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Mini Case 

The final stage in the interview process for an assistant financial analyst at Caledonia Products involves a test of your understanding of basic financial concepts. You are given the following memorandum and asked to respond to the questions. Whether you are offered a position at Caledonia will depend on the accuracy of your response.

• To:      Applicants for the position of Financial Analyst
• From: Mr.      V. Morrison, CEO, Caledonia Products
• Re: A test      of your understanding of basic financial concepts and of the corporate tax      code

Please respond to the following questions:

1. What is      the appropriate goal for the firm and why?
2. What does      the risk–return trade-off mean?
3. Why are we      interested in cash flows rather than accounting profits in determining the      value of an asset?
4. What is an      efficient market, and what are the implications of efficient markets for      us?
5. What is      the cause of the agency problem, and how do we try to solve it?
6. What do      ethics and ethical behavior have to do with finance?
7. Define (1)      sole proprietorship, (2) partnership, and (3) corporation.