,ACCESS Test Bank for Corporate Finance 8th Edition Ehrhardt
m m m m m m m m
Brigham/EhrhardtmFinancialmManagement:mTheorym&mPractice--Ehrhardt/BrighammCorporatemFinance:mAmFocusedmApproach
Solution and Answer Guide m m m
CHAPTERm 1:m ANm OVERVIEWm OFm FINANCIALm MANAGEMENTm ANDm THEm FINANCIALm ENVIRONMENT
TABLE OF CONTENTS
m m
ANSWERSmTOmEND-OF-CHAPTERmQUESTIONS................................................................. 1
MINImCASE .................................................................................................................................... 5
ANSWERS TO END-OF-CHAPTER QUESTIONS
m m m
1-1 Definemeachmofmthemfollowingmterms:
a. Proprietorship;m partnership; m corporation; m charter;m bylaws
b. Limitedm partnership; m limitedm liabilitym partnership;m professionalm corporation
c. Stockholdermwealthmmaximization
d. Moneymmarket;mcapitalmmarket;mprimarymmarket;msecondary mmarket
e. Privatem markets; m publicm markets;m derivatives
f. Investmentm bank;m financialm servicesm corporation; m financialm intermediary
g. Mutualmfund;mmoneymmarketmfund
h. Openm outcrym auction; m dealerm market;m automatedm tradingm platform
i. Productionmopportunities; mtimempreferencesmformconsumption
j. Foreignm tradem deficit
k. Algorithmic m trading; m high-frequencym trading
Answer:
a. Amproprietorship, mormsolemproprietorship, mismambusinessmownedmbymonemindividual. mAm
partnershipm existsm whenm twom orm morem personsm associatem tomconductm am business. m Inm
contrast,mamcorporation mismamlegalmentitymcreatedmbymamstate.mThemcorporation mismsep
aratem andm distinctm fromm itsmownersm andmmanagers. m Amcompanym mustmfilem am charterm
tombecomemamcorporation.mAmchartermincludesmthemfollowingminformation: m(1)mnamemo
fmthemproposedmcorporation, m(2)mtypesmofmactivities mitmwillmpursue,m(3)mamountmofmca
pitalmstock,m(4)mnumberm ofmdirectors,mandm(5)mnamesmandmaddressesmofm directors. mTh
embylawsmaremamsetm ofmrulesmdrawnmupmbymthemfoundersmofmthemcorporation. m Included
mare m such mpoints mas: m(1) mhow mdirectors mare m tombe melected m(allmelected meach myearmorm
perhapsmone-mthirdmeachmyearmform3-
yearmterms),m(2)mwhethermthemexistingmstockholders mwillmhavemthemfirstmrightmtombuym
anymnewmsharesmthemfirm missues,mandm(3)mprocedures mformchangingmthembylawsmthems
elves,mshouldmconditions mrequiremit.
b. Inmamlimitedmpartnership, mlimitedmpartners’mliabilities, minvestmentmreturnsmandmcontr
olmaremlimited, mwhilemgeneralmpartnersmhavemunlimitedmliabilitymandmcontrol.mInmlimit
edmpartnership, matmleastmonempartnermismliablemformallmthemdebtsminmthempartnership. m
Amlimitedmliabilitympartnershipm(LLP),msometimesmcalledmamlimitedmliabilitymcompanym(
LLC),mcombinesmthemlimitedmliabilitymadvantagemofmamcorporationmwithmthemtaxmadvan
tagesmofmampartnership. mAmprofessionalmcorporationm(PC),mknownminmsomemstatesmasma
mprofessional massociation m (PA), mhas m most m of mthe m benefits mof m incorporation mbut mthe mp
articipants maremnotmrelievedmofmprofessionalm(malpractice) mliability.
©m2024mCengage,mISBN:m9780357714485.mAllmRightsmReserved.mMaymnotmbemscanned,mcopiedmormduplicated,morm 1
postedmmto
publicly ma
accessible mwebsite,minmwholemorminm
part. mynursytest.store
,ACCESS Test Bank for Corporate Finance 8th Edition Ehrhardt
m m m m m m m m
Brigham/EhrhardtmFinancialmManagement:mTheorym&mPractice--Ehrhardt/BrighammCorporatemFinance:mAmFocusedmApproach
c. Stockholdermwealthmmaximizationmismthemappropriatemgoalmformmanagementmdecisio
ns.mThemriskmandmtimingmassociatedmwithmexpectedmearningsmpermsharemandmcashmflo
wsmaremconsideredminmordermtommaximizemthempricemofmthemfirm’smcommonmstock.mM
aximizingmshareholder’smwealthmismamdutymthatmneedsmtombemfulfillmbymcorporations.
