Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 1, Problem 7PS
Corporate goals* We can imagine the
- a. Make shareholders as wealthy as possible by investing in real assets.
- b. Modify the firm’s investment plan to help shareholders achieve a particular time pattern of consumption.
- c. Choose high- or low-risk assets to match shareholders’ risk preferences.
- d. Help balance shareholders’ checkbooks.
But in well-functioning capital markets, shareholders will vote for only one of these goals. Which one? Why?
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We can imagine the financial manager doing several things on behalf of the firm's stockholders. But in well-functioning capital markets, shareholders will vote for only one of these goals.
Which one?
Multiple Choice
Modify the firm's investment plan to help shareholders achieve a particular time pattern of consumption.
Help balance shareholders' checkbooks.
Choose high- or low-risk assets to match shareholders' risk preferences.
Make shareholders as wealthy as possible by investing in real assets.
The primary goal of financial managers include all of the following EXCEPT :
A. Maximize stockholder wealth.
B. Maximizing firm value
C. Challenge legislation in states where the company operates
D. Minimizing WACC
Direction: Answer comprehensively the following questions.
1. Explain the shareholder wealth maximization goal of the firm and how it can
be measured. Make an argument for why it is better goal than maximizing
profit.
2. What conflicts of interest can arise between managers and stockholders?
3. Name and describe as many stockholders as you can.
4. State the kinds of assurances that investors and creditors seek from a firm.
5. What are the three types of financial management decisions? For each type
of decision, give an example of a business transaction that would be relevant.
Chapter 1 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 1.A - Prob. 1QCh. 1 - Investment and financing decisions Read the...Ch. 1 - Investment and financing decisions Which of the...Ch. 1 - Prob. 3PSCh. 1 - Prob. 4PSCh. 1 - Prob. 5PSCh. 1 - Opportunity cost of capital FH Corp. continues to...Ch. 1 - Corporate goals We can imagine the financial...Ch. 1 - Maximizing shareholder value Ms. Espinoza is...Ch. 1 - Prob. 9PS
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- Which of the following statements is TRUE? a. The primary goal of financial management is to maximize the firm's profit and creditors' wealth Ob. The capital budgeting decision deals with how the firm obtains financing to support short-term investments. c. The observed market price of a company's stock is the stock's "true" value based on accurate risk and return data. Od. Shareholders elect the board of directors, who in turn create a management team to run the company and achieve corporate goals. e. Security analysis and portfolio theory are in the area of corporate finance.arrow_forwardExplain how a financial manager can, in practice, maximize the wealth of shareholders.arrow_forwardWhich of the following is the main goal of corporate financial managers? O A. Maximizing sales. B. Maximizing profits. C. Maximizing market share. D. Maximizing the price per share of the common stock.arrow_forward
- Which of the following is NOT a way of stating the overriding goal of financial management? Select one: a. Maximising the value of the firm. b. Maximising the wealth of shareholders. c. Maximing the firm's share price. d. Maximising revenue.arrow_forwardTutorial Questions Explain to John, your mentor, the primary goal of the organization? Your manager is requesting you to provide an explanation to the question. Would the role of a financial manager be likely to increase or decrease in importance if the rate of inflation increased? What is the difference between stock price maximization and profit maximization? What are the three principal forms of business organization? What are the advantages and disadvantages of each? What mechanisms exist to influence managers to act in shareholders’ best interests? What is an agency relationship? What agency relationships exist within a corporation? What are financial intermediaries, and what economic functions do they perform? How does an efficient capital market help to reduce the prices of goods and services? What is the term structure of interest rates? What is a yield curve? How should users and savers of…arrow_forwardIt is often stated that the ultimate goal of the Finance Manager is tomaximize the current value of the stock of shareholders and not simplymaximizing the profit of the firm. Discussarrow_forward
- Which of the following statement is true about financial managers? 1. The principal goal of a financial manager is to maximize the wealth of the stockholders II. It is generally not the duty of financial managers to ensure that a firm has the cash it needs for day-to-day transactions III. In general, financial managers make financial decisions in a corporation, rather than the shareholders making these decisions themselves IV. It is generally not the duty of financial managers to make decisions on how projects will be financed O I and III only O I only OI, III, and IV only O I and II only Warrow_forwardFinancial managers shouldconsider this when.improving thefinancials of the firm A. that the overall goal is the maximization of the market value of the equity through improved income and cashflows.B. that cost minimization is the primary concern of the firm.C. that exposing the firm to the most risk for the most return should be priority.D. that the personal goals of customer and employees are above the goals of the shareholders.arrow_forwardThe objective of a financial executive is; a. to maximize a firm's profit b. to maximize the price of a firm's common shares c. to avert financial disasters d. to maximize dividendsarrow_forward
- Select all that is true about the role of financial managers and the types of financial decisions they make. Select one or more: a. Capital structure describes the mix of short-term liabilities a firm uses to finance its short-term assets. b. The optimal financial management strategy of a financial manager is to reduce the overall risk level of the firm. c. The duties of the financial manager includes determining the capital structure and which projects the firm should undertake. Od. Size and timing of cash flows is unimportant in a capital budgeting decision. e. Capital Budgeting function involves planning and determining the firm's short term investments. Of. Determining the appropriate level of inventory is a working capital management function. ZA do W X Larrow_forwardIf you were a finance leader in a business organization, how would you apply the concept of risk and return in your daily decision-making processes? How might you explain the concept of risk vs. return trade-off during a shareholders' meeting? How would a proposed initiative to diversify current holdings factor into the discussion about total risk for the organization? Explainarrow_forwardThe dividend policy of a company is a key focus for potential investors. This is because dividends are the main contribution to the assumed investment objective. Hence, it is important that management monitor and review the various factors that influence the company's dividend policy. Critically analyse this statement.arrow_forward
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