Parrino et al. Fundamentals of Corporate Finance, 5th edition Solutions Manual
Solution Manual for df df
Fundamentals of Corporate Finance, 5th Edition by Robert Parrino, David
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Kidwell, Bates & Gillan. ISBN 9781119795438
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Chapter 1-21 df
Copyright © 2022 John Wiley & Sons, Inc. SM 4-
, Parrino et al. Fundamentals of Corporate Finance, 5th edition Solutions Manual
Chapter 1 df
The Financial Manager and the Firm
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Before You Go On Questions and Answers
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Section 1.1 df
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,
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the financing decision, and the working capital management decision. These decisions
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determine which productive assets to buy, how to pay for or finance these purchases,
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and how to manage the day-to-day financial matters so the company can pay its bills.
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2. Explain d f why d f you d f would d f make df an d f investment if d f d f the d f value d f of d f the d f
expected d f cash 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
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project because such projects will increase the value of the firm, making the owners
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wealthier. Most people start a business to increase their wealth. Remember that the cost
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of capital (time value of money) will 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
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of a firm?
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The capital budgeting decisions are considered the most important in the life of the
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firm because these decisions determine which productive assets the firm purchases, and
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df which assets generate most of the firm’s cash flows. Furthermore, capital budgeting
df df df df df df df df df df df df
decisions are df
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
df df df df df df df df df df df df df df df
stuck with the decision for a long time.
df df df df df df df
Section 1.2 df
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
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small operating scale and capital base of their firms. Both of these forms of business
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organization are 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
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corporation? The main advantages of operating as a public corporation are the access
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df to the public securities markets, which makes it easier to raise large amounts of
df df df df df df df df df df df df df df
capital, and the ease of ownership transfer. All the shareholders have to do is to call
df df df df df df df df df df df df df df df df
their broker to buy or sell shares of stock. Since a public corporation usually has many
df df df df df df df df df df df df df df df
df shares outstanding, large blocks of securities can be purchased or sold without an
df df df df df df df df df df df df df
appreciable impact on the price of the stock. The major disadvantage of corporations
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is the tax situation. Not only must the corporation pay taxes on its income, but the
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owners of the corporation get taxed again when dividends are paid to them. This is
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referred to as double taxation. In addition to taxes, public corporations are subject to
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stringent reporting requirements, and the incentives may convince managers to focus on
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shorter-term profitability than longer-term wealth creation. df df df df df
3. Explain why professional partnerships such as physicians’ groups organize as
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limited liability partnerships. df df
Professional partnerships such as physicians’ groups desire to organize as limited
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liability partnerships (LLPs) to take advantage of the tax arrangements of partnerships
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combined with the advantages of the limited liability of a corporation. By operating as
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df an LLP, the partnership is able to avoid a potential financial disaster resulting from the
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misconduct of one partner. df df df
Section 1.3 df
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
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financial decisions. df d f The CFO, who reports directly to the CEO, focuses on managing
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all aspects of the firm’s finances and works with the CEO on strategic issues.
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CFO also interacts with staff in other functional areas on a regular basis related to
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financial issues that affect the business. df df df df df
2. Identify the financial officers who typically report to the CFO and describe their
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duties. The financial officers discussed in the chapter who report to the CFO are the
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controller, the treasurer, 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
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statements and taxes. This position also requires close cooperation with the external
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auditors. The treasurer’s responsibility is the collection and disbursement of cash,
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investing excess cash, raising new capital, handling foreign exchange, and overseeing
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the company’s pension fund management. This individual also assists the CFO in
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handling important Wall Street relationships. The risk manager monitors and manages
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the firm’s risk exposure in financial and commodity markets and the firm’s
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relationships with insurance providers. Finally, the internal auditor is responsible for
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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
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of the board of directors?
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The internal auditor reports to the CFO on a day-to-day basis but is ultimately
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accountable for reporting any accounting irregularities to the board of directors. The
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dual reporting system serves as a check to ensure that there are no discrepancies in the
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company’s financial statements. df df
Section 1.4 df
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
df df df df df df df df df df df df df df df
difficult to define profits since accountants can apply and interpret the same accounting
df df df df df df df df df df df df
Copyright © 2022 John Wiley & Sons, Inc. SM 4-
Solution Manual for df df
Fundamentals of Corporate Finance, 5th Edition by Robert Parrino, David
df df df df df df df df df df
Kidwell, Bates & Gillan. ISBN 9781119795438
df df df df df
Chapter 1-21 df
Copyright © 2022 John Wiley & Sons, Inc. SM 4-
, Parrino et al. Fundamentals of Corporate Finance, 5th edition Solutions Manual
Chapter 1 df
The Financial Manager and the Firm
df df df df df
Before You Go On Questions and Answers
df df df df df df
Section 1.1 df
1. What are the three basic types of financial decisions managers must make?
df df df df df df df df df df df
The three basic decisions each business must make are the capital budgeting decision,
df df df df df df df df df df df df df
the financing decision, and the working capital management decision. These decisions
df df df df df df df df df df df
determine which productive assets to buy, how to pay for or finance these purchases,
df df df df df df df df df df df df df df
and how to manage the day-to-day financial matters so the company can pay its bills.
df df df df df df df df df df df df df df
2. Explain d f why d f you d f would d f make df an d f investment if d f d f the d f value d f of d f the d f
expected d f cash flows exceeds the cost of the project.
