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Unformatted text preview: Q1-1.Why must a financial manager have an integrated understanding of the five basic finance functions? Why is the corporate governance function considered a finance function? Has the risk-management function become more important in recent years?A1-1.A financial manager needs to know all five basic finance areas because they all impact his or her job. While the manager’s primary responsibilities may be in raising money or choosing investment projects, the manager also needs to know about capital markets and debt/equity optimal levels, be able to manage risks of the business and governance of the corporation. Corporate governance is a function because a manager wants to act in the best interest of its shareholders. New methods of managing risk have been developed in recent years, and a manager must be aware of these in order to maximize shareholder value.Q1-4.Can there be a difference between profit maximization and shareholder wealth maximization? If so, what could cause this difference? Which of the two should be the goal of the firm and its management?A1-4. Profit maximization and maximizing shareholder wealth could conflict. For example, a company could accept very high return (and also very high risk projects) that do not return enough to compensate for the high risk. Profits, or net income, are accounting numbers and therefore subject to manipulation. It would be possible to show positive profits when shareholder wealth was actually being decreased.Q1-5.Define a corporate stakeholder.Which groups are considered to be stakeholders? Would stockholders also be considered stakeholders? Compare the shareholder wealth maximization principle to the stakeholder wealth preservation principle in terms of economic systems.A1-5.Stakeholders include anyone with an interest in the company, including stockholders. Stakeholders are also management, employees, the government, the community, suppliers, customers, and lenders. Stakeholder wealth preservation appears to favor som more than capitalism. Stakeholder wealth, for example, keeping on too many employees for the firm to be efficient, may be preserved at the expense of stockholder wealth.Q1-6.What is meant by an “agency cost” or “agency problem”? Do these interfere with shareholder wealth maximization? Why? What mechanisms minimize these costs/problems? Are executive compensation contracts effective in mitigating these costs/problems?...
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- Spring '08