TEST BANK For Corporate Finance 6th Edition by Berk & DeMarzo, Verified Chapters 1 - 31, Complete Newest Version

,Contents
Part I: Introduction
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Chapter 1x@ The Corporation and Financial Markets
x@ x@ x@ x@ 1
Chapter 2x@ Introduction to Financial Statement Analysis
x@ x@ x@ x@ 5

Part II: Tools
x@ x@

Chapter 3x@ Arbitrage and Financial Decision Making
x@ x@ x@ x@ 15
Chapter 4x@ The Time Value of Money
x@ x@ x@ x@ 26
Chapter 5x@ Interest Ratesx@ 49

Part III: Basic Valuation
x@ x@ x@

Chapter 6x@ Valuing Bonds x@ 65
Chapter 7x@ Valuing Stocks x@ 77
Chapter 8x@ Investment Decision les x@ x@x@ 85
Chapter 9x@ Fundamentals of Capital Budgeting x@ x@ x@ 100

Part IV: Risk and Return
x@ x@ x@ x@

Chapter 10
x@ Capital Markets and the Pricing of Riskx@ x@ x@ x@ x@ x@ 108
Chapter 11
x@ Optimal Portfolio Choice and the Capital Asset Pricing Model
x@ x@ x@ x@ x@ x@ x@ x@ 117
Chapter 12
x@ Estimating the Cost of Capital x@ x@ x@ x@ 131
Chapter 13
x@ Investor Behaviour and Capital Market Efficiency
x@ x@ x@ x@ x@ 137

Part V: Options
x@ x@

Chapter 14
x@ Financial Options x@ 143
Chapter 15
x@ Option Valuation
x@ 152
Chapter 16
x@ Real Options
x@ 162

Part VI: Capital St cture and Dividend Policy
x@ x@ x@ x@ x@ x@ x@

Chapter 17
x@ Capital St cture in a Perfect Market x@ x@ x@ x@ x@ x@ 185
Chapter 18
x@ Debt and Taxes x@ x@ 192
Chapter 19
x@ Financial Distress, Managerial Incentives, and Information
x@ x@ x@ x@ x@ 199
Chapter 20
x@ Payout Policy x@ 207

Part VII: Valuation
x@ x@

Chapter 21
x@ Capital Budgeting and Valuation with Leverage
x@ x@ x@ x@ x@ 213
Chapter 22
x@ Valuation and Financial Modelling: A Case Study
x@ x@ x@ x@ x@ x@ 227

Part VIII: Long-Term Financing
x@ x@ x@

Chapter 23
x@ Raising Equity Capital x@ x@ 235
Chapter 24
x@ Debt Financing x@ 239
Chapter 25
x@ Leasing 242

Part IX: Short-Term Financing
x@ x@ x@

Chapter 26
x@ Working Capital Management x@ x@ 248
Chapter 27
x@ Short-Term Financial Planning x@ x@ 253

Part X: Special Topics
x@ x@ x@

Chapter 28
x@ Mergers and Acquisitions x@ x@ 257
Chapter 29
x@ Corporate Governance x@ 260
Chapter 30
x@ Risk Management x@ 263
Chapter 31
x@ International Corporate Finance x@ x@ 272

,Chapter 1 x@




The Corporation and Financial Markets
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1. x @ A corporation is a legal entity separate from its owners. This means ownership shares
x @ x @ x@ x@ x@ x@ x@ x@ x@ x@ x@ x@ x@ x@ x@ x

@in the corporation can be freely traded. None of the other organizational forms share this chara
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cteristic.

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2. x @Owners’ liability is limited to the amount they invested in the firm. Shareholders are not
x @ x@ x@ x@ x@ x@ x@ x@ x@ x@ x@ x@ x@ x@ x@ x

@responsible for any encumbrances of the firm; in particular, they cannot be required to pay bac
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k any debts incurred by the firm.
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3. Corporations (all shareholders have limited liability). Limited partnerships provide limited li
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ability for the limited partners, but not for the general partners.
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4. Advantages: Limited liability, liquidity, infinite life. Disadvantages: Double taxation,
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@separation of ownership and control.
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5. x @The corporation that only holds real estate must pay corporate income taxes. The real est
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ate investment t st (REIT) does not pay corporate taxes but must pass through substantially all
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of the income to the t st unit holders to whom it is taxable.
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1-6. x @ x @ First, the corporation pays the taxes. After taxes, $2 × (1 –
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x@0.34) = $1.32 per share is left to pay dividends. Once the dividend is paid, personal tax on th
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is must be paid, leaving $1.32 × (1 –
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x@0.18) = $1.0824 per share. So after all the taxes are paid, you are left with $1.0824 per share
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.

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7. x @ As a real estate investment t st (REIT) pays no corporate tax, the full amount of $2
x @ x @ x@ x@ x@ x@ x@ x@ x@ x@ x@ x@ x@ x@ x@ x@ x@ x@ x@

per unit can be paid out to you as a t st unit holder. You must then pay personal income tax o
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n the distribution. So you are left with
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$2 × (1 – 0.4) = $1.20 per unit.
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1-8. As the manager of an iPhone applications developer, you will make three types of financial decisions.
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i. You will make investment decisions such as determining which type of iPhone application pro
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jects will offer your company a positive NPV and should, therefore, be developed by your
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company.
ii. You will make the decision on how to fund your iPhone application investments and what
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mix of debt and equity your company will have.
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iii. You will be responsible for the cash management of your company, ensuring that your compa
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ny has the necessary funds to make investments, pay interest on loans, and pay your emplo
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yees.

1-9. Shareholders can x@



i. ensure that employees are paid with company stock and/or stock options.
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ii. ensure that underperforming managers are fired.
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iii. write contracts that ensure that the interests of the managers and shareholders are closely aligned.
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, iv. mount hostile takeovers.
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10. This will affect and hurt the customers. It will have a negative impact on the customer
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s, for they will likely get sour milk. It will also have a negative impact on shareholders becaus
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e, in the long n, customers will realize that the supermarket sells sour milk and will switch to
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x@other supermarkets. Thus, the value today of the future income and cash flow streams generate
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d by the supermarket will drop because of the long-
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term loss of customers caused by this strategy. This will negatively affect the current stock pric
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e as shareholders anticipate these long-term drawbacks.
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