Chapter 1

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Chapter 001 The Corporation and the Financial Manager

True / False Questions

1. The liability of sole proprietors is limited to the amount of their investment in the

company.FALSE

AACSB: Communication Abilities

Bloom's: Knowledge

Difficulty: EasyLearning Objectie: !"#

2. General partners have limited personal liability for business debts in a limited partnership.FALSE


Bloom's: Knowledge

Difficulty: $ediumLearning Objectie: !"#

3. The separation of onership and management is one distinctive feature of corporations.TRUE

AACSB: %eflectie &in(ing S(ills

Bloom's: )nderstanding


!. " ma#or disadvantage of partnerships is that they have $double ta%ation$ of profits.FALSE


Bloom's: Knowledge


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'. Financial assets have value because they are claims on the firm(s real assets and the cashthat those assets ill produce.TRUE



Difficulty: Easy

Learning Objectie: !"*

). Capital budgeting decisions are used to determine ho to raise the cash necessary forinvestments.FALSE


Bloom's: )nderstandingDifficulty: $edium

Learning Objectie: !"!

*. " successful investment is one that increases the value of the firm.TRUE



Difficulty: EasyLearning Objectie: !"!

+. ,-(s committing of '00 million to partnership ith /niversity of California,ereley todevelop ne sources of energy is a capital budgeting decision.TRUE

AACSB: %eflectie &in(ing S(illsBloom's: A++lication

Difficulty: Easy


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. ,oards of directors are often portrayed as active supporters of top management.FALSE



Difficulty: $edium

Learning Objectie: !"#

10. Financial analysts are involved in monitoring and controlling the ris associated ithinvestment pro#ects and financing decisions.TRUE


Bloom's: KnowledgeDifficulty: $edium

Learning Objectie: !",

11. The primary goal of any company should be to ma%imie current period profit.FALSE



Difficulty: $edium

Learning Objectie: !"-

12. Ma%imiing profits is the same as ma%imiing the value of the firm.FALSE



Difficulty: $edium


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13. Ma#or bans and securities firms protect their reputations by emphasiing their longhistory and their responsible behavior hen seeing ne customers.TRUE

AACSB: Etical )nderstanding . %easoning Abilities


Difficulty: Easy

Learning Objectie: !"/

1!. 4thical decision maing in business can be vieed as a long&term investment inreputation.TRUE


Bloom's: )nderstandingDifficulty: Easy


1'. 5eal assets can be intangible assets.TRUE



Difficulty: $ediumLearning Objectie: !"*

1). Maing good investment and financing decisions is the chief tas of the financialmanager.TRUE

AACSB: %eflectie &in(ing S(illsBloom's: )nderstanding

Difficulty: $edium


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1*. 6f a pro#ect(s value is less than its re7uired investment8 then the pro#ect is attractivefinancially.FALSE



Difficulty: $edium


1+. -fier(s spending of *.) billion in 200) on research and development of ne drugs is acapital budgeting decision but not a financing decision.TRUE


Bloom's: A++licationDifficulty: $edium


1. 9:M;(s 6ssuance of a *&year bond in 200'8 raising )00 million euros is a financingdecision.TRUE


Difficulty: $edium


20. "n 6 from your brother in la is a financial asset.TRUE


Difficulty: $edium


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21. The separation of onership and management is one distinctive feature of bothcorporations and sole proprietors.FALSE



Difficulty: $edium


22. ?hareholders elcome higher short&term profits even hen they damage long&termprofits.FALSE




23. 6nvestors usually give some companies ith good trac records the benefit of the doubthen the companies( performance fails to meet the maret e%pectation.TRUE

AACSB: Etical )nderstanding . %easoning AbilitiesBloom's: A++lication

Difficulty: $edium


2!. @hile control of large public companies in the /nited ?tates is e%ercised through theboard of directors and pressure from the stoc maret8 in many other countries the stocmaret is less important and control shifts to ma#or stocholders8 typically bans and othercompanies.TRUE

AACSB: Communication AbilitiesBloom's: Knowledge

Difficulty: $edium


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2'. 6nsider trading is the purchase or sale of shares based on information that is not availableto public investors8 and such behavior is accepted by the ?ecurities 4%change Commission.FALSE


Bloom's: Knowledge

Difficulty: $edium


Multiple Choice Questions

2). The stocholders in a sole proprietorship are represented byA".the oner of the firm.

