FIN

Why do all shareholders agree on the same goal for the financial manager?

-All of the decisions by the financial manager are made within the context of the overriding goal of financial management----to maximize the wealth of the owners, the stockholders. -The stockholders have invested in the corporation, putting their money at risk to become the owners of the corporation.

You are a shareholder in an S corporation. The corporation earns $2.35 per share before taxes. As a pass through entity, you will receive @2.35 for each share that you own. Your marginal tax rate is 28%. How much per share is left for you after all taxes are paid?

Amount that remains = Price per share - (Price per share X tax rate) 1.69

What is the most important difference between a corporation and all other organizational forms?

An important difference among the types of corporate organizational forms is the way they are taxed. Shareholders of a corporation pay taxes twice. This system is sometime referred to as double taxation.

Explain why the bid-ask spread is a transaction cost.

Investors always buy at the ask and sell at the bid. Since ask prices always exceed bid prices, investors "lose" this difference. It is one of the transaction costs. Since the market makers take the other side of the trade, they make this difference.

Which organizational forms give their owners limited liability?

Limited partnership for limited partners only.

Recall the last time you ate at an expensive restaurant where you paid the bill. Now think about the last time you ate at a similar restaurant, but your parents paid the bill. Did you order more food (or more expensive food) when your parents paid? Explain how this relates to the agency problem in corporations.

The agency problem leads an individual (in your case) and corporate managers (in the corporate setting) to put their own self-interest ahead of the interests of the shareholders (your parents in your case). In both situations there may be a lack of interest in controlling costs if those costs are not borne directly by the person making the decision.

What is the difference between a primary and a secondary market?

The primary market refers to a corporation issuing new shares of stock and selling them to investors. After this initial transaction between the corporation and investors, the shares continues to trade in a secondary market between investors without the involvement of the corporation.

Explain the difference between an S and a C corporation

The profits and losses of the S corporation are passed directly to shareholders and are not subject to corporate taxes, while the C corporation must first pay taxes on any profits before passing the after-tax profits on to shareholders. In addition, the S corporation can have no more than 100 shareholders, all of whom must be US citizens or residents. The C corporation does not have any such restrictions on its shareholders.

Your are the CEO of a company and you are considering entering into an agreement to have your company buy another company. You think the price might be too high, but you will be the CEO of the combined, much larger company. You know that when the company gets bigger, your pay and prestige will increase. What is the nature of the agency conflict here and how is it related to ethical considerations?

There is an ethical dilemma when the CEO of a firm has incentives that are opposite to those of the shareholders. In this case, you (as the CEO) have an incentive to potentially overpay for another company (which would be damaging to your shareholders) because your pay and prestige will improve.