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Corporate Finance Q&A: Agency Problems, Valuation, and Financial Management, Exams of Financial Statement Analysis

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.

Typology: Exams

2024/2025

Available from 05/14/2025

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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
pf3
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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

  1. 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%
  1. $80 million over 10 equal installments
  2. $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
  3. how risky is the investment Does your decision to pay the $24,000 depend on who made the promise of repayment?
  • ANSWER yes

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