Solutions to problems p1 1 lg 1 liability comparisons

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Solutions to Problems P1-1. LG 1: Liability comparisons Basic a. Ms. Harper has unlimited liability. b. Ms. Harper has unlimited liability. c. Ms. Harper has limited liability, which guarantees that she cannot lose more than she invested. P1-2. LG 2, 4: Marginal cost-benefit analysis and the goal of the firm Intermediate a. Benefits from new robotics $560,000 Benefits from existing robotics 400,000 Marginal benefits $160,000 b. Initial cash investment $220,000 Receipt from sale of old robotics 70,000 Marginal cost $150,000 c. Marginal benefits $160,000 Marginal cost 150,000 Net benefits $ 10,000 d. Ken should recommend that the company replace the old robotics with the new robotics. The net benefit to shareholders is positive which should make the shareholders better off. e. Ken should consider more than just net benefits. He should incorporate the important points of timing, cash flow, and risk, three important factors to determining the true impact on shareholders’ wealth.
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Chapter 1 The Role and Environment of Managerial Finance 13 P1-3. LG 2: Annual income versus cash flow for a period Basic a. Sales $760,000 Cost of goods sold 300,000 Net profit $460,000 b. Cash receipts $690,000 Cost of goods sold 300,000 Net cash flow $390,000 c. The cash flow statement is more useful to the financial manager. The accounting net income includes amounts that will not be collected and, as a result, do not contribute to the wealth of the owners. P1-4. LG 1: Personal finance: Cash flow statement a. Total cash inflow: $450 + $4,500 = $4,950 Total cash outflow: $1,000 + $500 + $800 + $355 + $280 + $1,200 + $222 = $4,357 b. Net cash flow: $4,950 – $4,357 = $593 c. If Jane is facing a shortage, she could cut back on some of her discretionary items, including clothing, dining out, and gas (i.e., travel less). d. If Jane has a surplus in August, she should compare these cash flows to those of other months and verify that August’s cash flows are typical.She may for instance, observe the existence of large automobile insurance bills or tendency to spend more during the Christmas holiday season. If she has such needs, Jane will want to save the $593 in a money market security, where she is unlikely to face a decline in investment. If her August net cash flow is not needed to pay anticipated bills, she should invest in a diversified portfolio. P1-5. LG 4: Identifying agency problems, costs, and resolutions Intermediate a. In this case the employee is being compensated for unproductive time. The company must pay someone to take her place during her absence. Installation of a time clock that must be punched by the receptionist every time she leaves work and returns would result in either: (1) her returning on time or (2) reducing the cost to the firm by reducing her pay for the lost work. b. The costs to the firm are in the form of opportunity costs. Money budgeted to cover the inflated costs of this project proposal is not available to fund other projects that may help to increase shareholder wealth. Make the management reward system based on how close the manager’s estimates come to the actual cost rather than having them come in below cost.
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