© jMcGraw jHill jLLC. jAll jrights jreserved. jNo jreproduction jor jdistribution jwithout jthe jprior jwritten jconsent jof jMcGrawCHAPTER j1
jHill jLLC.
, Introduction jto jCorporate jFinance
The jvalues jshown jin jthe jsolutions jmay jbe jrounded jfor jdisplay jpurposes. jHowever, jthe janswers
jwerejderived jusing ja jspreadsheet jwithout jany jintermediate jrounding.
Answers jto jProblem jSets
1. a. real
b. executive jairplanes
c. brand jnames
d. financial
e. bonds
*f. investment jor jcapital jexpenditure
*g. capital jbudgeting jor jinvestment
h. financing
*Note jthat jf jand jg jare jinterchangeable jin jthe jquestion.
Est jtime: j01-05
2. A jtrademark, ja jfactory, jundeveloped jland, jand jyour jwork jforce j(c, jd, je, jand jg) jare jall jreal
jassets. jReal jassets jare jidentifiable jas jitems jwith jintrinsic jvalue. jThe jothers jin jthe jlist jare
jfinancial jassets,jthat jis, jthese jassets jderive jvalue jbecause jof ja jcontractual jclaim.
Est jtime: j01-05
3. a. Financial jassets, jsuch jas jstocks jor jbank jloans, jare jclaims jheld jby jinvestors.
jCorporations jsell jfinancial jassets jto jraise jthe jcash jto jinvest jin jreal jassets jsuch jas
jplantjand jequipment. jSome jreal jassets jare jintangible.
b. Capital jexpenditure jmeans jinvestment jin jreal jassets. jFinancing jmeans jraising jthe
jcashjfor jthis jinvestment.
c. The jshares jof jpublic jcorporations jare jtraded jon jstock jexchanges jand jcan jbe
jpurchasedjby ja jwide jrange jof jinvestors. jThe jshares jof jclosely jheld jcorporations jare
jnot jpublicly jtraded jand jare jheld jby ja jsmall jgroup jof jprivate jinvestors.
d. Unlimited jliability: jInvestors jare jresponsible jfor jall jthe jfirm‘s jdebts. jA jsole jproprietor
jhasjunlimited jliability. jInvestors jin jcorporations jhave jlimited jliability. jThey jcan jlose
jtheir jinvestment, jbut jno jmore.
Est jtime: j01-05
© jMcGraw jHill jLLC. jAll jrights jreserved. jNo jreproduction jor jdistribution jwithout jthe jprior jwritten jconsent jof jMcGraw
jHill jLLC.
,4. Items jc jand jd japply jto jcorporations. jBecause jcorporations jhave jperpetual jlife, jownership jcan
jbejtransferred jwithout jaffecting joperations, jand jmanagers jcan jbe jfired jwith jno jeffect jon
jownership. jOther jforms jof jbusiness jmay jhave junlimited jliability jand jlimited jlife.
Est jtime: j01-05
5. Separation jof jownership jfacilitates jthe jkey jattributes jof ja jcorporation, jincluding j limited jliability
jforjinvestors, jtransferability jof jownership, ja jseparate jlegal jpersonality jof jthe jcorporation, jand
jdelegated jcentralized jmanagement. jThese jfour jattributes jprovide jsubstantial jbenefit jfor
jinvestors, jincluding jthe j ability jto jdiversify jtheir jinvestment jamong jmany juncorrelated
jreturns—a jvery jvaluable jtool jexplored jin jlater jchapters. jAlso, jthese jattributes jallow jinvestors
jto jquickly jexit,jenter, jor jshort jsell jan jinvestment, jthereby jgenerating jan jactive jliquid jmarket
jfor jcorporations.
However, jthese jpositive jaspects jalso jintroduce jsubstantial jnegative jexternalities jas jwell. j The
jseparation jof jownership jfrom jmanagement jtypically jleads jto jagency jproblems, jwhere
jmanagersjprefer jto jconsume jprivate jperks jor jmake jother jdecisions jfor jtheir jprivate jbenefit—
rather jthan jmaximize jshareholder jwealth. jShareholders jtend jto jexercise jless joversight jof
jeach jindividual jinvestment jas jtheir jdiversification jincreases. jFinally, jthe jcorporation‘s
jseparate jlegal jpersonalityjmakes jit jdifficult jto jenforce jaccountability jif jthey jexternalize jcosts
jonto jsociety.
Est jtime: j01-05
6. Shareholders jwill jonly jvote jto jmaximize jshareholder jwealth. jShareholders jcan jmodify
jtheir jpattern jof jconsumption jthrough jborrowing jand jlending, jmatch jrisk jpreferences, jand
jhopefullyjbalance jtheir jown jcheckbooks j(or jhire ja jqualified jprofessional jto jhelp jthem jwith
jthese jtasks).
