Week 1 Problem Set Answer the following questions and solve the following problems in the space provided. When you are done, save the file in the format flastname_Week_1_Problem_Set.docx, where flastname is your first initial and you last name, and submit it to the appropriate dropbox. Chapter 1 (page 19) 1.      What is the most important difference between a corporation and all other organizational forms? Answer: Main difference between a corporation with all other organizational forms is that a corporation and its owner are separate entity. 2.      What does the phrase limited liability mean in a corporate context? Answer: In limited liability, shareholders or stockholders are not liable or responsible for any situations of the firm. For example, shareholders are not hold to any debt incurred by the firm nor are they required to pay back it back. Also, owners ‘ liability is limited to their investment on the firm. 3.      Which organizational forms give their owners limited liability? Answer: They organizational forms that give their owners limited liability are corporations and limited liability companies. Limited partnership only provides limited liability to its limited partners not to their general partners. 4.      What are the main advantages and disadvantages of organizing a firm as a corporation? Answer: The advantages include infinite life, limited liability and liquidity. The disadvantages include the double taxation on corporation, separation of ownership and control. 5.      Explain the difference between an S corporation and a C corporation. Answer: One of the differences between C corporations and S corporations are C corporations must pay corporate income taxes while S corporations do not have to pay corporate taxes, but must pass through the income to shareholders to whom it is taxable. Chapter 2 The following is provided for use in answering the next set of questions. You may also find table 2.5 on page 53 of your text and all questions on pages 56–57. TABLE 2.5 2009–2013 Financial Statement Data and Stock Price Data for Mydeco Corp. Mydeco Corp. 2009–2013 (All data as of fiscal year end; in $ million) Income Statement 2009 2010 2011 2012 2013 Revenue Cost of Goods Sold 404.3 (188.3) 363.8 (173.8) 424.6 (206.2) 510.7 (246.8) 604.1 (293.4) Gross Profit Sales and Marketing Administration Depreciation and Amortization 216.0 (66.7) (60.6) (27.3) 190.0 (66.4) (59.1) (27.0) 218.4 (82.8) (59.4) (34.3) 263.9 (102.1) (66.4) (38.4) 310.7 (120.8) (78.5) (38.6) EBIT Interest Income (Expense)  61.4 (33.7) 37.5 (32.9) 41.9 (32.2) 57.0 (37.4) 72.8 (39.4) Pretax Income Income Tax  27.7   (9.7) 4.6 (1.6) 9.7 (3.4) 19.6 (6.9) 33.4 (11.7) Net Income Shares outstanding (millions) Earnings per share  18.0  55.0  $0.33 3.0 55.0 $0.05 6.3 55.0 $0.11 12.7 55.0 $0.23 21.7 55.0 $0.39 Balance Sheet 2009 2010 2011 2012 2013 Assets Cash Accounts Receivable Inventory 48.8 88.6 33.7 68.9 69.8 30.9 86.3 69.8 28.4 77.5 76.9 31.7 85.0 86.1 35.3   .

1. Week 1 Problem Set
Answer the following questions and solve the following
problems in the space provided. When you are done, save the
file in the format flastname_Week_1_Problem_Set.docx, where
flastname is your first initial and you last name, and submit it to
the appropriate dropbox.
Chapter 1 (page 19)
1. What is the most important difference between a
corporation and all other organizational forms?
Answer: Main difference between a corporation with all other
organizational forms is that a corporation and its owner are
separate entity.
2. What does the phrase limited liability mean in a corporate
context?
Answer: In limited liability, shareholders or stockholders are
not liable or responsible for any situations of the firm. For
example, shareholders are not hold to any debt incurred by the
firm nor are they required to pay back it back. Also, owners ‘
liability is limited to their investment on the firm.
3. Which organizational forms give their owners limited
liability?
Answer: They organizational forms that give their owners
limited liability are corporations and limited liability
companies. Limited partnership only provides limited liability
to its limited partners not to their general partners.
4. What are the main advantages and disadvantages of
organizing a firm as a corporation?
Answer: The advantages include infinite life, limited liability
and liquidity. The disadvantages include the double taxation on
corporation, separation of ownership and control.

