review questions 1-11 1-24

review questions 1-11 1-24 - Review Questions Chapter 1 Pgs...

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Review Questions Chapter 1 1-11 For what 3 basic reasons is profit maximization inconsistent with wealth maximization? Profit Maximization ignores the timing of returns, Cash-flows available to stockholders, and risk. Timing is crucial as in the example, the majority of the turnover came within the first year; this could be reinvested; but with profit maximization we are looking at the 3-year run. Profits do not necessarily result in Cash Flow. Greater EPS do not necessarily mean that the firm’s board of directors will vote to increase dividends payments. 1-12 What is Risk? Why must risk as well as return be considered by financial manager who is evaluating a decision alternative or action? Def. The chance that actual outcomes may differ from those expected. With risk, the share price will decrease. Stockholders are Risk-averse, and like to avoid risk. “Betting everything on a risky investment.” 1-13 What is the goal of a firm, and therefore, of all managers and employees? Discuss how one measures achievement of this goal? To maximize the wealth of the owners for whom it is being operated. They are measured by the share price of the stock, which in turn is based on the timing of returns (cash flows), their magnitude, and their risk. Recognizing the earnings per share, because they are viewed as an indicator of the firm’s future returns. 1-14 What is corporate governance? How has the Sarbanes-Oxley Act of 2002 affected it? Explain Def. It defines the rights and the responsibilities of key corporate participants, decision-making procedures, and the way in which the firm will set, achieve, and monitor its objectives. Sarbanes-Oxley focused on eliminating the many disclosure and conflict of interest problems that had surfaced. Established an oversight board to monitor the accounting industry; tightened audit regulations and controls; toughened penalties against executives who commit corporate fraud; strengthened accounting disclosure requirements and ethical guidelines for corporate officers; established corporate board structure and membership guidelines; established guidelines with regard to analyst conflict of interest; mandated instant disclosure of stock sales by corporate
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review questions 1-11 1-24 - Review Questions Chapter 1 Pgs...

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