Chapter 13, An Overview of Corporate Financing Video Solutions, Principles of Corporate Finance

Problem 1

True or false?
a. Net stock issues by U.S. nonfinancial corporations in most years are small but positive.
b. Most new capital investment by U.S. companies is funded by retained earnings.
c. Debt ratios in the United States are lower than in most other developed economies.

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Problem 2

Do you think firms rely too much on internal funds? Would it be better if they had to go back to shareholders when they needed cash?

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Problem 3

In Figure 13.1, would it have been better to have deducted dividends from the net cash raised from shareholders? Should we then have deducted interest payments from net cash raised from debtholders? If so, how would you have defined "internal funds"?

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03:59

Problem 4

Fill in the blanks, using the following terms: floating rate, common stock, convertible, subordinated, preferred stock, senior, warrant.
a. If a lender ranks behind the firm's general creditors in the event of default, his or her loan is said to be _______
b. Interest on many bank loans is based on a _______of interest.
c. $\mathrm{A}(\mathrm{n})$ _______bond can be exchanged for shares of the issuing corporation.
d. $\mathrm{A}(\mathrm{n})$_______ gives its owner the right to buy shares in the issuing company at a predetermined price.
e. Dividends on _______cannot be paid unless the firm has also paid any dividends on its_______

Jennifer Stoner

Numerade Educator

Problem 5

True or false?
a. Banks are huge investors in corporate equity.
b. Insurance companies are huge investors in corporate debt.
c. Rather than investing directly in corporate equities, most households prefer to pool their risk in a hedge fund.
d. Many individuals have a current account with an investment bank that then uses the cash to lend to industry.

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02:00

Problem 6

True or false?
a. In the United States, most common shares are owned by individual investors.
b. The majority of corporations have large shareholders who are prepared to challenge incompetent managers
c. Investments in partnerships cannot be publicly traded.

Crystal Wang

Numerade Educator

01:15

Problem 7

What do we mean when we say that stockholders have control rights and residual cash flow rights? How in practice do they exercise their control rights?

Kaylee Mcclellan

Numerade Educator

03:51

Problem 8

Large blockholders can either encourage or discourage value maximization. Explain.

Daniel Cisneros

Numerade Educator

Problem 9

In 2021, Beta Corporation earned gross profits of $$\$ 760,000$$.
a. Suppose that Beta was financed by a combination of common stock and $$\$ 1$$ million of debt. The interest rate on the debt was $10 \%$, and the corporate tax rate in 2021 was $21 \%$. How much profit was available for common stockholders after payment of interest and corporate taxes?
b. Now suppose that instead of issuing debt, Beta was financed by a combination of common stock and $$\$ 1$$ million of preferred stock. The dividend yield on the preferred was $8 \%$, and the corporate tax rate was still $21 \%$. Recalculate the profit available for common stockholders after payment of preferred dividends and corporate taxes.

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Problem 10

Which of the following features would increase the value of a corporate bond? Which would reduce its value?
a. The bond is convertible into shares.
b. The bond is secured by a mortgage on real estate.
c. The bond is subordinated.

Rashmi Sinha

Numerade Educator

Problem 11

True or false?
a. Financing for public corporations must flow through financial markets.
b. Financing for private corporations must flow through financial intermediaries.
c. Almost all foreign exchange trading occurs on the floors of the FOREX exchanges in New York and London.
d. Derivative markets are a major source of finance for many corporations.

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Problem 12

True or false?
a. Exchange traded funds are hedge funds that can be bought and sold on the stock exchange.
b. Hedge funds provide small investors with low-cost diversification.
c. The sale of insurance policies is a source of financing for insurance companies.
d. In defined-contribution pension plans, the pension pot depends on the rate of return earned on the contributions by the employer and employee.

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Problem 13

Financial markets and intermediaries channel savings from investors to corporate investment. The savings make this journey by many different routes. Give a specific example for each of the following routes:
a. Investor to financial intermediary, to financial markets, and to the corporation.
b. Investor to financial markets, to a financial intermediary, and to the corporation.
c. Investor to financial markets, to a financial intermediary, back to financial markets, and to the corporation.

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Problem 14

Explain briefly how each of the following allow individuals or companies to spread their risk:
a. An exchange traded fund.
b. Commodity markets.
c. A life insurance company.

Rashmi Sinha

Numerade Educator

Problem 15

Some individuals are eager to spend income before it arrives; others want to postpone consumption. Give some examples of intermediaries that provide services to these individuals.

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Problem 16

Which major countries have
a. The largest stock markets?
b. The largest bond markets?
c. The smallest direct holdings of shares by individual investors?
d. The largest holdings of bank deposits by individual investors?
e. The largest holdings of shares by other corporations?
f. The largest use of trade credit for financing?
In each case, define "largest" or "smallest" as total value relative to GDP.

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Problem 17

True/false?
a. Direct holdings of equity by households are larger in Japan than in the United States.
b. Bank financing of corporations is relatively important in Japan and continental Europe.
c. Intercompany loans and trade credit are particularly important in the United States.

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Problem 18

True/false?
a. A blockchain is a form of cryptocurrency.
b. Equity crowdfunding can be used to raise cash for start-up ventures by selling stock over the internet.
c. An initial coin offering is used to sell newly mined bitcoins.
d. P2P lending platforms are primarily used by banks to make small loans to individuals.

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