BF2244: Strategic Finance Worksheet One

(Lectures: Weeks 1 & 2) (Friday Sessions: Weeks 2 & 3)

1. We claim that the goal of the firm is to maximise current market value. Could the following actions be consistent with that goal? a. The firm adds a cost-of-living adjustment to the pensions of its retired employees. b. The firm reduces its dividend payment, choosing to reinvest more earnings in the business. c. The firm drills for oil in a remote jungle, the chances of finding oil are 1 in 5. 2. Explain why each of the following may not be appropriate corporate goals. a. Increase market share b. Minimise costs c. Expand profits 3. One way of easing the agency problem is to link earnings to corporate performance. Can you see any problems with this solution? 4. Company A is using child labour to produce goods. Its current suppliers have found out and are refusing to supply them any longer. Company A has approached you and offered to pay twice the market value for your materials. Would you supply them? Discuss. 5. If the markets are at least semi-strong form efficient then there is no need for professional money managers Discuss. 6. True or False: a. The efficient market hypothesis (EMH) asserts that investors have perfect forecasting ability. b. The semi-strong form of the EMH implies that prices reflect all information contained in past prices. c. In efficient markets the expected return on all stocks is the same. d. If the markets are strong form efficient then no one can ever make an abnormal gain on the stock market. 7. Which of the following would appear to violate the EMH? a. A positive correlation between the return on the market in one quarter and the change in aggregate corporate profits in the next quarter b. A director making superior returns on purchases of shares in his own company c. Companies who report unexpectedly high earnings offering higher returns than usual on their share for several months after the results announcement