Solution manual for fundamentals of financial management 12th edition, van horne

Solution Manual For Fundamentals of Financial Management 12th Edition, Van Horne YOU CAN FIND MORE QUESTIONS AND ANSWERS, just go HEREANSWERS TO QUESTIONS CHAPTER 1:…
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Solution Manual For Fundamentals of Financial Management 12th Edition, Van Horne YOU CAN FIND MORE QUESTIONS AND ANSWERS, just go HEREANSWERS TO QUESTIONS CHAPTER 1: THE ROLE OF FINANCIAL MANAGEMENT 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 characteristic. 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.www.testbanksuccess.com4. 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.CHAPTER 2: THE BUSINESS, TAX AND FINANCIAL ENVIRONMENTS 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.www.testbanksuccess.comCHAPTER 3: THE TIME VALUE OF MONEY1. Simple interest is interest that is paid (earned) on only the original amount, or principal, borrowed (lent). 2. With compound interest, interest payments are added to the principal and both then earn interest for subsequent periods. Hence interest is compounded. The greater the number of periods and the more times a period interest is paid, the greater the compounding and future value. 3. The answer here will vary according to the individual. Common answers include a savings account and a mortgage loan. 4. An annuity is a series of cash receipts of the same amount over a period of time. It is worth less than a lump sum equal to the sum of the annuities to be received because of the time value of money. 5. Interest compounded continuously. It will result in the highest terminal value possible for a given nominal rate of interest.CHAPTER 4: THE VALUATION OF LONG-TERM SECURITIES 1. The market value of a firm is the market price at which the firm trades in an open marketplace. This value is often viewed as being the higher of the firm's liquidation value (i.e., amount that could be realized if the firm's assets are sold separately from its operating organization) or going-concern value (i.e., amount a firm could be sold for as a continuing business). 2. The intrinsic value (or economic value) of a security could differ from its market value (or price). Even in a market that is reasonably efficient and informed, the market price of a security will fluctuate about its intrinsic value. The less efficient and informed the market may be, the greater the likelihood that intrinsic value will differ from market value. 3. Both bonds and preferred stocks are fixed-income securities. The interest payment or dividend is fixed at the time of issuance, is contractual, and occurs at regular intervals. Thus, we apply the same general approach to valuing bonds and preferred stock -- that is, we determine the present value of a fixed payment stream. 4. The longer the maturity, the less important the principal payment, and the more important the interest payments in the bond's valuation. As a result, the principal payment acts less as a buffer against the effect of changes in yield on market price.www.testbanksuccess.com5. The lower coupon bond will suffer the greater proportional market decline. Its income stream is further in the future than that for the higher coupon bond, and hence subject to more volatility.CHAPTER 5: RISK AND RETURN 1. Virtually none of the concepts presented would hold. Risk would not be a dimension of concern to the risk-neutral investor. The only concern would be with expected return, and market equilibrium would be in relation to seeking the highest expected return. If investors were risk seekers, increased risk would provide positive utility and would be sought along with higher expected returns. Obviously there would be no risk-return tradeoff of the type described. 2. The characteristic line depicts the expected relationship between excess returns (in excess of the risk-free rate) for the security involved and for the market portfolio. The beta is the slope of the characteristic line. [The alpha is the intercept on the vertical axis. It should be zero in theory, but may be positive or negative in practice.] 3. Beta measures the responsiveness of changes in excess returns for the security involved to changes in excess returns for the market portfolio. It tells us how attuned fluctuations in returns for the stock are with those for the market. A beta of one indicates proportional fluctuation and systematic risk; a beta greater than one indicates more than proportional fluctuation; and a beta less than one indicates less than proportional fluctuation relative to the market. 4. Req. (Rj) = Rf + [E(Rm) - Rf] Betaj Rf = risk-free rate; Req. (Rj) = required rate of return for security j; E(Rm) = expected rate of return for the market portfolio; Betaj = beta for security j; 5. No. The security market line (SML) can vary with changes in interest psychology, and perhaps with other factors.AND MUCH MOREYOU CAN FIND MORE QUESTIONS AND ANSWERS, just go HEREHAVE BEST TEST RESULT! ☺☺☺ ☺ ☺☺☺www.testbanksuccess.comrates, investor
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