INTEGRATIVE PROBLEM SOLUTIONS

CFIN (Corporate Finance), 7e Scott Besley, Eugene Brigham

(Solutions Manual All Chapter)

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Chapter 1 CFIN7 © 2022 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

INTEGRATIVE PROBLEM SOLUTIONS

• Finance deals with decisions about money—that is, how money is raised and used by

companies and individuals. Because value is based on cash flows, finance is integral to the successful operations of a firm. To be successful, a firm must understand how to raise funds, how much it costs to use investors’ money, and how to appropriately invest funds. The principal reason many small businesses fail is because the decision makers do not have a basic understanding of finance.

• Everyone deals with financial decisions, both in business and in their personal lives. For this

reason, and because there are financial implications in nearly every business-related decision, it is important that everyone has at least a general knowledge of financial concepts so they can make informed decisions about money. Marty should be especially knowledgeable in finance because he is a one-person operation—he is the person who makes the financial decisions for his firm.

• The three main forms of business organization are the proprietorship, the partnership, and

the corporation. Although proprietorships and partnerships are easy to start, the major disadvantage to these forms of business is that the owners have unlimited personal liability for the debts of the businesses. On the other hand, a corporation is more difficult to start than the other forms of business, but owners have limited liability. Most business is conducted by corporations because this organizational form maximizes firms’ values.

• Mr. Kimble probably should organize as a proprietorship because it is easy to start the

business as a proprietorship. In addition, it generally is more advantageous from a tax standpoint for a small business to be organized as a proprietorship rather than as a corporation.

• If the company is so successful that it grows to be a large organization, then Mr. Kimble

probably should change from a proprietorship to a corporation. A major reason for changing to a corporation is to protect personal wealth—the owners of a corporation are not personally liable for the debts of the business, whereas the owners of proprietorships and partnerships are personally fully liable for all business debts. When a company becomes very large, most 2 / 4

Chapter 1 CFIN7 © 2022 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.owners believe that the limited liability offered by the corporate form of business is extremely important. In addition, changing to a corporation will provide Mr. Kimble more sources to raise funds to support growth, because corporations can issue stocks and bonds to raise funds in the financial markets whereas proprietorships cannot.

• Mr. Kimble should operate the business so that his best interests are met. Perhaps he would

like to maximize the value of his company, or perhaps he would prefer to maximize his leisure time while making a good living with his business. Whatever goal(s) he chooses, as long as he is sole owner of the company, Mr. Kimble can operate the business as he pleases.However, if he sells a portion of the company to investors, then Mr. Kimble will have to pay more attention to the best interests of the investors—that is, he will have to pursue the goal of maximizing the value of the firm.

• After converting to a corporation and selling stock to outsiders, PAR will have multiple owners,

which means that Mr. Kimble and his management team will have to consider the best interests of the other owners when making decisions about the corporation. Mr. Kimble and his management team are “agents” of the stockholders, and they should operate the business to maximize the value of the firm. To ensure management makes decisions that are in the best interests of the owners, the company can pay incentives that are based on the success of the firm, make management owners of the firm, or use other methods to encourage management to make the “correct” decisions. Such methods will help to lessen the chances of management making decisions in their own best interests rather than the stockholders’ best interests—that is, such actions help to mitigate the possibility of agency problems.

• U.S. and foreign companies “go international” for the following major reasons:
• To seek new markets. After a company has saturated its home market, growth

opportunities often are better in foreign markets.

• To seek raw materials. Few countries have all the raw materials they need within their

own borders, which means generally they must seek some raw materials from other countries.

• To seek new technology. No single nation holds a commanding advantage in all

technologies, so companies scour the globe for leading scientific and design ideas. 3 / 4

Chapter 1 CFIN7 © 2022 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

• To seek production efficiency. Companies in countries where production costs are high

tend to shift production to low-cost countries.

• To avoid political and regulatory hurdles. For example, companies move production to

foreign countries in which they sell products to get around the countries’ import quotas.

• The following is a list of problems of which Mr. Kimble should be aware when conducting

busines in foreign markets:

• Different currency denominations. Cash flows in various parts of a multinational

corporate system often are denominated in different currencies. Hence, an analysis of exchange rates and the effects of fluctuating currency values must be included in all financial analyses.

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