Questions on Finance
FIN 301 HW
Chapter 1 (Odds 1-17)
1. Define shareholder wealth. Explain how it is measured
Shareholder wealth is represented by the market price of a firm’s common stock. It is measured by the market value of the shareholders’ common stock holdings
2. Which type of corporation is more likely to be a shareholder wealth maximizer -one with wide ownership and no owners directly involved in the firms management or one that is closely held.
A closely held corporation
3. It has been argued that shareholder wealth maximization is not a realistic normative goal for the firm, given the social responsibility activities that the firm is “expected” to engage in (such as contributing to the arts, education, etc.). Explain why these social responsibility activities are not inconsistent with shareholder wealth maximization.
By increasing shareholder wealth, the net worth of the shareholders increase. This would allow them to contribute to their own social responsible activities because they will have additional funds to invest in their own communities.
4. Explain what is meant by agency relationships and agency costs
Agency relationships occur when one or more of the principals hire an agent to perform a service on behalf of the principals. Agency costs are costs incurred by the owners of a firm when others manage the firm.
5. What is the source of potential agency conflicts between owners and bondholders? Who is the agent and who is the principal in this relationship?
Bondholders do not have any decision-making abilities. They also assume the risk if default because they are a creditor. Bondholders are the agent and the owners are the principals.
6. Explain the relationship between financial management and (a) microeconomics and (b) macroeconomics
Financial management relies heavily on related fields and disciplines such as accounting and economics. Microeconomics deals with the economic decisions of individuals, households and firms. Macroeconomics looks at the economy
Chapter 1 (Odds 1-17)
1. Define shareholder wealth. Explain how it is measured
Shareholder wealth is represented by the market price of a firm’s common stock. It is measured by the market value of the shareholders’ common stock holdings
2. Which type of corporation is more likely to be a shareholder wealth maximizer -one with wide ownership and no owners directly involved in the firms management or one that is closely held.
A closely held corporation
3. It has been argued that shareholder wealth maximization is not a realistic normative goal for the firm, given the social responsibility activities that the firm is “expected” to engage in (such as contributing to the arts, education, etc.). Explain why these social responsibility activities are not inconsistent with shareholder wealth maximization.
By increasing shareholder wealth, the net worth of the shareholders increase. This would allow them to contribute to their own social responsible activities because they will have additional funds to invest in their own communities.
4. Explain what is meant by agency relationships and agency costs
Agency relationships occur when one or more of the principals hire an agent to perform a service on behalf of the principals. Agency costs are costs incurred by the owners of a firm when others manage the firm.
5. What is the source of potential agency conflicts between owners and bondholders? Who is the agent and who is the principal in this relationship?
Bondholders do not have any decision-making abilities. They also assume the risk if default because they are a creditor. Bondholders are the agent and the owners are the principals.
6. Explain the relationship between financial management and (a) microeconomics and (b) macroeconomics
Financial management relies heavily on related fields and disciplines such as accounting and economics. Microeconomics deals with the economic decisions of individuals, households and firms. Macroeconomics looks at the economy