Solution Manual for Fundamentals of Corporate Finance 5th Edition | Parrino, Kidwell & Gillan

Parrino et al. Fundamentals of Corporate Finance, 5th edition Solutions Manual



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Fundamentals of Corporate Finance, 5th Edition by Robert Parrino, David Kidwell,
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Bates & Gillan. ISBN 9781119795438
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Chapter 1-21 n




Copyright © 2022 John Wiley & Sons, Inc. SM 4-

, Parrino et al. Fundamentals of Corporate Finance, 5th edition Solutions Manual
Chapter 1 n




TheFinancialManagerandthe Firm n n n n n




BeforeYouGo OnQuestionsand Answers
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Section1.1 n




1. What are the three basic types of financial decisions managers must make?
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The three basic decisions each business must make are the capital budgeting decision, the
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n financing decision, and the workingcapital management decision. These decisions determine
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n which productive assets to buy, how to pay for or finance these purchases, and how to manage the
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n day-to-day financial matters so the company can pay its bills.n n n n n n n n n




2. Explain why you would make an investment if the value of the expected cash
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n flows exceeds the cost of the project.
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You would accept an investment project whose cash flows exceed the cost of the project because
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n such projects will increase the value of the firm, making the owners wealthier. Most people start a
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business to increase their wealth. Remember that the cost of capital (time value of money) will
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n affect the decision about whether to invest.
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3. Why are capital budgeting decisions among the most important decisions in the life of a
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n firm?
The capital budgeting decisions are considered the most important in the life of the firm because
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n these decisions determine which productive assets the firm purchases, and which assets generate
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most of the firm’s cash flows. Furthermore, capital budgeting decisions are
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Copyright © 2022 John Wiley & Sons, Inc. SM 4-

,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
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n the decision for a long time.
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Section1.2 n




1. Why are many businesses operated as sole proprietorships or partnerships?
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Many businesses elect to operate as sole proprietorships or partnerships because of the small
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n operating scale and capital base of their firms. Both of these forms of business organization are
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n fairly easy to start and impose few regulations on the owners.
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2. What are some advantages and disadvantages of operating as a public corporation? The
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n main advantages of operating as a public corporation are the access to the public securities
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n markets, which makes it easier to raise large amounts of capital, and the ease of ownership
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transfer. All the shareholders have to do is to call their broker to buy or sell shares of stock. Since a
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n public corporation usually has many shares outstanding, large blocks of securities can be
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n purchased or sold without an appreciable impact on the price of the stock. The major
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n disadvantage of corporations is the tax situation. Not only must the corporation pay taxes on its
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n income, but the owners of the corporation get taxed again when dividends are paid to them. This
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n is referred to as double taxation. In addition to taxes, public corporations are subject to stringent
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reporting requirements, and the incentives may convince managers to focus on shorter-term
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n profitability than longer-term wealth creation. n n n n




3. Explain why professional partnerships such as physicians’ groups organize as limited
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n liability partnerships. n




Professional partnerships such as physicians’ groups desire to organize as limited liability
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n partnerships (LLPs) to take advantage of the tax arrangements of partnerships combined with the
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n advantages of the limited liability of a corporation. By operating as an LLP, the partnership is
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able to avoid a potential financial disaster resulting from the misconduct of one partner.
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Section1.3 n




1. What are the major responsibilities of the CFO?
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Copyright © 2022 John Wiley & Sons, Inc. SM 4-

, Parrino et al. Fundamentals of Corporate Finance, 5th edition Solutions Manual


The major responsibilities of a CFO include analysis and recommendations for financial
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n decisions. The CFO, who reports directly to the CEO, focuses on managing all aspects of the
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n firm’s finances and works with the CEO on strategic issues. The CFO also interacts with staff
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n in other functional areas on a regular basis related to financial issues that affect the business.
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2. Identify the financial officers who typically report to the CFO and describe their duties. The
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n financial officers discussed in the chapter who report to the CFO are the controller, the treasurer,
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n the risk manager, and the internal auditor.
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The controller is the firm’s chief accounting officer, and thus prepares the financial statements
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and taxes. This position also requires close cooperation with the external auditors. The treasurer’s
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n responsibility is the collection and disbursement of cash, investing excess cash, raising new
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n capital, handling foreign exchange, and overseeing the company’s pension fund management.
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n This individual also assists the CFO in handling important Wall Street relationships. The risk
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n manager monitors and manages the firm’s risk exposure in financial and commodity markets
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n and the firm’s relationships with insurance providers. Finally, the internal auditor is responsible
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n for conducting risk assessment and performing audits of high- risk areas.
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3. Why does the internal auditor report to both the CFO and the audit committee of the
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n board of directors? n n




The internal auditor reports to the CFO on a day-to-day basis but is ultimately accountable for
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n reporting any accounting irregularities to the board of directors. The dual reporting system
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serves as a check to ensure that there are no discrepancies in the company’s financial statements.
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Section1.4 n




1. Why is profit maximization an unsatisfactory goal for managing a firm?
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Profit maximization is not a satisfactory goal when managing a firm because it is rather difficult to
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define profits since accountants can apply and interpret the same accounting
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Copyright © 2022 John Wiley & Sons, Inc. SM 4-