,ACCESS Test Bank for Financial Management Theory & Practice 17th Edition B
m m m m m m m m m m m
igham
Brigham/Ehrhardtm Financialm Management:m Theorym &m Practice--Ehrhardt/Brighamm Corporate m Finance:m A m Focused m Approach
Solution and Answer Guide m m m
CHAPTER 1: AN O VERVIEW
M M M M OFM FINAN CIAL MAN AGEM EN T
M M AND M THE M F IN ANCIALM E NVIRONM ENT
TABLE M OF M CONTENTS
ANSWERS mTO m END-OF- CHAPTER mQUESTIONS ............................................... 1
MINIm CASE ......................................................................................... 5
ANSWERS TO END-OF-CHAPTER QUESTIONSm m m
1-1 Definemeachm of mthe mfollow ing m terms:
a. Proprietorship; m partnership; m corporation; m charter;m bylaw s
b. Limitedm partnership; m limitedm liabilitym partnership; m professionalm corporation
c. Stock holder m w ealth m max imization
d. Moneymmark et;mcapitalmmark et;mprimarymmark et;msecondarymmark et
e. Privatem mark ets; m publicm markets;m derivatives
f. Investmentm bank;m financialm servicesm corporation; m financialm intermediary
g. Mutualm fund;m moneym mark etmfund
h. Openm outcrym auction;m dealerm market;m automatedm trading m platform
i. Productionmopportunities; mtimempreferencesmformconsumption
j. Foreignm tradem deficit
k. Algorithmicm trading;m high-frequencym trading
Answer:
a. Amproprietorship,m orm solem proprietorship, m ismambusinessm ow nedm bymonem individual. mAm
partnershipmex istsm whenm tw omorm morempersonsmassociatem tom conductmam business.mInm c
ontrast,mam corporationmismamlegalm entitym createdm bymam state.mThem corporationmismsepa
ratemandmdistinctmfromm itsmownersmandmmanagers. mAmcompanym mustmfilemam charterm to
mbecomemamcorporation. mA m charterm includesm themfollow ing m information: m(1) mnamem ofm
themproposedm corporation, m(2)m typesm ofmactivitiesm itm w illmpursue,m(3)mamountm ofmcapi
talmstock,m(4)mnumbermofm directors, mandm(5)mnamesmandmaddressesmofm directors.mThem
bylawsmaremamsetm ofmrulesm draw nmupmbym themfoundersm ofm them corporation. mIncludedm a
remsuchmpointsmas:m(1)m how mdirectorsmarem tom bemelectedm(allm electedm eachm yearmormpe
rhapsmone-m thirdmeachm yearmform3-
yearmterms),m(2)mwhetherm themex isting mstock holdersmw illmhavem themfirstmrig htm tom buym
anymnewmsharesm themfirmm issues,mandm(3)mproceduresmform chang ing m thembylaw sm thems
elves,mshouldm conditionsm requirem it.
b. Inmamlimitedm partnership, mlimitedmpartners’mliabilities,m investmentmreturnsmandm contr
olmaremlimited,mwhilemgeneralmpartnersmhavemunlimitedmliabilitym andm control.mInmlimit
edmpartnership, m atmleastm onempartnerm ismliablemformallm themdebtsm inm them partnership. m
Amlimitedmliabilitympartnershipm(LLP),msometimesmcalledmamlimitedmliabilitymcompanym(
LLC),mcombinesm themlimitedmliabilitymadvantag emofmam corporationmw ithm them tax madva
ntagesmofmampartnership. m Amprofessionalm corporationm(PC),mknow nm inm somemstatesmasm
amprofessionalmassociationm(PA),mhasm mostmofm thembenefitsmofm incorporationm butm them
participantsmarem notmrelievedmofm professionalm(malpractice) mliability.
