FIN 515 Homework #1
1-1. What is the most important difference between a corporation and all other organizational forms?
1-2. What does the phrase limited liability mean in a corporate context?
1-3. Which organizational forms give their owners limited liability
1-4. What are the main advantages and disadvantages of organizing a firm as a corporation?
1-5. Explain the difference between an S corporation and a C corporation.
1-6. You are a shareholder in a C corporation. The corporation earns $2 per share before taxes. Once it has paid taxes it will distribute the rest of its earnings to you as a dividend. The corporate tax rate is 40% and the personal tax rate on (both dividend and
non-dividend) income is 30%. How much is left for you after all taxes are paid?
1-7. Repeat Problem 6 assuming the corporation is an S corporation.
2.8 In early 2009, General Electric (GE) had a book value of equity of $105 billion, 10.5 billion shares outstanding, and a market price of $10.80 per share. GE also had cash of $48 billion, and total debt of $524 billion. Three years later, in early 2012, GE had a book value of equity of $116 billion, 10.6 billion shares outstanding with a market price of $17 per share, cash of $84 billion, and total debt of $410 billion. Over this period, what was the change in GE’s:
- market capitalization?
- market-to-book ratio
- enterprise value?
2-11. Suppose that in 2013, Global launches an aggressive marketing campaign that boosts sales by 15%. However, their operating margin falls from 5.57% to 4.50%. Suppose that they have no other income, interest expenses are unchanged, and taxes are the same percentage of pretax income as in 2012.
- What is Global’s EBIT in 2013?
- What is Global’s net income in 2013?
- If Global’s P/E ratio and number of shares outstanding remains unchanged, what is Global’s share price in 2013?
2-24. Suppose your firm receives a $5 million order on the last day of the year. You fill the order with $2 million worth of inventory. The customer picks up the entire order the same day and pays $1 million upfront in cash; you also issue a bill for the customer to pay the remaining balance of $4 million in 30 days. Suppose your firm’s tax rate is 0% (i.e., ignore taxes). Determine the consequences of this transaction for each of the following: