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How did the recession of 2007–2009 compare with other recessions since the Great Depression in terms of length? Ans. It was the longest. This may be close to a perfect storm situation on top of a real estate bust, and a financial bust [crime? ], â€Å"Technology† is a big part of the unemployment situation, and then there's the world wide normalizing of salary levels – China, India, etc. up, US down. 2. What effect did the recession of 2007–2009 have on government regulation? It was greatly increased. 3.What advantages does a sole proprietorship offer? What is a major drawback of this type of organization? A sole proprietorship offers the advantage of simplicity of decision-making and low organizational and operating costs. A major drawback is that there is unlimited liability to the owner. 8. Why are institutional investors important in today's business world? Because institutional investors such as pension funds and mutual funds own a large percentage of major U. S. companies, they are having more to say about the way publicly owned companies are managed.As a group, they have the ability to vote large blocks of shares for the election of a board of directors, which is supposed to run the company in an efficient, competitive manner. The threat of being able to replace poor performing boards of directors makes institutional investors quite influential. Since these institutions, like pension funds and mutual funds, represent individual workers and investors, they have a responsibility to see that the firm is managed in an efficient and ethical way. 9. Why is profit maximization, by itself, an inappropriate goal?What is meant by the goal of maximization of shareholder wealth? The problem with a profit maximization goal is that it fails to take account of risk, the timing of the benefits is not considered, and profit measurement is a very inexact process. The goal of shareholders wealth maximization implies that the firm will attempt to achieve the highest possible total valuation in the marketplace. It is the one overriding objective of the firm and should influence every decision. 10. When does insider trading occur? What government agency is responsible for protecting against the unethical practice of insider trading?Insider trading occurs when anyone with non-public information buys or sells securities to take advantage of that private information. The Securities and Exchange Commission is responsible for protecting markets against insider trading. In the past people have gone to jail for trading on non-public information. This has included company officers, investment bankers, printers who have information before it is publishers and even truck drivers who deliver business magazines and read positive or negative articles about a company before the magazine is on the newsstands and then place trades or have friends place trades based on that information.The SEC has prosecuted anyone who profits from inside inf ormation. Every decision 12. What is the difference between a primary and a secondary market? A primary market refers to the use of the financial markets to raise new funds for the corporation. After the securities are sold to the public (institutions and individuals), they trade in the secondary market between investors. It is in the secondary market that prices are continually changing as investors buy and sell securities based on the expectations of corporate prospects. 13.Assume you are looking at many companies with equal risk; which ones will have the highest stock prices? Given companies with equal risk, those companies with expectations of high return will have higher common stock prices relative to those companies with expectations of poor returns. Chapter 2 1. Discuss some financial variables that affect the price-earnings ratio. The price-earnings ratio will be influenced by the earnings and sales growth of the firm, the risk or volatility in performance, the debt-equity structure of the firm, the dividend payment policy, the quality of management, and a number of other factors.The ratio tends to be future-oriented, and the more positive the outlook, the higher it will be. 2. What is the difference between book value per share of common stock and market value per share? Why does this disparity occur? Book value per share is arrived at by taking the cost of the assets and subtracting out liabilities and preferred stock and dividing by the number of common shares outstanding. It is based on the historical cost of the assets. Market value per share is based on current assessed value of the firm in the marketplace and may bear little relationship to original cost.Besides the disparity between book and market value caused by the historical cost approach, other contributing factors are the growth prospects for the firm, the quality of management, and the industry outlook. To the extent, these are quite negative or positive; market value may differ widely from book value. 5. How is the income statement related to the balance sheet? The earnings (less dividends) reported in the income statement is transferred to the ownership section of the balance sheet as retained earnings.Thus, what we earn in the income statement becomes part of the ownership interest in the balance sheet. 6. Comment on why inflation may restrict the usefulness of the balance sheet as normally presented. The balance sheet is based on historical costs. When prices are rising rapidly, historical cost data may lose much of their meaning–particularly for plant and equipment and inventory. 10. Why is interest expense said to cost the firm substantially less than the actual expense, while dividends cost it 100 percent of the outlay?Interest expense is a tax-deductible item to the corporation, while dividend payments are not. The net cost to the corporation of interest expense is the amount paid multiplied by the difference of one minus the applicable tax rate. Fo r example, $100 of interest expense costs the company $65 after taxes when the corporate tax rate is 35 percent; for example, $100 ? (1 – . 35) = $65. Problems Q5. Sales -Cost of goods sold Gross profit -Selling and administrative expense -Depreciation expense Operating profit -Interest expense Earnings before taxes Taxes Earnings after taxes -Preferred stock dividends Earnings available to common stockholders Shares outstanding Earnings per share Q11. Stein Books, Inc. Income Statement For the year ended Dec. 31 2010 Sales$273,000 Cost of goods sold$210,000 Gross profit= 63,000 S&A expenses -12,000 Depreciation expense -15,000 Operating profit =36,000 Interest Expense -10,000 Earnings before taxes = 26,000 Taxes -7,800 Earnings after taxes = 18,200 Q18. (a) Compute earnings per share and the P/E ratio for 2009.The P/E ratio equals the stock price divided by the earnings per share. 280,000 / 200,000 = $1. 40 EPS 30. 80 / 1. 40 = 22 P/E ratio (b) Compute earnings per share and the P/E ratio for 2010. 320,000 /200,000 = $1. 60 EPS 40 / 1. 60 = 25 P/E ratio (c) Give a general explanation of why the P/E ratio changed. The market price of the stock increased at a higher rate than earnings. Second part: From the problem above, assume for Botox Facial Care that in 2011, Earnings after taxes declined to $140,000 with the same $200,000 shares outstanding. The stock price declined to $24. 50. a.Compute earnings per share and the P/E ratio for 2011. 140,000 / 200,000 = $0. 70 EPS 24. 50 / 0. 70 = 35 b. Give a general explanation of why the P/E changed. Earnings decreased at a higher rate than the market price of the stock. Q. 23. Landers Nursery and Garden Stores Current assets$220,000 Capital/Fixed assets $170,000 Total assets $390,000 – Current liabilities $80,000 – Long-term liabilities 140,000 Shareholders’ equity 170,000 – Preferred stock obligation 40,000 Net worth assigned to common 130,000 Common shares outstanding 25,000 Book v alue (net worth) per share†¦ $5. 20