财务管理Chapter1~6课本答案
? Pearson Education Limited 2005
1
The Role of Financial Management
Increasing shareholder value over time is the bottom line of every move we make.
ROBERT GOIZUETA Former CEO, The Coca-Cola Company Part 1 Introduction to Financial Management
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ANSWERS TO QUESTIONS
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1. With an objective of maximizing shareholder wealth, capital will
tend to be allocated to the most productive investment opportunities on a risk-adjusted return basis. Other decisions will also be made to maximize efficiency. If all firms do this, productivity will be heightened and the economy will realize higher real growth. There will be a greater level of overall economic want satisfaction. Presumably people overall will benefit, but this depends in part on the redistribution of income and wealth via taxation and social programs. In other words, the economic pie will grow larger and everybody should be better off if there is no reslicing. With reslicing, it is possible some people will be worse off, but that is the result of a governmental change in redistribution. It is not due to the objective function of corporations.
2. Maximizing earnings is a nonfunctional objective for the following
reasons:
a. Earnings is a time vector. Unless one time vector of earnings
clearly dominates all other time vectors, it is impossible to
select the vector that will maximize earnings.
b. Each time vector of earning possesses a risk characteristi
c.
Maximizing expected earnings ignores the risk parameter.
c. Earnings can be increased by selling stock and buying treasury
bills. Earnings will continue to increase since stock does
not require out-of-pocket costs.
d. The impact of dividend policies is ignored. If all earnings
are retained, future earnings are increased. However, stock
prices may decrease as a result of adverse reaction to the
absence of dividends.
Maximizing wealth takes into account earnings, the timing and risk of these earnings, and the dividend policy of the firm.
3. Financial management is concerned with the acquisition, financing,
and management of assets with some overall goal in mind. Thus, the function of financial management can be broken down into three major decision areas: the investment, financing, and asset management decisions.
4. Yes, zero accounting profit while the firm establishes market
position is consistent with the maximization of wealth objective.
Other investments where short-run profits are sacrificed for the long run also are possible.
5. The goal of the firm gives the financial manager an objective
function to maximize. He/she can judge the value (efficiency) of any financial decision by its impact on that goal. Without such a goal, the manager would be "at sea" in that he/she would have no objective criterion to guide his/her actions.
6. The financial manager is involved in the acquisition, financing,
and management of assets. These three functional areas are all interrelated (e.g., a decision to acquire an asset necessitates the financing and management of that asset, whereas financing and management costs affect the decision to invest).
7. If managers have sizable stock positions in the company, they will
have a greater understanding for the valuation of the company.
Moreover, they may have a greater incentive to maximize shareholder wealth than they would in the absence of stock holdings. However, to the extent persons have not only human capital but also most of their financial capital tied up in the company, they may be more risk averse than is desirable. If the company deteriorates because
a risky decision proves bad, they stand to lose not only their jobs
but have a drop in the value of their assets. Excessive risk aversion can work to the detriment of maximizing shareholder wealth as can excessive risk seeking if the manager is particularly risk prone.
8. Regulations imposed by the government constitute constraints
against which shareholder wealth can still be maximized. It is important that wealth maximization remain the principal goal of firms if economic efficiency is to be achieved in society and people are to have increasing real standards of living. The benefits of regulations to society must be evaluated relative to the costs imposed on economic efficiency. Where benefits are small
relative to the costs, businesses need to make this known through the political process so that the regulations can be modified.
Presently there is considerable attention being given in Washington to deregulation. Some things have been done to make regulations less onerous and to allow competitive markets to work.
9. As in other things, there is a competitive market for good
managers. A company must pay them their opportunity cost, and indeed this is in the interest of stockholders. To the extent managers are paid in excess of their economic contribution, the returns available to investors will be less. However, stockholders can sell their stock and invest elsewhere. Therefore, there is a balancing factor that works in the direction of equilibrating managers' pay across business firms for a given level of economic contribution.
10. In competitive and efficient markets, greater rewards can be
obtained only with greater risk. The financial manager is constantly involved in decisions involving a trade-off between the two. For the company, it is important that it do well what it knows best. There is little reason to believe that if it gets into
a new area in which it has no expertise that the rewards will be
commensurate with the risk that is involved. The risk-reward trade-off will become increasingly apparent to the student as this book unfolds.
11. Corporate governance refers to the system by which corporations are
managed and controlled. It encompasses the relationships among a company’s shareholders, board of directors, and senior management.
