Finance Assignment Help by EssayCorp Expert Australia

Fall 2019
Homework 1

Please answer all questions, do not leave any question unanswered. You can submit this to me at
the beginning of class or through LMS, your choice. Typed answers are preferred but not
required.

CH1:
Part 1: True or False
1. In most corporations, the CEO ranks under the CFO
2. The Chairman of the Board must also be the CEO
3. Corporations generally have a tax advantage over partnerships and proprietorships.
4. An advantage of the corporate form of organization is that corporations are generally highly
regulated than proprietorships and partnerships.
5. One advantage of the corporate form of organization is that it avoids double taxation.
6. One danger of starting a proprietorship is that you may be exposed to personal liability if the
business goes bankrupt. This problem would be avoided if you formed a corporation to operate
the business.
7. If a corporation elects to be taxed as an S corporation, then it can avoid the corporate tax.
However, its stockholders will have to pay personal taxes on the firm's net income.
8. It is generally less expensive to form a corporation than a proprietorship because, with a
proprietorship, extensive legal documents are required.
9. The less capital a firm is likely to require, the greater the probability that it will be organized as a
corporation.
10. One disadvantage of forming a corporation rather than a partnership is that this makes it more
difficult for the firm's investors to transfer their ownership interests.
11. In order to maximize its shareholders' value, a firm's management must attempt to maximize the
stock price on a specific target date.
12. If a stock's intrinsic value is greater than its market price, then the stock is overvalued and should
be sold.
13. If a firm's board of directors wants to maximize value for its stockholders in general (as opposed
to some specific stockholders), it should design an executive compensation system whose focus is
on the firm's long-term value.

Part 2: Multiple Choice Questions

1.Which of the following statements is CORRECT?

a. One advantage of forming a corporation is that equity investors are usually exposed to less liability
than they would be in a partnership.
b. Corporations face fewer regulations than proprietorships.
c. One disadvantage of operating a business as a proprietor is that the firm is subject to double
taxation, because taxes are levied at both the firm level and the owner level.
d. It is generally less expensive to form a corporation than a proprietorship because, with a
proprietorship, extensive legal documents are required.
 e. If a partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or
her investment in the business.

2. Which of the following statements is CORRECT?

a. Corporations generally face fewer regulations than proprietorships.
b. Corporate shareholders are exposed to unlimited liability.
c. It is usually easier to transfer ownership in a corporation than in a partnership.
d. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax
advantages of incorporation.
e. There is a tax disadvantage to incorporation, and there is no way any corporation can escape this
disadvantage, even if it is very small.
3. The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to
a. Maximize its expected total corporate income.
b. Maximize its expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share over the long run, which is the stock's intrinsic value.
e. Maximize the stock price on a specific target date.
4. Which of the following statements is CORRECT?
a. One drawback of forming a corporation is that it generally subjects the firm to additional
regulations.
b. One drawback of forming a corporation is that it subjects the firm's investors to increased personal
liabilities.
c. One drawback of forming a corporation is that it makes it more difficult for the firm to raise
capital.
d. One advantage of forming a corporation is that it subjects the firm's investors to fewer taxes.
e. One disadvantage of forming a corporation is that it is more difficult for the firm's investors to
transfer their ownership interests.
5. Which of the following actions would be likely to encourage a firm's managers to make decisions that
are in the best interests of shareholders?
a. The percentage of executive compensation that comes in the form of cash is increased and the
percentage coming from long-term stock options is reduced.
b. The state legislature passes a law that makes it more difficult to successfully complete a hostile
takeover.
c. The percentage of the firm's stock that is held by institutional investors such as mutual funds,
pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%.
d. The firm's founder, who is also president and chairman of the board, sells 90% of her shares.
e. The firm's board of directors gives the firm's managers greater freedom to take whatever actions
they think best without obtaining board approval.

6. Which of the following statements is CORRECT?

a. Hostile takeovers are most likely to occur when a firm's stock is selling below its intrinsic value as
a result of poor management.
b. The efficiency of the U.S. economy would probably be increased if hostile takeovers were
absolutely forbidden.
 c. The managers of established, stable companies sometimes attempt to get their state legislatures to
remove rules that make it more difficult for raiders to succeed with hostile takeovers.
d. In general, it is more in bondholders' interests than stockholders' interests for a firm to shift its
investment focus away from safe, stable investments and into risky investments, especially those
that primarily involve research and development.
e. Stockholders in general would be better off if managers never disclosed favorable events and
therefore caused the price of the firm's stock to sell at a price below its intrinsic value.

Part 3: short answers

Q1. What is a firm’s intrinsic value? Its current stock price? Is the stock’s “true” long-run value
more closely related to its intrinsic value or to its current price?
Q3. Suppose three honest individuals gave you their estimates of Stock X’s intrinsic value. One
person is your current roommate, the second person is a professional security analyst with an
excellent reputation on Wall Street, and the third person is Company X’s CFO. If the three
estimates differed, in which one would you have the most confidence? Why?

Q4. Is it better for a firm’s actual stock price in the market to be under, over, or equal to its
intrinsic value? Would your answer be the same from the standpoints of stockholders in general
and a CEO who is about to exercise a million dollars in options and then retire? Explain.

