1.

Who owns a corporation? Shareholders

Describe the process whereby the owners control the firm ’ s management. The
shareholders elect the directors of the corporation, who in turn appoint the firm’s
management.
What is the main reason that an agency relationship exists in the corporate form of
organization? Separation of ownership and control
In this context, what kinds of problems can arise? Management may act in its own
or someone else’s best interests
2.
Suppose you were the financial manager of a not-for- profit business (a not-for-
profit hospital, perhaps). What kinds of goals do you think would be appropriate?
revenue minimization -> lowest cost
maximize the value of the equity
3.
Managers should not focus on the current stock value because doing so will lead to
an overemphasis on short-term profits at the expense of long-term profits.
FALSE -> reflects the risk, timing, and magnitude of all future cash flows, both
short-term and long-term
4.
Can the goal of maximizing the value of the stock conflict with other goals, such as
avoiding unethical or illegal behavior?
Either way
In particular, do you think subjects like customer and employee safety, the
environment, and the general good of society fit in this framework, or are they
essentially ignored?
Either way
->ethical and/or illegal behavior, and the framework of stock valuation explicitly
includes these.
->these are non-economic phenomena and are best handled through the political
process.
Think of some specific scenarios to illustrate your answer.
“A firm has estimated that the cost of improving the safety of one of its products is
$30 million. However, the firm believes that improving the safety of the product
will only save $20 million in product liability claims. What should the firm do?”
6.
Suppose you own stock in a company. The current price per share is $25. Another
company has just announced that it wants to buy your company and will pay $35
per share to acquire all the outstanding stock. Your company’s management
immediately begins fighting off this hostile bid. Is management acting in the
shareholders ’ best interests? Why or why not?
S1:
-> management believes that it can improve the profitability of the firm so that the
share price will exceed $35
->management believes that this bidder or other unidentified bidders will actually
pay more than $35 per share to acquire the company
S2:the current management cannot increase the value of the firm beyond the bid
price, and no other higher bids come in and current managers often lose their jobs
when the corporation is acquired  is not acting in the interests of the shareholders
8. In recent years, large financial institutions such as mutual funds and pension
funds have become the dominant owners of stock in the United States, and these
institutions are becoming more active in corporate affairs. What are the
implications of this trend for agency problems and corporate control?
-> lead to a reduction in agency problems and a more efficient market for corporate
control.
If the managers of the mutual fund or pension plan are not concerned with the
interests of the investors, the agency problem could potentially remain the same, or
even increase
9. Critics have charged that compensation to top managers in the United States is
simply too high and should be cut back. For example, focusing on large
corporations, Larry Ellison of Oracle has been one of the best-compensated CEOs
in the United States, earning about $130 million in 2010 alone and over $1 billion
during the 2006 – 2010 period. Are such amounts excessive? In answering, it
might be helpful to recognize that superstar athletes such as Tiger Woods, top
earners in the entertainment field such as James Cameron and Oprah Winfrey, and
many others at the top of their respective fields earn at least as much, if not a great
deal more.
Compensation schemes awarded by preferred shares will help managers work for
the benefit of shareholders more. Therefore, a cut in bonuses and bonuses will lose
managers' good incentive to maximize the current stock value, which can easily
lead to agency problems.
10. Why is the goal of financial management to maximize the current share price
of the company’s stock? In other words, why isn’t the goal to maximize the future
share price?
-> Maximizing the current share price is the same as maximizing the future share
price at any future period.
->The value of a share of stock depends on all of the future cash flows of company.
-> Expect higher value in the future