Corporate Finance: Objectives of the Firm Chapter 1 & 19
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Questions and Answers

What is the main concern of shareholders regarding higher short-term profits?

  • The company's reputation may be affected
  • Long-term profits may be damaged (correct)
  • Shareholders may not receive immediate dividends
  • Short-term profits may not be sustainable

    • What is the hurdle rate or cost of capital?

  • The average rate of return on investment
  • The maximum rate of return on investment
  • The rate of return on investment without risk
  • The minimum acceptable rate of return on investment (correct)

    • What is the main criticism of shareholder value maximization?

  • Long-termism and externalities
  • Short-termism and internalities
  • Short-termism and externalities (correct)
  • Long-termism and internalities

    • What is the difference between a shareholder and a stakeholder?

    <p>A shareholder owns stock, while a stakeholder is impacted by the company</p> Signup and view all the answers

    What is the primary objective of corporate finance?

    <p>Maximizing shareholder value</p> Signup and view all the answers

    What is the agency problem in the context of agency theory?

    <p>Managers prioritizing their own interests over maximizing shareholder value</p> Signup and view all the answers

    What is the opportunity cost of capital used for in corporate finance?

    <p>Setting the standard for investment decisions</p> Signup and view all the answers

    What determines the current wealth of shareholders?

    <p>All future cash flows generated by the company</p> Signup and view all the answers

    What is the difference between tangible and intangible assets?

    <p>Tangible assets can be seen, intangible assets cannot be seen</p> Signup and view all the answers

    What is the primary focus of investment decisions in corporate finance?

    <p>Purchasing real assets</p> Signup and view all the answers

    Why is a safe dollar worth more than a risky dollar?

    <p>Because it is less likely to be lost</p> Signup and view all the answers

    What is the purpose of good governance in corporate finance?

    <p>To maximize shareholder value in the long term</p> Signup and view all the answers

    What is a major problem with senior executives in companies?

    <p>They are corrupted by the large sums of money they are given</p> Signup and view all the answers

    What is the main purpose of corporate governance?

    <p>To protect shareholders and other investors</p> Signup and view all the answers

    What is an example of a corporate governance mechanism?

    <p>All of the above</p> Signup and view all the answers

    How is the rate of return calculated?

    <p>From the cash inflows and outflows generated by the investment project</p> Signup and view all the answers

    Why is a higher rate of return not always better?

    <p>Because it might be riskier</p> Signup and view all the answers

    What determines value in financial markets?

    <p>The answer is not provided in the text</p> Signup and view all the answers

    What is the key weakness of the agency problem?

    <p>Conflict of interest between managers and shareholders</p> Signup and view all the answers

    Why may few shareholders have a strong incentive to monitor management?

    <p>Because the benefits of monitoring accrue to all shareholders, not just the one who incurs the costs</p> Signup and view all the answers

    What is an example of how managers may allow themselves to enjoy expensive benefits at the expense of investors?

    <p>By purchasing private jets worth tens of millions of dollars</p> Signup and view all the answers

    What is a consequence of managers' ability to exercise substantial discretion over the disposition and allocation of investors' capital?

    <p>Investors are no longer assured of receiving fair returns on their funds</p> Signup and view all the answers

    What is an example of how managers may waste investors' funds?

    <p>By undertaking unprofitable projects that benefit themselves but not investors</p> Signup and view all the answers

    What is the implication of the statement 'Indeed, the very profits that many of the companies reported appear to have been the product more of auditors' imaginations than of any CEO's strategy for seizing or creating value'?

    <p>Managers' self-interest can lead to inaccurate financial reporting</p> Signup and view all the answers

    What is the concept that suggests identical assets should have the same value?

    <p>Law of one price</p> Signup and view all the answers

    According to the capital asset pricing model, how do investors reduce or eliminate some risks?

    <p>By diversifying their portfolios</p> Signup and view all the answers

    What is a key factor that affects the choice between debt and equity financing?

    <p>The risk of bankruptcy</p> Signup and view all the answers

    What is the primary focus of Chapters 6 and 9 in the context of corporate finance?

    <p>Measuring risk and return</p> Signup and view all the answers

    In a perfect financial market, what is the significance of the choice between debt and equity financing?

    <p>It is irrelevant due to the absence of taxes and other imperfections</p> Signup and view all the answers

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