HW1 - Problem Set 1 - FINA 4200 Spring 2010 Due Thursday...

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Problem Set 1 - FINA 4200 Spring 2010 Due Thursday January 21 before class I. Multiple Choices Chapter 1 1. The primary goal of a publicly-owned firm interested in serving its stockholders should be to a. Maximize expected total corporate profit. b. Maximize expected EPS. c. Minimize the chances of losses. d. Maximize the stock price per share. e. Maximize expected net income. 2. Which of the following statements is most correct? a. Compensating managers with stock can reduce the agency problem between stockholders and managers. b. Restrictions are included in credit agreements to protect bondholders from the agency problem that exists between bondholders and stockholders. c. The threat of a takeover can reduce the agency problem between bondholders and stockholders. d. Statements a and b are correct. e. All of the statements above are correct. 3. Which of the following actions are likely to reduce agency conflicts between stockholders and managers? a. Paying managers a large fixed salary. b. Increasing the threat of corporate takeover. c. Placing restrictive covenants in debt agreements. d. All of the statements above are correct. e. Statements b and c are correct. 4. The goal of maximizing stock price is a detriment to society in that few of the actions that result in maximization of stock price also benefit society. a. True b. False 5. Which of the following statements is most correct? a. Agency conflicts between stockholders and managers are not really a problem when outsiders (i.e., non-managers) own shares in a corporation. 1
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b. Managers may operate in stockholders' best interests, or managers may operate in their own personal best interests. As long as managers stay within the law, there are no effective controls that stockholders can implement to control managerial decision making. c. The agency conflicts between bondholders and stockholders can be reduced with the use of bond covenants. d. An agency relationship exists when one or more persons hire another person to perform some service but withhold decision-making authority from that person. e. All of the statements above are false. 6. Which of the following is a clear example of agency problem? a. A CEO is awarded $100,000 worth of executive stock options, which he exercises two years later for $1,000,000. b. A company borrows $1,000,000 for investment in equipment, but uses the money instead to repurchase stock. c. A company declares bankruptcy, but instead of being liquidated, it is reorganized and one set of bondholders who are owed $10 million accept $3 million in payment for the debt. d. A CEO orders the headquarters moved just so he can have a nicer office. e. A group of institutional stockholders votes to oust management. 7.
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This note was uploaded on 06/06/2011 for the course FINA 4200 taught by Professor Wu during the Spring '08 term at University of Georgia Athens.

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HW1 - Problem Set 1 - FINA 4200 Spring 2010 Due Thursday...

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