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FIN2601 ASSIGNMENT 1 SEMESTER 2EDWARD 0717846144
Question 1
The primary shortcoming in terms of legitimacy as a corporate entity is:
4. The owner has unlimited liability in that personal wealth can be taken to
satisfy debts.
This shortcoming refers to the potential risk faced by owners in certain business
structures where they have unlimited liability. In such cases, the owners' personal
wealth can be used to satisfy the company's debts, which poses a significant risk to
their personal finances. This limitation can discourage individuals from investing in or
starting businesses with this type of liability structure.
Question 2
The claim that is not ideal about profit maximization being the firm's goal is:
4. profits today are less desirable than profits earned in future years.
This claim contradicts the traditional profit maximization goal, which generally prioritizes
maximizing current profits. Profit maximization theory typically focuses on maximizing
immediate financial gains rather than emphasizing potential profits in the future.
Question 3
The correct statement describing the principal-agent problem is:
4. managers follow their own inclinations, which frequently diverge from the
objectives of shareholders.
The principal-agent problem refers to a situation in which one party (the principal)
delegates authority or decision-making to another party (the agent) to act on their
behalf. In this context, managers are the agents who are entrusted by shareholders (the
principals) to make decisions in the best interest of the shareholders. However, there
can be a misalignment of interests, where managers might prioritize their own
preferences or objectives over those of the shareholders. This divergence of interests
can lead to conflicts and inefficiencies in achieving the shareholders' goals.
Question 4
The statement that best describes this transaction is:
, FIN2601 ASSIGNMENT 1 SEMESTER 2
EDWARD 0717846144
1. This is an example of a primary market transaction.
Explanation: A primary market transaction involves the issuance of new securities
directly by the issuing company to investors. In this scenario, you (the issuer) are selling
newly issued shares of your company (Fidelity Investments) to your brother (the
investor). The exchange of money for the shares and the issuance of share certificates
represent a primary market transaction.
Question 5
TIE Ratio = EBIT / Interest Expense
Given that the company's profit for the year (EBIT) is R49,000 and its interest expense
is R20,000, we can calculate the TIE ratio as follows:
TIE Ratio = EBIT / Interest Expense
TIE Ratio = R49,000 / R20,000
TIE Ratio = 2.45
Question 6
Question 7
Market-to-Book Ratio = Market Value per Share / Book Value per Share
Where:
• Market Value per Share = Market Price per Share
• Book Value per Share = Total Equity / Number of Shares
Given the information provided:
• Market Price per Share = R75
• Total Equity = R74,597
• Number of Shares = 7,000
First, calculate the Book Value per Share:
Book Value per Share = Total Equity / Number of Shares Book Value per Share =
R74,,000
Book Value per Share = R10.6567 (approximately)
Now, calculate the Market-to-Book Ratio:
Market-to-Book Ratio = Market Price per Share / Book Value per Share Market-to-Book
Ratio = R75 / R10.6567
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