Corporate Finance - file. © 2024 Pearson Education, Inc. Contents ...

Fundamentals of Corporate Finance Sixth Edition Jonathan Berk Peter DeMarzo Jarrad Harford Solutions Manual Jared Stanfield All Chapters/Supplement files download link at the end of this file. 1 / 4

© 2024 Pearson Education, Inc.Contents Preface iii Chapter 1 Corporate Finance and the Financial Manager 1 Chapter 2 Introduction to Financial Statement Analysis 4

Chapter 3 Time Value of Money: An Introduction 15

Chapter 4 Time Value of Money: Valuing Cash Flow Streams 27

Chapter 5 Interest Rates 52 Chapter 6 Bonds 74 Chapter 7 Stock Valuation 89 Chapter 8 Investment Decision Rules 99 Chapter 9 Fundamentals of Capital Budgeting 123

Chapter 10 Stock Valuation: A Second Look 141

Chapter 11 Risk and Return in Capital Markets 156 Chapter 12 Systematic Risk and the Equity Risk Premium 167 Chapter 13 The Cost of Capital 179 Chapter 14 Raising Equity Capital 187 Chapter 15 Debt Financing 195 Chapter 16 Capital Structure 201 Chapter 17 Payout Policy 214 Chapter 18 Financial Modeling and Pro Forma Analysis 221 Chapter 19 Working Capital Management 231 Chapter 20 Short-Term Financial Planning 239 Chapter 21 Option Applications and Corporate Finance 248 Chapter 22 Mergers and Acquisitions 253 Chapter 23 International Corporate Finance 258 Chapter 24 Leasing 267 Chapter 25 Insurance and Risk Management 274 Chapter 26 Corporate Governance 278 2 / 4

© 2024 Pearson Education, Inc.Chapter 1 Corporate Finance and the Financial Manager

Note: All problems in this chapter are available MyLab Finance

• 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 give their owners limited liability. 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

• C corporations must pay corporate income taxes; S corporations do not pay corporate taxes but

must pass on the income to shareholders to whom it is taxable. S corporations are also limited to 75 shareholders and cannot have corporate or foreign stockholders.

• First, the corporation pays the taxes. After taxes, $2  (1 − 0.25) = $1.50 is left to pay

dividends. Once the dividend is paid, personal tax on this must be paid, leaving $1.50  (1 − 0.2) = $1.20. So after all the taxes are paid, you are left with $1.20.

• An S corporation does not pay corporate income tax, so it distributes $2 to its stockholders.

These stockholders must then pay personal income tax on the distribution. Thus, they are left with $2  (1 − 0.2) = $1.60.

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

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. 3 / 4

• Berk/DeMarzo/Harford • Fundamentals of Corporate Finance, Sixth Edition

© 2024 Pearson Education, Inc.

• Shareholders can
• 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; and/or

• 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; 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) potentially have an incentive to overpay for another company (which would be damaging to your shareholders) because your pay and prestige will improve.

• No—it will not necessarily make the shareholders better off. Even though you are reducing

costs, which could increase cash flows in the short-term, you will deal with more costly warranty issues and with lost reputation with your customers, potentially leading them to buy from your competitors, which would reduce cash flows in the long-run. Making a less expensive, but lower quality product is NOT the same as maximizing the value of the shares (making your shareholders better off).

• No—it will not necessarily make the shareholders better off. Even though you are reducing

costs, which could increase cash flows in the short term, you will deal with more costly warranty issues and with lost reputation with your customers, potentially leading them to buy from your competitors, which would reduce cash flows in the long run. Making a less expensive, but lower quality product is NOT the same as maximizing the value of the shares (making your shareholders better off).

• The shares of a public corporation are traded on an exchange (or “over the counter” in an

electronic trading system), while the shares of a private corporation are not traded on a public exchange.

• A primary market is where the company sells shares of itself to investors. The secondary

market is where investors can buy and/or sell the company’s shares with other investors (but not the company itself).

• A limit order specifies a price at which you are willing to buy or sell. It will be executed when

there is demand or supply at that price. A market order is executed immediately at the best outstanding limit order. For example, a market buy order will be immediately executed against the best limit ask price.

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