solution to first set of practice questions

solution to first set of practice questions - Chapter 1...

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Chapter 1 questions 6. Separation of ownership and management typically leads to agency problems, where managers prefer to consume private perks or make other decisions for their private benefit -- rather than maximize shareholder wealth. 7. a. Assuming that the encabulator market is risky, an 8% expected return on the F&H encabulator investments may be inferior to a 4% return on U.S. government securities. b. Unless their financial assets are as safe as U.S. government securities, their cost of capital would be higher. The CFO could consider what the expected return is on assets with similar risk. 8. Shareholders will only vote for (a) maximize shareholder wealth. Shareholders can modify their pattern of consumption through borrowing and lending, match risk preferences, and hopefully balance their own checkbooks (or hire a qualified professional to help them with these tasks). 9. If the investment increases the firm’s wealth, it will increase the value of the firm’s shares. Ms. Espinoza could then sell some or all of these more valuable shares in order to provide for her retirement income. 10. As the Putnam example illustrates, the firm’s value typically falls by significantly more than the amount of any fines and settlements. The firm’s reputation suffers in a financial scandal, and this can have a much larger effect than the fines
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solution to first set of practice questions - Chapter 1...

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