Critical Thinking and Concepts Review

Critical Thinking and Concepts Review

Critical Thinking and Concepts Review
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	1.1	The Financial Management Decision Process. 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.
	1.2	Sole Proprietorships and Partnerships. What are the four primary disadvantages to the sole proprietorship and partnership forms of business organization? What benefits are there to these types of business organization as opposed to the corporate form?
	1.3	Corporations. What is the primary disadvantage of the corporate form of organization? Name at least two of the advantages of corporate organization.
	1.4	Corporate Finance Organization. In a large corporation, what are the two distinct groups that report to the chief financial officer? Which group is the focus of corporate finance?
	1.5	Goal of Financial Management. What goal should always motivate the actions of the firm's financial manager?
	1.6	Agency Problems. Who owns a corporation? Describe the process whereby the owners control the firm's management. What is the main reason that an agency relationship exists in the corporate form of organization? In this context, what kinds of problems can arise?
	1.7	Primary versus Secondary Markets. You've probably noticed coverage in the financial press of an initial public offering (IPO) of a company's securities. Web search company Google is a relatively recent example. Is an IPO a primary-market transaction or a secondary-market transaction?
	1.8	Auction versus Dealer Markets. What does it mean when we say the New York Stock Exchange is an auction market? How are auction markets different from dealer markets? What kind of market is NASDAQ?
	1.9	Not-for-Profit Firm Goals. Suppose you were the financial manager of a not-for-profit business (a not-for-profit hospital, perhaps). What kinds of goals do you think would be appropriate?
	1.10	Ethics and Firm Goals. Can our goal of maximizing the value of the stock conflict with other goals, such as avoiding unethical or illegal behavior? In particular, do you think subjects such as customer and employee safety, the environment, and the general good of society fit in this framework, or are they essentially ignored? Try to think of some specific scenarios to illustrate your answer.
	1.11	International Firm Goal. Would our goal of maximizing the value of the stock be different if we were thinking about financial management in a foreign country? Why or why not?
	1.12	Agency Problems. Suppose you own stock in a company. The current price per share is $25. Another company has just announced that it wants to buy your company and will pay $35 per share to acquire all the outstanding stock. Your company's management immediately begins fighting off this hostile bid. Is management acting in the shareholders' best interests? Why or why not?
	1.13	Agency Problems and Corporate Ownership. Corporate ownership varies around the world. Historically, individuals have owned the majority of shares in public corporations in the United States. In Germany and Japan, however, banks, other large financial institutions, and other companies own most of the stock in public corporations. Do you think agency problems are likely to be more or less severe in Germany and Japan than in the United States? Why? In recent years, large financial institutions such as mutual funds and pension funds have been becoming the dominant owners of stock in the United States, and these institutions are becoming more active in corporate affairs. What are the implications of this trend for agency problems and corporate control?
	1.14	Executive Compensation. Critics have charged that compensation to top management in the United States is simply too high and should be cut back. For example, focusing on large corporations, Terry Semel, CEO of Yahoo!, earned about $174 million in 2006 and about $432 million over the 2002–2006 period. Are such amounts excessive? In answering, it might be helpful to recognize that superstar athletes such as Tiger Woods, top entertainers such as Oprah Winfrey, and many others at the top of their respective fields earn at least as much, if not a great deal more.
	1.15	Sarbanes-Oxley. In response to the Sarbanes-Oxley Act, many small firms in the United States have opted to “go dark” and delist their stock. Why might a company choose this route? What are the costs of “going dark”?

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Home > Chapter 1 > Critical Thinking and Concepts Review

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