ross5eChap01sm

ross5eChap01sm - Chapter 1: Introduction to Corporate...

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Answers to End-of-Chapter Problems B-1 Chapter 1: Introduction to Corporate Finance 1.1 An argument can be made either way. At the one extreme, we could argue that in a market economy, all of these things are priced. There is thus an optimal level of, for example, unethical and /or illegal behaviour, and the framework of stock valuation explicitly includes these. At the other extreme, we could argue that these are non– economic phenomena and are best handled through the political process. Recent studies appear to indicate that value may be reduced because the corporation fails to invest in profitable investments that do no meet the new social responsible criteria. A classic (and highly relevant) thought question that illustrates this debate goes something like this: “A firm has estimated that the cost of improving the safety of one of its products is $30 million. However, the firm believes that improving the safety of the product will only save $20 million in product liability claims. What should the firm do?’’ 1.2 In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect the directors of the corporation, who in turn appoint the firm’s
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ross5eChap01sm - Chapter 1: Introduction to Corporate...

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