d. Am moneym marketm ism am financialm marketm form debtm securitiesm withm maturitiesm ofm l
essmthanm 1m yearm (short-
term).m Them Newm Yorkm moneym marketm ism them examplem ofm moneymmarket. m Capital
m markets m are m the m financial m marketsm form long-
termm debtm andmcorporatemstocks.mThemNewmYorkmStockmExchangemmismanmmexamplem
mof ma mcapital m market. mPrimary m markets mare m the mmmarkets min mmwhich mnewly mmissued m
securitiesmaremsoldm form them firstm time.m Secondarym marketsm arem wherem securitiesm
arem resoldm afterminitialm issuem inm them primarym market.m Them Newm Yorkm Stockm Exch
angem ism am secondarymmarket.
e. Inmprivatemmarkets, mtransactionsmaremworkedmoutmdirectlymbetweenmtwompartiesmandm
structuredminm anymmannersmthatm appealmtomthem.mBankm loansmandm privatem placemen
tsmofm debtmwithminsurancemcompaniesmaremexamplesmofmprivatemmarketmtransactions.
mIn mpublic m markets, m standardized m contracts m are m traded m on m organized m exchanges. mSe
curitiesm thatm arem issuedm inm publicm markets, m suchm asmcommon m stockm andmcorporatemb
onds,maremultimatelymheldmbymamlargemnumbermofmindividuals. mPrivatemmarketmsecuriti
esmaremmoremtailor-
madembutmlessmliquid,mwhereasmpublicmmarketmsecuritiesmaremmoremliquidmbutmsubjec
tmtomgreatermstandardization. mDerivativesmaremthosemunderlyingmassetmthatmderivesmth
eirmvaluemfrommothermtradedmassets.mFutures,moptions,mforwardsmaremthemexamplesmof
mderivative mmarket. mTherefore, mthe mvalue mofma mderivative msecurity mis mderived m frommthe
mvalue mof man munderlying mrealmasset.
f. Anminvestmentmbankermismamfacilitatormbetweenmbusinessesmandmsavers.mInvestmen
tmbankingmhousesmassistminmthemdesignmofmcorporatemsecurities mandmthenmsellmthe
mmtomsaversm(investors)minmthemprimarymmarkets.mFinancialmservicemcorporationsmoffe
rmamwidemrangemofmfinancialmservicesmsuchmasmbrokeragemoperations,minsurance,mandm
commercialmbanking.mAmfinancialmintermediarymbuysmsecuritymwithmfundsmthatmismobta
inedmbymissuingmitsmownmsecurities.mAnmexamplemismamcommonmstockmmutualmfundmth
atmbuysmcommonmstocksmwithmfundsmobtainedmbymissuingmsharesminmthemmutualmfun
d.
g. Am mutualm fundmism anm organizationm thatm poolsmthem moneym depositedm bym saversmto
m buy mfinancial minstruments. mThese minstruments mreceive mdividends mand minterest mo
nmit.mThemresultingmdividends,minterest,mandmcapitalmgainsmaremdistributedmtomthem
fund’smshareholders maftermthemdeductionmofmoperatingmexpenses.mDifferentmfunds
m are m designed m tom meet m different m objectives. m Money m market m funds m are m mutual mfu
ndsmwhichminvestminmshort-termm securities mcarrymlow-
riskmandmalsom offermtheirmshareholders minterest-bearingm checkingm accounts.
h. Anmopenmoutcry mauctionmismammethodmwheremtradersmmeetmfacemtomfacematmpartic
ularmlocationmatmanmagreedmpricemandmquantity.mThesemtradersmcommunicatemwith
m each m other mthrough m hand msignals m and m shouts. m Inm am dealer m market,m am dealer m hol
dsmanminventory mofmthemsecuritymandmmakesmammarketmbymofferingmtombuymormsell.
m Others m whom wish m tom buym ormsell m canm see m the m offers m made m by m them dealers, m and m
canmcontactmthemdealermofmtheirmchoicemtomarrangemamtransaction.mAnmautomated
mtrading m platform m is m am computer m systemm inm which m buyers m and m sellers m postm order
sm andminmwhichmtradesmaremautomatically mexecutedmformmatchingmorders.
