week 1 - discussion questions Flashcards
A company wants to do philantripy, how does the share price react?
Corporate philanthropy is always a sticky issue, but it can be justified in terms of helping to create
a more attractive community that will make it easier to hire a productive work force. This corporate
philanthropy could be received by stockholders negatively, especially those stockholders not living in
its headquarters city. Stockholders are interested in actions that maximize share price, and if
competing firms are not making similar contributions, the “cost” of this philanthropy has to be borne
by someone—the stockholders. Also, it depends on how big the costs are relative to company’s
revenue base
A company invest 400 millin in Cina to build a new factory, how does the stock price change?
The value of a company’s shares is significantly influenced by its long-term future prospects. To
secure future cash flows, companies need to make strategic investments today. However, these new
investments typically take time to yield returns. As a result, while a company’s profits may be
temporarily reduced in the short term due to the costs of these investments, if the investment is sound
and promises long-term benefits, the company’s stock price is likely to rise over time.
Shareholders should recognize this dynamic. Assuming that a thorough and accurate analysis has been
conducted, investors should respond positively to the company’s decision to invest, understanding
that short-term profit suppression can lead to greater long-term gains.
This is where capital budgeting becomes crucial. Capital budgeting helps companies evaluate and
select investments that will provide future financial benefits. If a well-executed capital budgeting
analysis indicates that the investment will generate positive returns, the stock price is expected to
increase as the company reaps those long-term rewards. The principles and techniques of capital
budgeting will be explored in more detail in the upcoming weeks, as they are essential to making
informed investment decisions that can enhance shareholder value in the future
The company wants to change its investments froma a Treasury bond to common stocks, how does the share price change?
Treasury bonds are considered safe investments, while common stocks are far more risky. If
the company were to switch the emergency funds from Treasury bonds to stocks, stockholders should
see this as increasing the firm’s risk because stock returns are not guaranteed—sometimes they
increase and sometimes they decline. The firm might need the funds when the prices of their
investments were low and not have the needed emergency funds. Consequently, the firm’s stock price
would probably fall.
How does the agency problem manifest in sole proprietorship, partnerships andfinally corporations?
Sole proprietorships are characterized by the virtual non-existence of agency problems between
owners and managers, because the owner and manager are usually one and the same. Of course,
there still is the potential agency conflict between creditors and owners. However, even in this case
the risk to creditors is reduced because the owner has unlimited personal liability for the debts of the
firm. The major shortcoming of the proprietorship form of organization is the limited ability of the
owner to raise capital, because the owner is the sole source of equity and the owner is personally
liable for all of the firm’s debts.
Partnerships provide a greater potential for raising capital because there is more than one
ownermanager. The capital raising potential of partnerships is limited to the number of partners of
the firm. Owner-manager agency problems assume increased importance in a partnership because
each partner only bears a fractional portion of the cost of his/her actions. Hence, if a partner consumes
excessive perquisites, the partner will only pay a fractional share of the cost of this wasteful behavior.
The larger the partnership, the greater is this potential problem. Corporations have the greatest potential for owner-manager agency problems because of the
separation of ownership from control. Offsetting this corporate disadvantage is the nearly unlimited
ability of corporations to raise capital, both debt and equity. The capital raising ability of corporations
can be attributed largely to the limited liability feature of common stock ownership. This limited
liability feature gives rise to increased agency cost problems between owners and creditors
TIAA is considering to ask its stakeholders to vote for corporate issues, is this a good idea?
TIAA is one of the largest institutional shareholders in the United States and it owns large blocks of
stocks in many companies; and therefore its voice carries a lot of weight. This “shareholder” in effect
consists of many individual shareholders whose savings are invested with this group. b. For TIAA to
be effective in wielding its weight, it must act as a coordinated unit. In order to do this, the fund’s
managers should solicit from the individual shareholders their “votes” on the fund’s practices and
from those “votes” act on the majority’s wishes. In doing so, the individuals whose savings are
invested in the fund have, in effect, determined the fund’s voting practices
Is setting the compensation for division manager different than setting it for the Ceo?
Setting the compensation policy for three division managers would be different than setting the
compensation policy for a CEO because performance of each of these managers could be more easily
observed. For a CEO an award based on stock price performance makes sense. Each of the managers
could still be given stock awards; however, rather than the award being based solely on stock price it
could be determined from some observable measures too like increased gas output, oil output, etc
