,ACCESS Test Bank for Corporate Finance 8th Edition Ehrhardt
x x x x x x x x
Brigham/EhrhardtxFinancialxManagement:xTheoryx&xPractice--Ehrhardt/BrighamxCorporatexFinance:xAxFocusedxApproach
Solution and Answer Guide x x x
CHAPTERx 1:x ANx OVERVIEWx OFx FINANCIALx MANAGEMENTx ANDx THEx FINANCIALx ENVIRONMENT
TABLE OF CONTENTS
x x
ANSWERSxTOxEND-OF-CHAPTERxQUESTIONS................................................................... 1
MINIxCASE..................................................................................................................................... 5
ANSWERS TO END-OF-CHAPTER QUESTIONS
x x x
1-1 Definexeachxofxthexfollowingxterms:
a. Proprietorship;x partnership; x corporation; x charter;x bylaws
b. Limitedx partnership;x limitedx liabilityx partnership;x professionalx corporation
c. Stockholderxwealthxmaximization
d. Moneyxmarket;xcapitalxmarket;xprimaryxmarket;xsecondary xmarket
e. Privatex markets; x publicx markets;x derivatives
f. Investmentx bank;x financialx servicesx corporation;x financialx intermediary
g. Mutualxfund;xmoney xmarketxfund
h. Openx outcryx auction; x dealerx market;x automatedx tradingx platform
i. Productionxopportunities; xtimexpreferences xforxconsumption
j. Foreignx tradex deficit
k. Algorithmic x trading; x high-frequencyx trading
Answer:
a. Axproprietorship, xorxsolexproprietorship, xisxaxbusinessxownedxbyxonexindividual.xAxpartn
ershipx existsx whenx twox orx morex personsx associatex toxconductx ax business.x Inxcontrast,xa
xcorporation xis xa xlegalxentity xcreated xbyxa xstate. xThe xcorporation xis xseparate x and x distin
ctxfromx itsxownersxandxmanagers.xAxcompanyx mustx filex axcharterxtoxbecomexaxcorporat
ion.xAxcharterxincludesxthexfollowingxinformation: x(1)xnamexofxthexproposedxcorporatio
n,x(2)xtypesxofxactivitiesxitxwillxpursue,x(3)xamountxofxcapitalxstock,x(4)xnumberx ofxdirec
tors,xandx(5)x namesxandxaddressesxofx directors. xThexbylawsxarexaxsetx ofxrulesxdrawnxupx
byxthexfoundersxofxthexcorporation. xIncludedxarex suchxpointsxas:x(1)xhowxdirectorsxarext
oxbexelectedx(allxelectedxeachxyearxorxperhapsxone-xthirdxeachxyearxforx3-
yearxterms),x(2)xwhetherxthexexistingxstockholdersxwillxhavexthexfirstxrightxtoxbuyxanyxn
ewx sharesxthexfirmxissues,xandx(3)xproceduresxforxchangingxthexbylawsxthemselves, xshou
ldxconditionsxrequirexit.
b. Inxaxlimitedxpartnership, xlimitedxpartners’xliabilities,xinvestmentxreturnsxandxcontrolxa
rexlimited,xwhilexgeneralxpartnersxhavexunlimited xliabilityxandxcontrol.xInxlimitedxpart
nership,xatxleastxonexpartnerxisxliablexforxallxthexdebtsxinxthexpartnership. xAxlimitedxlia
bilityxpartnershipx(LLP),xsometimesxcalledxaxlimitedxliabilityxcompanyx(LLC),xcombinesxt
hexlimitedxliabilityxadvantagexofxaxcorporationxwithxthextaxxadvantagesxofxaxpartnershi
p.xAxprofessionalxcorporationx(PC),xknownxinxsomexstatesxasxaxprofessionalxassociationx
(PA),xhasxmostx ofxthexbenefitsxofxincorporation xbutxthexparticipants xarexnotxrelievedxof
xprofessional x(malpractice) xliability.