©m2024mCengage,mISBN:m9780357714485.mAllmRightsmReserved.mMaymnotmbemscanned,mcopiedmormduplicated,morm 2
postedmmto
publicly ma
accessible mwebsite,minmwholemorminm
part. mynursytest.store
, i. Productionmopportunitiesmaremthemcashmgeneratingmactivitymthatmrequiremcashminm
thempresentmbutmhavemthemability mtomgeneratemmoremcashminmfuture.mThemhighermt
he
©m2024mCengage,mISBN:m9780357714485.mAllmRightsmReserved.mMaymnotmbemscanned,mcopiedmormduplicated,morm 3
postedmmto
publicly ma
accessible mwebsite,minmwholemorminm
part. mynursytest.store
m m m m m m m m
Brigham/EhrhardtmFinancialmManagement:mTheorym&mPractice--Ehrhardt/BrighammCorporatemFinance:mAmFocusedmApproach
Solution and Answer Guide m m m
CHAPTERm 1:m ANm OVERVIEWm OFm FINANCIALm MANAGEMENTm ANDm THEm FINANCIALm ENVIRONMENT
TABLE OF CONTENTS
m m
ANSWERSmTOmEND-OF-CHAPTERmQUESTIONS................................................................. 1
MINImCASE .................................................................................................................................... 5
ANSWERS TO END-OF-CHAPTER QUESTIONS
m m m
1-1 Definemeachmofmthemfollowingmterms:
a. Proprietorship;m partnership; m corporation; m charter;m bylaws
b. Limitedm partnership; m limitedm liabilitym partnership;m professionalm corporation
c. Stockholdermwealthmmaximization
d. Moneymmarket;mcapitalmmarket;mprimarymmarket;msecondary mmarket
e. Privatem markets; m publicm markets;m derivatives
f. Investmentm bank;m financialm servicesm corporation; m financialm intermediary
g. Mutualmfund;mmoneymmarketmfund
h. Openm outcrym auction; m dealerm market;m automatedm tradingm platform
i. Productionmopportunities; mtimempreferencesmformconsumption
j. Foreignm tradem deficit
k. Algorithmic m trading; m high-frequencym trading
Answer:
a. Amproprietorship, mormsolemproprietorship, mismambusinessmownedmbymonemindividual. mAm
partnershipm existsm whenm twom orm morem personsm associatem tomconductm am business. m Inm
contrast,mamcorporation mismamlegalmentitymcreatedmbymamstate.mThemcorporation mismsep
aratem andm distinctm fromm itsmownersm andmmanagers. m Amcompanym mustmfilem am charterm
tombecomemamcorporation.mAmchartermincludesmthemfollowingminformation: m(1)mnamemo
fmthemproposedmcorporation, m(2)mtypesmofmactivities mitmwillmpursue,m(3)mamountmofmca
pitalmstock,m(4)mnumberm ofmdirectors,mandm(5)mnamesmandmaddressesmofm directors. mTh
embylawsmaremamsetm ofmrulesmdrawnmupmbymthemfoundersmofmthemcorporation. m Included
mare m such mpoints mas: m(1) mhow mdirectors mare m tombe melected m(allmelected meach myearmorm
perhapsmone-mthirdmeachmyearmform3-
yearmterms),m(2)mwhethermthemexistingmstockholders mwillmhavemthemfirstmrightmtombuym
anymnewmsharesmthemfirm missues,mandm(3)mprocedures mformchangingmthembylawsmthems
elves,mshouldmconditions mrequiremit.
b. Inmamlimitedmpartnership, mlimitedmpartners’mliabilities, minvestmentmreturnsmandmcontr
olmaremlimited, mwhilemgeneralmpartnersmhavemunlimitedmliabilitymandmcontrol.mInmlimit
edmpartnership, matmleastmonempartnermismliablemformallmthemdebtsminmthempartnership. m
Amlimitedmliabilitympartnershipm(LLP),msometimesmcalledmamlimitedmliabilitymcompanym(
LLC),mcombinesmthemlimitedmliabilitymadvantagemofmamcorporationmwithmthemtaxmadvan
tagesmofmampartnership. mAmprofessionalmcorporationm(PC),mknownminmsomemstatesmasma
mprofessional massociation m (PA), mhas m most m of mthe m benefits mof m incorporation mbut mthe mp
articipants maremnotmrelievedmofmprofessionalm(malpractice) mliability.
©m2024mCengage,mISBN:m9780357714485.mAllmRightsmReserved.mMaymnotmbemscanned,mcopiedmormduplicated,morm 1
postedmmto
publicly ma
accessible mwebsite,minmwholemorminm
part. mynursytest.store
,ACCESS Test Bank for Corporate Finance 8th Edition Ehrhardt
m m m m m m m m
Brigham/EhrhardtmFinancialmManagement:mTheorym&mPractice--Ehrhardt/BrighammCorporatemFinance:mAmFocusedmApproach
c. Stockholdermwealthmmaximizationmismthemappropriatemgoalmformmanagementmdecisio
ns.mThemriskmandmtimingmassociatedmwithmexpectedmearningsmpermsharemandmcashmflo
wsmaremconsideredminmordermtommaximizemthempricemofmthemfirm’smcommonmstock.mM
aximizingmshareholder’smwealthmismamdutymthatmneedsmtombemfulfillmbymcorporations.