,.the general partner of the firm.C.the ,oard of Birectors of the firm.D.no one sole proprietorships have no stocholders.


Bloom's: Knowledge

Difficulty: Easy


2*. @hich of the folloing ould be considered an advantage of the sole proprietorship formof organiationD".@ide access to capital marets,./nlimited liabilityC." pool of e%pertiseD.-rofits ta%ed at only one level




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2+. 6n a partnership form of organiation8 income ta% liability8 if any8 is incurred byA".the partnership itself.B.the partners individually.C.both the partnership and the partners.

B.neither the partnership nor the partners.


Difficulty: $edium


2. @hich of the folloing ould correctly differentiate general partners from limitedpartners in a limited partnershipD".General partners have more #ob e%perience.

,.General partners have an onership interest.C.General partners are sub#ect to double ta%ation.D.General partners have unlimited personal liability.


Bloom's: Knowledge

Difficulty: $edium


30.

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31. @hich of the folloing is leastliely to be discussed in the articles of incorporationD".The ma%imum number of shares that can be issued.,.The purpose of the business.C.The price range of the shares of stoc.

B.The number of members of the ,oard of Birectors.


Difficulty: Easy


32. @hen a corporation fails8 the ma%imum that can lost by an investor protected by limitedliability isAA.the amount of the initial investment.

,.the amount of the profit on the investment.C.the amount necessary to pay the corporation(s debts.B.the amount of the investor(s personal ealth.



Difficulty: Easy


33. @hich of the folloing is notan advantage to incorporating a businessD

".4asier access to financial marets.,.9imited liability.C.,ecoming a permanent legal entity.D.-rofits ta%ed at the corporate level and the shareholder level.



Difficulty: Easy


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3!. /nlimited liability is faced by the oners ofA".corporations.,.partnerships and corporations.C.sole proprietorships and partnerships.

B.all forms of business organiation.


Difficulty: Easy


3'. @hich of the folloing statements generally cannot be correct for an investor ho facesunlimited liability on an investmentD".The investor ons stoc in the firm.

,.The investor has no partners.C.The investor is sub#ect to double ta%ation.B.The investor is responsible for managing the firm.



Difficulty: $edium


3). 6n the case of a professional corporation8 EEEEEEEE hashave limited liability.

".only the professionals.B.only the business.C.both the professionals andthe business.B.neither the professionals northe business.


Bloom's: Knowledge

Difficulty: $edium


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3*. " board of directors is elected as a representative of the corporation(sA".top management.,.staeholders.C.shareholders.

B.customers.


Difficulty: $edium


3+. The legal $life$ of a corporation isA".coincident ith that of its C4

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!0. $Bouble ta%ation$ refers toA".all partners paying e7ual ta%es on profits.,.corporations paying ta%es on both dividends and retained earnings.C.paying ta%es on profits at the corporate level and dividends at the personal level.

B.the fact that marginal ta% rates are doubled for corporations.


Difficulty: $edium


!1. " corporation is considered to be closely held henAA.only a fe shareholders e%ist.,.the maret value of the shares is stable.

C.it operates in a small geographic area.B.management also serves as the board of directors.


Difficulty: Easy


!2. Corporations are referred to as public companies hen theirA".shareholders have no ta% liability.

,.shares are held by the federal or state government.C.stoc is idely traded.B.products or services are available to the public.


Bloom's: KnowledgeDifficulty: Easy


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!3. " common problem for closely held corporations isAA.lac of access to substantial amounts of capital.,.that shareholders receive only one vote each.C.the separation of onership and management.

B.an abundance of agency problems.


Difficulty: $edium


!!. Corporate managers are e%pected to mae corporate decisions that are in the best interestofA".top corporate management.

,.the corporation(s board of directors.C.the corporation(s shareholders.B.all corporate employees.



Difficulty: $edium


!'. @hich of the folloing ould not be considered a real assetD

A." corporate bond,." machineC." patentB." factory


Bloom's: A++lication

Difficulty: $edium


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!). @hich of the folloing statements best distinguishes the difference beteen real andfinancial assetsD".5eal assets have less value than financial assets.,.5eal assets are tangible financial assets are not.

C.Financial assets represent claims to income that is generated by real assets.B.Financial assets appreciate in value real assets depreciate in value.