©m 2024 mCengage,mISBN:m9780357714485.mAll mRightsmReserved.mMaymnotmbe mscanned,mcopiedmorm duplicated,mormp 1
ostedmtommaccessible
publicly a mwebsite, minm wholemorminm
part. mynursytest.store
,ACCESS Test Bank for Financial Management Theory & Practice 17th Edition B
m m m m m m m m m m m
igham
Brigham/Ehrhardtm Financialm Management:m Theorym &m Practice--Ehrhardt/Brighamm Corporate m Finance:m A m Focused m Approach
c. Stockholdermwealthmmax imizationmismthemappropriatemg oal mformmanag ementmdecisio
ns.mThemrisk mandmtiming massociatedmw ith mex pectedmearning smper mshare mandmcashmflo
wsmaremconsideredminmordermtommax imizemthempricemofmthemfirm’smcommonmstock .m
Maximizing m shareholder’smw ealthmismamdutymthatmneed smtombemfulfill mbymcorporatio
ns.
d. Am moneym marketm ism am financialm marketm form debtm securitiesm w ithm maturitiesm ofm l
essmthanm1m yearm(short-
term).mThemNewmYork m moneym marketm ism them examplemofmmoneym market.mCapitalm
marketsmarem themfinancialm marketsmformlong -
termmdebtmand m corporatem stock s.m Them Newm York m Stock m Ex chang em ism anm exampl
em ofm am capitalm mark et.m Primarym marketsm arem them marketsm inm whichm newlym issu
edm securitiesm aremsoldm form them firstm time.m Secondarym mark etsm arem wherem securi
tiesm arem resoldm afterm initialm issuem inm them primarym mark et.m T hem New m York m Stock m
Exchangem ism am secondarymmarket.
e. Inmprivatemmark ets,m transactionsm aremworkedm outmdirectlym betw eenm twom partiesmandm
structuredm inmanym mannersm thatmappealm tom them.m Bank mloansmandmprivatem placement
sm ofmdebtmw ithm insurancemcompaniesmaremex amplesm ofm privatem marketm transactions. m
Inmpublicmmark ets,mstandardizedm contractsmarem tradedm onm org anizedm ex chang es. m Sec
uritiesm thatmarem issuedm inmpublicmmark ets,m suchmasmcommonm stock mandm corporatem bo
nds,maremultimatelymheldmbymamlarg emnumbermofmindividuals. m Privatemmark etmsecuritie
smaremmoremtailor-
madembutmlessmliquid,m whereasm publicm mark etmsecuritiesmaremmoremliquidm butmsubjec
tmtomgreaterm standardization. mDerivativesmarem thosemunderlying massetm thatm derivesm th
eirmvaluemfrommotherm tradedmassets.mFutures,m options,mforwardsmarem them examplesmof
mderivativemmark et. mTherefore, mthemvaluemof mamderivativemsecuritymismderivedmfrom m th
emvaluemofmanmunderlying mrealm asset.
f. Anminvestmentmbank ermisma mfacilitatormbetw eenmbusinessesmandmsavers.mI nv estmen
tmbank ing mhouses massistm inm them desig nmofmcorporatem securities mand mthenmsellm them
mtomsavers m(investors) min mthemprimarymmark ets. mFinancial mservice m corporationsmofferm
amwidemrangem ofmfinancialm servicesmsuchmasmbrokerag em operations, minsurance, mandmc
ommercialm bank ing.mA mfinancial mintermediarymbuys msecuritymw ith mfundsmthatmismobtai
nedmbymissuing m itsm ow nmsec urities. mA nm ex amplemism am commonm stock m mutualmfundm t
hatmbuy sm com monm stock sm w ithmfundsm obtainedm bym issuing m sharesm inm them mutualm f
und.
