Homework: Generally Accepted Accounting Principles and Operating Cash Flow
Homework of Corporate Finance
The 3rd Week
【Corporations】
What is the primary disadvantage of the corporate form of organization? Name at least two advantages of corporate organization.
Answer: The primary disadvantage of the corporate form is the double taxation to shareholders of distributed earnings and dividends.
Advantages include: limited liability; ability to raise capital; and unlimited life
【Agency Problem】
Who owns a corporation? Describe the process whereby the owners control the firm’s management. What is the main reason that an agency relationship exists in the corporate form of organization? In this context, what kinds of problems can arise?
Answer: In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect the directors of the corporation, who in turn appoint the firm's management.
This separation of ownership from control in the corporate form of organization is what causes agency problems to exist.
Management may act in its own or someone else's best interests, rather than those of the shareholders.
If such events occur, they may contradict the goal of maximizing the share price of the equity of the firm.
【Liquidity】
What does liquidity measure? Explain the trade-off a firm faces between high liquidity and low liquidity levels.
【Calculating Cash Flows】
Dahlia Industries had the following operating results for 2009: sales = 22,800; cost of goods sold = 16,050; depreciation expense = 4,050; interest expense = 1,830; dividends paid = 1,300. At the beginning of the year, net fixed assets were 13,650, current assets were 4,800, and current liabilities were 2,700. At the end of the year, net fixed assets were 16,800, current assets were 5,930, and current liabilities were 3,150. The tax rate for 2009 was 34 percent.
a. What is net income for 2009?
b. What is the operating cash flow for 2009?
c. What is the cash flow from assets for 2009? Is this possible? Explain.
d. If no new debt
The 3rd Week
【Corporations】
What is the primary disadvantage of the corporate form of organization? Name at least two advantages of corporate organization.
Answer: The primary disadvantage of the corporate form is the double taxation to shareholders of distributed earnings and dividends.
Advantages include: limited liability; ability to raise capital; and unlimited life
【Agency Problem】
Who owns a corporation? Describe the process whereby the owners control the firm’s management. What is the main reason that an agency relationship exists in the corporate form of organization? In this context, what kinds of problems can arise?
Answer: In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect the directors of the corporation, who in turn appoint the firm's management.
This separation of ownership from control in the corporate form of organization is what causes agency problems to exist.
Management may act in its own or someone else's best interests, rather than those of the shareholders.
If such events occur, they may contradict the goal of maximizing the share price of the equity of the firm.
【Liquidity】
What does liquidity measure? Explain the trade-off a firm faces between high liquidity and low liquidity levels.
【Calculating Cash Flows】
Dahlia Industries had the following operating results for 2009: sales = 22,800; cost of goods sold = 16,050; depreciation expense = 4,050; interest expense = 1,830; dividends paid = 1,300. At the beginning of the year, net fixed assets were 13,650, current assets were 4,800, and current liabilities were 2,700. At the end of the year, net fixed assets were 16,800, current assets were 5,930, and current liabilities were 3,150. The tax rate for 2009 was 34 percent.
a. What is net income for 2009?
b. What is the operating cash flow for 2009?
c. What is the cash flow from assets for 2009? Is this possible? Explain.
d. If no new debt