Corporate Finance, - 4e Berk, DeMarzo, Stangeland, Marosi, Harford (...

Solutions Manual for Fundamentals of Corporate Finance, 4th Canadian Edition, 4e Berk, DeMarzo, Stangeland, Marosi, Harford (All Chapters Download link at the end of this file) 1 / 3

1 Copyright © 2023 Pearson Canada Inc.Chapter 1 Corporate Finance and the Financial Manager Note: All problems in this chapter are available in MyLabFinance. An asterisk (*) indicates problems with a higher level of difficulty.

• A corporation is a legal entity separate from its owners. This means ownership shares in

the corporation can be freely traded. None of the other organizational forms share this characteristic.

• Owners’ liability is limited to the amount they invested in the firm. Stockholders are not

responsible for any encumbrances of the firm; in particular, they cannot be required to pay back any debts incurred by the firm.

• Corporations and limited liability companies. Limited partnerships provide limited liability

for the limited partners, but not for the general partners.

4. Advantages: Limited liability, liquidity, infinite life

Disadvantages: Double taxation, separation of ownership and control

• Real estate corporations must pay corporate income taxes but REITs do not pay corporate

tax; instead, they must pass through substantially all of the income to the trust unit holders to whom the income is taxable.

• Excel Solution

Plan: First find the value remaining after corporate taxes. Then determine the remainder after personal taxes.Execute: First the corporation pays the taxes. After taxes, $2 × (1 – 0.34) = $1.32 per share is left to pay dividends. Once the dividend is paid, personal tax on this must be paid leaving $1.32 × (1 – 0.18) = $1.0824 per share.

Evaluate: After all the taxes are paid, you are left with $1.0824 per share.

• Excel Solution

Plan: First find the value remaining after corporate taxes. Then determine the remainder after personal taxes.Execute: As a REIT, there is no corporate tax so the full $2 per share can be paid out to you as a unit holder. You must then pay personal income tax on the distribution. So you are left with $2 × (1 – 0.4) = $1.20 per share.Evaluate: After all the taxes are paid, you are left with $1.20 per share. 2 / 3

2 Chapter 1: Corporate Finance and the Financial Manager

Copyright © 2023 Pearson Canada Inc.

• The investment decision is the most important decision that a financial manager makes, as

the manager must decide how to put the owners’ money to its best use.

• The goal of maximizing shareholder wealth is agreed upon by all shareholders because all

shareholders are better off when this goal is achieved.

10. Shareholders can do the following:

• Ensure that employees are paid with company stock and/or stock options.
• Ensure that underperforming managers are fired.
• Write contracts that ensure that the interests of the managers and shareholders are

closely aligned.

• Mount hostile takeovers.
• When your parents pay for the meal, you benefit from the food but do not take on the cost

of the food. This is similar to the agency problem in corporations, when managers can benefit from taking actions in their own personal interests using money that belongs to shareholders.

• The agent (renter) will not take the same care of the apartment as the principal (owner),

because the renter does not share in the costs of fixing damage to the apartment. To mitigate this problem, having the renter pay a deposit would motivate the renter to keep damages to a minimum. The deposit forces the renter to share in the costs of fixing any problems that are caused by the renter.

• There is an ethical dilemma when the CEO of a firm has opposite incentives to those of the

shareholders. In this case, you (as the CEO) have an incentive to potentially overpay for another company (which would be damaging to your shareholders) because your pay and prestige will improve.*14. Plan: For each of parts (a) to (d) you must determine if your personal change in monetary wealth more than offsets the value to you of losing your leisure time (valued at $51,000).If it does, then you would decide to proceed with the new project.

Execute:

• If you owned 100% of the company and the project were accepted, your personal shares

of stock would increase in value by 100% of $1 million = $1 million. This would more than offset your personal cost of lost leisure; therefore, your decision would be to proceed with the project.

• If you owned 1% of the company and the project were accepted, your personal shares

of stock would increase in value by 1% of $1 million = $10,000. This would not be enough to offset your personal cost of lost leisure; therefore your decision would be to reject the project.

• If you owned 3% of the company and the project were accepted, your personal shares

of stock would increase in value by 3% of $1 million = $30,000. In addition, you would receive a bonus of $25,000, so in total your monetary wealth would increase by $55,000. This more than offsets your personal cost of lost leisure; therefore, your decision would be to proceed with the project.

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