Proprietorship; partnership; corporation

Proprietorship; partnership; corporation Student Help Chapter 1

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KEY TERMS Define each of the following terms:
a. Sarbanes-Oxley Act
b. Proprietorship; partnership; corporation
c. S corporations; limited liability companies (LLCs); limited liability partnerships (LLPs)
d. Stockholder wealth maximization
e. Intrinsic value; market price
f. Equilibrium; marginal investor
1- If you bought a share of stock, what would you expect to receive, when would you expect
to receive it, and would you be certain that your expectations would be met?
2- If most investors expect the same cash flows from Companies A and B but are more confident
that A’s cash flows will be closer to their expected value, which company should
have the higher stock price? Explain.
3- What is a firm’s intrinsic value? its current stock price? Is the stock’s “true long-run value”
more closely related to its intrinsic value or to its current price?
4- When is a stock said to be in equilibrium? At any given time, would you guess that most
stocks are in equilibrium as you defined it? Explain.
Suppose three honest individuals gave you their estimates of Stock X’s intrinsic value.
5- One person is your current roommate, the second person is a professional security analyst
with an excellent reputation on Wall Street, and the third person is Company X’s CFO. If
the three estimates differed, in which one would you have the most confidence? Why?
Chapter 2
KEY TERMS Define each of the following terms:
a. Spot markets; futures markets
b. Money markets; capital markets
c. Primary markets; secondary markets
d. Private markets; public markets
e. Derivatives
1- How does a cost-efficient capital market help reduce the prices of goods and services?
2- Describe the different ways in which capital can be transferred from suppliers of capital to
those who are demanding capital.
3- Is an initial public offering an example of a primary or a secondary market transaction?
4- Indicate whether the following instruments are examples of money market or capital market
a. U.S. Treasury bills
b. Long-term corporate bonds
c. Common stocks
5- What would happen to the U.S. standard of living if people lost faith in the safety of the
financial institutions? Explain
Chapter 3
KEY TERMS Define each of the following terms:
a. Annual report; balance sheet; income statement; statement of cash flows; statement of
stockholders’ equity
b. Stockholders’ equity; retained earnings; working capital; net working capital
c. Depreciation; amortization; operating income; EBITDA; free cash flow
d. Progressive tax; marginal tax rate; average tax rate
e. Tax loss carry-back; carry-forward; AMT
f. Capital gain (loss)
g. S corporation
1- What four financial statements are contained in most annual reports?
2- Who are some of the basic users of financial statements, and how do they use them?
3- If a “typical” firm reports $20 million of retained earnings on its balance sheet, could its
directors declare a $20 million cash dividend without having any qualms about what they
were doing? Explain your answer.
4- Explain the following statement: While the balance sheet can be thought of as a snapshot
of a firm’s financial position at a point in time, the income statement reports on operations
over a period of time.
5- Financial statements are based on generally accepted accounting principles (GAAP) and
are audited by CPA firms. Therefore, do investors need to worry about the validity of
those statements? Explain your answer.
Easy Problem
1- INCOME STATEMENT Little Books Inc. recently reported $3 million of net income. Its
EBIT was $6 million, and its tax rate was 40%. What was its interest expense? [Hint: Write
out the headings for an income statement and fill in the known values. Then divide $3
million of net income by (1 ” T) ! 0.6 to find the pretax income. The difference between
EBIT and taxable income must be the interest expense. Use this same procedure to complete
similar problems.]
2- INCOME STATEMENT Pearson Brothers recently reported an EBITDA of $7.5 million and
net income of $1.8 million. It had $2.0 million of interest expense, and its corporate tax rate
was 40%. What was its charge for depreciation and amortization?
3- STATEMENT OF STOCKHOLDERS’ EQUITY In its most recent financial statements,
Newhouse Inc. reported $50 million of net income and $810 million of retained
earnings. The previous retained earnings were $780 million. How much in dividends
were paid to shareholders during the year? Assume that all dividends declared were
actually paid.

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