Solutions Manual for F j j j
undamentals of Corpor j j
ate Finance, 5eRobert P
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arrino, DavidKidwell,
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Thomas Bates, Stuart G
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illan (All Chapters Exce
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,Parrinojetjal.jFundamentalsjofjCorporatejFinance,j5thjedition SolutionsjManual
Chapter 1 j
The Financial Manager and the Firm
j j j j j
Before You Go On Questions and Answers
j j j j j j
Section 1.1
j
1. Whatjarejthejthreejbasicjtypesjofjfinancialjdecisionsjmanagersjmustjmake?
Thejthreejbasicjdecisionsjeachjbusinessjmustjmakejarejthejcapitaljbudgetingjdecision,jthejfinanci
ngjdecision,jandjthejworkingjcapitaljmanagementjdecision.jThesejdecisionsjdeterminejwhichjpro
ductivejassetsjtojbuy,jhowjtojpayjforjorjfinancejthesejpurchases,jandjhowjtojmanagejthejday-to-
dayjfinancialjmattersjsojthejcompanyjcanjpayjitsjbills.
2. Explainj whyj youj wouldj makej anj investmentj ifj thej valuej ofj thej expectedj cashj flowsjexc
eedsjthejcostjofjthejproject.
Youjwouldjacceptjanjinvestmentjprojectjwhosejcashjflowsjexceedjthejcostjofjthejprojectjbecausejs
uchjprojectsjwilljincreasejthejvaluejofjthejfirm,jmakingjthejownersjwealthier.jMostjpeoplejstartjajb
usinessjtojincreasejtheirjwealth.jRememberjthatjthejcostjofjcapitalj(timejvaluejofjmoney)jwilljaffe
ctjthejdecisionjaboutjwhetherjtojinvest.
3. Whyjarejcapitaljbudgetingjdecisionsjamongjthejmostjimportantjdecisionsjinjthejlifejofjajfir
m?
Thejcapitaljbudgetingjdecisionsjarejconsideredjthejmostjimportantjinjthejlifejofjthejfirmjbecausej
thesejdecisionsjdeterminejwhichjproductivejassetsjthejfirmjpurchases,jandjwhichjassetsjgenerat
ejmostjofjthejfirm’sjcashjflows.jFurthermore,jcapitaljbudgetingjdecisionsjarejlong-
termjdecisionsjandjifjyoujmakejajmistakejinjselectingjajproductivejasset,jyoujarejstuckjwithjthejde
cisionjforjajlongjtime.
Section 1.2
j
Copyrightj©j2022jJohnjWileyj&jSons,jInc. SMj1-1
,Parrinojetjal.jFundamentalsjofjCorporatejFinance,j5thjedition SolutionsjManual
1. Whyjarejmanyjbusinessesjoperatedjasjsolejproprietorshipsjorjpartnerships?
Manyjbusinessesjelectjtojoperatejasjsolejproprietorshipsjorjpartnershipsjbecausejofjthejsmalljoper
atingjscalejandjcapitaljbasejofjtheirjfirms.jBothjofjthesejformsjofjbusinessjorganizationjarejfairlyj
easyjtojstartjandjimposejfewjregulationsjonjthejowners.
2. Whatjarejsomejadvantagesjandjdisadvantagesjofjoperatingjasjajpublicjcorporation?jThejm
ainjadvantagesjofjoperatingjasjajpublicjcorporationjarejthejaccessjtojthejpublicjsecuritiesjmarkets,j
whichjmakesjitjeasierjtojraisejlargejamountsjofjcapital,jandjthejeasejofjownershipjtransfer.jAlljthej
shareholdersjhavejtojdojisjtojcalljtheirjbrokerjtojbuyjorjselljsharesjofjstock.jSincejajpublicjcorporati
onjusuallyjhasjmanyjsharesjoutstanding,jlargejblocksjofjsecuritiesjcanjbejpurchasedjorjsoldjwitho
utjanjappreciablejimpactjonjthejpricejofjthejstock.jThejmajorjdisadvantagejofjcorporationsjisjthejta
xjsituation.jNotjonlyjmustjthejcorporationjpayjtaxesjonjitsjincome,jbutjthejownersjofjthejcorporati
onjgetjtaxedjagainjwhenjdividendsjarejpaidjtojthem.jThisjisjreferredjtojasjdoublejtaxation.jInjadditi
onjtojtaxes,jpublicjcorporationsjarejsubjectjtojstringentjreportingjrequirements,jandjthejincentives
mayjconvincejmanagersjtojfocusjonjshorter-termjprofitabilityjthanjlonger-termjwealthjcreation.
j
3. Explainjwhyjprofessionaljpartnershipsjsuchjasjphysicians’jgroupsjorganizejasjlimitedjlia
bilityjpartnerships.
