Introduction

Question 1

What is the main objective of a firm?

Answer 1

Create value

Question 2

What are the different value measures?

Answer 2

-Accounting/Book value - taken from the company’s statements
-Fundamental/Intrinsic value - cash flows now + present value of future cash flows
-Market price (value)
-Liquidation value - value of selling all the assets one by one and paying all the debt

Question 3

What are the different types of value?

Answer 3

-Equity value (equity)
-Enterprise Value (FA+WC)
-Firm Value (enterprise value + NOA) (or equity + debt)

Question 4

Market Price works as a proxy of:

Answer 4

Fundamental value

Question 5

Book value tens to be used as a proxy of:

Answer 5

Liquidation value

Question 6

In what consists the Tobin-Q ratio?

Answer 6

Market value of assets / replacement value of assets (what would take to build a company from scatch)

Question 7

What does it mean if the Tobin-Q ratio is negative?

Answer 7

It means that the management is destroying value - doesn’t compensate to buy all the assets

Question 8

What is the goodwill in finance?And what does it mean?

Answer 8

Market value of assets - replacement of all the assets -> the larger this difference is, the more value the company is creating

Question 9

How can we estimate Tobin-Q?

Answer 9

(Share Price * no. of shares + debt) / (book value of equity + debt)

Question 10

Why sometimes we have a negative tobin-q but investors think it’s still worth investing?

Answer 10

Because of the use of proxys. If the real Tobin-Q is lower than 1, usually the company is worth more dead than alive

Question 11

What is the goal of financial management regarding value?

Answer 11

Is to maximize the value of the owners’ equity.

Question 12

What is the objective in conventional corporate financial theory?

Answer 12

Is to maximize the value of the firm.

Question 13

Should we maximize the value of the company or the equity to please stakeholders?

Answer 13

We should maximize the value of the firm, altough, by doing that, we are also pleasing shareholders, since we are also maximizing the equity (Ev=E+D)

Question 14

What is the relationship between managers and shareholders?

Answer 14

Shareholders hire managers to have their best interests in mind.

Question 15

Why is it important to have creditors in atention when you are a manager? And creditors should keep an eye on managers?

Answer 15

Because creditors can’t control managers, so they are exposed to risk, and the managers need their wellness

Question 16

How do managers affect financial markets?

Answer 16

They can manipulate information - markets will be less efficient

Question 17

What are the main impacts managers have on the society nowadays?

Answer 17

They can have methods implemented that harm the society. This because they need to decide whether it’s more beneficial to please the shareholders, the ones directly paying, or the society, who are costumers and can be persuaded to buy through green policies and so on.

Question 18

If a firm maximizes shareholders’ wealth and markets are efficient, what will they maximize ultimatly?

Answer 18

They’ll maximize equity price

Question 19

What are the decisions involved in maximizing firm value?

Answer 19

-Investment Decisions
-Financing Decisions
-Dividend Decisions