Review questions 111 for what three basic reasons is

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Unformatted text preview: e same time, new compensation plans that better link managers’ performance with regard to shareholder wealth to their compensation are expected to be developed and implemented. Unconstrained, managers may have other goals in addition to share price maximization, but much of the evidence suggests that share price maximization—the focus of this book—is the primary goal of most firms. Review Questions 1–11 For what three basic reasons is profit maximization inconsistent with wealth maximization? 1–12 What is risk? Why must risk as well as return be considered by the financial manager who is evaluating a decision alternative or action? 1–13 What is the goal of the firm and therefore of all managers and employees? Discuss how one measures achievement of this goal. 1–14 What is economic value added (EVA®)? How is it used? 1–15 Describe the role of corporate ethics policies and guidelines, and discuss the relationship that is believed to exist between ethics and share price. 1–16 How do market forces, both shareholder activism and the threat of takeover, act to prevent or minimize the agency problem? 1–17 Define agency costs, and explain why firms incur them. How can management structure management compensation to minimize agency problems? What is the current view with regard to the execution of many compensation plans? LG5 1.4 Financial Institutions and Markets financial institution An intermediary that channels the savings of individuals, businesses, and governments into loans or investments. Hint Think about how inefficient it would be if each individual saver had to negotiate with each potential user of savings. Institutions make the process very efficient by becoming intermediaries between savers and users. Most successful firms have ongoing needs for funds. They can obtain funds from external sources in three ways. One is through a financial institution that accepts savings and transfers them to those that need funds. Another is through financial markets, organized forums in which the su...
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