©x2024xCengage,xISBN:x9780357714485.xAllxRightsxReserved.xMayxnotxbexscanned,xcopiedxorxduplicated,xorxpostedxto 1
a
xpublicly xaccessiblexwebsite,xinxwholexorxinxpart
. mynursytest.store
,ACCESS Test Bank for Corporate Finance 8th Edition Ehrhardt
x x x x x x x x
Brigham/EhrhardtxFinancialxManagement:xTheoryx&xPractice--Ehrhardt/BrighamxCorporatexFinance:xAxFocusedxApproach
c. Stockholderxwealthxmaximizationxisxthexappropriatexgoalxforxmanagementxdecisions.xT
hexriskxandxtimingxassociatedxwithxexpectedxearningsxperxsharexandxcashxflowsxarexco
nsideredxinxorderxtoxmaximizexthexpricexofxthexfirm’sxcommonxstock.xMaximizingxshar
eholder’sxwealthxisxaxdutyxthatxneedsxtoxbexfulfillxbyxcorporations.
d. Ax moneyx marketx isx ax financialx marketx forx debtx securitiesx withx maturitiesx ofx lessxt
hanx 1x yearx (short-
term).x Thex Newx Yorkx moneyx marketx isx thex examplex ofx moneyxmarket.x Capitalx mar
ketsx arex thex financialx marketsx forx long-
termx debtx andxcorporatexstocks.xThexNewxYorkxStockxExchangexxisxanxxexamplexxofxax
capitalxmarket. xPrimaryxmarketsxarexthexxmarketsxinxxwhichxnewlyxxissuedxsecurities xa
rexsoldx forx thex firstx time.x Secondaryx marketsx arex wherex securitiesx arex resoldx after
xinitial x issue x in x the x primary x market. x Thex New x York x Stock x Exchange x is x a x secondary x
market.
e. Inxprivatexmarkets, xtransactionsxarexworkedxoutxdirectlyxbetweenxtwoxpartiesxandxstru
cturedxinx anyxmannersxthatx appealxtoxthem.xBankx loansxandx privatex placements xofx deb
txwithxinsurancexcompaniesxarexexamplesxofxprivatexmarketxtransactions.xInxpublicx ma
rkets,xstandardizedxcontractsx arex tradedx onx organizedx exchanges. xSecuritiesx thatx arex i
ssuedx inx publicx markets,x suchx asxcommonx stockx andxcorporatexbonds,xarexultimatelyxh
eldxbyxaxlargexnumberxofxindividuals. xPrivatexmarketxsecuritiesxarexmorextailor-
madexbutxlessxliquid,xwhereasxpublicxmarketxsecuritiesxarexmorexliquidxbutxsubjectxtoxg
reaterxstandardization. xDerivativesxarexthosexunderlyingxassetxthatxderivesxtheirxvaluex
fromxotherxtradedxassets.xFutures,xoptions,xforwardsxarexthexexamplesxofxderivative xm
arket.xTherefore,xthexvaluexofxaxderivativexsecurityxisxderivedxfromxthexvaluexofxanxunder
lyingxrealxasset.
f. Anxinvestmentxbankerxisxaxfacilitatorxbetweenxbusinessesxandxsavers.xInvestment xba
nkingxhousesxassistxinxthexdesignxofxcorporatexsecurities xandxthenxsellxthemxtoxsave
rsx(investors)xinxthexprimaryxmarkets.xFinancialxservicexcorporationsxofferxaxwidexrangex
ofxfinancialxservicesxsuchxasxbrokeragexoperations,xinsurance,xandxcommercialxbankin
g.xAxfinancialxintermediaryxbuysxsecurityxwithxfundsxthatxisxobtainedxbyxissuingxitsxownx
securities.xAnxexamplexisxaxcommonxstockxmutualxfundxthatxbuysxcommonxstocksxwit
hxfundsxobtainedxbyxissuingxsharesxinxthexmutualxfund.
g. Ax mutualx fundxisx anx organizationx thatx poolsx thex moneyx depositedx byxsaversx toxbuyx
financialxinstruments.xThesexinstruments xreceivexdividendsxandxinterestxonxit.xThexr
esultingxdividends,xinterest,xandxcapitalxgainsxarexdistributedxtoxthexfund’s xshareh
oldersxafterxthexdeductionxofxoperatingxexpenses.xDifferentxfundsxarexdesignedxtox
meetxdifferentxobjectives.xMoneyxmarketxfundsxarexmutualxfundsxwhichxinvestxinxs
hort-termxsecurities xcarryxlow-riskxandxalsoxofferxtheirxshareholders xinterest-
bearingx checkingx accounts.
