Mini Case


Why is corporate finance important to all managers?


Describe the organizational forms a company might have as it evolves from a start-up toa major corporation. List the advantages and disadvantages of each form.


How do corporations go public and continue to grow?

What are agency problems?

What is corporate governance?


What should be the primary objective of managers?


What three aspects of cash flows affect the value of any investment?


What are free cash flows?


What is the weighted average cost of capital?


How do free cash flows and the weighted average cost of capital interact to determine a firm’s value?


Who are the providers (savers) and users (borrowers) of capital?


What do we call the price that a borrower must pay for debt capital? Interest Rate

What is the priceof equity capital?

What are the four most fundamental factors that affect the cost ofmoney, or the general level of interest rates, in the economy?


What are some economic conditions (including international aspects) that affect the cost of money?


What are financial securities? Describe some financial instruments.



List some financial institutions.


What are some different types of markets?


How are secondary markets organized?


2-6: Statement of Retained Earnings


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 was paid to shareholders during the year?


2-7 Corporate Tax Liability


The Talley Corporation had a taxable income of $365,000 from operations after all operating costs but before (1) interest charges of $50,000, (2) dividends received of $15,000, (3) dividends paid of $25,000, and (4) income taxes.


What are the firm’s income tax liability and its after-tax income?


What are the company’s marginal and average tax rates on taxable income?


2-9 Corporate After-Tax Yield (muni, corp, PS)


The Shrieves Corporation has $10,000 that it plans to invest in marketable securities. It is choosing among AT&T bonds, which yield 7.5%, state of Florida muni bonds, which yield 5% (but are not taxable), and AT&T preferred stock, with a dividend yield of 6%. Shrieves’s corporation tax rate is 35%, and 70% of the dividends received are tax exempt. Find the after-tax rates of return on all three securities.