These relationships provide the framework within which corporate objectives are set and performance is monitored.
The board of directors sets company-wide policy and advises the CEO and other senior executives, who manage the company’s day-to-day activities. Boards review and approve strategy, significant investments, and acquisitions. The board also oversees operating plans, capital budgets, and the company’s financial reports to common shareholders.
12. The controller's responsibilities are primarily accounting in
nature. Cost accounting, as well as budgets and forecasts, would be for internal consumption. External financial reporting would be provided to the IRS, the SEC, and the stockholders.
The treasurer's responsibilities fall into the decision areas most commonly associated with financial management: investment (capital budgeting, pension management), financing (commercial banking and investment banking relationships, investor relations, dividend disbursement), and asset management (cash management, credit management).
? Pearson Education Limited 2005
2
The Business, Tax,
and Financial Environments
Corporation, n. An ingenious device for obtaining individual profit without individual responsibility.
AMBROSE BIERCE The Devil’s Dictionary
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ANSWERS TO QUESTIONS
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1. The principal advantage of the corporate form of business
organization is that the corporation has limited liability. The owner of a small family restaurant might be required to personally guarantee corporate borrowings or purchases anyway, so much of this advantage might be eliminated. The wealthy individual has more at stake and unlimited liability might cause one failing business to bring down the other, healthy businesses.
2. The liability is limited to the amount of the investment in both
the limited partnership and in the corporation. However, the limited partner generally does not have a role in selecting the management or in influencing the direction of the enterprise. On a pro rata basis, stockholders are able to select management and affect the direction of the enterprise. Also, partnership income is taxable to the limited partners as personal income whereas corporate income is not taxed unless distributed to the stockholders as dividends.
3. With both a sole proprietorship and partnership, a major drawback
is the legal liability of the owners. It extends beyond the financial resources of the business to the owners personally.
Fringe benefits are not deductible as an expense. Also, both forms of organization lack the corporate feature of "unlimited life."
With the partnership there are problems of control and management.
The ownership is not liquid when it comes to planning for
individual estates. Decision making can be cumbersome. An LLC generally lacks the feature of "unlimited life," and complete transfer of an ownership interest is usually subject to the approval of at least a majority of the other LLC members.
4. The chief beneficiaries are smaller companies where the first
$75,000 in taxable income is a large portion, if not all, of their total taxable income.
5. Accelerated depreciation is used up to the point it is advantageous
to switch to straight line depreciation. A one-half year convention is followed in the first year, which reduces the cost recovery in that year from what would otherwise be the case.
Additionally, a one-half year convention is followed in the year following the asset class. This pushes out the depreciation schedule, which is disadvantageous from a present value standpoint.
The double declining balance method is used for the first four asset classes, 3, 5, 7 and 10 years. The asset category determines the project's depreciable life.
6. The immunity from each other's taxing power dates back to the early
part of the 19th century. It used to apply to salaries of government employees as well. The exemption is historical, and it is hard to rationalize from the standpoint of economic/taxing efficiency.
7. Personal tax rates are progressive up to a point, then become
regressive.
8. With the differential taxation of ordinary income and
capital gains, securities with a higher likelihood of capital gains are tax advantaged. These include low dividend common stocks, common stocks in general, discount bonds, real estate, and other investments of this sort.
9. Depreciation changes the timing of tax payments. The longer these
payments can be delayed, the better off the business is.
10. One advantage to Subchapter S occurs when investors have outside
income against which to use losses by the company. Even with no outside income, stockholders still may find Subchapter S to be advantageous. If dividends are paid, the stockholder under Subchapter S is subject only to taxation on the profits earned by the company. Under the corporate method, the company pays taxes on its profits and then the owners pay personal income taxes on the dividends paid to them.
11. Tax incentives are the result of special interest groups
influencing legislators. For example, exporters influenced the passage of DISCs. Doctors and attorneys influenced the passage of the Keogh pension plans. Some of these incentives benefit society as a whole; others benefit only a few at the expense of the rest of society. It is hard to imagine all individuals placing the interest of the whole above their own interests. Therefore, it is difficult to perceive that tax incentives will be discontinued.
Further, some incentives can be used to benefit large groups of people.
12. The purpose of the carryback and carryforward provisions is to
allow the cyclical company with large profit swings to obtain most of the tax benefits available to a company with more steady profits. Also, the provision protects the company with a large loss in a given year. While if a company has steady losses it does not benefit from this provision, the marginal company with profit swings does.
