Corporate Finance Chapter 1 Solution
Solutions to Textbook Answers Chapter 1 Introduction
Solutions to questions
1. Finance involves three main areas—corporate finance, financial institutions and markets, and investments—that are closely related and complementary. For example, in corporate finance the central issues are how to acquire and employ or invest funds. To acquire funds a financial manager must deal with financial institutions, so some knowledge of the operations of financial institutions and markets is essential. Similarly, corporate finance involves investments because decisions have to be made about which assets should be acquired by a business. Given the close relationship between these three areas of finance, it is impossible to discuss one of them without some discussion of the others. In investment decisions , managers consider the amount invested in the assets of the business and the composition of that investment. Managers of the business are therefore involved in the task of choosing, usually from a long list of available projects, those that are to be undertaken. In addition to decisions about the amount and composition of investments, managers have to decide how to finance them. These are financing decisions . This will involve generating funds internally or raising funds from sources external to the business. Financing decisions also involve dividend decisions because payment of dividends reduces the internally generated funds that are available. (a) A sole proprietorship is a business owned by one person. Many small service businesses, retail stores and professional practices are operated as sole proprietorships. Although the owner of a sole proprietorship is legally liable for its debts, the business should be regarded by the proprietor as a separate entity. (b) A partnership is a business owned by two or more people acting as partners. Partnerships are not separate legal entities and the partners are therefore personally liable for the debts of the partnership. From the
Solutions to questions
1. Finance involves three main areas—corporate finance, financial institutions and markets, and investments—that are closely related and complementary. For example, in corporate finance the central issues are how to acquire and employ or invest funds. To acquire funds a financial manager must deal with financial institutions, so some knowledge of the operations of financial institutions and markets is essential. Similarly, corporate finance involves investments because decisions have to be made about which assets should be acquired by a business. Given the close relationship between these three areas of finance, it is impossible to discuss one of them without some discussion of the others. In investment decisions , managers consider the amount invested in the assets of the business and the composition of that investment. Managers of the business are therefore involved in the task of choosing, usually from a long list of available projects, those that are to be undertaken. In addition to decisions about the amount and composition of investments, managers have to decide how to finance them. These are financing decisions . This will involve generating funds internally or raising funds from sources external to the business. Financing decisions also involve dividend decisions because payment of dividends reduces the internally generated funds that are available. (a) A sole proprietorship is a business owned by one person. Many small service businesses, retail stores and professional practices are operated as sole proprietorships. Although the owner of a sole proprietorship is legally liable for its debts, the business should be regarded by the proprietor as a separate entity. (b) A partnership is a business owned by two or more people acting as partners. Partnerships are not separate legal entities and the partners are therefore personally liable for the debts of the partnership. From the