FINANCIAL MANAGEMENT EXAM CH.1-5 QUESTIONS AND ANSWERS

FINANCIAL MANAGEMENT EXAM
CH.1-5 QUESTIONS AND ANSWERS

AnnloandloJacklohavelobeenlopartnersloforloseveralloyears.loTheirlofirm,loAlo&loJloTax
loPreparation,lohaslobeenloverylosuccessful,loaslothelopairloagreeloonlomostlobusiness-

relatedloquestions.loOne
lodisagreement,lohowever,loconcernslothelolegalloformlooflotheirlobusiness.loForlothelopastlot

wo
loyears,loAnnlohaslotriedlotoloconvinceloJacklotoloincorporate.loShelobelieveslothatlothereloislon

olodownsidelotoloincorporatingloandloseesloonlylobenefits.loJacklostrongly
lodisagrees;lohelothinkslothatlothelobusinessloshouldloremainloalopartnershiploforever.lo

loFirst,lotake

loAnn'sloside,loandloexplainlothelopositivelosidelotoloincorporatinglothelobusiness.lo

loNext,lotakeloJack'sloside,loandlostatelotheloadvantageslotoloremainingloalopartnership.lo

loLastly,lowhatloinformationlowouldloyoulowantloifloyoulowereloaskedlotolomakelothelodecisionlo

forloAnnloandloJack?

Whichlooflothelofollowinglostatementsloarelotheloadvantagesloofloalopartnershiplocomparedlot
oloalocorporation?lo-loanswer---Lessloexpensivelotoloorganize.
-Lowerloincomelotaxes.

Whichlooflothelofollowinglostatementsloarelotheloadvantagesloofloalocorporationlocomparedlot
oloalopartnership?lo-loanswer---Ownerslohavelolimitedloliability.
-Longlolifelooflofirm.
-Ownershiploisloreadilylotransferable.

WhatloinformationlowouldloyoulowantloifloyoulowereloaskedlotolomakelothelodecisionloforloAnnl
oandloJack?lo-loanswer---Marital

statusloandlotaxlosituationloofloeachlopartner
-Expectationlooflothelolongevitylooflothelofirm
-Agelooflothelocurrentloowners
-loCurrentloplanlooflosuccession
-loRisklotolerancelooflotheloowners
-loExpectationlooflofuturelotaxlolawlochanges
-loCapitalloneedslooflothelofirm
-loGrowthloprospectslooflothelofirm
-loReasonsloforloeachlopartner'sloviewlooflothelopreferredloformloofloownership

Aslochieflofinancial
loofficer,loyouloareloresponsibeloforloweighinglothelofinancialloprosloandloconslooflothelomanyloi

nvestmentloopportunitieslodevelopedlobyloyour
locompany'sloresearchloandlodevelopmentlodivision.loYouloarelocurrentlyloevaluatinglotwoloc

ompetinglo15-yearloprojectslothatlodifferloinloseveralloways.loRelativelotoloyour
lofirm'slocurrentloEPS,lothelofirstloprojectloisloexpectedlotologenerateloabove-

, averageloEPSloduringlothelofirstlo5loyears,loaverageloEPSloduringlothelosecondlo5
loyears,andlothenlobelow-

averageloEPSloinlothelolastlo5loyears.loThelosecondloprojectloisloexpectedlotologenerate
lobelow-averageloEPSloduringlothelofirstlo5loyears,loaverageloEPSloinlothelosecondlo5

loyears,loandlothenlowell-above-average loEPSloinlothelolastlo5loyears.



Islothelochoiceloobviousloifloyouloexpectlothatlothelosecondloinvestmentlowillloresultloinloalolarg
erlooverallloearningsloincrease?lo-loanswer--No.loThelofirmlocanloearnloaloreturnloonlofundsloit
loreceives,lothereforelotheloreceiptlooflofundsloislopreferredlosoonerloratherlothanlolater.loThelo

firstloprojectlogeneratesloanloabove-averageloreturnloinlothelofirstlo5
loyears,lowhilelothelosecondloprojectlogenerateslobelow-

averageloreturnsloinlothelosameloperiod.

Givenlothelogoallooflothelofirm,lowhatloissueslowillloyouloconsiderlobeforelomakingloalofinal
lodecision?lo/loIssuesloyouloshouldloconsiderlobeforelomakingloalofinallodecisionloare:lo-

loanswer---timing,locashloflows,loandlorisk



Taxloliabilityloforlofirstloyearlo(exampleloonlocardlo7lobelow)lo-loanswer--
Findlo(Taxableloincomelo=lopretaxloordinaryloincomelo+locapitallogains)
andlothenlouselothatloanswerlotolofindlothelotaxloliabilitylofromlothelo'Corplotaxlorateloschedule'lo
datalotable

RossloCompany,loalomanufacturerloof
lopharmaceuticals,lohaslopretaxloordinaryloincomelooflo$500,000loandlohaslojustlosoldloanloa

ssetlopurchasedlotwoloyearsloagolowithloalorealizedlocapitallogainlooflo
$25,000.loUsinglothislotable,localculatelothelotaxloliabilityloforlothelocompanylothisloyear.lo-
loanswer--1.taxloincomelo=lo500klo+lo25klo=lo525k

2.loUsinglotable:lo525klo=lo$178,500lotaxloliability

MeridethloHarperlohasloinvested
lo$25,000loinloSouthwestloDevelopmentloCompany.loThelofirmlohaslorecentlylodeclaredloba

nkruptcyloandlohaslo$60,000loinlounpaidlodebts.loExplainlothelonaturelooflopayments,loif
loany,lobyloMeridethloinloeachlooflothelofollowinglosituations.

a.loSouthwestloDevelopmentloCompanyloisloalosoleloproprietorshiploownedlobyloMs.loHarpe
r.
b.loSouthwestloDevelopmentloCompanyloisloalo50-
50lopartnershiploofloMeridethloHarperloandloChristopherloBlack.
c.loSouthwestloDevelopmentloCompanyloisloalocorporation.lo-loanswer--
a.loMs.loHarperlohaslounlimited
loliability,lowhichlomeanslocreditorslocanloclaimloagainstloherlopersonalloassets.



b.loMs.loHarperlohaslounlimited
loliability,lowhichlomeanslocreditorslocanloclaimloagainstloherlopersonalloassets.



c.loMs.loHarperlohaslolimited
loliability,lowhichloguaranteeslothatloshelocannotloloselomorelothanlothe

lo$25,000losheloinvested.



ItloislotypicalloforloJaneloto
loplan,lomonitor,loandloassessloherlofinanciallopositionlousinglocashloflowslooverloalogiven