13. Financial markets allow for efficient allocation in the flow of
savings in an economy to ultimate users. In a macro sense, savings originate from savings-surplus economic units whose savings exceed their investment in real assets. The ultimate users of these savings are savings-deficit economic units whose investments in real assets exceed their savings. Efficiency is introduced into the process through the use of financial markets. Since the savings-surplus and savings-deficit units are usually different entities, markets serve to channel these funds at the least cost and inconvenience to both. As specialization develops, efficiency increases. Loan brokers, secondary markets, and investment bankers all serve to expedite this flow from savers to users.
14. Financial intermediaries provide an indirect channel for the flow
of funds from savers to ultimate users. These institutions include commercial banks, savings and loan associations, life insurance companies, pension and profit-sharing funds and savings banks.
Their primary function is the transformation of funds into more attractive packages for savers. Services and economies of scale
are side benefits of this process. Pooling of funds, diversifica-tion of risk, transformation of maturities and investment expertise are desirable functions that financial intermediaries perform.
15. Differences in maturity, default risk, marketability, taxability,
and option features affect yields on financial instruments. In general, the longer the maturity, the greater the default risk, the lower the marketability and the more the return is subject to ordinary income taxation as opposed to capital gains taxation or no taxation, the higher the yield on the instrument. If the investor receives an option (e.g., a conversion feature or warrant), the yield should be lower than otherwise. Conversely, if the firm issuing the security receives an option, such as a call feature, the investor must be compensated with a higher yield. Another factor -- one not taken up in this chapter -- is the coupon rate.
The lower the coupon rate, the greater the price volatility of a bond, all other things the same, and generally the higher the yield.
16. The market becomes more efficient when the cost of financial
intermediation is reduced. This cost is represented by the difference in interest rate between what the ultimate saver receives and what the ultimate borrower pays. Also, the inconvenience to one or both parties is an indirect cost. When financial intermediation reduces these costs, the market becomes more efficient. The market becomes more complete when special types of financial instruments and financial processes are offered
in response to an unsatisfied demand by investors. For example, the new product might be a zero-coupon bond and the new process, automatic teller machines.
17. These exchanges serve as secondary markets wherein the buyer and
seller meet to exchange shares of companies that are listed on the exchange. These markets have provided economies of time and scale in the past and have facilitated exchange among interested parties.
18. a) All other things the same, the cost of funds (interest rates)
would rise. If there are no disparities in savings pattern,
the effect would fall on all financial markets.
b) Given a somewhat segmented market for mortgages, it would
result in mortgage rates falling and rates on other financial
instruments rising somewhat.
c) It would lower the demand for common stock, bonds selling at a
discount, real estate, and other investments where capital
gains are an attraction for investment. Prices would fall for
these assets relative to fixed income securities until
eventually the expected returns after taxes for all financial
instruments were in equilibrium.
d) Great uncertainty would develop in the money and capital
markets and the effect would likely be quite disruptive.
Interest rates would rise dramatically and it would be
difficult for borrowers to find lenders willing to lend at a
fixed interest rate. Disequilibrium would likely continue to
occur until the rate of inflation reduced to a reasonable
level.
e) Financial markets would be less efficient in channeling funds
from savers to investors in real estate.
19. Answers to this question will differ depending on the financial
intermediary that is chosen. The economic role of all is to channel savings to investments at a lower cost and/or with less inconvenience to the ultimate borrower and to the ultimate saver than would be the case in their absence. Their presence improves the efficiency of financial markets in allocating savings to the most productive investment opportunities.
20. Money markets serve the short-term liquidity needs of investors.
The usual line of demarkation is one year; money markets include instruments with maturities of less than a year while capital markets involve securities with maturities of more than one year.
However, both markets are financial markets with the same economic purpose so the distinction of maturity is somewhat arbitrary.
Money markets involve instruments that are impersonal; funds flow on the basis of risk and return. A bank loan, for example, is not
a money-market instrument even though it might be short term.
21. Transaction costs impede the efficiency of financial markets. The
larger they are, the less efficient are financial markets.
Financial institutions and brokers perform an economic service for which they must be compensated. The means of compensation is transaction costs. If there is competition among them, transaction costs will be reduced to justifiable levels.
22. The major sources are bank loans, bond issues, mortgage debt, and
stock issues.
