Introduction to Financial Management Exercises and Problems
Complete these exercises and problems and then check your work.
Define a corporation.
Explain the concepts of limited liability and double-taxation and how they relate to the corporate form of ownership.
One of the "disadvantages" of the corporate form of ownership is the higher regulatory cost. One of the large costs facing corporations is the cost of preparing and verifying financial statements. Who ultimately pays for this and does it benefit shareholders? Discuss.
What are the two primary instruments corporations issue to raise money? Explain the primary characteristics of each.
What is the goal of financial management? What 3 elements are essential to meeting this goal?
Why should we concentrate on Cash Flows instead of Earnings Per Share?
One of the key assumptions in finance is that people are risk averse. What do we mean by risk aversion? Does this seem to be a valid assumption? Explain.
Assume that for $1 you could buy a coin flip that would pay you $2 for heads and nothing for tails. If you are risk averse, should you take the coin flip? What if the coin flip cost you $0.90 instead of $1? What is the lowest price that YOU would take to accept the coin flip and why might this be different for others?
How does globalization relate to the concept of maximizing firm value?
Explain what is meant by social responsibility and ethics? Discuss how these issues relate to the primary goal of the firm?
Define an agency relationship. What major agency problem do corporations encounter? What can be done to help minimize this problem?
One of the more controversial issues facing corporations today is the issue of executive compensation. Make an argument for the current state of executive compensation being okay and an argument in favor of regulation to reduce executive compensation. Base your arguments on the concept of shareholders and wealth maximization. After considering this would you be in favor of regulations?
Source: Kevin Bracker, Fang Lin, and Jennifer Pursley, https://businessfinanceessentials.pressbooks.com/chapter/chapter-1/
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