Solution Manual For Corporate Finance: A Focused Approach, 7th Edition

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1-1Chapter 1An Overview ofFinancial ManagementandThe Financial EnvironmentANSWERS TO END-OF-CHAPTER QUESTIONS1-1a.A proprietorship, or sole proprietorship, is a business owned by one individual.Apartnership exists when two ormore persons associate to conduct a business.Incontrast, a corporation is a legal entity created by a state.The corporation is separateand distinct from its owners and managers.Acharterincludes the followinginformation: (1) name of the proposed corporation, (2) types of activities it willpursue, (3) amount of capital stock, (4) number of directors, and (5) names andaddresses of directors.The bylaws are a set of rules drawn up by the founders of thecorporation. Included are such points as: (1) how directors are to be elected (allelected each year or perhaps one-third each year for 3-year terms), (2) whether theexisting stockholders will have the first right to buy any new shares the firm issues,and (3) procedures for changing the bylaws themselves, should conditions require it.b.In a limited partnership, limited partners’ liabilities, investment returns and controlare limited, while general partners have unlimited liability and control.A limitedliability partnership (LLP),sometimes called a limited liability company (LLC),combines the limited liability advantage of a corporation with the tax advantages of apartnership.A professional corporation (PC), known in some states as a professionalassociation (PA), has most of the benefits of incorporation but the participants are notrelieved of professional (malpractice) liability.c.Stockholder wealth maximization is the appropriate goal for management decisions.The risk and timing associated with expected earnings per share and cash flows areconsidered in order to maximize the price of the firm’s common stock.d.A money market is a financial market for debt securities with maturities of less thanone year (short-term).The New York money market is the world’s largest.Capitalmarkets are the financial markets for long-term debt and corporate stocks.The NewYork Stock Exchange is an example of a capital market.Primary markets are themarkets in which newly issued securities are sold for the first time.Secondarymarkets are where securities are resold after initial issue in the primary market.TheNew York Stock Exchange is a secondary market.

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