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Unformatted text preview: S1-1 CHAPTER 1 INTRODUCTION TO CORPORATE FINANCE Learning Objectives LO1The basic types of financial management decisions and the role of the financial manager. LO2The financial implications of the different forms of business organization. LO3The goal of financial management. LO4The conflicts of interests that can arise between managers and owners. LO5The roles of financial institutions and markets. Answers to Concepts Review and Critical Thinking Questions 1.(LO1)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 firms credit collection policy with its customers). (LO1) 2.(LO2)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.(LO2)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, unlimited life, and so forth. 4.(LO4) The treasurers office and the controllers office are the two primary organizational groups that report directly to the chief financial officer. The controllers office handles cost and financial accounting, tax management, and management information systems, while the treasurers office is responsible for cash and credit management, capital budgeting, and financial planning. Therefore, the study of corporate finance is concentrated within the treasury groups functions. 5.(LO3) To maximize the current market value (share price) of the equity of the firm (whether its publicly-traded or not). 6. (LO4) 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 firms 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 elses best interests, rather than those of the shareholders. If such events occur, they may contradict the goal of maximizing the share price of the shareholders....
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- Spring '08
- Corporate Finance