g. Ammutualmfund m isman morg anizationm thatm poolsm the m moneym depositedm by m sav ersm to
m buymfinancial minstruments. m T hese minstrumentsmreceive mdividendsm and m interest mo
nmit.m T hemresulting m div idends, m interest,m andm cap italmg ainsm arem d istrib uted m tom the
mfund’sm shareholders m afterm them deduc tionm ofm operating m ex penses. m Differentm fund
smaremdesig nedm tom meetm differentm objec tives. m M oneym mark etmfundsm arem mutualmf
undsmw hic hm investm inm short-term m securitiesm carrym low -
risk mandm alsom offerm theirm shareholdersm interest-bearing m check ing m acc ounts.
h. Anmopenmoutcrym auctionm ism am methodm w herem tradersm meetmfacem tomfac ematm partic
ularmlocationm atmanm ag reedm pric emand m quantity.m T hesem tradersm communicatem w it
hmeachm otherm throug hm handm sig nalsm andm shouts.mI nm am dealerm mark et,m am dealerm ho
ldsmanmin ventorym ofm them securitym andm mak esm am mark etm bym offering m tom buy morm sell
.mOthersm w hom w ishm tom buym orm sellm can msee m them offersm madem bym them d ealers,mand m
canmcontactm them dealerm ofm theirm choice m tom arrange mam transaction. mA n mautomated
mtrading m platform m is m am com puterm sy stem m inm w hichm buy ersm andm sellersm postm orders
mandminm w hic hm tradesm aremautomaticallym ex ecuted mform matc hing m orders.
©m 2024 mCengage,mISBN:m9780357714485.mAll mRightsmReserved.mMaymnotmbe mscanned,mcopiedmorm duplicated,mormp 2
ostedmtommaccessible
publicly a mwebsite, minm wholemorminm
part. mynursytest.store
, i. Production mop portunities mare mthem cash mg enerating mactivity mthat mreq uire mcashmin mt
hempresentm butm havem themab ilitym tom g eneratem morem cashm inmfuture.m T hem hig herm t
he
©m 2024 mCengage,mISBN:m9780357714485.mAll mRightsmReserved.mMaymnotmbe mscanned,mcopiedmorm duplicated,mormp 3
ostedmtommaccessible
publicly a mwebsite, minm wholemorminm
part. mynursytest.store
m m m m m m m m m m m
igham
Brigham/Ehrhardtm Financialm Management:m Theorym &m Practice--Ehrhardt/Brighamm Corporate m Finance:m A m Focused m Approach
Solution and Answer Guide m m m
CHAPTER 1: AN O VERVIEW
M M M M OFM FINAN CIAL MAN AGEM EN T
M M AND M THE M F IN ANCIALM E NVIRONM ENT
TABLE M OF M CONTENTS
ANSWERS mTO m END-OF- CHAPTER mQUESTIONS ............................................... 1
MINIm CASE ......................................................................................... 5
ANSWERS TO END-OF-CHAPTER QUESTIONSm m m
1-1 Definemeachm of mthe mfollow ing m terms:
a. Proprietorship; m partnership; m corporation; m charter;m bylaw s
b. Limitedm partnership; m limitedm liabilitym partnership; m professionalm corporation
c. Stock holder m w ealth m max imization
d. Moneymmark et;mcapitalmmark et;mprimarymmark et;msecondarymmark et
e. Privatem mark ets; m publicm markets;m derivatives
f. Investmentm bank;m financialm servicesm corporation; m financialm intermediary
g. Mutualm fund;m moneym mark etmfund
h. Openm outcrym auction;m dealerm market;m automatedm trading m platform
i. Productionmopportunities; mtimempreferencesmformconsumption
j. Foreignm tradem deficit
k. Algorithmicm trading;m high-frequencym trading
Answer:
a. Amproprietorship,m orm solem proprietorship, m ismambusinessm ow nedm bymonem individual. mAm
partnershipmex istsm whenm tw omorm morempersonsmassociatem tom conductmam business.mInm c
ontrast,mam corporationmismamlegalm entitym createdm bymam state.mThem corporationmismsepa
ratemandmdistinctmfromm itsmownersmandmmanagers. mAmcompanym mustmfilemam charterm to
mbecomemamcorporation. mA m charterm includesm themfollow ing m information: m(1) mnamem ofm
themproposedm corporation, m(2)m typesm ofmactivitiesm itm w illmpursue,m(3)mamountm ofmcapi
talmstock,m(4)mnumbermofm directors, mandm(5)mnamesmandmaddressesmofm directors.mThem
bylawsmaremamsetm ofmrulesm draw nmupmbym themfoundersm ofm them corporation. mIncludedm a
remsuchmpointsmas:m(1)m how mdirectorsmarem tom bemelectedm(allm electedm eachm yearmormpe
rhapsmone-m thirdmeachm yearmform3-
yearmterms),m(2)mwhetherm themex isting mstock holdersmw illmhavem themfirstmrig htm tom buym
anymnewmsharesm themfirmm issues,mandm(3)mproceduresmform chang ing m thembylaw sm thems
elves,mshouldm conditionsm requirem it.