Professionaljpartnershipsjsuchjasjphysicians’jgroupsjdesirejtojorganizejasjlimitedjliabilityjpartner
shipsj(LLPs)jtojtakejadvantagejofjthejtaxjarrangementsjofjpartnershipsjcombinedjwithjthejadvanta
gesjofjthejlimitedjliabilityjofjajcorporation.jByjoperatingjasjanjLLP,jthejpartnershipjisjablejtojavoid
ajpotentialjfinancialjdisasterjresultingjfromjthejmisconductjofjonejpartner.
j
Section 1.3
j
1. WhatjarejthejmajorjresponsibilitiesjofjthejCFO?
ThejmajorjresponsibilitiesjofjajCFOjincludejanalysisjandjrecommendationsjforjfinancialjdecision
s.j ThejCFO,jwhojreportsjdirectlyjtojthejCEO,jfocusesjonjmanagingjalljaspectsjofjthejfirm’sjfinanc
esjandjworksjwithjthejCEOjonjstrategicjissues.j ThejCFOjalsojinteractsjwith
Copyrightj©j2022jJohnjWileyj&jSons,jInc. SMj1-2
, Parrinojetjal.jFundamentalsjofjCorporatejFinance,j5thjedition SolutionsjManual
staffjinjotherjfunctionaljareasjonjajregularjbasisjrelatedjtojfinancialjissuesjthatjaffectjthejbusi
ness.
2. IdentifyjthejfinancialjofficersjwhojtypicallyjreportjtojthejCFOjandjdescribejtheirjduties.jTh
ejfinancialjofficersjdiscussedjinjthejchapterjwhojreportjtojthejCFOjarejthejcontroller,jthejtreasurer,
thejriskjmanager,jandjthejinternaljauditor.
j
Thejcontrollerjisjthejfirm’sjchiefjaccountingjofficer,jandjthusjpreparesjthejfinancialjstatementsjan
djtaxes.jThisjpositionjalsojrequiresjclosejcooperationjwithjthejexternaljauditors.jThejtreasurer’sjre
sponsibilityjisjthejcollectionjandjdisbursementjofjcash,jinvestingjexcessjcash,jraisingjnewjcapital,
handlingjforeignjexchange,jandjoverseeingjthejcompany’sjpensionjfundjmanagement.jThisjindi
j
vidualjalsojassistsjthejCFOjinjhandlingjimportantjWalljStreetjrelationships.jThejriskjmanagerjmo
nitorsjandjmanagesjthejfirm’sjriskjexposurejinjfinancialjandjcommodityjmarketsjandjthejfirm’sjre
lationshipsjwithjinsurancejproviders.jFinally,jthejinternaljauditorjisjresponsiblejforjconductingjri
skjassessmentjandjperformingjauditsjofjhigh-jriskjareas.
3. WhyjdoesjthejinternaljauditorjreportjtojbothjthejCFOjandjthejauditjcommitteejofjthejboa
rdjofjdirectors?
ThejinternaljauditorjreportsjtojthejCFOjonjajday-to-
dayjbasisjbutjisjultimatelyjaccountablejforjreportingjanyjaccountingjirregularitiesjtojthejboardjofj
directors.jThejdualjreportingjsystemjservesjasjajcheckjtojensurejthatjtherejarejnojdiscrepanciesjinj
thejcompany’sjfinancialjstatements.
Section 1.4 j
1. Whyjisjprofitjmaximizationjanjunsatisfactoryjgoaljforjmanagingjajfirm?
Profitjmaximizationjisjnotjajsatisfactoryjgoaljwhenjmanagingjajfirmjbecausejitjisjratherjdifficultjt
ojdefinejprofitsjsincejaccountantsjcanjapplyjandjinterpretjthejsamejaccountingjprinciplesjdifferen
tly.jAlso,jprofitjmaximizationjdoesjnotjdefinejthejsize,jthejuncertainty,jandjthejtimingjofjcashjflow
s;jitjignoresjthejtimejvaluejofjmoneyjconcept.