h. Anxopenxoutcry xauctionxisxaxmethodxwherextradersxmeetxfacextoxfacexatxparticularxlo
cationxatxanxagreedxpricexandxquantity.xThesextradersxcommunicatexwithxeachxoth
erxthroughxhandxsignalsxandxshouts.xInxaxdealerxmarket,xaxdealerxholdsxanxinventory
xofxthe xsecurity xand xmakes xaxmarket xby xoffering xtoxbuy xorxsell. xOthers xwho xwish xtox
buyxorxsellxcanxseexthexoffersxmadexbyxthexdealers,xandxcanxcontactxthexdealerxofxt
heirxchoicextoxarrangexaxtransaction.xAnxautomatedxtradingxplatformx isx ax computer
x system x inx which x buyersx and x sellers x post x orders x and x inxwhich xtrades xare xautomatic
allyxexecutedxforxmatchingxorders.
i. Productionxopportunities xarexthexcashxgeneratingxactivityxthatxrequirexcashxinxthexp
resentxbutxhavexthexability xtoxgeneratexmorexcashxinxfuture.xThexhigherxthe
©x2024xCengage,xISBN:x9780357714485.xAllxRightsxReserved.xMayxnotxbexscanned,xcopiedxorxduplicated,xorxpostedxto 2
a
xpublicly xaccessiblexwebsite,xinxwholexorxinxpart
. mynursytest.store
, ACCESS Test Bank for Corporate Finance 8th Edition Ehrhardt
x x x x x x x x
Brigham/EhrhardtxFinancialxManagement:xTheoryx&xPractice--Ehrhardt/BrighamxCorporatexFinance:xAxFocusedxApproach
productionxopportunities,xthexmorexcashxwillxbexdemandedxnow.xConsumptionxtim
expreferences xreferxtoxthexpreferredxpatternxofxconsumption.xConsumers’xtimexpref
erencesx forx consumptionx establishx howx muchx consumptionx theyx arex willingxtoxsav
exorxconsumexatxdifferentxlevelsxofxinterest.xItxmajorlyximpactsxrequiredxratexofxret
urn.
j. Axforeignxtradexdeficitxoccursxwhenxbusinessesxandxindividuals xxinxxthexxUnitedxStatesx
importxmorexgoodsxfromxforeignxcountriesxxcomparedxxtoxxexports.xxThisxcausex anx inc
reasex inx anx interestx rate.x Tradex deficitsx mustx bex financed, x andx thexmainx sourcex of
x financing x is x debt. x Foreign x tradex surplus x occurs x when x exports x arexmorex thanx impo
rts.x Asx thex tradex deficitx increases,x thex debtx financingx increases,xdrivingx upx interes
tx rates.x U.S.x interestx ratesx mustx bex competitive x withx foreignxinterestx rates;x ifx thex
Federalx Reservex attemptsx tox setx interestx ratesx lowerx thanxforeignx rates,x foreigners
x willx sellx U.S. x bonds, x decreasing x bond x prices, x resultingx inxhigher x U.S.x rates.
k. Algorithmic xtradingx occursxwhenx computers xarexprogramedxtoxbuyx orxsellxstocksxo
nxbehalfxofxstockholders xifxaxparticularxeventxorxsequencexofxeventsxhappens.xHig
hxfrequency xtradingx(HFT)xisxaxtypexofxalgorithmic xtradingxinxwhichxHFTxtraders,x
whichx arexcomputers,xbuyxandxsellxhundreds xorxthousands xofxtimesxaxday.xMostxH
FTxisxdonexbyxfirmsxthatxarexcreatedxforxthisxpurposexbecausexHFTxrequiresxexpen
sivexcomputerxsystemsxandxhighlyxpaidxprogrammers.
1-2 Whatxarexthexthreexprincipalxformsxofxbusiness xorganization?xWhatxarexthexa
dvantagesxandxdisadvantages xofxeach?
Answer:
Solexproprietorship, xpartnership,xandxcorporationxarexthexthreexprincipalxformsxofxbusi
nessxorganization. xThexadvantagesxofxthex Solexproprietorshipxandxpartnershipxincludesx
easexandxlowxcostxofxformation.xThexadvantages xofxthexcorporationxincludexlimitedxliabi
lity,xindefinitexlife,xeasexofxownershipxtransfer,xandxaccessxtoxcapitalxmarkets.