df df df df df df df
You would accept an investment project whose cash flows exceed the cost of the
df df df df df df df df df df df df df df
project because such projects will increase the value of the firm, making the owners
df df df df df df df df df df df df df df
wealthier. Most people start a business to increase their wealth. Remember that the cost
df df df df df df df df df df df df df df
of capital (time value of money) will affect the decision about whether to invest.
df df df df df df df df df df df df df
3. Why are capital budgeting decisions among the most important decisions in the life
df df df df df df df df df df df df df
of a firm?
df df
The capital budgeting decisions are considered the most important in the life of the
df df df df df df df df df df df df df df
firm because these decisions determine which productive assets the firm purchases, and
df df df df df df df df df df df
df which assets generate most of the firm’s cash flows. Furthermore, capital budgeting
df df df df df df df df df df df df
decisions are df
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
df df df df df df df df df df df df df df df
stuck with the decision for a long time.
df df df df df df df
Section 1.2 df
1. Why are many businesses operated as sole proprietorships or partnerships?
df df df df df df df df df
Many businesses elect to operate as sole proprietorships or partnerships because of the
df df df df df df df df df df df df df
small operating scale and capital base of their firms. Both of these forms of business
df df df df df df df df df df df df df df df
organization are fairly easy to start and impose few regulations on the owners.
df df df df df df df df df df df df
2. What are some advantages and disadvantages of operating as a public
df df df df df df df df df df df
corporation? The main advantages of operating as a public corporation are the access
df df df df df df df df df df df df
df to the public securities markets, which makes it easier to raise large amounts of
df df df df df df df df df df df df df df
capital, and the ease of ownership transfer. All the shareholders have to do is to call
df df df df df df df df df df df df df df df df
their broker to buy or sell shares of stock. Since a public corporation usually has many
df df df df df df df df df df df df df df df
df shares outstanding, large blocks of securities can be purchased or sold without an
df df df df df df df df df df df df df
appreciable impact on the price of the stock. The major disadvantage of corporations
df df df df df df df df df df df df df
is the tax situation. Not only must the corporation pay taxes on its income, but the
df df df df df df df df df df df df df df df df
owners of the corporation get taxed again when dividends are paid to them. This is
df df df df df df df df df df df df df df df
referred to as double taxation. In addition to taxes, public corporations are subject to
df df df df df df df df df df df df df df
stringent reporting requirements, and the incentives may convince managers to focus on
df df df df df df df df df df df df
shorter-term profitability than longer-term wealth creation. df df df df df
3. Explain why professional partnerships such as physicians’ groups organize as
df df df df df df df df df df
limited liability partnerships. df df
Professional partnerships such as physicians’ groups desire to organize as limited
df df df df df df df df df df df
liability partnerships (LLPs) to take advantage of the tax arrangements of partnerships
df df df df df df df df df df df df
combined with the advantages of the limited liability of a corporation. By operating as
df df df df df df df df df df df df df
df an LLP, the partnership is able to avoid a potential financial disaster resulting from the
df df df df df df df df df df df df df df df
misconduct of one partner. df df df
Section 1.3 df
1. What are the major responsibilities of the CFO?
df df df df df df df
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
df df df df df df df df df df df
financial decisions. df d f The CFO, who reports directly to the CEO, focuses on managing
df df df df df df df df df df df
all aspects of the firm’s finances and works with the CEO on strategic issues.
df df df df df df df df df df df df df d f The df
CFO also interacts with staff in other functional areas on a regular basis related to
df df df df df df df df df df df df df df df
financial issues that affect the business. df df df df df
2. Identify the financial officers who typically report to the CFO and describe their
df df df df df df df df df df df df df
duties. The financial officers discussed in the chapter who report to the CFO are the
df df df df df df df df df df df df df df df
controller, the treasurer, the risk manager, and the internal auditor.
df df df df df df df df df
The controller is the firm’s chief accounting officer, and thus prepares the financial
df df df df df df df df df df df df df
statements and taxes. This position also requires close cooperation with the external
df df df df df df df df df df df df
auditors. The treasurer’s responsibility is the collection and disbursement of cash,
df df df df df df df df df df df
investing excess cash, raising new capital, handling foreign exchange, and overseeing
df df df df df df df df df df df
the company’s pension fund management. This individual also assists the CFO in
df df df df df df df df df df df df
handling important Wall Street relationships. The risk manager monitors and manages
df df df df df df df df df df df
the firm’s risk exposure in financial and commodity markets and the firm’s
df df df df df df df df df df df df
relationships with insurance providers. Finally, the internal auditor is responsible for
df df df df df df df df df df df
conducting risk assessment and performing audits of high- risk areas.
df df df df df df df df df
3. Why does the internal auditor report to both the CFO and the audit committee
df df df df df df df df df df df df df df
of the board of directors?
df df df df
The internal auditor reports to the CFO on a day-to-day basis but is ultimately
df df df df df df df df df df df df df df
accountable for reporting any accounting irregularities to the board of directors. The
df df df df df df df df df df df df
dual reporting system serves as a check to ensure that there are no discrepancies in the
df df df df df df df df df df df df df df df df
company’s financial statements. df df
Section 1.4 df
1. Why is profit maximization an unsatisfactory goal for managing a firm?
df df df df df df df df df df
Profit maximization is not a satisfactory goal when managing a firm because it is rather
df df df df df df df df df df df df df df df
difficult to define profits since accountants can apply and interpret the same accounting
df df df df df df df df df df df df
Copyright © 2022 John Wiley & Sons, Inc. SM 4-