Difficulty: $edium


!*. @hich of the folloing ould not be considered a financial assetDA." patent

,." personal 6

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!. Corporations that do notissue financial securities such as stoc or debt obligationsA".ill not be able to increase sales.,.cannot be profitable.C.ill not be able to generate sufficient funds to fulfill their needs.

B.do not face double ta%ation of their profits.


Difficulty: $edium


'0. @hich of the folloing ould be considered a capital budgeting decisionD".-lanning to issue common stoc rather than issuing preferred stocB." decision to e%pand into a ne line of products8 at a cost of ' million

C.5epurchasing shares of common stocB.6ssuing debt in the form of long&term bonds


Difficulty: $edium


'1. " financial manager facing a capital budgeting decision must decide hether toA".issue stoc or debt securities.

,.use the money maret or capital maret.C.use primary marets or secondary marets.D.buy ne machinery or repair the old.




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'2. The best criterion for success in a capital budgeting decision ould be toA".minimie the cost of the investment.,.ma%imie the number of capital budgeting pro#ects.C.ma%imie the difference beteen cash inflos and cost.

B.finance all capital budgeting pro#ects ith debt.


Difficulty: $edium


'3. The overall goal of capital budgeting pro#ects should be toA".decrease the firm(s reliance upon debt.,.increase the firm(s sales.

C.increase the firm(s outstanding shares of stoc.D.increase the ealth of the firm(s shareholders.


Difficulty: Easy


'!. "n e%ample of a firm(s financing decision ould beA".ac7uisition of a competitive firm.

,.ho much to pay for a specific asset.C.the issuance of ten&year versus tenty&year bonds.B.hether or not to increase the price of its products.




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''. @hich of the folloing is0O&a financing decisionD".?hould the firm borro money from a ban or sell bondsDB.?hould the firm shut don an unprofitable factoryDC.?hould the firm buy or lease a ne machine that it is committed to ac7uiringD

B.?hould the firm issue preferred stoc or common stocD


Difficulty: $edium


'). 9ong&term financing arrangements occur in theA".money marets.B.capital marets.

C.secondary marets.B.primary marets.


Difficulty: Easy


'*. The term $capital structure$ refers toAA.the manner in hich a firm obtains its long&term sources of funding.

,.the length of time needed to repay debt.C.hether the firm invests in capital budgeting pro#ects.B.hich specific assets the firm should invest in.




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'+. Firms can alter their capital structure byA".not accepting any capital&budgeting pro#ects.,.investing in nontangible assets.C.issuing stoc to repay debt.

B.becoming a limited liability company.


Difficulty: Easy


'. @hen a corporation decides to issue long&term debt in order to pay for the ac7uisition ofreal assets8 it has made aA".capital budgeting decision.

B.financing decision.C.money maret decision.B.secondary maret decision.



Difficulty: Easy


)0. " firm decides to pay for a small investment pro#ect through a 1 million increase in

short&term ban loans. This is best described as an e%ample of a=n>AA.financing decision.,.investment decision.C.capital budgeting decision.B.capital maret decision.



Difficulty: EasyLearning Objectie: !"!

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)1. The short&term decisions of financial managers are comprised ofA".capital structure decisions.,.investment decisions.C.financing decisions.

D.both investment and financing decisions.


Difficulty: $edium


)2. @hich of the folloing represents a financing decisionDA." decision to borro 10 million through a ban loan.,." decision to invest in the common stoc of another corporation.

C." decision to buy a ne mainframe computer.B." decision to pay 1 million of accounts payable.


Difficulty: Easy


)3. @hich of the firm(s financial managers is most liely to be involved ith obtainingfinancing for the firmD

A.Treasurer,.ControllerC.Chief 4%ecutive

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)!. 6n a large corporation8 budget preparation ould most liely be conducted by theA".treasurer.B.controller.C.chief financial officer.

B.financial manager.


Difficulty: Easy


)'. 6n a firm having both a treasurer and a controller8 hich of the folloing ould mostliely be handled by the controllerDA.6nternal auditing

,.Credit managementC.,aning relationshipsB.6nsurance


Bloom's: Knowledge

Difficulty: $edium


)). @hich of the folloing statement more accurately describes the controller than the

treasurerD".9iely to be the only financial e%ecutive in small firms.B.Monitors capital e%penditures to mae sure that they are not misappropriated.C.5esponsible for investing the firm(s spare cash.B.5esponsible for arranging any issue of common stoc.



