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Warm-up Exercises
(Principles of managerial finance, Gitman, 14th edition)
E1–1 Allie and Austin have operated a small florist business from their garage at home as an
informal business for the last three years. After some deliberation, they have decided to make their
business formal. They approach you, as a management consultant, to assist them in selecting the
most appropriate form of business organization.
You have established that both would like to minimize their tax liability. Advise Allie and Austin on
the most appropriate legal form of business organization based on this requirement. Provide a
brief outline of the strengths and weaknesses of the legal form of business organization
recommended. What other legal form of business organization would you recommend they
consider? What would be the motivation behind this recommendation?
E1–2 As chief financial officer, it is your responsibility to weigh the financial pros and cons of the
many investment opportunities developed by your company’s research and development division.
You are currently evaluating two competing 15-year projects that differ in several ways. Relative to
your firm’s current EPS, the first project is expected to generate above-average EPS during the
first 5 years, average
EPS during the second five years, and then below-average EPS during the last
5 years. The second project is expected to generate below-average EPS during the first 5 years,
average EPS during the second 5 years, and then well-above-average EPS during the last 5
years.
Is the choice obvious if you expect that the second investment will result in a larger overall
earnings increase? Given the goal of the firm, what issues will you consider before making a final
decision?
E1–3 The end-of-year parties at Yearling, Inc., are known for their extravagance. Management
provides the best food and entertainment to thank the employees for their hard work. During the
planning for this year’s bash, a disagreement broke out between the treasurer’s staff and the
controller’s staff. The treasurer’s staff contended that the firm was running low on cash and might
have trouble paying its bills over the coming months; they requested that cuts be made to the
budget for the party. The controller’s staff believed that any cuts were unwarranted, as the firm
continued to be very profitable.