Thexdisadvantages xofxaxsolexproprietorshipxarex(1)xdifficultyxinxobtainingxlargexsums
xofxcapital, x(2)xunlimited xpersonal xliability xforxbusiness xdebts, xand x(3) xlimited xlife.xThe x
disadvantagesxofxaxpartnershipxarex(1)xunlimitedxliability,x(2)xlimitedxlife,x(3)xdifficultyx
ofxtransferringxownership,xandx(4)xdifficultyxofxraisingxlargexamountsxofxcapital.xThexdis
advantages xofxaxcorporationxarex(1)xdoublextaxationxofxearningsxandx(2)xrequirements xtox
filexstatexandxfederalxreportsxforxregistration,xwhichxarexexpensive,xcomplex,xandxtime
-consuming.
1-3 Whatxisxaxfirm’sxfundamentalxvaluex(whichxisxalsoxcalledxitsxintrinsicxvalue)?xWhatxmightxc
ausexaxfirm’sxintrinsic xvaluextoxbexdifferentxfromxitsxactualxmarketxvalue?
Answer:
Ax firm’sx fundamental, x orx intrinsic,x valuex isx thex presentx valuex ofx itsx freex cashx flowsxwhen
x discounted x at x the x weighted x average x cost x of x capital. x If x the x market x price x reflects xallxrele
vantxinformation, xthenxthexobservedxpricexisxalsoxthexintrinsicxprice.xIntrinsic xvaluex depen
dsx onx allx ofx itsx expected x futurex cashx flows.
1-4 EdmundxCorporationxrecentlyxmadexaxlargexinvestmentxtoxupgradexitsxtechnology.
Althoughxtheseximprovementsxwon’txhavexmuchxofxanximpactxonxperformancexinxthexshor
txrun,xtheyxarexexpectedxtoxreducexfuturexcostsxsignificantly. xWhatximpactxwillxthisxinvestm
entxhavexonxEdmund’sxearningsxperxsharexthisxyear?xWhatximpactxmightxthisxinvestmentx
havexonxthexcompany’s xintrinsicxvaluexandxstockxprice?
©x2024xCengage,xISBN:x9780357714485.xAllxRightsxReserved.xMayxnotxbexscanned,xcopiedxorxduplicated,xorxpostedxto 3
a
xpublicly xaccessiblexwebsite,xinxwholexorxinxpart
. mynursytest.store
x x x x x x x x
Brigham/EhrhardtxFinancialxManagement:xTheoryx&xPractice--Ehrhardt/BrighamxCorporatexFinance:xAxFocusedxApproach
Solution and Answer Guide x x x
CHAPTERx 1:x ANx OVERVIEWx OFx FINANCIALx MANAGEMENTx ANDx THEx FINANCIALx ENVIRONMENT
TABLE OF CONTENTS
x x
ANSWERSxTOxEND-OF-CHAPTERxQUESTIONS................................................................... 1
MINIxCASE..................................................................................................................................... 5
ANSWERS TO END-OF-CHAPTER QUESTIONS
x x x
1-1 Definexeachxofxthexfollowingxterms:
a. Proprietorship;x partnership; x corporation; x charter;x bylaws
b. Limitedx partnership;x limitedx liabilityx partnership;x professionalx corporation
c. Stockholderxwealthxmaximization
d. Moneyxmarket;xcapitalxmarket;xprimaryxmarket;xsecondary xmarket
e. Privatex markets; x publicx markets;x derivatives
f. Investmentx bank;x financialx servicesx corporation;x financialx intermediary
g. Mutualxfund;xmoney xmarketxfund
h. Openx outcryx auction; x dealerx market;x automatedx tradingx platform
i. Productionxopportunities; xtimexpreferences xforxconsumption
j. Foreignx tradex deficit
k. Algorithmic x trading; x high-frequencyx trading
Answer:
a. Axproprietorship, xorxsolexproprietorship, xisxaxbusinessxownedxbyxonexindividual.xAxpartn
ershipx existsx whenx twox orx morex personsx associatex toxconductx ax business.x Inxcontrast,xa
xcorporation xis xa xlegalxentity xcreated xbyxa xstate. xThe xcorporation xis xseparate x and x distin
ctxfromx itsxownersxandxmanagers.xAxcompanyx mustx filex axcharterxtoxbecomexaxcorporat
ion.xAxcharterxincludesxthexfollowingxinformation: x(1)xnamexofxthexproposedxcorporatio
n,x(2)xtypesxofxactivitiesxitxwillxpursue,x(3)xamountxofxcapitalxstock,x(4)xnumberx ofxdirec
tors,xandx(5)x namesxandxaddressesxofx directors. xThexbylawsxarexaxsetx ofxrulesxdrawnxupx
byxthexfoundersxofxthexcorporation. xIncludedxarex suchxpointsxas:x(1)xhowxdirectorsxarext
oxbexelectedx(allxelectedxeachxyearxorxperhapsxone-xthirdxeachxyearxforx3-
yearxterms),x(2)xwhetherxthexexistingxstockholdersxwillxhavexthexfirstxrightxtoxbuyxanyxn
ewx sharesxthexfirmxissues,xandx(3)xproceduresxforxchangingxthexbylawsxthemselves, xshou
ldxconditionsxrequirexit.
