Corporate Finance Exercises

Agency Problems Who owns a corporation? Describe the process whereby the owners control the firm’s management. What is the main reason that an agency relationship exists in the corporate form of organization? In this context, what kinds of problems can arise? 2. Not-for-Profit Firm Goals . 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? 3. Goal of the Firm.

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Evaluate the following statement: Managers should not focus on the current stock value because doing so ill lead to an overemphasis on short-term profits at the expense of long-term profits. 4. Ethics and Firm Goals. Can the goal of maximizing the value of the stock conflict with other goals, such as avoiding unethical or illegal behavior? In particular, do you think subjects like customer and employee safety, the environment, and the general good of society fit in this remark, or are they essentially ignored? Think of some specific scenarios to Illustrate your answer. . International Firm Goal. Would the goal of maximizing the value of the stock differ for financial management In a reign country? Why or why not? 6. Agency Problems. 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 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? 7. Agency Problems and Corporate Ownership.

Corporate ownership vanes around the have owned the majority of shares in public corporations in the united States. In Germany and Japan,however,banks, other rage financial institutions, and other companies own most of the stock in public corporations. Do you think agency problems are likely to be more or less severe in Germany and Japan than in the united States? 8. Agency Problems and Corporate Ownership . 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. Hat are the implications of this trend for agency problems and corporate control? 9. Executive Compensation. 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 over the 2004-2008 period. Are such amounts excessive? In answering,let might be helpful to recognize that superstar athletes such as Tiger Woods, top entertainers such as Tom Hanks and Opera Winfred, and many others at the top of their respective fields earn at least as much, if not a great deal more.

Goal of Financial Management. Why is the goal of financial management to maximize the current share price of the company’s stock? In other words, why Isn’t . In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect the directors of the corporation, who in turn appoint the firm’s management. This separation of ownership from control in the corporate form of organization is what causes agency problems to exist. Management may act in its own or someone else’s best interests, rather than those of the shareholders.

For example,a corporate expenditure may benefit management but cost the shareholders. Managers would tend to maximize the resources they have control,which leading to overemphasis corporate size and Roth. The conflict between shareholders and management, they may contradict the goal of maximizing the share price of the equity of the firm. 2. Such organizations frequently pursue social or political missions, so many different goals are conceivable. One goal that is often cited is revenue minimization; I. E. , provide whatever goods and services are offered at the lowest possible cost to society.

A better approach might be to observe that even a not-for-profit business has equity such as private colleges. Thus, one answer is that the appropriate goal is to maximize the value of the equity. 3. Presumably, the goals to maximize the value of the share,while the current stock value reflects the risk, timing, and magnitude of all future cash flows, both short-term and long-term. If this is correct, then the statement is false. 4. An argument can be made either way. At the one extreme, we could argue that in a perfect market economy, all of these things are priced.

There is thus an optimal level of, for example, ethical and/or illegal behavior, and the framework of stock valuation explicitly includes these. At the other extreme, we could argue that these are non-economic phenomena and are best handled wrought the political process. A classic (and highly relevant) thought question that illustrates this debate goes something like this: -?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? It depends on corporate’ s decisions on the behalf of shareholders and management or stakeholders(employees customers, suppliers and even the government. 5. The goal will be the same, but the best course of action toward that goal may be different cause of different social, political, and economic institutions. The goal of management should be to maximize the share price for the current shareholders. If management believes that it can improve the profitability of the firm so that the share price will exceed $35, then they should fight the offer from the outside company.

If management believes that this bidder or other unidentified bidders will actually pay more than $35 per share to acquire the company, then they should still fight the offer. However, if the current management cannot increase the value of the rim beyond the bid price, and no other higher bids come in, then management is not acting in the interests of the shareholders by fighting the offer. Since current managers often lose their Jobs when the corporation is acquired, poorly monitored managers have an incentive to fight corporate takeovers in situations such as this. . We would expect agency problems to be less severe in other countries, primarily due to the relatively small percentage of individual ownership. Corporate goals. The high percentage of institutional ownership might lead too higher degree of agreement between owners and managers on decisions nickering risky projects. In addition, institutions may be better able to implement effective monitoring mechanisms on managers than can individual owners, based on the institutions’ deeper resources and experiences with their own management.