CFIN6 – CHAPTER 1
INTEGRATIVE PROBLEM SOLUTIONS
a. Finance deals with decisions about money—that is, how money is raised and used by companies and
individuals. Because value is based on cash flows, finance is integral to the successful operations of a
firm. To be successful, a firm needs to understand how to raise funds, how much it costs to use
investors’ money, and how to appropriately invest funds.
c. The three main forms of business organization are the proprietorship, the partnership, and the
corporation. Although proprietorships and partnerships are easy to start, the major disadvantage to these
forms of business is that the owners have unlimited personal liability for the debts of the businesses. On
the other hand, a corporation is more difficult to start than the other forms of business, but owners have
limited liability. Most business is conducted by corporations because this organizational form maximizes
firms’ values.
d. Mr. Kimble probably should organize as a proprietorship, because it is easy to start the business as a
proprietorship and it generally is more advantageous from a tax standpoint for a small business to be
organized as a proprietorship rather than as a corporation.
f. Mr. Kimble should operate the business so that his best interests are met. Perhaps he would like to
maximize the value of his company, or perhaps he would prefer to maximize his leisure time while
making a good living with his business. Whatever goal(s) he chooses, as long as he is sole owner of the
company, Mr. Kimble can operate the business as he pleases. However, if he sells a portion of the
company to investors, then Mr. Kimble will have to pay more attention to the best interests of the
investors—that is, he will have to pursue the goal of maximizing the value of the firm.
h. U.S. and foreign companies “go international” for the following major reasons:
1. To seek new markets. After a company has saturated its home market, growth opportunities often
are better in foreign markets.
i. 1. Different currency denominations. Cash flows in various parts of a multinational corporate system
often are denominated in different currencies. Hence, an analysis of exchange rates and the effects
of fluctuating currency values must be included in all financial analyses.
3. Language differences. The ability to communicate is critical in all business transactions.
4. Cultural differences. Even within geographic regions long considered fairly homogeneous, different
countries have unique cultural heritages that shape values and influence the role of business in the
society. Multinational corporations find that such matters as defining the appropriate goals of the
firm, attitudes toward risk taking, dealing with employees, and the ability to curtail unprofitable
operations can vary dramatically from one country to the next.