Est jtime: j01-05
7. If jthe jinvestment jincreases jthe jfirm‘s jwealth, jit jincreases jthe jfirm‘s jshare jvalue. jMs.
jEspinozajcould jthen jsell jsome jor jall jthese jmore jvaluable jshares jto jprovide jfor jher
jretirement jincome.
Est jtime: j01-05
8. a. Assuming jthat jthe jencabulator jmarket jis jrisky, jan j8% jexpected jreturn
jonjthe jF&H jencabulator jinvestments jmay jbe jinferior jto ja j4% jreturn
jon jU.S.
government jsecurities, jdepending jon jthe jrelative jrisk jbetween jthe jtwo jassets.
b. Unless jthe jfinancial jassets jare jas jsafe jas jU.S. jgovernment jsecurities, jtheir jcost jof
jcapitaljwould jbe jhigher. jThe jCFO jcould jconsider jexpected jreturns jon jassets jwith
jsimilar jrisk.
Est jtime: j06-10
9. Managers jwould jact jin jshareholders‘ jinterests jbecause jthey jhave ja jlegal jduty jto jact jin jtheir
jinterests. j Managers jmay jalso jreceive jcompensation— jbonuses, jstock, jand joption jpayouts
j with jvalue jtied j(roughly) jto jfirm jperformance. jManagers jmay jfear jpersonal jreputational
jdamage jfrom jnot jacting jin jshareholders‘ jinterests. jAnd jmanagers jcan jbe jfired jby jthe jboard
jof jdirectors j(electedjby jshareholders). j If jmanagers jstill jfail jto jact jin jshareholders‘ jinterests,
© jMcGraw jHill jLLC. jAll jrights jreserved. jNo jreproduction jor jdistribution jwithout jthe jprior jwritten jconsent jof jMcGraw
jHill jLLC.
, jshareholders jmay jsell jtheir jshares, jlowering jthe jstock jprice jand jpotentially jcreating jthe
jpossibility jof ja jtakeover, jwhich jcan jagain jlead jto jchanges jin jthe jboard jof jdirectors jand
jsenior jmanagement.
Est jtime: j01-05
© jMcGraw jHill jLLC. jAll jrights jreserved. jNo jreproduction jor jdistribution jwithout jthe jprior jwritten jconsent jof jMcGraw
jHill jLLC.
jHill jLLC.
, Introduction jto jCorporate jFinance
The jvalues jshown jin jthe jsolutions jmay jbe jrounded jfor jdisplay jpurposes. jHowever, jthe janswers
jwerejderived jusing ja jspreadsheet jwithout jany jintermediate jrounding.
Answers jto jProblem jSets
1. a. real
b. executive jairplanes
c. brand jnames
d. financial
e. bonds
*f. investment jor jcapital jexpenditure
*g. capital jbudgeting jor jinvestment
h. financing
*Note jthat jf jand jg jare jinterchangeable jin jthe jquestion.
Est jtime: j01-05
2. A jtrademark, ja jfactory, jundeveloped jland, jand jyour jwork jforce j(c, jd, je, jand jg) jare jall jreal
jassets. jReal jassets jare jidentifiable jas jitems jwith jintrinsic jvalue. jThe jothers jin jthe jlist jare
jfinancial jassets,jthat jis, jthese jassets jderive jvalue jbecause jof ja jcontractual jclaim.
Est jtime: j01-05
3. a. Financial jassets, jsuch jas jstocks jor jbank jloans, jare jclaims jheld jby jinvestors.
jCorporations jsell jfinancial jassets jto jraise jthe jcash jto jinvest jin jreal jassets jsuch jas
jplantjand jequipment. jSome jreal jassets jare jintangible.
b. Capital jexpenditure jmeans jinvestment jin jreal jassets. jFinancing jmeans jraising jthe
jcashjfor jthis jinvestment.
c. The jshares jof jpublic jcorporations jare jtraded jon jstock jexchanges jand jcan jbe
jpurchasedjby ja jwide jrange jof jinvestors. jThe jshares jof jclosely jheld jcorporations jare
jnot jpublicly jtraded jand jare jheld jby ja jsmall jgroup jof jprivate jinvestors.
d. Unlimited jliability: jInvestors jare jresponsible jfor jall jthe jfirm‘s jdebts. jA jsole jproprietor
jhasjunlimited jliability. jInvestors jin jcorporations jhave jlimited jliability. jThey jcan jlose
jtheir jinvestment, jbut jno jmore.
