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COB 300B - Finance - Exam 1 |Questions with 100% Correct Verified Answers
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COB 300B - Finance - Exam 1 |Questions with 100% Correct Verified Answers
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COB 300B - Finance - Exam 1 |Questions with100% Correct Verified Answers
Basic structure of Corporation - ✔✔-shareholders (stockholders) own the business
-managers and employees work on behalf of shareholders
Objective of Corporation - ✔✔maximize market value of company stock
Who owns a corporation? - ✔✔stockholders/shareholders
Why do shareholders own the company? - ✔✔to increase their wealth
How is a shareholder's wealth determined? - ✔✔stock value
Stock Value - ✔✔long term, determined by magnitude, timing, risk of cash flows
Stock Price - ✔✔current market price, determined by magnitude, timing, risk of cash flows
True characteristics - ✔✔Value
Perception - ✔✔Price
Job of financial manager - ✔✔make decisions that maximize long-term value of future cash
flows
Friedman's argument - ✔✔-Make as much profit as possible
, -Less focus on social issues
-Should base decisions on what shareholders want
-Why is an expert in business dealing with other tasks such as charity and social responsibility?
Zingales and Hart arguments - ✔✔people don't only care about money
Agency problem - ✔✔-people are naturally inclined to act in their own self interests
-manager's interests may not be the same as shareholders
-separation of ownership and management lead to this issue
Agency costs - ✔✔extra costs incurred to solve the agency problem and align incentives
Compensation - ✔✔-method to align incentives
-Tie management pay largely to value of the company
-As shareholders get wealthy, managers get wealthy (and vice versa)
-Stock Options are a common method to do this
-Alex Trotman, former Chairman of Ford required top 80 managers to own stock in the
company at least equal to annual salary.
Examples of management compensation - ✔✔-base salary
-performance bonus
-stock options
Argument 1 in debate - ✔✔managers may not have full control over stock value
Argument 2 in debate - ✔✔compensation with stock may encourage a short term focus
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