Difficulty: $ediumLearning Objectie: !",

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)*. " chief financial officer ould typicallyA".report to the treasurer8 but supervise the controller.,.report to the controller8 but supervise the treasurer.C.report to both the treasurer and controller.

D.supervise both the treasurer and controller.


Difficulty: Easy


)+.

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*0. 6nvestment bans lie Merrill 9ynch or Goldman ?achsA".collect deposits and relend the cash to corporations and individuals.B.help companies sell their securities to investors.C.design and sell insurance policies for businesses.

B.lend to corporations and investors in commercial real estate.


Difficulty: Easy


*1. The primary goal of corporate management should be toA".ma%imie the number of shareholders.,.ma%imie the firm(s profit.

C.minimie the firm(s costs.D.ma%imie the shareholders( ealth.


Difficulty: $edium


*2. @ithin the realm of ethical decision maing8 managers should attempt to ma%imieAA.the maret value of the shareholders( ealth.

,.their compensation plans.C.their firm(s maret share.B.the profits of the firm.


Bloom's: )nderstandingDifficulty: $edium


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*3. @hich of the folloing appears to be the most appropriate goal for corporatemanagementDA.Ma%imiing maret value of the company(s shares.,.Ma%imiing the company(s maret share.

C.Ma%imiing the current profits of the company.B.Minimiing the company(s liabilities.



Difficulty: $edium


*!. ;o may a reduction in cash dividends be in the best interests of current shareholdersD".Bividends are ta%ed at tice the rate of other gains.

B.The firm ill have available cash to increase current investment and future profits.C.5educed dividends increase managerial compensation8 thus increasing their motivation.B." reduction of cash dividends cannotbe in the best interests of current shareholders.



Difficulty: 1ard


*'. -rofit ma%imiation is not a ell&defined corporate ob#ective becauseA

".it leaves open the 7uestion of hich year(s profits.,.higher profits does not necessarily mean a better rate of return.C.profits can be changed by using different accounting rules.D."ll of these.



Difficulty: $edium


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*). " managerial ob#ective to increase maret share is more liely to be successful in thelong&run if the firm isA".selling shares in the secondary maret.B.the lo&cost producer in the industry.

C.managed by the board of directors.B.investing in capital budgeting pro#ects.



Difficulty: $edium


**. @orldCom(s failure to report 3.+ billion of operating e%penses is an e%ample ofA".an effort to conform to changed accounting rules.

,.an attempt to ma%imie the value of the shareholders( investment in the firm.C.an effort to serve the needs of the customer.D.an attempt to increase the company(s maret value in an unethical ay.



Difficulty: Easy


*+. " first&step in determining managerial ob#ectives is toA

".develop appropriate compensation policies.,.eliminate agency problems.C.serve the needs of the customer.B.select an appropriate capital structure.



Difficulty: $edium


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*. 4thical decision&maing by management has a payoff for shareholders in terms ofA".improved capital structure.B.enhanced reputation value.C.increased managerial benefits.

B.higher dividend payments.

AACSB: Etical )nderstanding . %easoning AbilitiesBloom's: )nderstanding

Difficulty: $edium


+0. 4thical decision maing in businessA".reduces the firm(s profits.B.re7uires adherence to implied rules as ell as ritten rules.

C.is not in the best interests of shareholders.B.is less important than good capital budgeting decisions.

AACSB: Etical )nderstanding . %easoning AbilitiesBloom's: )nderstanding

Difficulty: 1ard


+1. The actions of ?alomon ,rothers during their 11 Treasury bond bidding suggest that afirm(s reputationA

".cannot be e%pected to affect profitability.,.is determined by the firm(s bondholders.C.is outside of managerial control.D.can impact shareholders( ealth.



Difficulty: $edium


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+2. 6n hich of the folloing organiations ould it be least li(elyto find the e%istence ofagency problemsDA." sole proprietorship,." partnership

C." corporationB." closely held corporation



Difficulty: Easy

Learning Objectie: !"2

+3. ?ole proprietorships resolve the issue of agency problems byA".avoiding e%cessive e%pense accounts.

,.discharging those ho violate the rules.C.alloing oners to share the cost of their actions ith others.D.forcing oners to bear the full cost of their actions.



Difficulty: $edium


+!. "gency problems can best be characteried asA

".dislie of firm(s bondholders by its e7uity holders.B.differing incentives beteen managers and oners.C.spending corporate resources.B.friction beteen the primary and secondary marets.


