Fins1613 Tutorial Solutions Week 2

CORPORATE FINANCE WORKSHOP QUESTIONS WEEK 2 –Questions based on Lecture 1, Introduction and Basic Concepts 1. Which of these could explain why someone would choose to operate as a sole proprietorship rather than as a corporation? a. Sole proprietorships have limited liability b. There are relatively few rules relating to the establishment and running of a sole proprietorship c. The firm can last forever d. It is easy to raise large sum of money e. All of these answers 2. The primary goal of a publicly-owned firm interested in serving its stockholders should be to: a. Maximize expected total corporate profit. b. Maximize expected EPS. c. Minimize the chances of losses. d. Maximize the stock price per share. e. Maximize expected net income. 3. The value that the financial markets place on a company’s debt and equity securities will depend on the: a. Standard deviations of the returns from investments in those securities. b. Risk and expected return from investments in those securities. c. Expected return from investments in those securities. d. Interest rate on the debt securities. 4. Shareholders in a company have limited liability, which means that: a. Shareholders can be called upon to contribute only the amount unpaid on shares held in the company. b. The maximum the shareholders can be called upon to contribute is the current market price of the shares. c. Shareholders can never be called upon to make an additional contribution to the company’s assets. d. Shareholders have little or limited interest in the activities of management of the company, because the management and ownership of the firm are separated.

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Workshop Questions

5. Which of the following does not represent an agency cost resulting from the separation of ownership from control of the firm? a. The expense of providing management with bonuses based on profitability. b. The cost of a company director taking a business trip to Hawaii with no potential benefit to the company.