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RWJ1

MKTG (with Marketing CourseMate with eBook Printed Access Card)

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CHAPTER 1 INTRODUCTION TO CORPORATEFINANCE Answers to Concepts Review and Critical Thinking Questions1. 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 workingcapital management (modifying the firm’s credit collection policy with its customers). 2. Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, hard to raisecapital 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 distributedearnings and dividends. Some advantages include: limited liability, ease of transferability, ability toraise capital, and unlimited life. 4. The treasurer’s office and the controller’s office are the two primary organizational groups thatreport directly to the chief financial officer. The controller’s office handles cost and financialaccounting, tax management, and management information systems. The treasurer’s office isresponsible 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 publiclytraded or not). 6. In the corporate form of ownership, the shareholders are the owners of the firm. The shareholderselect 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 toexist. Management may act in its own or someone else’s best interests, rather than those of theshareholders. If such events occur, they may contradict the goal of maximizing the share price of theequity of the firm.
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