HW1 solution - Solution to Problem Set 1 FINA 4200 Spring...

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Solution to Problem Set 1 - FINA 4200 Spring 2010 I. Multiple Choices 1. d 2. d 3. b 4. b 5. c 6. d 7. d 8. d 9. c 10. b 11. a 12. a 13. a 14. c 15. d 16. b 17. c 18. d 19. a 20. b 21. d 22. b 23. a 24. c 25. b 26. c 27. e 28. d 29. b 30. e 31. d 32. b 33. c 34. a 35. b 36. d 37. a 38. b 39. d II. Essay Questions Chapter 1 Q1. a . Stockholder wealth maximization is the appropriate goal for management decisions. The risk and timing associated with expected earnings per share and cash flows are considered in order to maximize the price of the firm’s common stock. d. An agency relationship arises whenever one or more individuals, the principals, hire another individual, the agent, to perform some service and then delegate decision-making authority to that agent. Primary agency relationships exist between (1) stockholders and managers, and (2) between debtholders and stockholders. e. Agency costs include all costs borne by shareholders to encourage managers to maximize a firm’s stock price rather than act in their own self-interests. The three major categories of agency
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