2. 5. Explain the difference between an S corporation and a C
corporation.
Answer: One of the differences between C corporations and S
corporations are C corporations must pay corporate income
taxes while S corporations do not have to pay corporate taxes,
but must pass through the income to shareholders to whom it is
taxable.
Chapter 2
The following is provided for use in answering the next set of
questions. You may also find table 2.5 on page 53 of your text
and all questions on pages 56–57.
TABLE 2.5 2009–2013 Financial Statement Data and Stock
Price Data for Mydeco Corp.
Mydeco Corp. 2009–2013
(All data as of fiscal year end; in $ million)
Income Statement
2009
2010
2011
2012
2013
Revenue
Cost of Goods Sold
404.3
(188.3)
363.8
(173.8)
424.6
(206.2)
510.7
(246.8)
604.1
(293.4)
Gross Profit
Sales and Marketing
Administration

3. Depreciation and Amortization
216.0
(66.7)
(60.6)
(27.3)
190.0
(66.4)
(59.1)
(27.0)
218.4
(82.8)
(59.4)
(34.3)
263.9
(102.1)
(66.4)
(38.4)
310.7
(120.8)
(78.5)
(38.6)
EBIT
Interest Income (Expense)
61.4
(33.7)
37.5
(32.9)
41.9
(32.2)
57.0
(37.4)
72.8
(39.4)
Pretax Income
Income Tax
27.7

4. (9.7)
4.6
(1.6)
9.7
(3.4)
19.6
(6.9)
33.4
(11.7)
Net Income
Shares outstanding (millions)
Earnings per share
18.0
55.0
$0.33
3.0
55.0
$0.05
6.3
55.0
$0.11
12.7
55.0
$0.23
21.7
55.0
$0.39
Balance Sheet
2009
2010
2011
2012
2013
Assets
Cash
Accounts Receivable

5. Inventory
48.8
88.6
33.7
68.9
69.8
30.9
86.3
69.8
28.4
77.5
76.9
31.7
85.0
86.1
35.3
Total Current Assets
Net Property, Plant, and Equip.
Goodwill and Intangibles
171.1
245.3
361.7
169.6
169.6
243.3
184.5
309
361.7
186.1
345.6
361.7

6. 206.4
347.0
361.7
Total Assets
Liabilities and Stockholders’ Equity
Accounts Payable
Accrued Compensation
778.1
18.7
6.7
774.6
17.9
6.4
855.2
22.0
7.0
893.4
26.8
8.1
915.1
31.7
9.7
Total Current Liabilities
Long-term Debt
25.4
500.0
24.3
500.0
29.0
575.0
34.9

7. 600.0
41.4
600.0
Total Liabilities
Stockholders’ Equity
525.4
252.7
524.3
250.3
604.0
251.2
634.9
258.5
641.4
273.7
Total Liabilities and Stockholders’ Equity
778.1
774.6
855.2
893.4
915.1
Statement of Cash Flows
2009
2010
2011
2012
2013
Net Income
Depreciation and Amortization
Chg. in Accounts Receivable
Chg. in Inventory
Chg. in Payables and Accrued Comp.
18.0
27.3
3.9
(2.9)

8. 2.2
3.0
27.0
18.8
2.8
(1.1)
6.3
34.3
(0.0)
2.5
4.7
12.7
38.4
(7.1)
(3.3)
5.9
21.7
38.6
(9.2)
(3.6)
6.5
Cash from Operations
Capital Expenditures
48.5
(25.0)
50.5
(25.0)
47.8
(100.0)
46.6
(75.0)
54.0
(40.0)
Cash from Investing Activities
Dividends Paid
Sale (or purchase) of stock

9. Debt Issuance (Pay Down)
(25.0)
(5.4)
—
—
(25.0)
(5.4)
—
—
(100.0)
(5.4)
—
75.0
(75.0)
(5.4)
—
25.0
(40.0)
(6.5)
—
—
Cash from Financing Activities
(5.4)
(5.4)
69.6
19.6
(6.5)
Change in Cash
18.1
20.1
17.4
(8.8)
7.5
Mydeco Stock Price
$7.92
$3.30