b. Inxaxlimitedxpartnership, xlimitedxpartners’xliabilities,xinvestmentxreturnsxandxcontrolxa
rexlimited,xwhilexgeneralxpartnersxhavexunlimited xliabilityxandxcontrol.xInxlimitedxpart
nership,xatxleastxonexpartnerxisxliablexforxallxthexdebtsxinxthexpartnership. xAxlimitedxlia
bilityxpartnershipx(LLP),xsometimesxcalledxaxlimitedxliabilityxcompanyx(LLC),xcombinesxt
hexlimitedxliabilityxadvantagexofxaxcorporationxwithxthextaxxadvantagesxofxaxpartnershi
p.xAxprofessionalxcorporationx(PC),xknownxinxsomexstatesxasxaxprofessionalxassociationx
(PA),xhasxmostx ofxthexbenefitsxofxincorporation xbutxthexparticipants xarexnotxrelievedxof
xprofessional x(malpractice) xliability.
©x2024xCengage,xISBN:x9780357714485.xAllxRightsxReserved.xMayxnotxbexscanned,xcopiedxorxduplicated,xorxpostedxto 1
a
xpublicly xaccessiblexwebsite,xinxwholexorxinxpart
. mynursytest.store
,ACCESS Test Bank for Corporate Finance 8th Edition Ehrhardt
x x x x x x x x
Brigham/EhrhardtxFinancialxManagement:xTheoryx&xPractice--Ehrhardt/BrighamxCorporatexFinance:xAxFocusedxApproach
c. Stockholderxwealthxmaximizationxisxthexappropriatexgoalxforxmanagementxdecisions.xT
hexriskxandxtimingxassociatedxwithxexpectedxearningsxperxsharexandxcashxflowsxarexco
nsideredxinxorderxtoxmaximizexthexpricexofxthexfirm’sxcommonxstock.xMaximizingxshar
eholder’sxwealthxisxaxdutyxthatxneedsxtoxbexfulfillxbyxcorporations.
d. Ax moneyx marketx isx ax financialx marketx forx debtx securitiesx withx maturitiesx ofx lessxt
hanx 1x yearx (short-
term).x Thex Newx Yorkx moneyx marketx isx thex examplex ofx moneyxmarket.x Capitalx mar
ketsx arex thex financialx marketsx forx long-
termx debtx andxcorporatexstocks.xThexNewxYorkxStockxExchangexxisxanxxexamplexxofxax
capitalxmarket. xPrimaryxmarketsxarexthexxmarketsxinxxwhichxnewlyxxissuedxsecurities xa
rexsoldx forx thex firstx time.x Secondaryx marketsx arex wherex securitiesx arex resoldx after
xinitial x issue x in x the x primary x market. x Thex New x York x Stock x Exchange x is x a x secondary x
market.
