1. Questions: The Role & Objective of financial Managers Flashcards
Define shareholder wealth . Explain how it is measured.
What are the differences between shareholder wealth maximization and profit maximization? If a firm chooses to pursue the objective of shareholder wealth maximization, does this preclude the use of profit maximization decision-making rules? Explain.
Which type of corporation is more likely to be a shareholder wealth maximizer — one with wide ownership and no owners directly involved in the firm ’ s management, or one that is closely held?
Is the shareholder wealth maximization goal a shortor long-term goal? Explain your answer.
It has been argued that shareholder wealth maximization is not a realistic normative goal for the firm, given the social responsibility activities that the firm is “ expected ” to engage in (such as contributing to the arts, education, etc.). Explain why these social responsibility activities are not inconsistent with shareholder wealth maximization.
Explain why management may tend to pursue goals other than shareholder wealth maximization.
Explain what is meant by agency relationships and agency costs .
Give some examples of agency costs incurred by shareholders in the agency relationship between the shareholders (owners) and management of a firm.
What is the source of potential agency conflicts between owners and bondholders? Who is the agent and who is the principal in this relationship?
Explain the differences in the responsibilities of the treasurer and the controller in a large corporation.
Explain the relationship between financial management and (a) microeconomics and (b) macroeconomics.
Why is EPS not a consistently good measure of a firm ’ s performance?
Metropolitan Life Insurance Company, Swiss Bank Corporation, and several other holders of RJR Nabisco bonds filed suit against the company to prevent it from completing the leveraged buyout acquisition from Kohlberg Kravis Roberts. Why do you think the bondholders wanted to block this transaction? What arguments can you make for and against the bondholders ’ case?
What are the major factors that determine the value of a firm ’ s stock?
Under pressure from outside investors including corporate raider Carl Icahn, USX Corporation, the parent corporation for U.S. Steel and Marathon Oil, announced a plan to split its stock into separate steel and energy issues. The market response to this action was immediately positive, with the stock price of USX increasing $2.37 to close at $31.25 on the day of the announcement. Why do you think this action by USX was so well received by the stock market?
