FUNDAMENTALS OF CORPORATE
FINANCE 6TH EDITION JONATHAN BERK
PETER DEMARZO JARRAD HARFORD
SOLUTIONS MANUAL WITH TEST BANK
COMPREHENSIVE TEST PAPER 2026
COMPLETE ANSWERS ACCURATE
⫸ Capital Budgeting Answer: The process of planning and managing a
firm's long-term investments.
In capital budgeting, the financial manager tries to identify investment
opportunities that are worth more to the firm than they cost to acquire.
Loosely speaking, this means that the value of the cash flow generated
by an asset exceeds the cost of that asset.
⫸ Capital Structure Answer: The mixture of debt and equity maintained
by a firm.
A firm's capital structure (or financial structure) is the specific mixture
of long-term debt and equity the firm uses to finance its operations.
The financial manager has two concerns in this area. First, how much
should the firm borrow? That is, what mixture of debt and equity is best?
The mixture chosen will affect both the risk and the value of the firm.
Second, what are the least expensive sources of funds for the firm?
,⫸ Working Capital Answer: A firm's short-term assets and liabilities.
The term working capital refers to a firm's short-term assets, such as
inventory, and its short-term liabilities, such as money owed to
suppliers. Managing the firm's working capital is a day-to-day activity
that ensures that the firm has sufficient resources to continue its
operations and avoid costly interruptions. This involves a number of
activities related to the firm's receipt and disbursement of cash.
Some questions about working capital that must be answered are the
following: (1) How much cash and inventory should we keep on hand?
(2) Should we sell on credit? If so, what terms will we offer, and to
whom will we extend them? (3) How will we obtain any needed short-
term financing? Will we purchase on credit, or will we borrow in the
short term and pay cash? If we borrow in the short term, how and where
should we do it? These are just a small sample of the issues that arise in
managing a firm's working capital.
⫸ Why is the corporate form superior when it comes to raising cash?
Answer: The relative ease of transferring ownership, the limited liability
for business debts, and the unlimited life of the business are why the
corporate form is superior for raising cash.
If a corporation needs new equity, for example, it can sell new shares of
stock and attract new investors. Apple is an example. The company was
a pioneer in the personal computer business. As demand for its products
exploded, it had to convert to the corporate form of organization to raise
the capital needed to fund growth and new product development. The
, number of owners can be huge; larger corporations have many
thousands or even millions of stockholders. For example, in 2020,
General Electric Company (better known as GE) had about 440,000
stockholders and about 8.7 billion shares outstanding. In such cases,
ownership can change continuously without affecting the continuity of
the business
⫸ What is the difference between a general and a limited partnership?
Answer: In a general partnership, all the partners share in gains or
losses, and all have unlimited liability for all partnership debts, not just
some particular share. The way partnership gains (and losses) are
divided is described in the partnership agreement.
In a limited partnership, one or more general partners will run the
business and have unlimited liability, but there will be one or more
limited partners who will not actively participate in the business. A
limited partner's liability for business debts is limited to the amount that
partner contributes to the partnership.
⫸ Sole Proprietorship Answer: A business owned by one person. This is
the simplest type of business to start and is the least regulated form of
organization.
Depending on where you live, you might be able to start a proprietorship
by doing little more than getting a business license and opening your
doors. For this reason, there are more proprietorships than any other type
of business, and many businesses that later become large corporations
start out as small proprietorships.
FINANCE 6TH EDITION JONATHAN BERK
PETER DEMARZO JARRAD HARFORD
SOLUTIONS MANUAL WITH TEST BANK
COMPREHENSIVE TEST PAPER 2026
COMPLETE ANSWERS ACCURATE
⫸ Capital Budgeting Answer: The process of planning and managing a
firm's long-term investments.
In capital budgeting, the financial manager tries to identify investment
opportunities that are worth more to the firm than they cost to acquire.
Loosely speaking, this means that the value of the cash flow generated
by an asset exceeds the cost of that asset.
⫸ Capital Structure Answer: The mixture of debt and equity maintained
by a firm.
A firm's capital structure (or financial structure) is the specific mixture
of long-term debt and equity the firm uses to finance its operations.
The financial manager has two concerns in this area. First, how much
should the firm borrow? That is, what mixture of debt and equity is best?
The mixture chosen will affect both the risk and the value of the firm.
Second, what are the least expensive sources of funds for the firm?
,⫸ Working Capital Answer: A firm's short-term assets and liabilities.
The term working capital refers to a firm's short-term assets, such as
inventory, and its short-term liabilities, such as money owed to
suppliers. Managing the firm's working capital is a day-to-day activity
that ensures that the firm has sufficient resources to continue its
operations and avoid costly interruptions. This involves a number of
activities related to the firm's receipt and disbursement of cash.
Some questions about working capital that must be answered are the
following: (1) How much cash and inventory should we keep on hand?
(2) Should we sell on credit? If so, what terms will we offer, and to
whom will we extend them? (3) How will we obtain any needed short-
term financing? Will we purchase on credit, or will we borrow in the
short term and pay cash? If we borrow in the short term, how and where
should we do it? These are just a small sample of the issues that arise in
managing a firm's working capital.
⫸ Why is the corporate form superior when it comes to raising cash?
Answer: The relative ease of transferring ownership, the limited liability
for business debts, and the unlimited life of the business are why the
corporate form is superior for raising cash.
If a corporation needs new equity, for example, it can sell new shares of
stock and attract new investors. Apple is an example. The company was
a pioneer in the personal computer business. As demand for its products
exploded, it had to convert to the corporate form of organization to raise
the capital needed to fund growth and new product development. The
, number of owners can be huge; larger corporations have many
thousands or even millions of stockholders. For example, in 2020,
General Electric Company (better known as GE) had about 440,000
stockholders and about 8.7 billion shares outstanding. In such cases,
ownership can change continuously without affecting the continuity of
the business
⫸ What is the difference between a general and a limited partnership?
Answer: In a general partnership, all the partners share in gains or
losses, and all have unlimited liability for all partnership debts, not just
some particular share. The way partnership gains (and losses) are
divided is described in the partnership agreement.
In a limited partnership, one or more general partners will run the
business and have unlimited liability, but there will be one or more
limited partners who will not actively participate in the business. A
limited partner's liability for business debts is limited to the amount that
partner contributes to the partnership.
⫸ Sole Proprietorship Answer: A business owned by one person. This is
the simplest type of business to start and is the least regulated form of
organization.
Depending on where you live, you might be able to start a proprietorship
by doing little more than getting a business license and opening your
doors. For this reason, there are more proprietorships than any other type
of business, and many businesses that later become large corporations
start out as small proprietorships.
