STUDY NOTES & REFERENCE GUIDE
Parrino et al. Fundamentals of Corporate Finance, 5th edition Solutions Manual
Solution Manual for
Fundamentals of Corporate Finance, 5th Edition by Robert Parrino, David Kidwell, Bates &
Gillan. ISBN 9781119795438
Chapter 1-21
StudyNexa Stuvia | Page 1 of 504
, STUDY NOTES & REFERENCE GUIDE
Parrino et al. Fundamentals of Corporate Finance, 5th edition Solutions Manual
Chapter 1
The Financial Manager and the Firm
Before You Go On Questions and Answers
Section 1.1
1. What are the three basic types of financial decisions managers must make?
The three basic decisions each business must make are the capital budgeting decision, the financing
decision, and the working capital management decision. These decisions determine which productive
assets to buy, how to pay for or finance these purchases, and how to manage the day-to-day financial
matters so the company can pay its bills.
2. Explain why you would make an investment if the value of the expected cash flows
exceeds the cost of the project.
You would accept an investment project whose cash flows exceed the cost of the project because
such projects will increase the value of the firm, making the owners wealthier. Most people start a
business to increase their wealth. Remember that the cost of capital (time value of money) will affect
the decision about whether to invest.
3. Why are capital budgeting decisions among the most important decisions in the life of a firm?
The capital budgeting decisions are considered the most important in the life of the firm because these
decisions determine which productive assets the firm purchases, and which assets generate most of
the firm’s cash flows. Furthermore, capital budgeting decisions are
StudyNexa Stuvia | Page 2 of 504
, STUDY NOTES & REFERENCE GUIDE
Parrino et al. Fundamentals of Corporate Finance, 5th edition Solutions Manual
long-term decisions and if you make a mistake in selecting a productive asset, you are stuck with the
decision for a long time.
Section 1.2
1. Why are many businesses operated as sole proprietorships or partnerships?
Many businesses elect to operate as sole proprietorships or partnerships because of the small
operating scale and capital base of their firms. Both of these forms of business organization are fairly
easy to start and impose few regulations on the owners.
2. What are some advantages and disadvantages of operating as a public corporation? The main
advantages of operating as a public corporation are the access to the public securities markets, which
makes it easier to raise large amounts of capital, and the ease of ownership transfer. All the
shareholders have to do is to call their broker to buy or sell shares of stock. Since a public corporation
usually has many shares outstanding, large blocks of securities can be purchased or sold without an
appreciable impact on the price of the stock. The major disadvantage of corporations is the tax
situation. Not only must the corporation pay taxes on its income, but the owners of the corporation get
taxed again when dividends are paid to them. This is referred to as double taxation. In addition to
taxes, public corporations are subject to stringent reporting requirements, and the incentives may
convince managers to focus on shorter-term profitability than longer-term wealth creation.
3. Explain why professional partnerships such as physicians’ groups organize as limited
liability partnerships.
Professional partnerships such as physicians’ groups desire to organize as limited liability partnerships
(LLPs) to take advantage of the tax arrangements of partnerships combined with the advantages of the
limited liability of a corporation. By operating as an LLP, the partnership is able to avoid a potential
financial disaster resulting from the misconduct of one partner.
Section 1.3
1. What are the major responsibilities of the CFO?
StudyNexa Stuvia | Page 3 of 504
, STUDY NOTES & REFERENCE GUIDE
Parrino et al. Fundamentals of Corporate Finance, 5th edition Solutions Manual
The major responsibilities of a CFO include analysis and recommendations for financial decisions.
The CFO, who reports directly to the CEO, focuses on managing all aspects of the firm’s finances and
works with the CEO on strategic issues. The CFO also interacts with staff in other functional areas on
a regular basis related to financial issues that affect the business.
2. Identify the financial officers who typically report to the CFO and describe their duties. The
financial officers discussed in the chapter who report to the CFO are the controller, the treasurer, the
risk manager, and the internal auditor.
The controller is the firm’s chief accounting officer, and thus prepares the financial statements and
taxes. This position also requires close cooperation with the external auditors. The treasurer’s
responsibility is the collection and disbursement of cash, investing excess cash, raising new capital,
handling foreign exchange, and overseeing the company’s pension fund management. This individual
also assists the CFO in handling important Wall Street relationships. The risk manager monitors and
manages the firm’s risk exposure in financial and commodity markets and the firm’s relationships with
insurance providers. Finally, the internal auditor is responsible for conducting risk assessment and
performing audits of high- risk areas.
3. Why does the internal auditor report to both the CFO and the audit committee of the board of
directors?
The internal auditor reports to the CFO on a day-to-day basis but is ultimately accountable for
reporting any accounting irregularities to the board of directors. The dual reporting system serves as a
check to ensure that there are no discrepancies in the company’s financial statements.
