Textbook Problems

Textbook Problems Chapter 1 1. What is the most important difference between a corporation and all other organization forms? Three types of organizational forms: May be wrong - Partnership - Liability - Cooperation Biggest difference cooperation is a legal entity on its own separate from its owners; where a sole proprietorship is not, they are responsible for their own obligations 2. What does the phrase limited liability mean in a corporate context? The owners liability is limited to the amount they invest into the firm/company. 3. Which organizational forms give their owners limited liability? x Law and accounting firms provide partial limitation of a partner's liability. 4. What are the main advantages and disadvantages of organizing a firm as a corporation? That owners hold no liability against the business as it is separate but, there is double taxation Advantages: Limited liability Liquidity (easier to buy in and get out of a corporation) Infinite life meaning it can continue after you die Disadvantages: A lot of stockholders meaning you have less say in the business Double taxation (income of corp. is taxed and then your income is taxed) Separation of ownership and control
6. You are a shareholder in a corporation. The corporation earns $2.00 per share before taxes. Once it has paid taxes, it will distribute the rest of its earnings to you as a dividend. The corporate tax rate is 34%, the personal tax rate on dividend income is 18%, and the personal tax rate on ordinary income is 40%. How much is left for you after all taxes are paid? First fine the calculate of the remaining after the corporate taxes are paid. Then determine amount received after personal taxes. After taxes ($2x(1-0.34))=$1.32 per share. Personal tax rate is 18% on dividends. 1.32 x (1-0.18) = $1.0824. If on quiz round to 2 decimals places =$1.08 8. What is the most important type of decision that the financial manager makes? Financial managers make investment decisions, financing decisions, and how to manage short-term cash. The investment decision is the most important decision because the financial manager must be decide how to put the owners' money to use. 9. Why do all shareholders agree on the same goal for the financial manager? They want to maximize shareholder wealth. 10.Corporate managers work for the owners of the corporation. Consequently, corporate managers should make decisions that are in the interests of the owners, rather than in their own interests. What strategies are available to shareholders to help ensure that managers are motivated to act this way? Align the goals of the shareholders with the managers. Compensate off of profit. Incentives (big bonus, salary, options, stock). Fire them if they underperform. Vacation. 17.What is the difference between a public and a private corporation? The shares of a public corporation trade on an exchange, where as shares of a private corporation fo not. It makes it easy to value the company. 18.What is the difference between a primary and a secondary market? A primary market is where companies sell shares to investors for the first time. The secondary market is where investors can buy or sell shares to other investors. 19. Explain why the bid-ask spread is a transaction cost. Buy at ask, sell at bid. 20. The following quotes were observed for Buffin Corp. (ticker: BUFN) on the two dates indicated. a. Suppose you decide to use a market order to buy 500 shares of BUFN on September 14 and then sell the 500 shares using a market order on September 15. Assuming no brokerage commissions, how much of a gain or loss did you make? - Buy at ask, 500 @ 14.60 = 7,300. Gain, p/l, =220.
b. Suppose you decide to use limit orders instead of market orders. On September 14 you put in a limit order to buy 500 shares of BUFN at $14.58 per share. On September 15 you put in a limit order to sell 500 shares of BUFN at $15.08 per share. Both orders were executed on their respective days. Assuming no brokerage commissions, how much of a gain or loss did you make? - Gain of $.50x500 = 250. c. What are the trade-offs between using market orders and limit orders? - Market order are instant, limit order can take time. Chapter 2 1. What financial statements can be found in a firm's annual report? What checks exist to ensure the accuracy of these statements? In a firm's annual report, four financial statements can be found; Balance sheet, income statement =, cash flow, and shareholders equity. Financial Statements need to be audited by an independent third party. 4. xConsider the following potential events that might have occurred at Global on December 30, 2018. For each one, indicate which line items in Global's statement of financial position would be affected and by how much. Also indicate the change to Global's book value of equity. a. Unchanged b. Decrease of 5m c. No change d. Equity would decrease e. No change f. No change 5. What was the change in Global's book value of equity from 2017 to 2018 according to Table 2.1? Does this imply that the market price of Global's shares increased in 2018? Explain.
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