FIN2004 Tutorial 1 Prepared by Sectional J01 Group 1: Aw Cheng Wei A0125469X Bay Mei Feng, Joyce A0126069A Cai Zhihui A0126036N Erin Toh Ern Yun A0126271M Wong Li Qing A0126264J #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. Current stock value is the value of stock perceived by the marginal investor. It is usually affected by both long term and short time plans. Maximizing current stock value could benefit both long term and short-term profitability. To do so Managers should: Take on profitable projects if Company’s finance situation allows. This will allow the investor to see potential in the company and stock value will likely to increase. Consider investing in properties and marketable securities rather than having cash idling around. Profit can be earned through this way and stock value will likely to increase. Take on loans for investment/expansion when necessary. Investment and expansion must be thought and planned carefully. Loans must be taken in a controlled amount with the consideration of company’s ability to pay back (e.g. debt ratio) Boost stakeholders’ confidence through investment metrics; maintaining a good earning per shares ratio and issue dividends regularly. This will maximise the stock value perceived by investor. In conclusion, focus on current stock value will not lead to overemphasis on short- term profits at the expense of long-term profits instead it depends on manager’s inclination on long-term or short-term plan.
#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? 1. It can improve the profitability of the firm so that share price will exceed $35.
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- Spring '11
- Corporate Finance