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Exam 1 Solutions - Spring 2003 Exam 1 1 Which of the...

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Spring 2003 Exam 1 1. Which of the following statements is least correct (most incorrect)? A. Stockholder wealth maximization should be thought of as a long-term goal. For instance, assume that one action by a firm would increase its cash flow from a current level of $41 million to $51 million in six months and then to $61 million by the end of five years. This might not be as optimal as another action that kept cash flow at $41 million for several years, but then increased it to $81 million by year 5. B. The three principle forms of business organizations are the sole proprietorship, the partnership, and the corporation. In addition, there are other forms of business that we might call hybrids, such as limited partnerships, professional associations, etc. C. The price of a firm’s stock depends on the size of the firm’s cash flow, the timing of these cash flows, and their risk. * D. Since the threat of being fired is fairly low for corporate executives, and the threat of takeovers is almost non-existent, and the direct intervention by stockholders is virtually unheard of, the only way to motivate managers to act in the best interests of the stockholders is through the use of stock options. E. Agency problems may arise whenever you have one group of individuals (the agents) acting on behalf of others. Thus, management acts as agents for shareholders. Problems may arise because not only does management have access to more and better information than the shareholders (the owners), but management may also take actions that are in their own best interests rather than the best interests of the shareholders. 2. Which of the following statements is least correct (most incorrect)? *
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