b. Inmamlimitedm partnership, mlimitedmpartners’mliabilities,m investmentmreturnsmandm contr
olmaremlimited,mwhilemgeneralmpartnersmhavemunlimitedmliabilitym andm control.mInmlimit
edmpartnership, m atmleastm onempartnerm ismliablemformallm themdebtsm inm them partnership. m
Amlimitedmliabilitympartnershipm(LLP),msometimesmcalledmamlimitedmliabilitymcompanym(
LLC),mcombinesm themlimitedmliabilitymadvantag emofmam corporationmw ithm them tax madva
ntagesmofmampartnership. m Amprofessionalm corporationm(PC),mknow nm inm somemstatesmasm
amprofessionalmassociationm(PA),mhasm mostmofm thembenefitsmofm incorporationm butm them
participantsmarem notmrelievedmofm professionalm(malpractice) mliability.
©m 2024 mCengage,mISBN:m9780357714485.mAll mRightsmReserved.mMaymnotmbe mscanned,mcopiedmorm duplicated,mormp 1
ostedmtommaccessible
publicly a mwebsite, minm wholemorminm
part. mynursytest.store
,ACCESS Test Bank for Financial Management Theory & Practice 17th Edition B
m m m m m m m m m m m
igham
Brigham/Ehrhardtm Financialm Management:m Theorym &m Practice--Ehrhardt/Brighamm Corporate m Finance:m A m Focused m Approach
c. Stockholdermwealthmmax imizationmismthemappropriatemg oal mformmanag ementmdecisio
ns.mThemrisk mandmtiming massociatedmw ith mex pectedmearning smper mshare mandmcashmflo
wsmaremconsideredminmordermtommax imizemthempricemofmthemfirm’smcommonmstock .m
Maximizing m shareholder’smw ealthmismamdutymthatmneed smtombemfulfill mbymcorporatio
ns.
d. Am moneym marketm ism am financialm marketm form debtm securitiesm w ithm maturitiesm ofm l
essmthanm1m yearm(short-
term).mThemNewmYork m moneym marketm ism them examplemofmmoneym market.mCapitalm
marketsmarem themfinancialm marketsmformlong -
termmdebtmand m corporatem stock s.m Them Newm York m Stock m Ex chang em ism anm exampl
em ofm am capitalm mark et.m Primarym marketsm arem them marketsm inm whichm newlym issu
edm securitiesm aremsoldm form them firstm time.m Secondarym mark etsm arem wherem securi
tiesm arem resoldm afterm initialm issuem inm them primarym mark et.m T hem New m York m Stock m
Exchangem ism am secondarymmarket.