Section 1.4
1. Why is profit maximization an unsatisfactory goal for managing a firm?
Profit maximization is not a satisfactory goal when managing a firm because it is rather difficult to define
profits since accountants can apply and interpret the same accounting
StudyNexa Stuvia | Page 4 of 504
Parrino et al. Fundamentals of Corporate Finance, 5th edition Solutions Manual
Solution Manual for
Fundamentals of Corporate Finance, 5th Edition by Robert Parrino, David Kidwell, Bates &
Gillan. ISBN 9781119795438
Chapter 1-21
StudyNexa Stuvia | Page 1 of 504
, STUDY NOTES & REFERENCE GUIDE
Parrino et al. Fundamentals of Corporate Finance, 5th edition Solutions Manual
Chapter 1
The Financial Manager and the Firm
Before You Go On Questions and Answers
Section 1.1
1. What are the three basic types of financial decisions managers must make?
The three basic decisions each business must make are the capital budgeting decision, the financing
decision, and the working capital management decision. These decisions determine which productive
assets to buy, how to pay for or finance these purchases, and how to manage the day-to-day financial
matters so the company can pay its bills.
2. Explain why you would make an investment if the value of the expected cash flows
exceeds the cost of the project.
You would accept an investment project whose cash flows exceed the cost of the project because
such projects will increase the value of the firm, making the owners wealthier. Most people start a
business to increase their wealth. Remember that the cost of capital (time value of money) will affect
the decision about whether to invest.
3. Why are capital budgeting decisions among the most important decisions in the life of a firm?
The capital budgeting decisions are considered the most important in the life of the firm because these
decisions determine which productive assets the firm purchases, and which assets generate most of
the firm’s cash flows. Furthermore, capital budgeting decisions are
StudyNexa Stuvia | Page 2 of 504
, STUDY NOTES & REFERENCE GUIDE
Parrino et al. Fundamentals of Corporate Finance, 5th edition Solutions Manual
long-term decisions and if you make a mistake in selecting a productive asset, you are stuck with the
decision for a long time.
Section 1.2
1. Why are many businesses operated as sole proprietorships or partnerships?
Many businesses elect to operate as sole proprietorships or partnerships because of the small
operating scale and capital base of their firms. Both of these forms of business organization are fairly
easy to start and impose few regulations on the owners.
2. What are some advantages and disadvantages of operating as a public corporation? The main
advantages of operating as a public corporation are the access to the public securities markets, which
makes it easier to raise large amounts of capital, and the ease of ownership transfer. All the
shareholders have to do is to call their broker to buy or sell shares of stock. Since a public corporation
usually has many shares outstanding, large blocks of securities can be purchased or sold without an
appreciable impact on the price of the stock. The major disadvantage of corporations is the tax
situation. Not only must the corporation pay taxes on its income, but the owners of the corporation get
taxed again when dividends are paid to them. This is referred to as double taxation. In addition to
taxes, public corporations are subject to stringent reporting requirements, and the incentives may
convince managers to focus on shorter-term profitability than longer-term wealth creation.
3. Explain why professional partnerships such as physicians’ groups organize as limited
liability partnerships.
Professional partnerships such as physicians’ groups desire to organize as limited liability partnerships
(LLPs) to take advantage of the tax arrangements of partnerships combined with the advantages of the
limited liability of a corporation. By operating as an LLP, the partnership is able to avoid a potential
financial disaster resulting from the misconduct of one partner.
Section 1.3
1. What are the major responsibilities of the CFO?
StudyNexa Stuvia | Page 3 of 504
, STUDY NOTES & REFERENCE GUIDE
Parrino et al. Fundamentals of Corporate Finance, 5th edition Solutions Manual
The major responsibilities of a CFO include analysis and recommendations for financial decisions.
The CFO, who reports directly to the CEO, focuses on managing all aspects of the firm’s finances and
works with the CEO on strategic issues. The CFO also interacts with staff in other functional areas on
a regular basis related to financial issues that affect the business.
2. Identify the financial officers who typically report to the CFO and describe their duties. The
financial officers discussed in the chapter who report to the CFO are the controller, the treasurer, the
risk manager, and the internal auditor.
The controller is the firm’s chief accounting officer, and thus prepares the financial statements and
taxes. This position also requires close cooperation with the external auditors. The treasurer’s
responsibility is the collection and disbursement of cash, investing excess cash, raising new capital,
handling foreign exchange, and overseeing the company’s pension fund management. This individual
also assists the CFO in handling important Wall Street relationships. The risk manager monitors and
manages the firm’s risk exposure in financial and commodity markets and the firm’s relationships with
insurance providers. Finally, the internal auditor is responsible for conducting risk assessment and
performing audits of high- risk areas.
3. Why does the internal auditor report to both the CFO and the audit committee of the board of
directors?
The internal auditor reports to the CFO on a day-to-day basis but is ultimately accountable for
reporting any accounting irregularities to the board of directors. The dual reporting system serves as a
check to ensure that there are no discrepancies in the company’s financial statements.
Section 1.4
1. Why is profit maximization an unsatisfactory goal for managing a firm?
Profit maximization is not a satisfactory goal when managing a firm because it is rather difficult to define
profits since accountants can apply and interpret the same accounting
StudyNexa Stuvia | Page 4 of 504
