Fundamentals of Corporate Finance

B

Solutions to Selected Questions and Problems

CHAPTER 1

1.1 The two basic sources of funds for all businesses are debt and equity.

1.3 A profitable firm is able to generate enough cash flows from productive assets to cover its operating expenses, taxes, and payments to creditors. Unprofitable firms fail to do this, and therefore they may be forced to declare bankruptcy.

1.5 A firm should undertake a capital project only if the value of its future cash flows exceeds the cost of the project.

1.7 The financial manager must make working capital decisions regarding the level of inventory to hold, the terms of granting credit (account receivables), and the firm's policy on paying accounts payable.

1.9 Advantages: easiest business type to start; least regulated; owners have full control; all income is taxed as personal income. Disadvantages: unlimited liability of proprietor; initial capital limited to proprietor's wealth; difficult to transfer ownership.

1.11 The owners of a corporation are its stockholders, and the evidence of their ownership is represented by shares of common stock.

1.13 Double taxation occurs when earnings are taxed twice. The owners of a C-corporation are subject to double taxation—first at the corporate level when the firm's earnings are taxed and then again at a personal level when the dividends they receive are taxed.

1.15 The board of directors of a corporation is responsible for serving the interests of stockholders in managing the corporation. It is possible ...