Tutorial 1 Answers - FIN2004\/FIN2004X Tutorial 1 Introduction Overview of Financial Management and Financial Statement Analysis Conducted by Mr Chong

Tutorial 1 Answers - FIN2004/FIN2004X Tutorial 1...

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0 Tutorial 1 : Introduction & Overview of Financial Management and Financial Statement Analysis Conducted by : Mr Chong Lock Kuah, CFA FIN2004/FIN2004X
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1 #1: Evaluate the following statement : Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long- term profits Presumably, the current stock value reflects the risk, timing, and magnitude of all future cash flows, both short-term and long-term. As such, the above statement is false.
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2 #2: 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 the management acting in the shareholders’ best interest? Why or why not?
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3 The goal of management should be to maximize the share price for the current shareholders. If management believes that it can improve the profitability of the firm so that the share price will exceed $35, then they should fight the offer from the outside company. If management believes that this bidder or other unidentified bidders will actually pay more than $35 per share to acquire the company, then they should still fight the offer. However, if the current management cannot increase the value of the firm beyond the bid price, and no other higher bids come in, then management is not acting in the interests of the shareholders by fighting the offer. Since current managers often lose their jobs when the corporation is acquired, poorly monitored managers have an incentive to fight corporate takeovers in situations such as this.
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  • Spring '11
  • tohmunheng
  • Corporate Finance, Current Liabilities, Financial Ratio, Generally Accepted Accounting Principles

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