d. Am moneym marketm ism am financialm marketm form debtm securitiesm withm maturitiesm ofm l
essmthanm 1m yearm (short-
term).m Them Newm Yorkm moneym marketm ism them examplem ofm moneymmarket. m Capital
m markets m are m the m financial m marketsm form long-
termm debtm andmcorporatemstocks.mThemNewmYorkmStockmExchangemmismanmmexamplem
mof ma mcapital m market. mPrimary m markets mare m the mmmarkets min mmwhich mnewly mmissued m
securitiesmaremsoldm form them firstm time.m Secondarym marketsm arem wherem securitiesm
arem resoldm afterminitialm issuem inm them primarym market.m Them Newm Yorkm Stockm Exch
angem ism am secondarymmarket.
e. Inmprivatemmarkets, mtransactionsmaremworkedmoutmdirectlymbetweenmtwompartiesmandm
structuredminm anymmannersmthatm appealmtomthem.mBankm loansmandm privatem placemen
tsmofm debtmwithminsurancemcompaniesmaremexamplesmofmprivatemmarketmtransactions.
mIn mpublic m markets, m standardized m contracts m are m traded m on m organized m exchanges. mSe
curitiesm thatm arem issuedm inm publicm markets, m suchm asmcommon m stockm andmcorporatemb
onds,maremultimatelymheldmbymamlargemnumbermofmindividuals. mPrivatemmarketmsecuriti
esmaremmoremtailor-
madembutmlessmliquid,mwhereasmpublicmmarketmsecuritiesmaremmoremliquidmbutmsubjec
tmtomgreatermstandardization. mDerivativesmaremthosemunderlyingmassetmthatmderivesmth
eirmvaluemfrommothermtradedmassets.mFutures,moptions,mforwardsmaremthemexamplesmof
mderivative mmarket. mTherefore, mthe mvalue mofma mderivative msecurity mis mderived m frommthe
mvalue mof man munderlying mrealmasset.
f. Anminvestmentmbankermismamfacilitatormbetweenmbusinessesmandmsavers.mInvestmen
tmbankingmhousesmassistminmthemdesignmofmcorporatemsecurities mandmthenmsellmthe
mmtomsaversm(investors)minmthemprimarymmarkets.mFinancialmservicemcorporationsmoffe
rmamwidemrangemofmfinancialmservicesmsuchmasmbrokeragemoperations,minsurance,mandm
commercialmbanking.mAmfinancialmintermediarymbuysmsecuritymwithmfundsmthatmismobta
inedmbymissuingmitsmownmsecurities.mAnmexamplemismamcommonmstockmmutualmfundmth
atmbuysmcommonmstocksmwithmfundsmobtainedmbymissuingmsharesminmthemmutualmfun
d.
g. Am mutualm fundmism anm organizationm thatm poolsmthem moneym depositedm bym saversmto
m buy mfinancial minstruments. mThese minstruments mreceive mdividends mand minterest mo
nmit.mThemresultingmdividends,minterest,mandmcapitalmgainsmaremdistributedmtomthem
fund’smshareholders maftermthemdeductionmofmoperatingmexpenses.mDifferentmfunds
m are m designed m tom meet m different m objectives. m Money m market m funds m are m mutual mfu
ndsmwhichminvestminmshort-termm securities mcarrymlow-
riskmandmalsom offermtheirmshareholders minterest-bearingm checkingm accounts.
h. Anmopenmoutcry mauctionmismammethodmwheremtradersmmeetmfacemtomfacematmpartic
ularmlocationmatmanmagreedmpricemandmquantity.mThesemtradersmcommunicatemwith
m each m other mthrough m hand msignals m and m shouts. m Inm am dealer m market,m am dealer m hol
dsmanminventory mofmthemsecuritymandmmakesmammarketmbymofferingmtombuymormsell.
m Others m whom wish m tom buym ormsell m canm see m the m offers m made m by m them dealers, m and m
canmcontactmthemdealermofmtheirmchoicemtomarrangemamtransaction.mAnmautomated
mtrading m platform m is m am computer m systemm inm which m buyers m and m sellers m postm order
sm andminmwhichmtradesmaremautomatically mexecutedmformmatchingmorders.
©m2024mCengage,mISBN:m9780357714485.mAllmRightsmReserved.mMaymnotmbemscanned,mcopiedmormduplicated,morm 2
postedmmto
publicly ma
accessible mwebsite,minmwholemorminm
part. mynursytest.store
, i. Productionmopportunitiesmaremthemcashmgeneratingmactivitymthatmrequiremcashminm
thempresentmbutmhavemthemability mtomgeneratemmoremcashminmfuture.mThemhighermt
he
©m2024mCengage,mISBN:m9780357714485.mAllmRightsmReserved.mMaymnotmbemscanned,mcopiedmormduplicated,morm 3
postedmmto
publicly ma
accessible mwebsite,minmwholemorminm
part. mynursytest.store
