequently pursue social or political missions, many different goals are conceivable. One goal that is often cited is revenue minimization; i.e., providing their goods and services to society at the lowest possible cost. Another approach might be to observe that even a not- for-profit business has equity. Thus, an appropriate goal would be to maximize the value of the equity. 10.
Background image of page 3
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Create a FREE account now to get started. Log In

The email address you entered is not valid. The email address you provided is already in use.
Your username must be at least 5 characters. Your username must consist of only alphanumeric characters. Your username must contain at least one letter. Your username contains inappropriate language. Another user has already claimed this username.
Your password must be at least 6 characters in length.
{[ $select.selected.label ]} Please select a valid school.
By creating an account you agree to our Privacy Policy, Terms of Use, and Honor Code.
Create my FREE account Processing...
Sign Up with Facebook

We will never post anything without your permission.

Already on Course Hero? Log In