End of Chapter Solutions Essentials of Corporate Finance 6
th edition Ross, Westerfield, and Jordan Updated 08-01-2007
CHAPTER 1 INTRODUCTION TO CORPORATE FINANCE Answers to Concepts Review and Critical Thinking Qu estions 1. Capital budgeting (deciding on whether to expand a manufacturing plant), capital structure (deciding whether to issue new equity and use the p roceeds to retire outstanding debt), and working capital management (modifying the firm’s credit col lection policy with its customers). 2. Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, hard to raise capital funds. Some advantages: simpler, less regul ation, the owners are also the managers, sometimes personal tax rates are better than corpor ate tax rates. 3. The primary disadvantage of the corporate form is the double taxation to shareholders of distributed earnings and dividends. Some advantages include: li mited liability, ease of transferability, ability to raise capital, and unlimited life. 4. The treasurer’s office and the controller’s office are the two primary organizational groups that report directly to the chief financial officer. The controller’s office handles cost and financial accounting, tax management, and management informat ion systems. The treasurer’s office is responsible for cash and credit management, capital budgeting, and financial planning.