Est jtime: j01-05
© jMcGraw jHill jLLC. jAll jrights jreserved. jNo jreproduction jor jdistribution jwithout jthe jprior jwritten jconsent jof jMcGraw
jHill jLLC.
,4. Items jc jand jd japply jto jcorporations. jBecause jcorporations jhave jperpetual jlife, jownership jcan
jbejtransferred jwithout jaffecting joperations, jand jmanagers jcan jbe jfired jwith jno jeffect jon
jownership. jOther jforms jof jbusiness jmay jhave junlimited jliability jand jlimited jlife.
Est jtime: j01-05
5. Separation jof jownership jfacilitates jthe jkey jattributes jof ja jcorporation, jincluding j limited jliability
jforjinvestors, jtransferability jof jownership, ja jseparate jlegal jpersonality jof jthe jcorporation, jand
jdelegated jcentralized jmanagement. jThese jfour jattributes jprovide jsubstantial jbenefit jfor
jinvestors, jincluding jthe j ability jto jdiversify jtheir jinvestment jamong jmany juncorrelated
jreturns—a jvery jvaluable jtool jexplored jin jlater jchapters. jAlso, jthese jattributes jallow jinvestors
jto jquickly jexit,jenter, jor jshort jsell jan jinvestment, jthereby jgenerating jan jactive jliquid jmarket
jfor jcorporations.
However, jthese jpositive jaspects jalso jintroduce jsubstantial jnegative jexternalities jas jwell. j The
jseparation jof jownership jfrom jmanagement jtypically jleads jto jagency jproblems, jwhere
jmanagersjprefer jto jconsume jprivate jperks jor jmake jother jdecisions jfor jtheir jprivate jbenefit—
rather jthan jmaximize jshareholder jwealth. jShareholders jtend jto jexercise jless joversight jof
jeach jindividual jinvestment jas jtheir jdiversification jincreases. jFinally, jthe jcorporation‘s
jseparate jlegal jpersonalityjmakes jit jdifficult jto jenforce jaccountability jif jthey jexternalize jcosts
jonto jsociety.
Est jtime: j01-05
6. Shareholders jwill jonly jvote jto jmaximize jshareholder jwealth. jShareholders jcan jmodify
jtheir jpattern jof jconsumption jthrough jborrowing jand jlending, jmatch jrisk jpreferences, jand
jhopefullyjbalance jtheir jown jcheckbooks j(or jhire ja jqualified jprofessional jto jhelp jthem jwith
jthese jtasks).
Est jtime: j01-05
7. If jthe jinvestment jincreases jthe jfirm‘s jwealth, jit jincreases jthe jfirm‘s jshare jvalue. jMs.
jEspinozajcould jthen jsell jsome jor jall jthese jmore jvaluable jshares jto jprovide jfor jher
jretirement jincome.
Est jtime: j01-05
8. a. Assuming jthat jthe jencabulator jmarket jis jrisky, jan j8% jexpected jreturn
jonjthe jF&H jencabulator jinvestments jmay jbe jinferior jto ja j4% jreturn
jon jU.S.
government jsecurities, jdepending jon jthe jrelative jrisk jbetween jthe jtwo jassets.
b. Unless jthe jfinancial jassets jare jas jsafe jas jU.S. jgovernment jsecurities, jtheir jcost jof
jcapitaljwould jbe jhigher. jThe jCFO jcould jconsider jexpected jreturns jon jassets jwith
jsimilar jrisk.
Est jtime: j06-10
9. Managers jwould jact jin jshareholders‘ jinterests jbecause jthey jhave ja jlegal jduty jto jact jin jtheir
jinterests. j Managers jmay jalso jreceive jcompensation— jbonuses, jstock, jand joption jpayouts
j with jvalue jtied j(roughly) jto jfirm jperformance. jManagers jmay jfear jpersonal jreputational
jdamage jfrom jnot jacting jin jshareholders‘ jinterests. jAnd jmanagers jcan jbe jfired jby jthe jboard
jof jdirectors j(electedjby jshareholders). j If jmanagers jstill jfail jto jact jin jshareholders‘ jinterests,
© jMcGraw jHill jLLC. jAll jrights jreserved. jNo jreproduction jor jdistribution jwithout jthe jprior jwritten jconsent jof jMcGraw
jHill jLLC.
, jshareholders jmay jsell jtheir jshares, jlowering jthe jstock jprice jand jpotentially jcreating jthe
jpossibility jof ja jtakeover, jwhich jcan jagain jlead jto jchanges jin jthe jboard jof jdirectors jand
jsenior jmanagement.
Est jtime: j01-05
© jMcGraw jHill jLLC. jAll jrights jreserved. jNo jreproduction jor jdistribution jwithout jthe jprior jwritten jconsent jof jMcGraw
jHill jLLC.
