Fin 111

FIN111 Tutorial Solution Week 2 Ross Chapter 1 Critical Thinking and concepts review Chapter 1 1. Capital budgeting (deciding on whether to expand a manufacturing plant), capital structure (deciding whether to issue new equity and use the proceeds to retire outstanding debt), and working capital management (modifying the firm’s credit collection policy with its customers). Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, hard to raise capital funds. Some advantages: simpler, less regulation, the owners are also the managers, sometimes personal tax rates are better than corporate tax rates. To maximise the current market value (share price) of the equity of the firm (whether it’s publicly traded or not). 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 organisation 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. If such events occur, they may contradict the goal of maximising the share price of the equity of the firm. Since such organisations frequently pursue social or political missions, many different goals are conceivable. One goal that is often cited is revenue minimisation; i.e., providing their goods and services to society at the lowest possible cost. Another approach might be to observe that even a not-for-profit business has equity. Thus, an appropriate goal would be to maximise the value of the equity.

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14. How much is too much? Who is worth more, Ralph Norris or Nicole Kidman? The simplest answer is that there is a market for executives just as there is for all types of labor. Executive compensation is the price that clears the market. The same is true for athletes and performers. Having said that,