Copyrightj©j2022jJohnjWileyj&jSons,jInc. SMj1-3
undamentals of Corpor j j
ate Finance, 5eRobert P
j j j j
arrino, DavidKidwell,
j j j
Thomas Bates, Stuart G
j j j
illan (All Chapters Exce
j j j
l files Download Link be
j j j j
low)
,Parrinojetjal.jFundamentalsjofjCorporatejFinance,j5thjedition SolutionsjManual
Chapter 1 j
The Financial Manager and the Firm
j j j j j
Before You Go On Questions and Answers
j j j j j j
Section 1.1
j
1. Whatjarejthejthreejbasicjtypesjofjfinancialjdecisionsjmanagersjmustjmake?
Thejthreejbasicjdecisionsjeachjbusinessjmustjmakejarejthejcapitaljbudgetingjdecision,jthejfinanci
ngjdecision,jandjthejworkingjcapitaljmanagementjdecision.jThesejdecisionsjdeterminejwhichjpro
ductivejassetsjtojbuy,jhowjtojpayjforjorjfinancejthesejpurchases,jandjhowjtojmanagejthejday-to-
dayjfinancialjmattersjsojthejcompanyjcanjpayjitsjbills.
2. Explainj whyj youj wouldj makej anj investmentj ifj thej valuej ofj thej expectedj cashj flowsjexc
eedsjthejcostjofjthejproject.
Youjwouldjacceptjanjinvestmentjprojectjwhosejcashjflowsjexceedjthejcostjofjthejprojectjbecausejs
uchjprojectsjwilljincreasejthejvaluejofjthejfirm,jmakingjthejownersjwealthier.jMostjpeoplejstartjajb
usinessjtojincreasejtheirjwealth.jRememberjthatjthejcostjofjcapitalj(timejvaluejofjmoney)jwilljaffe
ctjthejdecisionjaboutjwhetherjtojinvest.
3. Whyjarejcapitaljbudgetingjdecisionsjamongjthejmostjimportantjdecisionsjinjthejlifejofjajfir
m?
Thejcapitaljbudgetingjdecisionsjarejconsideredjthejmostjimportantjinjthejlifejofjthejfirmjbecausej
thesejdecisionsjdeterminejwhichjproductivejassetsjthejfirmjpurchases,jandjwhichjassetsjgenerat
ejmostjofjthejfirm’sjcashjflows.jFurthermore,jcapitaljbudgetingjdecisionsjarejlong-
termjdecisionsjandjifjyoujmakejajmistakejinjselectingjajproductivejasset,jyoujarejstuckjwithjthejde
cisionjforjajlongjtime.
Section 1.2
j
Copyrightj©j2022jJohnjWileyj&jSons,jInc. SMj1-1
,Parrinojetjal.jFundamentalsjofjCorporatejFinance,j5thjedition SolutionsjManual
1. Whyjarejmanyjbusinessesjoperatedjasjsolejproprietorshipsjorjpartnerships?
Manyjbusinessesjelectjtojoperatejasjsolejproprietorshipsjorjpartnershipsjbecausejofjthejsmalljoper
atingjscalejandjcapitaljbasejofjtheirjfirms.jBothjofjthesejformsjofjbusinessjorganizationjarejfairlyj
easyjtojstartjandjimposejfewjregulationsjonjthejowners.
2. Whatjarejsomejadvantagesjandjdisadvantagesjofjoperatingjasjajpublicjcorporation?jThejm
ainjadvantagesjofjoperatingjasjajpublicjcorporationjarejthejaccessjtojthejpublicjsecuritiesjmarkets,j
whichjmakesjitjeasierjtojraisejlargejamountsjofjcapital,jandjthejeasejofjownershipjtransfer.jAlljthej
shareholdersjhavejtojdojisjtojcalljtheirjbrokerjtojbuyjorjselljsharesjofjstock.jSincejajpublicjcorporati
onjusuallyjhasjmanyjsharesjoutstanding,jlargejblocksjofjsecuritiesjcanjbejpurchasedjorjsoldjwitho
utjanjappreciablejimpactjonjthejpricejofjthejstock.jThejmajorjdisadvantagejofjcorporationsjisjthejta
xjsituation.jNotjonlyjmustjthejcorporationjpayjtaxesjonjitsjincome,jbutjthejownersjofjthejcorporati
onjgetjtaxedjagainjwhenjdividendsjarejpaidjtojthem.jThisjisjreferredjtojasjdoublejtaxation.jInjadditi
onjtojtaxes,jpublicjcorporationsjarejsubjectjtojstringentjreportingjrequirements,jandjthejincentives
mayjconvincejmanagersjtojfocusjonjshorter-termjprofitabilityjthanjlonger-termjwealthjcreation.
j
3. Explainjwhyjprofessionaljpartnershipsjsuchjasjphysicians’jgroupsjorganizejasjlimitedjlia
bilityjpartnerships.
