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Unformatted text preview: Solutions to Assigned Problems Chapter One 2. Example One: An individual opens a savings account at a local commercial bank with a $200 deposit. The bank loans out the $200 with other funds from other savings accounts to a local business man who is expanding his business. The local business man pays back the loan overtime with interest and the bank credits the savings account with interest. The individual withdraws money from the savings account to buy a new bike. Example Two: An individual deposits his monthly paycheck in a checking account. The bank accumulates the funds from many checking accounts and loans money to an individual buying a house. The new homeowner makes monthly mortgage payments to the bank. The bank uses the mortgage payments to cover the checks written by the person with the checking account. Example Three: An individual buys a municipal bond for an airport improvement project. The individual usually buys a municipal from a bond dealer, an investment banker marketing the bond, and the funds from the sale of the bond are delivered to the city minus a fee from the investment banker. The city uses the funds to build new facilities at the airport, for example a new parking lot. Once finished the fees received from parking are used to payback the buyer of the bond with interest. 7. The goal of the financial manager is to maximize the current share price or equity value of the firm. This goal encompasses many good business practices such as a good working relationship with the surrounding community. If the firm pollutes local streams, abuses local facilities such as roads, and in general does not participate in the economic advancement of the local community its share price or equity value will suffer. The local community may sue the company for its damages and the best local workforce members may choose not to work for the company. Employees may not be loyal to the company causing high turnover and increased personal costs for recruiting and training. Finally, facilities such as roads and utilities may not be repaired or modernized by the local community impacting the company’s ability to produce a profit. A good community relationship is embedded in the goal of maximizing current share price or the equity value of the company. 9. Principal-Agent pair: Shareholder – Chief Executive Officer Conflict is the “perk” the CEO elects to take, a personal jet for flying to and from business activities instead of flying commercial carriers. The cost of the jet outweighs the expense of commercial carriers so it hurts the company profits. However the CEO feels that the private jet allows for greater supervision of the operations and hence a more efficient operation. This conflict could be reduced by the board of directors reviewing the travel needs and frequency of the CEO and the inconvenience of using commercial carriers. Once the pros and cons of the different travel options have been reviewed a company policy can be issued so that shareholders understand the rationale if a private jet...
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This note was uploaded on 11/02/2011 for the course FIN 300 taught by Professor Staff during the Summer '08 term at Ill. Chicago.
- Summer '08