Corporate finance

Chapter 1 review and exercise

Lecturer: Dr. Duong Thi Thuy An

A. Review questions:
1. The Financial Management Decision Process: What are the three types of financial
management decisions? For each type of decision, give an example of a business transaction
that would be relevant.
2. Sole Proprietorships and Partnerships: What are the four primary disadvantages of the sole
proprietorship and partnership forms of business organization? What benefits are there to
these types of business organization as opposed to the corporate form?
3. Corporations: What is the primary disadvantage of the corporate form of organization? Name
at least two advantages of corporate organization.
4. Goal of Financial Management :What goal should always motivate the actions of a firm’s
financial manager?
5. Agency Problems: 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?
6. Financial Ratios: Fully explain the kind of information the following financial ratios provide
about a firm:
Ratio Explaination
a. Quick ratio.
b. Cash ratio.
c. Total asset turnover.
d. Equity multiplier.
e. Long-term debt ratio.
f. Times interest earned ratio.
g. Profit margin.
h. Return on assets.
i. Return on equity.
j. Price–earnings ratio.
B. Exercise:
1. Goal of the Firm: Evaluate the following statement: Managers should not focus on the current
stock value because doing so will lead to an overemphasis on short-term profits at the expense
of long-term profits.
2. Agency Problems : Suppose you own stock in a company. The current price per share is $25.
Another company has just announced that it wants to buy your company and will pay $35 per
share to acquire all the outstanding stock. Your company’s management immediately begins
fighting off this hostile bid. Is management acting in the shareholders’ best interests? Why or
why not?
3. Firm A and firm B have debt–total asset ratios of 35% and 30% and returns on total assets of
12% and 11%, respectively. Which firm has a greater return on equity?
4. Penguin Pucks, Inc., has current assets of $5,100, net fixed assets of $23,800, current liabilities
of $4,300, and long-term debt of $7,400.
a. What is the value of the shareholders’ equity account for this firm? The company has sales
of $586,000, costs of $247,000, depreciation expense of $43,000, interest expense of
$32,000, and a tax rate of 35 percent.
 b. What is the net income for this firm?
c. Suppose the firm paid out $73,000 in cash dividends. What is the addition to retained
earnings?
d. Suppose the firm had 85,000 shares of common stock outstanding. What is the earnings per
share, or EPS, figure?
e. What is the dividends per share figure?
5. Consider the following balance sheets and the most recent income statement for the Philippe
Corporation. Based on the balance sheets and income statement, assume the company has 1000
outstanding stock, each stock has 1$ face value, calculate the following ratios for 2009:
• Current ratio
• Quick ratio
• Cash ratio
• Inventory turnover
• Receivables turnover
• Total debt ratio
• Long-term debt ratio
• Book value per share
• Dividend ratio
• Dividend per share
• Earning per share
• ROA
• ROE