Bloom's: Knowledge

Difficulty: $edium


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+'. @hich of the folloing is leastliely to represent an agency problemD".lavish spending on e%pense accounts.,.plush remodeling of the e%ecutive suite.C.e%cessive investment in $safe$ pro#ects.

D.e%ecutive incentive compensation plans.


Difficulty: 1ard


+). @hen managers( compensation plans are tied in a meaningful manner to the profits of thefirm8 agency problemsAA.can be reduced.

,.ill be created.C.are shifted to other staeholders.B.are eliminated entirely from the firm.



Difficulty: $edium


+*. The term $corporate staeholder$ typically refers toA

".a company(s customers.B.anyone ith a financial interest in the firm.C.the e7uity holders of the firm.B.the management and ,oard of Birectors of the firm.


Bloom's: Knowledge

Difficulty: $edium


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++. @hich of the folloing groups is least liely to be considered a staeholder of the firmD".Government,.,ondholdersC.Competitors

B.4mployees


Difficulty: Easy


+. " manager(s compensation plan that offers financial incentives for increases in 7uarterlyprofitability may create agency problems in thatA".the managers are not motivated by personal gain.

,.the board of directors may claim the credit.C.short&term8 not long&term profits become the focus.B.investors desire stable profits.



Difficulty: 1ard


0.

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1. @hich of the folloing forms of compensation is most liely to align the interests ofmanagers and shareholdersD"." fi%ed salary.,." salary that is lined to company profits.

C." salary that is paid partly in the form of the company(s shares.B." salary that is lined to the company(s total maret value.



Difficulty: 1ard


2. -rofit&sharing plans may be beneficial hen used toA".reduce the impact of corporate income ta%es.

B.improve managers( incentives for effective decision maing.C.divert financial resources from shareholders.B.reduce the payment of cash dividends.



Difficulty: $edium


3. " corporate board of directors should provide support for the top management teamA

".under all circumstances.,.in all decisions related to cash dividends.C.only hen the board has confidence in management(s actions.B.if shareholders are pleased ith the firm(s performance.



Difficulty: $edium


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!. " corporation(s board of directorsA".is selected by and can be removed by management.B.can be voted out of poer by the shareholders.C.has a lifetime appointment to the board.

B.is selected by a vote of all corporate staeholders.


Difficulty: $edium


'.

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Essay Questions

*. @hat general factors may influence the decision of hether to organie as a sole

proprietorship8 a partnership8 or a corporationD

Factors that may influence the decision concerning organiational form ould includeAamount of capital needed in relation to amount of capital that can be raised8 estimated salesvolume8 the e%tent of managerial e%pertise8 the illingness to share profits8 the importance oflimited liability8 a desire for the permanence of the organiation8 the issue of double ta%ation.

AACSB: Analytical S(ills

Bloom's: Analysis


+. Biscuss hy corporations typically e%hibit separation of onership and management8 asdistinguished from sole proprietorships or partnerships.

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. @hy is limited liability such an important aspect to investorsD

Many investors ould not be illing to commit their investment funds into pro#ects if it erenon they ere rising more than those specific funds. ?pecifically in the case of separated

onership and management8 shareholders may be unilling to remain liable for decisionsthey did not have a hand in maing. @ith the aversion to ris that is itnessed in general formany investors8 it is 7uestionable hether investors ould direct their funds into financialassets that did not offer limited liability. Thus8 the e%istence of limited liability may greatlyaffect the demand for corporate shares.

AACSB: Analytical S(illsBloom's: Analysis


100. -rovide at least three e%amples each of real and financial assets that might appear on thebalance sheet of General Motors.

4%amples of real assets for General MotorsA cash8 ra materials inventory8 productionfacilities8 tools and machines8 finished inventory of automobiles. 4%amples of financial assetsthat could have been issued by General MotorsA common stoc =different classes>8 preferredstoc8 corporate bonds8 ban loans8 et cetera. .




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101. Bistinguish beteen a firm(s capital budgeting decision and financing decision.

4%amples of the capital budgeting decision for a firm could includeA a decision to replace allof the firm(s personal computers8 a decision to e%pand the sie of the production facility8 a

decision to buy a corporate #et8 a decision to e%pand production into to ne product lines8 etcetera. 4%amples of the financing decision for a firm could includeA a decision to issuecorporate bonds rather than e%pand a ban loan8 a decision to float a ne issue of commonstoc8 a decision to denominate a loan in Japanese yen rather than /.?. dollars8 a decision toroll over short&term financing rather than borro for a longer term8 et cetera.