Professionaljpartnershipsjsuchjasjphysicians’jgroupsjdesirejtojorganizejasjlimitedjliabilityjpartner
shipsj(LLPs)jtojtakejadvantagejofjthejtaxjarrangementsjofjpartnershipsjcombinedjwithjthejadvanta
gesjofjthejlimitedjliabilityjofjajcorporation.jByjoperatingjasjanjLLP,jthejpartnershipjisjablejtojavoid
ajpotentialjfinancialjdisasterjresultingjfromjthejmisconductjofjonejpartner.
j
Section 1.3
j
1. WhatjarejthejmajorjresponsibilitiesjofjthejCFO?
ThejmajorjresponsibilitiesjofjajCFOjincludejanalysisjandjrecommendationsjforjfinancialjdecision
s.j ThejCFO,jwhojreportsjdirectlyjtojthejCEO,jfocusesjonjmanagingjalljaspectsjofjthejfirm’sjfinanc
esjandjworksjwithjthejCEOjonjstrategicjissues.j ThejCFOjalsojinteractsjwith
Copyrightj©j2022jJohnjWileyj&jSons,jInc. SMj1-2
, Parrinojetjal.jFundamentalsjofjCorporatejFinance,j5thjedition SolutionsjManual
staffjinjotherjfunctionaljareasjonjajregularjbasisjrelatedjtojfinancialjissuesjthatjaffectjthejbusi
ness.
2. IdentifyjthejfinancialjofficersjwhojtypicallyjreportjtojthejCFOjandjdescribejtheirjduties.jTh
ejfinancialjofficersjdiscussedjinjthejchapterjwhojreportjtojthejCFOjarejthejcontroller,jthejtreasurer,
thejriskjmanager,jandjthejinternaljauditor.
j
Thejcontrollerjisjthejfirm’sjchiefjaccountingjofficer,jandjthusjpreparesjthejfinancialjstatementsjan
djtaxes.jThisjpositionjalsojrequiresjclosejcooperationjwithjthejexternaljauditors.jThejtreasurer’sjre
sponsibilityjisjthejcollectionjandjdisbursementjofjcash,jinvestingjexcessjcash,jraisingjnewjcapital,
handlingjforeignjexchange,jandjoverseeingjthejcompany’sjpensionjfundjmanagement.jThisjindi
j
vidualjalsojassistsjthejCFOjinjhandlingjimportantjWalljStreetjrelationships.jThejriskjmanagerjmo
nitorsjandjmanagesjthejfirm’sjriskjexposurejinjfinancialjandjcommodityjmarketsjandjthejfirm’sjre
lationshipsjwithjinsurancejproviders.jFinally,jthejinternaljauditorjisjresponsiblejforjconductingjri
skjassessmentjandjperformingjauditsjofjhigh-jriskjareas.
3. WhyjdoesjthejinternaljauditorjreportjtojbothjthejCFOjandjthejauditjcommitteejofjthejboa
rdjofjdirectors?
ThejinternaljauditorjreportsjtojthejCFOjonjajday-to-
dayjbasisjbutjisjultimatelyjaccountablejforjreportingjanyjaccountingjirregularitiesjtojthejboardjofj
directors.jThejdualjreportingjsystemjservesjasjajcheckjtojensurejthatjtherejarejnojdiscrepanciesjinj
thejcompany’sjfinancialjstatements.
Section 1.4 j
1. Whyjisjprofitjmaximizationjanjunsatisfactoryjgoaljforjmanagingjajfirm?
Profitjmaximizationjisjnotjajsatisfactoryjgoaljwhenjmanagingjajfirmjbecausejitjisjratherjdifficultjt
ojdefinejprofitsjsincejaccountantsjcanjapplyjandjinterpretjthejsamejaccountingjprinciplesjdifferen
tly.jAlso,jprofitjmaximizationjdoesjnotjdefinejthejsize,jthejuncertainty,jandjthejtimingjofjcashjflow
s;jitjignoresjthejtimejvaluejofjmoneyjconcept.
Copyrightj©j2022jJohnjWileyj&jSons,jInc. SMj1-3
