Jessica Schmitt

Corporate Finance
Module 1 assignment
1-4:
a) Marginal benefit = benefit of new robotics benefit of old
$560,000 400,000 = $160,000
b) Marginal cost = cost of new sale of old
$220,000 70,000 = $150,000
c) Net benefit = marginal benefit marginal cost
$160,000 - $150,000 = $10,000
d) Ken should recommend that the company replace the existing robotics
because the net profit is positive.
e) Other factors Ken should consider is whether additional training might be
needed for the new robotics, whether better robotics will be available in the
near future and what the energy cost of the new robotics will be.
1-6: What it means to say that managers should maximize shareholder wealth
subject to ethical constraints is that managers should try and make the most
profit that they can for the companys shareholders, but within the boundaries of
the standards of business ethics; for example, not participating in things like fraud,
insider trading or kickbacks. Some ethical considerations that might enter into
decisions that would result in lower cash flow or stock prices would be thinks like
taking care of environmental issues that the public might not ever know about
otherwise, not exaggerating the quality of a product or embellishing cash flow
projections.
2-7:
Asset
A
B
C
D
E

Sale
Purchase
Price
Price
$3,40
0
$3,000
$12,0
00
$12,000
$80,0
00
$62,000
$45,0
00
$41,000
$18,0
00
$16,500

Capital Gain (sale price purchase price)

Tax (capital gain

x .40)
$400

$160

$0

$0

$18,000

$7,200

$4,000

$1,600

$1,500

$600

2-8: The ethical issues that could arise when a corporate insider wants to buy or sell
shares in the firm where he or she works include having access to relevant
information that people outside of the company do not have. Even though stock
prices are said to fully reflect the information available to the public, this may not
be accurate as there is a lot of information about a company that is not made public

and therefore stock prices may not accurately reflect the information known. It
gives the person working at the company an unfair advantage over anyone outside
of it.
Integrative Case 1:
a. Some pros of borrowing money from a bank or other lender include maintaining
ownership of your company. Yes, you are obligated to make on-time payments to
them, but that is the end of the obligation. Your business is run without any outside
interference. Another pro is the tax deductions you are able to take, because the
loan is classified as a business expense. Some cons include being obligated to pay
back the loan even if your business fails, or if the company is forced to go into
bankruptcy the lender has claims to repayment before any equity investors.
Another con is that you will likely be asked to put up collateral on the loan in case of
a default on payments, and you will also need to make sure your business has
enough cash flow when the loan repayments start.
b. There are many advantages and disadvantages to converting a company to
public ownership. Some of the advantages include providing access to money that
the company needs in order to grow, having shareholders provide cash without
being able to take the company to a bankruptcy court if they are unable to make a
payment, and it can create public awareness of the company. Disadvantages
include added disclosure for investors, meaning the need to have periodic financial
reporting, no guarantee that shareholders will invest in a company (therefor
resulting in a price on the company that is lower than expected), or there is the
possibility that an individual investor or firm could purchase all of the shares
available to the public and remove the founder of the company from the
management team.
c. The option I believe Sara should recommend to the board is converting the
company to public ownership. The reasoning behind that decision includes the fact
that it would be easier to raise the capital the company needs without going into
significant debt, and in the event that the company needed more capital down the
road further borrowing would be limited with the banks. Not only that, but the banks
would likely demand financial disclosures, something that going public would be
necessary to do anyways. Yes there are obvious risks to going public but I think in
the long run it would be better for the company.