Complete Solutions Manual for Corporate Finance A Focused Approach, 8th Edition by Michael C. Ehrhardt, Eugene F. Brigham, 9780357714638. Full chapters included Chapter 1 to 17.
1. An Overview of Financial Management and the Financial Environment.
2. Financial Statements, Cash Flow, and Taxes.
3...
Corporate Finance A Focused Approach,
8th Edition by
Michael C. Ehrhardt
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,Brigham/Ehrhardt Financial Management: Theory & Practice--Ehrhardt/Brigham Corporate Finance: A Focused Approach
Solution and Answer Guide
CHAPTER 1: AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE FINANCIAL ENVIRONMENT
TABLE OF CONTENTS
ANSWERS TO END-OF-CHAPTER QUESTIONS ................................................................... 1
MINI CASE ............................................................................................................................. 5
ANSWERS TO END-OF-CHAPTER QUESTIONS
1-1 Define each of the following terms:
a. Proprietorship; partnership; corporation; charter; bylaws
b. Limited partnership; limited liability partnership; professional corporation
c. Stockholder wealth maximization
d. Money market; capital market; primary market; secondary market
e. Private markets; public markets; derivatives
f. Investment bank; financial services corporation; financial intermediary
g. Mutual fund; money market fund
h. Open outcry auction; dealer market; automated trading platform
i. Production opportunities; time preferences for consumption
j. Foreign trade deficit
k. Algorithmic trading; high-frequency trading
Answer:
a. A proprietorship, or sole proprietorship, is a business owned by one individual. A
partnership exists when two or more persons associate to conduct a business. In
contrast, a corporation is a legal entity created by a state. The corporation is
separate and distinct from its owners and managers. A company must file a charter
to become a corporation. A charter includes the following information: (1) name of
the proposed corporation, (2) types of activities it will pursue, (3) amount of capital
stock, (4) number of directors, and (5) names and addresses of directors. The bylaws
are a set of rules drawn up by the founders of the corporation. Included are such
points as: (1) how directors are to be elected (all elected each year or perhaps one-
third each year for 3-year terms), (2) whether the existing stockholders will have the
first right to buy any new shares the firm issues, and (3) procedures for changing the
bylaws themselves, should conditions require it.
b. In a limited partnership, limited partners’ liabilities, investment returns and control
are limited, while general partners have unlimited liability and control. In limited
partnership, at least one partner is liable for all the debts in the partnership. A
limited liability partnership (LLP), sometimes called a limited liability company (LLC),
combines the limited liability advantage of a corporation with the tax advantages of
a partnership. A professional corporation (PC), known in some states as a
professional association (PA), has most of the benefits of incorporation but the
participants are not relieved of professional (malpractice) liability.
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, Brigham/Ehrhardt Financial Management: Theory & Practice--Ehrhardt/Brigham Corporate Finance: A Focused Approach
c. Stockholder wealth maximization is the appropriate goal for management decisions.
The risk and timing associated with expected earnings per share and cash flows are
considered in order to maximize the price of the firm’s common stock. Maximizing
shareholder’s wealth is a duty that needs to be fulfill by corporations.
d. A money market is a financial market for debt securities with maturities of less
than 1 year (short-term). The New York money market is the example of money
market. Capital markets are the financial markets for long-term debt and
corporate stocks. The New York Stock Exchange is an example of a capital
market. Primary markets are the markets in which newly issued securities are
sold for the first time. Secondary markets are where securities are resold after
initial issue in the primary market. The New York Stock Exchange is a secondary
market.
e. In private markets, transactions are worked out directly between two parties and
structured in any manners that appeal to them. Bank loans and private placements
of debt with insurance companies are examples of private market transactions. In
public markets, standardized contracts are traded on organized exchanges.
Securities that are issued in public markets, such as common stock and corporate
bonds, are ultimately held by a large number of individuals. Private market securities
are more tailor-made but less liquid, whereas public market securities are more
liquid but subject to greater standardization. Derivatives are those underlying asset
that derives their value from other traded assets. Futures, options, forwards are the
examples of derivative market. Therefore, the value of a derivative security is derived
from the value of an underlying real asset.
f. An investment banker is a facilitator between businesses and savers. Investment
banking houses assist in the design of corporate securities and then sell them to
savers (investors) in the primary markets. Financial service corporations offer a wide
range of financial services such as brokerage operations, insurance, and commercial
banking. A financial intermediary buys security with funds that is obtained by issuing
its own securities. An example is a common stock mutual fund that buys common
stocks with funds obtained by issuing shares in the mutual fund.
g. A mutual fund is an organization that pools the money deposited by savers to
buy financial instruments. These instruments receive dividends and interest on it.
The resulting dividends, interest, and capital gains are distributed to the fund’s
shareholders after the deduction of operating expenses. Different funds are
designed to meet different objectives. Money market funds are mutual funds
which invest in short-term securities carry low-risk and also offer their
shareholders interest-bearing checking accounts.
h. An open outcry auction is a method where traders meet face to face at particular
location at an agreed price and quantity. These traders communicate with each
other through hand signals and shouts. In a dealer market, a dealer holds an
inventory of the security and makes a market by offering to buy or sell. Others
who wish to buy or sell can see the offers made by the dealers, and can contact
the dealer of their choice to arrange a transaction. An automated trading
platform is a computer system in which buyers and sellers post orders and in
which trades are automatically executed for matching orders.
i. Production opportunities are the cash generating activity that require cash in the
present but have the ability to generate more cash in future. The higher the
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