Homework: Goals and Governance Assignment
1.Which of the following are investment decisions, and which are financing decisions?
-Should we stock up with inventory ahead of the holiday season? I
-Should we develop a new software package to manage our inventory? I
-With the savings we make from our new inventory system, it may be possible to
increase our dividend. F
-Alternatively, we can use the savings to repay some of our long-term debt. F
-With a new automated inventory management system, it may be possible to sell off
our Birdlip warehouse. I
2.Which of the following are real assets, and which are financial?
-Real: Trademark, factory, undeveloped land, experienced and hardworking sales
force
-Financial: share of stock, personal IOU, balance in the firm's checking account,
corporate bond
3.Which of the following statements always apply to corporations? (You may select more
than one answer. Single click the box with the question mark to produce a check mark
for a correct answer and double click the box with the question mark to empty the box
for a wrong answer. Any boxes left with a question mark will be automatically graded as
incorrect.)
-Ownership can be transferred without affecting operations
-Managers can be fired with no effect on ownership
4.Which of the following are correct descriptions of large corporations?
-
The corporation survives even if managers are dismissed
- Shareholders can sell their holdings without disrupting the business.
5. Which of the following statements more accurately describes the treasurer than the controller?
- b. Responsible for investing the firm's spare cash.
- c. Responsible for arranging any issue of common stock.
6. We claim that the goal of the firm is to maximize current market value. Could the following actions be
consistent with that goal?
The firm adds a cost-of-living adjustment to the pensions of is retired employees. Yes
The firm reduces its dividend payment, choosing to reinvest more earnings in the business. Yes
The firm buys a corporate jet for its executives. Yes
The firm drills for oil in a remote jungle. The chance of finding oil is only 1 in 5. Yes
7. Company A pays its managers a fixed salary. Company B ties compensation to the performance of the
stock. Which company’s compensation would most help to mitigate conflicts of interest between
managers and shareholders?
Company B
8. Read the following passage and choose the appropriate terms to complete the sentences.
Companies usually buy real assets. These include both tangible assets such as executive airplanes and
intangible assets such as brand names. To pay for these assets, they sell financial assets such as bonds.
The decision about which assets to buy is usually termed the capital budgeting or investment decision.
The decision about how to raise the money is usually termed the financing decision.
9. Choose the type of company in each case that best fits the description.
The business is owned by a small group of investors. Private Corporation
The business does not pay income tax. Partnership
The business has limited liability. Public corporation
The business is owned by its shareholders. Public corporation
10. Is limited liability always an advantage for a corporation and its shareholders?
No
Explanation
In some situations, lenders are not willing to lend to a corporation without personal guarantees from
shareholders, promising repayment of a loan in the event that the corporation does not have the
financial resources to repay the loan. Typically, these situations involve small corporations, with only a
few shareholders; often these corporations can obtain debt financing only if the shareholders provide
these personal guarantees.
11. Read the following passage and choose the appropriate terms to complete the sentences.
Shareholders want managers to maximize the market value of their investments. The firm faces a trade-
off. Either it can invest its cash in real assets or it can give the cash back to shareholders in the form of a
dividend and they can invest it in financial assets. Shareholders want the company to invest in real assets
only if the expected return is higher than they could earn for themselves. The return that shareholders
could earn for themselves is therefore the opportunity cost of capital for the firm.
