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A series of questions and answers related to corporate finance, covering topics such as agency problems, corporate control, financial planning, and the time value of money. It explores the roles of shareholders, boards of directors, and management in corporations, as well as ethical considerations and financial decision-making. The material is presented in a question-and-answer format, making it useful for quick review and comprehension. It also touches on sustainable growth rate, external funds needed, and the implications of compounding periods on present and future values. Suitable for students studying introductory corporate finance.
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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
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