102. Biscuss the interrelationship beteen a firm(s financing and capital structure decisions.

"lthough the capital budgeting decision considers hat to invest in and specifically homuch to invest8 this decision is importantly related to ho the necessary funds should beraised. For e%ample8 if many other firms of similar ris have recently issued bonds8 the supplyof loanable funds may be lo8 hich could affect the interest rate on such funds.

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103. @ho are the financial managers in large corporationsD

The treasurer is responsible for looing after the firm(s cash8 raising ne capital8 andmaintaining relationships ith bans and other investors ho hold the firm(s securities. 9arger

corporations usually also have a controller8 ho prepares the financial statements8 managesthe firm(s internal budgets and accounting8 and loos after its ta% affairs. 9arge corporationsoften appoint a chief financial officer =CF to oversee both the treasurer(s and the controller(sor.


Bloom's: KnowledgeLearning Objectie: !",

10!. Frit and Frieda ent to business school together 10 years ago. They have #ust been hiredby a midsied corporation that ants to bring in ne financial managers. Frit studiedfinance8 ith an emphasis on financial marets and institutions. Frieda ma#ored in accountingand became a C-" ' years ago. @ho is more suited to be treasurer and ho controllerD,riefly e%plain.

Frit ould more liely be the treasurer and Frieda the controller. The treasurer raises moneyfrom the financial marets and re7uires a bacground in financial institutions. The controllerre7uires a bacground in accounting.

AACSB: Analytical S(illsBloom's: Analysis


1&3!

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10'. -rovide e%amples of managerial goals other than the ma%imiation of maret value.

Managers may attempt to ma%imie profits8 or to ma%imie maret share8 or even toma%imie their on benefitsK -roblems ith ma%imiing profits can include the method of

ma%imiing =i.e.8 is it in the long&run or short&run best interests of the firmD>8 the maintenanceof product 7uality8 ethical decision maing8 customer satisfaction8 et cetera. -roblems ithmaret share can include economies of scale =i.e.8 lo average cost of production>8 maintainedprofitability8 increased liabilities8 et cetera. "gency problems that relate to managerialcompensation or per7uisites that are not in the long&run interest of shareholders are anothere%ample of misguided goals.




10). "re there companies that have attempted to increase their maret value in unethical aysrecentlyD

The years 2001 and 2002 revealed an unusual number of bad apples. For e%ample8 telecomgiant @orldCom admitted that it failed to report 3.+ billion of operating e%penses8 such thatits income became significantly overstated. @hen the company(s true profitability asdiscovered8 it became banrupt ithin a month. 6n late 20018 4nron8 the energy trading andinvestment company8 announced over 1.* billion in losses that had previously beenconcealed in $special purpose entities$ =?-4s>.

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10*. Bevelop a case for the interrelationship of ethical decision maing by corporatemanagement and profitability of the firm.

4thical decision maing can have an important impact on employee attitudes8 investor

actions8 and customer retention. Further8 all of these factors can have a large impact on thebottom line. The list of potential benefits for a firm that has developed a reputation for ethicaloperations can be long easier employee recruitment8 loer employee turnover8 easier issueof primary securities8 repeat business8 good ord of mouth8 et cetera. 6n other ords8 theactions of all staeholders can be positively affected hen they perceive the firm to be ethicalin its decisions.


Bloom's: Analysis


10+. 6s there a conflict beteen $doing ell$ and $doing good$D @hen there are conflicts8ho may government regulations or las tilt the firm toard doing goodD

"s the te%t notes8 the first step in doing ell is doing good by your customers. ,usinessescannot prosper for long if they do not provide to their customers the products and servicesthey desire. 6n addition8 reputation effects often mae it in the firm(s on interest to actethically toard its business partners and employees since the firm(s ability to mae deals andto hire silled labor depends on its reputation for dealing fairly. 6n some circumstances8 henfirms have incentives to act in a manner inconsistent ith the public interest8 ta%es or fees can

align private and public interests. For e%ample8 ta%es or fees charged on pollution mae itmore costly for firms to pollute8 thereby affecting the firm(s decisions regarding activities thatcause pollution.

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10. Bescribe agency problems in general8 and offer at least three e%amples fromcorporations.

