Download Corporate Finance Q&A: Agency Problems, Valuation, and Financial Management and more Exams Financial Statement Analysis in PDF only on Docsity!
BUSI 7110 Modules 1 Through 3 Questions And
Correct Answers 100% Verified
Who owns a corporation? - ANSWER the shareholders How do the owners control the corporation? - ANSWER by electing a board of directors who in turn appoint management What causes agency problems? - ANSWER the separation of ownership from control in the corporate form of organization What is one type of agency problems that can exist? - ANSWER management acting in its own way or for someone else's best interests rather than those of the shareholders What if an agency problem exists? - ANSWER management may contradict the goal of maximizing the share price of the equity of the firm True or False: Managers should not focus on the current stock value because during so will lead to an overemphasis on short term profits at the expense of long term profits. - ANSWER false Why is the statement about mangers & current stock value false? - ANSWER presumably, the current stock value will reflect the risk, timing & magnitude of all future cash flows (both short & long-term) Can maximizing the value of stock conflict with other goals? - ANSWER yes and no In a market economy, all of the outside conflicts are priced and there is an optimal level of what? - ANSWER ethical and/or illegal behavior that is explicitly included by stock
valuation Some people may also believe these conflicts are non-economic phenomena and best handled by what? - ANSWER political process An example from the textbook of ethical versus illegal behavior was? - ANSWER a firm decided to make a product safer for $30 million, but only saving $20 million in product liability claims When should management fight a hostile bid by another company? - ANSWER 1. if they believe they can get their company's stock valued more than what the hostile bid is offering to pay for it
- if they think the bidder(s) will actually pay more per share than is on the table now Under what circumstances should management not fight a hostile bid from another company? ANSWER if they cannot raise the price per share and no higher offers come in What is a positive implication of the following trend? Large financial institutions, such as mutual/pension funds, have become the dominant owners of stock and are becoming more active in corporate affairs. - ANSWER this may lead to a decrease in agency problems and make a more efficient market for corporate control What is a negative implication of the following trend? Large financial institutions such as mutual/pension funds have become the dominant owners of stock and are becoming more active in corporate affairs. - ANSWER if managers of the funds are not concerned with the interests of investors agency problem can actually increase If a firm's sales will grow by 20%, but their projected EFN is negative, what does this say about their sustainable growth rate (SGR)? - ANSWER their SGR is less than 20%
- $80 million over 10 equal installments
- $80 million over 10 equal installment with each installment rising by 5% - ANSWER option one Should lending laws be changed to require the reporting of EARs instead of APRs? - ANSWER yes Why should lending laws change to require the reporting of EARs? - ANSWER because APRs don't provide the relevant rate What is APRs only advantage? - ANSWER it is easier to compute If interest does not accrue until repayments begin (on a student loan), who will receive a bigger subsidy a freshman or senior? - ANSWER the freshman Why would the freshman receive a bigger subsidy? - ANSWER because the freshman gets to use the money longer before interest starts accruing TMCC is selling securities today that will repay $100,000 in thirty years for $24,000. Why would TMCC take such a small amount? - ANSWER it has to do with the time value of money, TMCC gets to use the $24,000 today and if they use it wisely it will be worth more than $100,000 in thirty years What would your two key considerations be in deciding to pay the $24,000 to TMCC? - ANSWER 1. is the rate of return implicit in the offer attractive compared to other similarly risky investments
- how risky is the investment Does your decision to pay the $24,000 depend on who made the promise of repayment?
Capital structure refers to the firm's: - ANSWER proportions of financing from current and long-term debt and equity. Which one of these best fits the description of an agency cost? - ANSWER the payment required for an outside audit of the firm The ultimate control of a corporation lies in the hands of the corporate: - ANSWER stockholders What is the corporate document that establishes how many members will be on the original board of directors? - ANSWER articles of incorporation What term describes the planning and controlling of a firm's long-term assets? - ANSWER capital budgeting What is the major goal of financial management? - ANSWER maximize the current value per share of the existing stock Which of the following is the best description of the major advantage of being a limited partner rather than a general partner? - ANSWER liability for firm debts is limited to the capital invested A proxy fight occurs when: - ANSWER a group solicits voting rights to replace the board of directors. Accounting profits and cash flows are generally: - ANSWER different because of GAAP rules regarding the recognition of income The cheapest business entity to form is typically the: - ANSWER sole proprietorship