23. Financial brokers, such as investment bankers in particular as well
as mortgage bankers, facilitate the matching of borrowers in need
of funds with savers having funds to lend. For this matching and
servicing, the broker earns a fee that is determined by competitive
forces. In addition, security exchanges and the over-the-counter
market improve the secondary market and hence the efficiency of the
primary market where securities are sold originally.
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SOLUTIONS TO PROBLEMS
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1. a) Under the partnership, $418,000 in actual liabilities. If
sued, they could lose up to their full combined net worths.
As a corporation, their exposure is limited to the $280,000 in
equity that they have in the business.
b) Creditors should be less willing to extend credit, because the
personal net worths of the owners no longer back the claims.
2. Equipment Machine
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Cost $28,000.00 $53,000.00 Depreciation in year:
1 9,332.40 10,600.00
2 12,446.00 16,960.00
3 4,146.80 10,176.00
4 2,074.80 6,105.60
5 6,105.60
6 3,052.80
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$28,000.00 $53,000.00
3. Amount
Percent Subject Subject
Payment to Taxes to Taxes Taxes
──────────────────────────────────────Interest $180,000 100% $180,000 $61,200 Pfd. Div. 300,000 30% 90,000 30,600
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$91,800 4. Year Profit Taxes
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20X1 $ 0 $ 0
20X2 35,000 5,250
20X3 68,000 12,000
20X4 -120,000 (17,250) tax refund of all prior
taxes paid
20X5 52,000 5,250*
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*Loss carryforward through 20X4 =
-$120,000 + $35,000 + $68,000 = -$17,000
Taxable income in 20X5 = $52,000 - $17,000 = $35,000
5. a) The expected real rate of return is 5 percent, and the
inflation premium is 4 percent.
b) The lender gains in that his real return is 7 percent instead
of the 5 percent that was expected. In contrast, the borrower
suffers in having to pay a higher real return than expected.
In other words, the loan is repaid with more expensive dollars
than anticipated.
c) With 6 percent inflation, the real return of the lender is
only 3 percent, so he suffers whereas the borrower gains.
6. No specific solution is recommended. The student should consider
default risk, maturity, marketability, and any tax effects.
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SOLUTIONS TO SELF-CORRECTION PROBLEMS
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1. a. Henry is responsible for all liabilities, book as well as
contingent. If the lawsuit were lost, he would lose all his
net assets, as represented by a net worth of $467,000.
Without the lawsuit, he still is responsible for $90,000 in
liabilities if for some reason the business is unable to pay
them.
b. He still could lose all his net assets because Kobayashi's net
worth is insufficient to make a major dent in the lawsuit:
$600,000 - $36,000 = $564,000. As the two partners have
substantially different net worths, they do not share equally
in the risk. Henry has much more to lose.
c. Under the corporate form, he could lose the business, but that
is all. The net worth of the business is $263,000 - $90,000 =
$173,000, and this represents Henry's personal financial stake
in the business. The remainder of his net worth, $467,000 -
$173,000 = $294,000, would be protected under the corporate
form.
2. Depreciation charges for the equipment:
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Year Percent Amount
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1 20.00% $ 3,200.00
2 32.00 5,120.00
3 19.20 3,072.00
4 11.52 1,843.20
5 11.52 1,843.20
6 5.76 921.60
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Total $16,000.00
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3. a. At $2 million in expenses per $100 million in loans,
administrative costs come to 2 percent. Therefore, to just
break even, the firm must set rates so that (at least) a 2
percent difference exists between the deposit interest rate
and the mortgage rate. In addition, market conditions dictate
that 3 percent is the floor for the deposit rate, while 7
percent is the ceiling for the mortgage rate. Suppose that
Wallopalooza wished to increase the current deposit rate and
lower the current mortgage rate by equal amounts while earning
a before-tax return spread of 1 percent. It would then offer
a deposit rate of 3.5 percent and a mortgage rate of 6.5
percent. Of course, other answers are possible, depending on
your profit assumptions.
b. Before-tax profit of 1 percent on $100 million in loans equals
$1 million.
4. a. The premium attributable to default risk and lower
marketability is 9% - 7.25% = 1.75%.
b. The premium attributable to maturity is 7.25% - 6% = 1.25%.
In this case, default risk is held constant and marketability,
for the most part, is also held constant.
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3
The Time Value of Money
The chief value of money lies in the fact that one lives in a world in which it is overestimated.
H.L. MENCKEN From A Mencken Chrestomathy Part 2 Valuation