e. Inxprivatexmarkets, xtransactionsxarexworkedxoutxdirectlyxbetweenxtwoxpartiesxandxstru
cturedxinx anyxmannersxthatx appealxtoxthem.xBankx loansxandx privatex placements xofx deb
txwithxinsurancexcompaniesxarexexamplesxofxprivatexmarketxtransactions.xInxpublicx ma
rkets,xstandardizedxcontractsx arex tradedx onx organizedx exchanges. xSecuritiesx thatx arex i
ssuedx inx publicx markets,x suchx asxcommonx stockx andxcorporatexbonds,xarexultimatelyxh
eldxbyxaxlargexnumberxofxindividuals. xPrivatexmarketxsecuritiesxarexmorextailor-
madexbutxlessxliquid,xwhereasxpublicxmarketxsecuritiesxarexmorexliquidxbutxsubjectxtoxg
reaterxstandardization. xDerivativesxarexthosexunderlyingxassetxthatxderivesxtheirxvaluex
fromxotherxtradedxassets.xFutures,xoptions,xforwardsxarexthexexamplesxofxderivative xm
arket.xTherefore,xthexvaluexofxaxderivativexsecurityxisxderivedxfromxthexvaluexofxanxunder
lyingxrealxasset.
f. Anxinvestmentxbankerxisxaxfacilitatorxbetweenxbusinessesxandxsavers.xInvestment xba
nkingxhousesxassistxinxthexdesignxofxcorporatexsecurities xandxthenxsellxthemxtoxsave
rsx(investors)xinxthexprimaryxmarkets.xFinancialxservicexcorporationsxofferxaxwidexrangex
ofxfinancialxservicesxsuchxasxbrokeragexoperations,xinsurance,xandxcommercialxbankin
g.xAxfinancialxintermediaryxbuysxsecurityxwithxfundsxthatxisxobtainedxbyxissuingxitsxownx
securities.xAnxexamplexisxaxcommonxstockxmutualxfundxthatxbuysxcommonxstocksxwit
hxfundsxobtainedxbyxissuingxsharesxinxthexmutualxfund.
g. Ax mutualx fundxisx anx organizationx thatx poolsx thex moneyx depositedx byxsaversx toxbuyx
financialxinstruments.xThesexinstruments xreceivexdividendsxandxinterestxonxit.xThexr
esultingxdividends,xinterest,xandxcapitalxgainsxarexdistributedxtoxthexfund’s xshareh
oldersxafterxthexdeductionxofxoperatingxexpenses.xDifferentxfundsxarexdesignedxtox
meetxdifferentxobjectives.xMoneyxmarketxfundsxarexmutualxfundsxwhichxinvestxinxs
hort-termxsecurities xcarryxlow-riskxandxalsoxofferxtheirxshareholders xinterest-
bearingx checkingx accounts.
h. Anxopenxoutcry xauctionxisxaxmethodxwherextradersxmeetxfacextoxfacexatxparticularxlo
cationxatxanxagreedxpricexandxquantity.xThesextradersxcommunicatexwithxeachxoth
erxthroughxhandxsignalsxandxshouts.xInxaxdealerxmarket,xaxdealerxholdsxanxinventory
xofxthe xsecurity xand xmakes xaxmarket xby xoffering xtoxbuy xorxsell. xOthers xwho xwish xtox
buyxorxsellxcanxseexthexoffersxmadexbyxthexdealers,xandxcanxcontactxthexdealerxofxt
heirxchoicextoxarrangexaxtransaction.xAnxautomatedxtradingxplatformx isx ax computer
x system x inx which x buyersx and x sellers x post x orders x and x inxwhich xtrades xare xautomatic
allyxexecutedxforxmatchingxorders.
i. Productionxopportunities xarexthexcashxgeneratingxactivityxthatxrequirexcashxinxthexp
resentxbutxhavexthexability xtoxgeneratexmorexcashxinxfuture.xThexhigherxthe
©x2024xCengage,xISBN:x9780357714485.xAllxRightsxReserved.xMayxnotxbexscanned,xcopiedxorxduplicated,xorxpostedxto 2
a
xpublicly xaccessiblexwebsite,xinxwholexorxinxpart
. mynursytest.store
, ACCESS Test Bank for Corporate Finance 8th Edition Ehrhardt
x x x x x x x x
Brigham/EhrhardtxFinancialxManagement:xTheoryx&xPractice--Ehrhardt/BrighamxCorporatexFinance:xAxFocusedxApproach
productionxopportunities,xthexmorexcashxwillxbexdemandedxnow.xConsumptionxtim
expreferences xreferxtoxthexpreferredxpatternxofxconsumption.xConsumers’xtimexpref
erencesx forx consumptionx establishx howx muchx consumptionx theyx arex willingxtoxsav
exorxconsumexatxdifferentxlevelsxofxinterest.xItxmajorlyximpactsxrequiredxratexofxret
urn.