e. Inmprivatemmark ets,m transactionsm aremworkedm outmdirectlym betw eenm twom partiesmandm
structuredm inmanym mannersm thatmappealm tom them.m Bank mloansmandmprivatem placement
sm ofmdebtmw ithm insurancemcompaniesmaremex amplesm ofm privatem marketm transactions. m
Inmpublicmmark ets,mstandardizedm contractsmarem tradedm onm org anizedm ex chang es. m Sec
uritiesm thatmarem issuedm inmpublicmmark ets,m suchmasmcommonm stock mandm corporatem bo
nds,maremultimatelymheldmbymamlarg emnumbermofmindividuals. m Privatemmark etmsecuritie
smaremmoremtailor-
madembutmlessmliquid,m whereasm publicm mark etmsecuritiesmaremmoremliquidm butmsubjec
tmtomgreaterm standardization. mDerivativesmarem thosemunderlying massetm thatm derivesm th
eirmvaluemfrommotherm tradedmassets.mFutures,m options,mforwardsmarem them examplesmof
mderivativemmark et. mTherefore, mthemvaluemof mamderivativemsecuritymismderivedmfrom m th
emvaluemofmanmunderlying mrealm asset.
f. Anminvestmentmbank ermisma mfacilitatormbetw eenmbusinessesmandmsavers.mI nv estmen
tmbank ing mhouses massistm inm them desig nmofmcorporatem securities mand mthenmsellm them
mtomsavers m(investors) min mthemprimarymmark ets. mFinancial mservice m corporationsmofferm
amwidemrangem ofmfinancialm servicesmsuchmasmbrokerag em operations, minsurance, mandmc
ommercialm bank ing.mA mfinancial mintermediarymbuys msecuritymw ith mfundsmthatmismobtai
nedmbymissuing m itsm ow nmsec urities. mA nm ex amplemism am commonm stock m mutualmfundm t
hatmbuy sm com monm stock sm w ithmfundsm obtainedm bym issuing m sharesm inm them mutualm f
und.
g. Ammutualmfund m isman morg anizationm thatm poolsm the m moneym depositedm by m sav ersm to
m buymfinancial minstruments. m T hese minstrumentsmreceive mdividendsm and m interest mo
nmit.m T hemresulting m div idends, m interest,m andm cap italmg ainsm arem d istrib uted m tom the
mfund’sm shareholders m afterm them deduc tionm ofm operating m ex penses. m Differentm fund
smaremdesig nedm tom meetm differentm objec tives. m M oneym mark etmfundsm arem mutualmf
undsmw hic hm investm inm short-term m securitiesm carrym low -
risk mandm alsom offerm theirm shareholdersm interest-bearing m check ing m acc ounts.
h. Anmopenmoutcrym auctionm ism am methodm w herem tradersm meetmfacem tomfac ematm partic
ularmlocationm atmanm ag reedm pric emand m quantity.m T hesem tradersm communicatem w it
hmeachm otherm throug hm handm sig nalsm andm shouts.mI nm am dealerm mark et,m am dealerm ho
ldsmanmin ventorym ofm them securitym andm mak esm am mark etm bym offering m tom buy morm sell
.mOthersm w hom w ishm tom buym orm sellm can msee m them offersm madem bym them d ealers,mand m
canmcontactm them dealerm ofm theirm choice m tom arrange mam transaction. mA n mautomated
mtrading m platform m is m am com puterm sy stem m inm w hichm buy ersm andm sellersm postm orders
mandminm w hic hm tradesm aremautomaticallym ex ecuted mform matc hing m orders.
©m 2024 mCengage,mISBN:m9780357714485.mAll mRightsmReserved.mMaymnotmbe mscanned,mcopiedmorm duplicated,mormp 2
ostedmtommaccessible
publicly a mwebsite, minm wholemorminm
part. mynursytest.store
, i. Production mop portunities mare mthem cash mg enerating mactivity mthat mreq uire mcashmin mt
hempresentm butm havem themab ilitym tom g eneratem morem cashm inmfuture.m T hem hig herm t
he
©m 2024 mCengage,mISBN:m9780357714485.mAll mRightsmReserved.mMaymnotmbe mscanned,mcopiedmorm duplicated,mormp 3
ostedmtommaccessible
publicly a mwebsite, minm wholemorminm
part. mynursytest.store