10. $5.25
$8.71
$10.89
29. In fiscal year 2011, Starbucks Corporation (SBUX) had
revenue of $11.70 billion, gross profit of $6.75 billion, and net
income of $1.25 billion. Peet’s Coffee and Tea (PEET) had
revenue of $372 million, gross profit of $72.7 million, and net
income of $17.8 million.
· a. Compare the gross margins for Starbucks and Peet’s.
· b. Compare the net profit margins for Starbucks and Peet’s.
· c. Which firm was more profitable in 2011?
Answer:
a. Starbucks’ gross margin =6.75/11.70=57.69% ; Peet’s
gross margin =72.7/19.54%.
b. Starbucks’ net margin =1.25/11.70=10.68%; Peet’s net
margin =17.8/372=4.78%.
c. Starbucks was more profitable in 2011.
31. See Table 2.5 showing financial statement data and stock
price data for Mydeco Corp.
a. How did Mydeco’s accounts receivable days change
over this period?
b. How did Mydeco’s inventory days change over this
period?
c. Based on your analysis, has Mydeco improved its
management of its working capital during this time period?
Answer: a. 2009 accounts receivable
days=88.6/(404.3/365)=80.0.
2013 accounts receivable days=86.1/(604.1/365).
b. 2009 inventory days=33.7/(188.3/365)=65.3.
2013 inventory days=35.3/(293.4/365)=43.9.
c. Between 2009 and 2013, Mydeco improved its working
capital management by reducing both accounts receivable days
and inventory days.
32. See Table 2.5 showing financial statement data and stock

11. price data for Mydeco Corp.
a. Compare Mydeco’s accounts payable days in 2009
and 2013.
b. Did this change in accounts payable days improve or
worsen Mydeco’s cash position in 2013?
Answer: a. 2009 account payable days=18.7/(188.3/365)=36.2
2013 account payable days=31.7/(293.4/365)=39.4
b. Account payable days decreases from 2009 to 2013, which
improve the cash position of Mydeco
33. See Table 2.5 showing financial statement data and stock
price data for Mydeco Corp.
· a. By how much did Mydeco increase its debt from 2009 to
2013?
· b. What was Mydeco’s EBITDA/Interest coverage ratio in
2009 and 2013? Did its coverage ratio ever fall below 2?
· c. Overall, did Mydeco’s ability to meet its interest payments
improve or decline over this period?
Answer: a. Mydeco increase its debt from $500m in 2009 and
$600m in 2013 (by $ 100 million)
b. 2009 EBITDA/Interest coverage ratio=(61.4+27.3)/33.7=2.6
2013 EBITDA/Interest coverage ratio=(72.8+38.6)/39.4=2.8
Mydeco’s coverage ratio fell below 2 in 2010 wher it was
1.96
c. overall Mydeco’s ability to meets its interest payments
improved over this period, although its experienced a slid dip
in 2010.
42. For fiscal year 2011, Starbucks Corporation (SBUX) had
total revenues of $11.70 billion, net income of $1.25 billion,
total assets of $7.36 billion, and total shareholder’s equity of
$4.38 billion.
· a. Calculate the Starbucks’ ROE directly, and using the
DuPont Identity.
· b. Comparing with the data for Peet’s in Problem 41, use the

12. DuPont Identity to understand the difference between the two
firms’ ROEs.
Answer: a. Starbucks’ ROE=1.25/4.38=28.54%.
Starbucks’ net profit margin= 1.25/11.7-10.68%.
Starbucks’ asset turnover= 11.70/7.36=1.59.
Starbucks’ equity multiplier= 7.36/4.38=1.68.
Starbucks’s ROE (DuPont) = 10.68% × 1.59 × 1.68 = 28.53%
b. Starbucks has a superior profit margin and a greater equity
multiplier (which could represent higher leverage). However, it
has a lower asset turnover. Its greater ROE is driven by its
profit margin and its leverage.
-----Please show stata commands-----
Using data from 82 subjects, a cancer epidemiologist studied
the relationship
between a particular “lung cancer risk score” (y) that ranges
from 0 to 150 and a specificbiomarker (x). A simple linear
regression analysis gave the following output:
= 10, SE() = 2, = 2.5, SE() = 0.75, =5.
Also, a 95% confidence interval for α is (6, 14), and for β it is
(1,4).
(a) Write down the estimated regression line.
(b) Obtain a point estimate of the difference between average
risk scoresfor two people who have biomarker values that differ
by 5 units.
(c) Is there a statistically significant association between the

13. biomarker andcancer risk score? Explain.
(d) What biomarker value is expected for people with risk score
of 100?
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