Chapter 1 Assignment: An Overview of Financial Management

Finance professionals make decisions that fall into three distinctive areas: corporate finance, capital markets, and investments. Below is a set of decisions made by finance professionals. Categorize the decisions according to the area of finance to which they belong (corporate finance, capital markets, or investments). Decisions: (a) Anthony must make a decision on how to cut costs so that his company can generate extra cash flow to acquire assets. (b) Sachit, a trader at the New York Stock Exchange (NYSE), executes the decisions made by investors and takes action based on requests by different buyers and sellers in the market. (c) Jack works for a financial advising firm. He must create a financial plan and come up with a list of securities in which his client can invest. Jack must make decisions regarding the investments that he should recommend to his clients to include in their portfolio.

(a) corporate finance (b) capital markets (c) investments

The owners of a corporation are the (a)_____. The primary goal of the corporate management team is to (b)_____ the shareholders' wealth by (c)_____ the (d)_____ over the long run.

(a) shareholders of the company, (b) maximize, (c) maximizing, (d) company's stock price

You come across different kinds of businesses every day. The following table describes some businesses. Using the description of each business, classify it as a sole proprietorship, a partnership, a corporation, or a limited liability company/limited liability partnership. (a) Anthony started a tutoring website. After a few months, a publishing company filed a lawsuit against his company for copyright infringement. Anthony had to shut down his business and lost all his personal assets in the process. (b) Sachit and his friend Shirley run a carpet cleaning business. They distribute the profits proportionately and file their individual taxes. (c) Jack, the CEO of a beverage company, is required to certify the accuracy of information provided in the company's quarterly reports. (d) Jack, Sachit, and Jose own an accounting firm in San Francisco. All share in the profits of the firm proportionately and file taxes at an individual level. According to their agreement, none of the owners will be held personally liable for the accounting firm's debt.

(a) sole proprietorship (b) partnership (c) corporation (d) LLC/LLP

The goal of the managers of a publicly owned company should be to maximize the firm's _____.

Intrinsic value

In an attempt to minimize agency problems in a company (potential conflict of interest between the company's managers and shareholders), attractive compensation packages are created to retain and encourage managers. In the best interest of shareholders, compensation packages should be structured in a way such that managers have an incentive to maximize the _____ value of the company's stock price.

Long-run

Both the CEO and the CFO are required to certify the accuracy of information contained in financial statements, reports, press releases, and any other form of public announcement made by a company. This requirement was instituted in 2002 as a part of the _____.

Sarbanes-Oxley Act

True or False: A small number of institutional investors are often able and motivated to bring direct shareholder pressure on a firm's management in an effort to reduce potential agency conflicts.

True

Different forms of businesses have different characteristics. Which of the following characteristics would apply to a partnership? Check all that apply. a. Income is allocated on a pro rata basis b. Legal arrangement between two or more people c. Can easily raise large amounts of capital d. Chartered by a state and is its own legal entity separate and distinct from its owners and managers e. Taxed at individual level f. Subject to unlimited personal liability

a. Income is allocated on a pro rata basis b. Legal arrangement between two or more people e. Taxed at individual level f. Subject to unlimited personal liability

Vision Tech is a software company based out of San Francisco. Its stockholders are mostly institutional investors and there is relatively little individual ownership. If these institutions dilute their positions and sell off their stake in Vision Tech's stock to several individual investors, would direct shareholder intervention be more or less likely to motivate the firm's management? a. Less likely b. More likely

a. Less likely

Corporate finance is concerned with the different aspects of a business's financial management. The chief financial officer (CFO) is the top financial position in the organization and oversees several tasks. The CFO is not responsible for which of the following departments? Check all that apply. a. Marketing b. Production c. Accounting d. Investor relations e. Administration

a. Marketing b. Production e. Administration

Vision Tech's stock price is currently trading at $20 per share. The consensus among analysts is that the intrinsic value of Vision Tech's stock is $28 per share. Is Vision Tech more or less likely to receive a hostile takeover bid? a. More likely b. Less likely

a. More likely

Krit Corp. is a US manufacturing company based in the Midwest. As an investor, Wilson bought 225 shares of stock in Krit Corp. The stock price of Krit Corp. is currently trading at $30.00 per share. Wilson's total wealth in Krit Corp. is: a. $6,500.00 b. $6,750.00 c. $750.00 d. $225.00

b. $6,750.00

An analyst with a leading investment bank tracks the stock of Mandalays Inc. According to her estimations, the value of Mandalays Inc.'s stock should be $11.52 per share, but Mandalays Inc.'s stock is trading at $19.57 per share on the New York Stock Exchange (NYSE). Considering the analyst's expectations, the stock is currently: a. in equilibrium b. overvalued c. undervalued

b. overvalued

Consider the following scenario and determine whether an agency conflict exists: Last week, an investigative reporter for a major metropolitan newspaper discovered that the doctors conducting clinical trials of a new cancer treatment drug are also the principal shareholders in Cancer Solutions Inc. (CSI). CSI is the company developing and attempting to market the drug. Upon being interviewed by federal authorities, the doctors acknowledged their conflict of interest but reported that they were sold the shares at a 75% discount by CSI's chief financial officer. The CFO was concerned that CSI might not be able to meet its annual performance objectives and in turn pay his anticipated multimillion-dollar bonus. Does an agency conflict exist between CSI's CFO and the company's shareholders? a. No; professionals, such as doctors and professional money managers, would not participate in unethical activities. b. No; in general, shareholders are satisfied with company officers engaging in any type of legal or illegal activity to ensure the chances of them receiving greater dividend payments. c. Yes; CSI's CFO engaged in unethical conduct to manipulate the firm's short-term earnings and improve the likelihood of receiving his annual bonus. d. Yes; the shares should not have been sold at a 75% discount, which is price discrimination.

c. Yes; CSI's CFO engaged in unethical conduct to manipulate the firm's short-term earnings and improve the likelihood of receiving his annual bonus.

If the stock price of Krit Corp. increases in the next two years, Wilson's wealth in Krit Corp. will _____.

increase