Q5. If a company’s board of directors wants management to maximize shareholder wealth,

should the CEO’s compensation be set as a fixed dollar amount, or should the compensation
depend on how well the firm performs? If it is to be based on performance, how should
performance be measured? Would it be easier to measure performance by the growth rate in
reported profits or the growth rate in the stock’s intrinsic value? Which would be the better
performance measure? Why?

Q6. What are the various forms of business organization? What are the advantages and
disadvantages of each?

Q7. Should stockholder wealth maximization be thought of as a long-term or a short-term goal?

For example, if one action increases a firm’s stock price from a current level of $20 to $25 in 6
months and then to $30 in 5 years but another action keeps the stock at $20 for several years but
then increases it to $40 in 5 years, which action would be better? Think of some specific
corporate actions that have these general tendencies. (NO CALCULATIONS NEEDED)

Q8. What are some actions that stockholders can take to ensure that management’s and
stockholders’ interests are aligned?

CH3:
Part 1: True or False

1. The primary reason the annual report is important in finance is that it is used by investors when
they form expectations about the firm's future earnings and dividends, and the riskiness of those
cash flows.
2. The amount shown on the December 31, 2015 balance sheet as "retained earnings" is equal to the
firm's net income for 2015 minus any dividends it paid
3. The income statement shows the difference between a firm's income and its costs--i.e., its profits-
-during a specified period of time. However, not all reported income comes in the form of cash,
and reported costs likewise may not be consistent with cash outlays. Therefore, there may be a
substantial difference between a firm's reported profits and its actual cash flow for the same
period.
4. In finance, we are generally more interested in cash flows than in accounting profits. Free cash
flow (FCF) is calculated as after-tax operating income plus depreciation less the sum of capital
expenditures and changes in net operating working capital.
5. To estimate the cash flow from operations, depreciation must be added back to net income
because it is a non-cash charge that has been deducted from revenue in the net income
calculation.

Part 2: Multiple Choice Questions

1. Which of the following statements is CORRECT?
a. Assets other than cash are expected to produce cash over time, and the amounts of cash they
eventually produce should be exactly the same as the amounts at which the assets are carried
on the books.
b. The primary reason the annual report is important in finance is that it is used by investors
when they form expectations about the firm's future earnings and dividends, and the riskiness
of those cash flows.
c. The annual report is an internal document prepared by a firm's managers solely for the use of
its creditors/lenders.
d. The four most important financial statements provided in the annual report are the balance
sheet, income statement, cash budget, and statement of stockholders' equity.

2. Other things held constant, which of the following actions would increase the amount of cash on
a company's balance sheet?
a. The company repurchases common stock.
b. The company pays a dividend.
c. The company issues new common stock.
d. The company gives customers more time to pay their bills.
e. The company purchases a new piece of equipment.

3. Which of the following items cannot be found on a firm’s balance sheet under current liabilities?
a. Accounts payable.
b. Short-term notes payable to the bank.
 c. Accrued wages.
d. Cost of goods sold.
e. Accrued payroll taxes.

Part 3: Problems
Q1. The assets of Dallas & Associates consist entirely of current assets and net plant and
equipment. The firm has total assets of $2.5 million and net plant and equipment equals $2
million. It has notes payable of $150,000, long-term debt of $750,000, and total common equity
of $1.5 million. The firm does have accounts payable and accruals on its balance sheet. The firm
only finances with debt and common equity, so it has no preferred stock on its balance sheet.
a. What is the company’s total debt?
b. What is the amount of total liabilities and equity that appears on the firm’s balance
sheet?
c. What is the balance of current assets on the firm’s balance sheet?
d. What is the balance of current liabilities on the firm’s balance sheet?
e. What is the amount of accounts payable and accruals on its balance sheet? [Hint:
Consider this as a single line item on the firm’s balance sheet.]
f. What is the firm’s net working capital?
g. What is the firm’s net operating working capital?

Q2. Pearson Brothers recently reported an EBITDA of $7.5 million and net income of $2.1
million. It had $2 million of interest expense, and its corporate tax rate was 30%. What was its
charge for depreciation and amortization? Hint : Deprec. = EBITDA – EBIT
EBIT = EBT + Interest EBT = Net Income / ( 1- T ) Interest = EBIT – EBT

Q3. Harper Industries has $900 million of common equity on its balance sheet; its stock price is
$80 per share; and its Market Value Added (MVA) is $50 million. How many common shares
are currently outstanding?

Q4. Hapmton Co. had $39,000 in cash at year-end 2015 and $11,000 in cash at year-end 2016.
The firm invested in property, plant, and equipment totaling $210,000. Cash flow from financing
activities totaled + $120,000.
a. What was the cash flow from operating activities?
b. If accruals increased by $15,000, receivables and inventories increased by $50,000, and
depreciation and amortization totaled $25,000, what was the firm’s net income?
Part 4: Short Answers
Q1. Who are some of the basic users of financial statements, and how do they use them?
Q2. Financial statements are based on generally accepted accounting principles (GAAP) and are
audited by CPA firms. Do investors need to worry about the validity of those statements?
Explain your answer.
Q4. What is free cash flow? If you were an investor, why might you be more interested in free
cash flow than net income?
Q5. Would it be possible for a company to report negative free cash flow and still be highly
valued by investors; that is, could a negative free cash flow ever be viewed optimistically
by investors? Explain your answer.