@henever the firm(s managers are different from the firm(s oners8 the potential e%ists for

agency problems. Management may be taing advantage of the fact that corporate onershipis often 7uite diverse8 such that none of the oners appears to be $minding the store.$ 6n thosecases8 it may be easy for top management to vote itself an e%cessive raise8 or to redecorate thecorporate suite8 or to be la% on the #ustification of e%pense reports8 or even to invest inpro#ects that are $too safe.$ @hy might managers choose safe pro#ectsD For e%ample8 thee%ecutive may have one year remaining on an employment contract and be more concernedith stable profits than ith rising profits.




110. Tabulate and compare the differences among corporations8 proprietorships andpartnerships.




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111. @hat are the to ma#or decisions made by financial managersD

Financial management can be broen don into =1> the investment8 or capital budgeting8decision and =2> the financing decision. The firm has to decide =1> ho much to invest and

hich real assets to invest in and =2> ho to raise the necessary cash.


Bloom's: )nderstandingLearning Objectie: !"!

112. @hat does $real asset$ meanD

5eal assets include all assets used in the production or sale of the firms( products or services.

5eal assets can be tangible =plant and e7uipment8 for e%ample> or intangible =patents ortrademars8 for e%ample>.



113. @ho is the financial managerD

"lmost all managers are involved to some degree in investment decisions8 but some managers

specialie in finance8 for e%ample8 the treasurer8 controller8 and CF

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11'. 6s value ma%imiation alays ethicalD

Modern finance does not condone attempts to pump up stoc price by unethical means. ,utthere need be no conflict beteen ethics and value ma%imiation. The surest route to

ma%imum value starts ith products and services that satisfy customers. " good reputationith customers8 employees8 and other staeholders is also important for the firms( long&runprofitability and value.




11). ;o do corporations ensure that managers( and stocholders( interests coincideD

Conflicts of interest beteen managers and stocholders can lead to agency problems. Theseproblems are ept in chec by compensation plans that lin the ell&being of employees tothat of the firm by monitoring of management by the board of directors8 security holders8 andcreditors and by the threat of taeover.



11*. @hat actions can shareholders tae hen the corporation is underperforming and theboard of directors is not aggressive in holding managers to tasD

6f shareholders believe that the corporation is underperforming and the board of directors isnot sufficiently aggressive in holding managers to tas8 they can try to replace the board in thene%t election. The dissident shareholders ill attempt to convince the other shareholders tovote for their slate of candidates to the board. 6f they succeed8 a ne board ill be elected andit can replace the current management team. ?hort of that8 unhappy shareholders can attemptto elect representatives to the board to mae their voices heard. 6n 200)8 for e%ample8dissatisfied shareholders of the ;. J. ;ein food company voted in to directors proposed byan outside investor8 elson -elt. @ith over 1 trillion of assets under management8 hedge

funds have become increasingly aggressive and successful in pursuing this strategy.




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11+. @hat is a Japanese eiretsu8 e.g.8 the Mitsubishi eiretsuD @hat are the advantages anddisadvantages of performing corporate governance in a eiretsuD

6n Japan ma#or industrial and financial companies have traditionally been lined together in a

group called a eiretsu. For e%ample8 the Mitsubishi eiretsu contains 2 core companiesincluding a ban8 to insurance companies8 an automobile manufacturer8 a breery8 and asteel company. Members of the eiretsu are tied together in several ays. First8 managers maysit on the boards of directors of other group companies8 and a $president(s council$ of chiefe%ecutives meets regularly. ?econd8 each company in the group holds shares in many of theother companies. "nd third8 companies generally borro from the eiretsu(s ban or fromelsehere ithin the group.

These lins may have several advantages. Companies can obtain funds from other membersof the group ithout the need to reveal confidential information to the public8 and if a memberof the group runs into financial heavy eather8 its problems can be ored out ith other

members of the group rather than in the banruptcy court. The more stable and concentratedshareholder base of large Japanese corporations may mae it easier for them to resistpressures for short&term performance and allo them to focus on securing long&termadvantage.

,ut the Japanese system of corporate governance also has its disadvantages8 for the lac ofmaret discipline can allo lagging or inefficient corporations to put off painful surgery. "sthe Japanese economy languished in the 10s8 these disadvantages became more apparent8the lins that bound eiretsus together began to eaen8 and companies began to sell theirshares in other members of the group.



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