Solutions: Income Statement and Pearson Education

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Contents
Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Chapter 14 Chapter 15 Chapter 16 Chapter 17 Chapter 18 Chapter 19 Chapter 20 Chapter 21 Chapter 22 Chapter 23 Chapter 24 Chapter 25 Chapter 26 Chapter 27 Chapter 28 Chapter 29 Chapter 30 Chapter 31 The Corporation Introduction to Financial Statement Analysis Arbitrage and Financial Decision Making The Time Value of Money Interest Rates Investment Decision Rules Fundamentals of Capital Budgeting Valuing Bonds Valuing Stocks Capital Markets and the Pricing of Risk Optimal Portfolio Choice and the Capital Asset Pricing Model Estimating the Cost of Capital Investor Behavior and Capital Market Efficiency Capital Structure in a Perfect Market Debt and Taxes Financial Distress, Managerial Incentives, and Information Payout Policy Capital Budgeting and Valuation with Leverage Valuation and Financial Modeling: A Case Study Financial Options Option Valuation Real Options Raising Equity Capital Debt Financing Leasing Working Capital Management Short-Term Financial Planning Mergers and Acquisitions Corporate Governance Risk Management International Corporate Finance 1 4 16 26 50 69 89 106 123 134 148 166 175 184 193 202 216 225 244 253 263 274 300 306 310 317 324 331 337 340 352

©2011 Pearson Education, Inc. Publishing as Prentice Hall

Chapter 1

The Corporation
1-1. 1-2. What is the most important difference between a corporation and all other organization forms? A corporation is a legal entity separate from its owners. What does the phrase limited liability mean in a corporate context? Owners’ liability is limited to the amount they invested in the firm. Stockholders are not responsible for any encumbrances of the firm; in particular, they cannot be required to pay back any debts incurred by the firm. Which organization forms give their owners limited liability? Corporations and limited liability companies give owners limited liability. Limited partnerships provide limited liability for the limited partners, but not for the general partners. What are the main advantages and disadvantages of organizing a firm as a corporation? Advantages: Limited liability, liquidity, infinite life Disadvantages: Double taxation, separation of ownership and control Explain the difference between an S corporation and a C corporation. C corporations much pay corporate income taxes; S corporations do not pay corporate taxes but must pass through the income to shareholders to whom it is taxable. S corporations are also limited to 75 shareholders and cannot have corporate or foreign stockholders. You are a shareholder in a C corporation. The corporation earns $2 per share before taxes. Once it has paid taxes it will distribute the rest of its earnings to you as a dividend. The corporate tax rate is 40% and the personal tax rate on (both dividend and non-dividend) income is 30%. How much is left for you after all taxes are paid? First the corporation pays the taxes. After taxes, $2 ! (1 " 0.4) = $1.20 is left to pay dividends. Once the dividend is paid, personal tax on this must be paid, which leaves $1.20 ! (1 " 0.3) = $0.84 . So after all the taxes are paid, you are left with 84¢. 1-7. Repeat Problem 6 assuming the corporation is an S corporation. An S corporation does not pay corporate income tax. So it distributes $2 to its stockholders. These stockholders must then pay personal income tax on the distribution. So they are left with $2 ! (1 " 0.3) = $1.40 .

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©2011 Pearson Education, Inc. Publishing as Prentice Hall

2 1-8.

Berk/DeMarzo • Corporate Finance, Second Edition You have decided to form a new start-up company developing applications for the iPhone. Give examples of the three distinct types of financial decisions you will need to make. As the manager of an iPhone applications developer, you will make three types of financial decisions. i. You will make...
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