SOLUTIONS MANUAL for Fundamentals of Corporate Finance, 5th Edition by Robert Parrino, David Kidwell, Bates & Gillan | All Chapters 1-21

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
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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
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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
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stuck with the decision for a long time.
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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
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capital, and the ease of ownership transfer. All the shareholders have to do is to call
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their broker to buy or sell shares of stock. Since a public corporation usually has many
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df shares outstanding, large blocks of securities can be purchased or sold without an
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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
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difficult to define profits since accountants can apply and interpret the same accounting
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Copyright © 2022 John Wiley & Sons, Inc. SM 4-