j. Axforeignxtradexdeficitxoccursxwhenxbusinessesxandxindividuals xxinxxthexxUnitedxStatesx
importxmorexgoodsxfromxforeignxcountriesxxcomparedxxtoxxexports.xxThisxcausex anx inc
reasex inx anx interestx rate.x Tradex deficitsx mustx bex financed, x andx thexmainx sourcex of
x financing x is x debt. x Foreign x tradex surplus x occurs x when x exports x arexmorex thanx impo
rts.x Asx thex tradex deficitx increases,x thex debtx financingx increases,xdrivingx upx interes
tx rates.x U.S.x interestx ratesx mustx bex competitive x withx foreignxinterestx rates;x ifx thex
Federalx Reservex attemptsx tox setx interestx ratesx lowerx thanxforeignx rates,x foreigners
x willx sellx U.S. x bonds, x decreasing x bond x prices, x resultingx inxhigher x U.S.x rates.
k. Algorithmic xtradingx occursxwhenx computers xarexprogramedxtoxbuyx orxsellxstocksxo
nxbehalfxofxstockholders xifxaxparticularxeventxorxsequencexofxeventsxhappens.xHig
hxfrequency xtradingx(HFT)xisxaxtypexofxalgorithmic xtradingxinxwhichxHFTxtraders,x
whichx arexcomputers,xbuyxandxsellxhundreds xorxthousands xofxtimesxaxday.xMostxH
FTxisxdonexbyxfirmsxthatxarexcreatedxforxthisxpurposexbecausexHFTxrequiresxexpen
sivexcomputerxsystemsxandxhighlyxpaidxprogrammers.
1-2 Whatxarexthexthreexprincipalxformsxofxbusiness xorganization?xWhatxarexthexa
dvantagesxandxdisadvantages xofxeach?
Answer:
Solexproprietorship, xpartnership,xandxcorporationxarexthexthreexprincipalxformsxofxbusi
nessxorganization. xThexadvantagesxofxthex Solexproprietorshipxandxpartnershipxincludesx
easexandxlowxcostxofxformation.xThexadvantages xofxthexcorporationxincludexlimitedxliabi
lity,xindefinitexlife,xeasexofxownershipxtransfer,xandxaccessxtoxcapitalxmarkets.
Thexdisadvantages xofxaxsolexproprietorshipxarex(1)xdifficultyxinxobtainingxlargexsums
xofxcapital, x(2)xunlimited xpersonal xliability xforxbusiness xdebts, xand x(3) xlimited xlife.xThe x
disadvantagesxofxaxpartnershipxarex(1)xunlimitedxliability,x(2)xlimitedxlife,x(3)xdifficultyx
ofxtransferringxownership,xandx(4)xdifficultyxofxraisingxlargexamountsxofxcapital.xThexdis
advantages xofxaxcorporationxarex(1)xdoublextaxationxofxearningsxandx(2)xrequirements xtox
filexstatexandxfederalxreportsxforxregistration,xwhichxarexexpensive,xcomplex,xandxtime
-consuming.
1-3 Whatxisxaxfirm’sxfundamentalxvaluex(whichxisxalsoxcalledxitsxintrinsicxvalue)?xWhatxmightxc
ausexaxfirm’sxintrinsic xvaluextoxbexdifferentxfromxitsxactualxmarketxvalue?
Answer:
Ax firm’sx fundamental, x orx intrinsic,x valuex isx thex presentx valuex ofx itsx freex cashx flowsxwhen
x discounted x at x the x weighted x average x cost x of x capital. x If x the x market x price x reflects xallxrele
vantxinformation, xthenxthexobservedxpricexisxalsoxthexintrinsicxprice.xIntrinsic xvaluex depen
dsx onx allx ofx itsx expected x futurex cashx flows.
1-4 EdmundxCorporationxrecentlyxmadexaxlargexinvestmentxtoxupgradexitsxtechnology.
Althoughxtheseximprovementsxwon’txhavexmuchxofxanximpactxonxperformancexinxthexshor
txrun,xtheyxarexexpectedxtoxreducexfuturexcostsxsignificantly. xWhatximpactxwillxthisxinvestm
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