CHAPTER 1

INTRODUCTION TO CORPORATE FINANCE

CONCEPT QUESTIONS
1. 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?
- Shareholders/Stockholders own a corporation.
- They elect the board of directors ( Bầu ra ban giám đốc )
- The main reason is to separate ownership from management. Managers can focus on their
expertise ( chuyên môn) in running the business, while shareholders can focus on investing and
providing capital. Moreover, by separating ownership from management, shareholders can limit
their personal liabilities. The company can continue to exist even if the shareholders change.
- The conflict of interest/ goals between the shareholders/stockholders and the manager;
Managers might prioritize their own perks (đặc quyền)/ benefits over stockholders’ interests (lợi
ích).
2. Not-for-Profit Firm Goals Suppose you were the financial manager of a not-for-profit
business (a not-for-profit hospital, perhaps). What kinds of goals do you think would be
appropriate?
- Minimize revenue ( lower cost )
- Maximize value of equity
3. 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.
- No.
4. Ethics and Firm Goals Can the goal of maximizing the value of the stock conflict with other
goals, such as avoiding unethical or illegal behavior? In particular, do you think subjects like
customer and employee safety, the environment, and the general good of society fit in this
framework, or are they essentially ignored? Think of some specific scenarios to illustrate your
answer.
- Yes, in order to boost the value of stock, firms might use some tricks to window dressing (Làm
đẹp BCTC) which misleads the investor to believe that the company will continue developing in
the future-> the value of stock rises.
- Yes, when it comes to the environment, firms can cut the cost of production such as using
unfriendly environmental machines. Moreover, firms might pay low wages and provide the poor
working conditions which might increase their profit -> EPS rises.
5. International Firm Goal Would the goal of maximizing the value of the stock differ for
financial management in a foreign country? Why or why not?
- No, because every firms wanna maximize the value of the stock. Therefore,
6. 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?
- Synergy value ( giá trị cộng hưởng)
7. Agency Problems and Corporate Ownership Corporate ownership varies around the world.
Historically, individuals have owned the majority of shares in public corporations in the United
States. In Germany and Japan, however, banks, other large financial institutions, and other
companies own most of the stock in public corporations. Do you think agency problems are
likely to be more or less severe in Germany and Japan than in the United States?
8. Agency Problems and Corporate Ownership In recent years, large financial institutions
such as mutual funds and pension funds have become the dominant owners of stock in the
United States, and these institutions are becoming more active in corporate affairs. What are the
implications of this trend for agency problems and corporate control?
9. Executive Compensation Critics have charged that compensation to top managers in the
United States is simply too high and should be cut back. For example, focusing on large
corporations, Larry Ellison of Oracle has been one of the best-compensated CEOs in the United
States, earning about $76.9 million in 2013. Are such amounts excessive? In answering, it might
be helpful to recognize that superstar athletes such as Cristiano Ronaldo, top earners in the
entertainment field such as James Cameron and Oprah Winfrey, and many others at the top of
their respective fields earn at least as much, if not a great deal more.
10. Goal of Financial Management Why is the goal of financial management to maximize the
current value of the company’s stock? In other words, why isn’t the goal to maximize the future
value?
-

EXERCISES
1. Building an Income Statement Shelton, Inc., has sales of $435,000, costs of $216,000,
depreciation expense of $40,000, interest expense of $21,000, and a tax rate of 35 percent. What
is the net income for the firm? Suppose the company paid out $30,000 in cash dividends. What
is the addition to retained earnings?
-
2. Cash Flows Ritter Corporation’s accountants prepared the following financial statements for
year-end 2015:
a. Explain the change in cash during 2015.
b. Determine the change in net working capital in 2015.

INCOME STATEMENT 2015 BALANCE SHEET

Revenue $790 December 31
Expenses 575 2015 2014
Depreciation 90 Assets
Net income $125 Cash 80 60
Dividends $95 Other current assets 185 170
Net fixed assets 405 385
Total assets $670 $615
Liabilities and Equity
Accounts Payable 140 125
Long-term debt 160 150
Stockholders' equity 370 340
 Total liabilities and equity $670 $615

3. Building an Income Statement During the year, the Senbet Discount Tire Company had
gross sales of $925,000. The firm’s cost of goods sold and selling expenses were $490,000 and
$220,000, respectively. Senbet also had notes payable of $740,000. These notes carried an
interest rate of 4 percent. Depreciation was $120,000. Senbet’s tax rate was 35 percent. What
was Senbet’s net income?
4. Using Income Statements Given the following information for O’Hara Marine Co., calculate
the depreciation expense: sales = $44,000; costs = $27,500; addition to retained earnings =
$5,200; dividends paid = $1,670; interest expense = $1,850; tax rate = 40 percent.
5. Net Income and OCF: During 2015, Rainbow Umbrella Corp. had sales of $590,000. Cost
of goods sold, administrative and selling expenses, and depreciation expenses were
$455,000, $85,000, and $125,000, respectively. In addition, the company had an interest
expense of $65,000 and a tax rate of 35 percent. (Ignore any tax loss carryback or carryforward
provisions). What is the company’s net income for 2015?
6. Accounting Values versus Cash Flows: In Problem 8, suppose Rainbow Umbrella Corp.
paid out $34,000 in cash dividends. Is this possible? If spending on net fixed assets and net
working capital was zero, and if no new stock was issued during the year, what was the change
in the firm’s long-term debt account?
7. Use the following information for Ingersoll, Inc., Draw up an income statement and
balance sheet for this company for 2014 and 2015. (assume the tax rate is 34 percent)