Professional Documents
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Sajdhkajsh
Sajdhkajsh
17-334
International Corporate Finance
Atty. Cochingyan III
MIDTERM EXAMINATIONS
1. The theory of the firm being a nexus of contracts describes the firm as a set of explicit
and implicit contracts. The firm is neither an entity nor a thing capable of being owned. It is a
legal fiction representing the complex set of contractual relationships between these inputs. The
Wealth Maximization theory, on the other hand, seeks to increase social wealth, as measured by
the dollar equivalents of everything in society. I would subscribe to the contractarian theory of
the firm. I find the wealth maximization theory as unrealistic because it does not take into
account that different players in the firm have different goals other than wealth maximization. As
compared to the contractarian theory, all the interests of the parties are represented in bargaining
for the contract terms.
2. No. An enterprise in the informal sector is not 100% in the underground economy.
According to Martha Alther Chen in “Rethinking the Informal Economy” (2005), the
informal sector includes microenterpreneurs, own account operators, informal wage workers, and
industrial workers. This large share of economic units and workers remain outside the world of
regulated economic activities and protected employment relationships. For these entities,
registration may not benefit them as much and may be too costly for them, hence, they opt to
remain informal. It may be classified into two broad groups: self-employed, who run small
unregistered and wage workers. Examples of informal entities are the vegetable vendors on the
street, taho vendors, and sari-sari store vendors.
4. No, finance is not simply a matter of cash inflow and outflows. The role that finance
plays in enhancing the capability of the firm is that finance helps in investing in opportunities
that would bring possible income or benefit to it. It does not only concern cash inflow and
outflows. Corporations, in order to thrive, need to invest in human capital, skills, creativity,
training, and others. Valuation plays a part in this milieu because these investments have value,
even though there are problems as to ascertaining such in the balance sheet as they are elusive in
practice. Some asset doesn’t even appear therein because it has not been involved in a
transaction.
5. According to William Klein in the Business Organization and Finance, the advantage of
separating ownership from control is that some shareholders choose to be hands-off and not
bother running the business themselves (or are not comfortable in doing so). However, the
downsides of separating ownership from control are that first, there could be conflicts of interest
or incompetent business decisions since ownership is with the shareholders while control is with
board of directors who are driven by different incentives. A second disadvantage would be in
terms of negligence. For example, Morris, Pamela’s manager negligently injures a pedestrian.
Morris is personally liable because it was his negligence that caused the harm. However, Pamela
is also liable because of the doctrine of respondeat superior. Lastly, there could be irreducible
divergencies of interest since the parties have different objectives and both parties are better off
other than alone, even if they failed to reach their optimal goal.
6. The Economics of Organizational Structure by Brickley presented the Barings Bank case
where its Singaporean star trader was able to do risky trades resulting in the fall of the bank
which was sold in the end for one pound. Its organizational structure is flawed which allowed
such employee to abuse its decision making powers as to making trades. This contributed to its
failure. A poorly designed structure may result in loss of profits and even failure of such. A
company that clings to an inefficient high-cost org design is eventually forced to either adapt or
close. Thus, Brickley proposed that the three factors to consider in making the organizational
structure of a company which are: decision making rights, performance evaluation and rewards
system.
9. The change in the view on corporate finance brought about by ENRON is that it urged
the state to give at least basic standards for all corporations. Before the ENRON bankruptcy, the
government had deregulated the oil and gas industry to allow more competition, but deregulation
also made it easier for companies to act fraudulently. Enron, among other companies, took
advantage of this situation. The various misdeeds and crimes that Enron's officers and employees
committed were extensive and ongoing. Particularly damaging misrepresentations produced
inflated earnings reports for shareholders, many of whom eventually suffered devastating losses
when the company failed. Many other instances of dishonesty and fraud also occurred, including
embezzlement of corporate funds by Enron executives and illegal manipulations of the energy
market. To minimize corporate fraud, U.S. Senator Paul Sarbanes and U.S. Representative
Michael Oxley drafted legislation known as the Sarbanes-Oxley Act (SOX). The intent of SOX
was to protect investors by improving the accuracy and reliability of corporate disclosures in
financial statements and other documents by: closing loopholes in accounting practices and
strengthening corporate governance rules.
10. The purpose of a balance sheet is to list all the assets of a business and all of its financial
resources at a given point in time. The main items on a balance sheet are Assets, Liabilities and
Equity. The balance sheet measures accurately the historical cost of the company’s assets and
liabilities. The balance sheet must balance as portrayed by the equation Assets = Liabilities +
Equity. According to Fridson, however, the balance sheet does not really give us an accurate
picture of the value of an enterprise. There is a value problem. It is difficult to value assets
accurately such as intangible assets or specialized machinery. Also, some assets which have
value are not listed in the balance sheet because there is no transaction. An example would be
goodwill, human capital, which is the skill and creativity of the employees.