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Unformatted text preview: Test #1 Solutions 1. State two differences between corporations and partnerships. Any of the items discussed in class on September 12 or listed on page 12 of the text are acceptable. 2. State two differences between bonds and common shares . Two fundamental differences are Cash flows to bondholders are legal obligations , while cash flows to common shareholders (both timing and level) are at the discretion of the corporation. Common shareholders have voting rights on major corporate is- sues, bondholders have no input on the corporations affairs. There were other answers which were accepted. 3. To calculate a firms operating cash flow on the statement of cash flows, we begin with net income and make several ad- justments. Give an example of such an adjustment, together with a brief (i.e. one or two lines) explanation for why this adjustment is made. There are many acceptable answers here. See the sample statement on page 51 for some of the adjustments, and tutorial notes from Septem- ber 26 for their motivation. 4. ABC Corporation announced earnings per share of $4 today, all of which was paid out as dividends. Beginning next year and continuing for the indefinite future, ABC will pay out 50% of its earnings as dividends and invest the remainder in...
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- Fall '08