Corporate Finance Ch 1 Solutions

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Solutions to Chapter 1

The Firm and the Financial Manager

1. real executive airplanes brand names financial stock investment capital budgeting financing

2. A firm might cut its labor force dramatically which could reduce immediate expenses and increase profits in the short term. Over the long term, however, the firm might not be able to serve its customers properly or it might alienate its remaining workers; if so, future profits will decrease, and the stock price will decrease in anticipation of these problems.

Similarly, a firm can boost profits over the short term by using less costly materials even if this reduces the quality of the product. Once customers catch on, sales will decrease and profits
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A personal IOU financial c. A trademark real d. A truck real e. Undeveloped land real f. The balance in the firm’s checking account financial g. An experienced and hardworking sales force real h. A bank loan agreement financial

10. Capital budgeting decisions Should a new computer be purchased? Should the firm develop a new drug? Should the firm shut down an unprofitable factory?

Financing decisions Should the firm borrow money from a bank or sell bonds? Should the firm issue preferred stock or common stock? Should the firm buy or lease a new machine that it is committed to acquiring?

11. The stock price reflects the value of both current and future dividends the shareholders will receive. In contrast, profits reflect performance in the current year only. Profit maximizers may try to improve this year’s profits at the expense of future profits. But stock price maximizers will take account of the entire stream of cash flows that the firm can generate. They are more apt to be forward looking.

12. a. This action might appear, superficially, to be a grant to former employees and thus not consistent with value maximization. However, such ‘benevolent’ actions might enhance the firm’s reputation as a good place to work, might result in greater loyalty on the part of current employees, and might contribute to the firm’s recruiting efforts. Therefore, from a broader perspective, the action may
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