Goals and Governance of the Corporation Assignment Solutions
Q1. Which of the following are investment decisions, and which are financing decisions?
- Should we stock up with inventory ahead of the holiday season? Investment Decision
- Do we need a bank loan to help buy the inventory? Financing Decision
- Should we develop a new software package to manage our inventory? Investment Decision
- With a new automated inventory management system, it may be possible to sell off our Birdlip warehouse. Investment Decision
- With the savings we make from our new inventory system, it may be possible to increase our dividend. Financing Decision
- Alternatively, we can use the savings to repay some of our long-term debt. Financing Decision
Q2. Which of the following are real assets, and which are financial?
- A share of stock – Financial Asset
- A personal IOU – Financial Asset
- A trademark – Real Asset
- A truck – Real Asset
- Undeveloped land – Real Asset
- The balance in the firm’s checking account – Financial Asset
- An experienced and hardworking sales force – Real Asset
- A bank loan agreement – Financial Asset
Q3. Which of the following statements always apply to corporations?
- Unlimited liability
- Limited life
- Ownership can be transferred without affecting operations
- Managers can be fired with no effect on ownership.
Q4. Which of the following are correct descriptions of large corporations?
- Managers no longer have the incentive to act in their own interests.
- The corporation survives even if managers are dismissed.
- Shareholders can sell their holdings without disrupting the business.
- Corporations, unlike sole proprietorships, do not pay tax; instead shareholders are taxed on any dividends they receive.
Q5. Which of the following statements more accurately describes the treasurer than the controller?
- Monitors capital expenditures to make sure that they are not misappropriated.
- Responsible for investing the firm’s spare cash
- Responsible for arranging any issue of common stock
- Responsible for the company’s tax affairs.
Q6. We claim that the goal of the firm is to maximize current market value. Could the following actions be consistent with that goal?
- The firm adds a cost-of-living adjustment to the pensions of is retired employees. Yes
- The firm reduces its dividend payment, choosing to reinvest more earnings in the business. Yes
- The firm buys a corporate jet for its executives. Yes
- The firm drills for oil in a remote jungle. The chance of finding oil is only 1 in 5. Yes
Q7. Company A pays its managers a fixed salary. Company B ties compensation to the performance of the stock. Which company’s compensation would most help to mitigate conflicts of interest between managers and shareholders?
- Company A
- Company B
Q8. Read the following passage and choose the appropriate terms to complete the sentences.
Companies usually buy real assets. These include both tangible assets such as executive airplanes and intangible assets such as brand names. To pay for these assets, they sell financial assets such as bonds. The decision about which assets to buy is usually termed the capital budgeting or investment decision. The decision about how to raise the money is usually termed the financing decision.
Q9. Choose the type of company in each case that best fits the description.
- The business is owned by a small group of investors. Private Corporation
- The business does not pay income tax. Partnership
- The business has limited liability. Public Corporation
- The business is owned by its shareholders. Public Corporation
Q10. Is limited liability always an advantage for a corporation and its shareholders?
Q11. Read the following passage and choose the appropriate terms to complete the sentences.
Shareholders want managers to maximize the market value of their investments. The firm faces a trade-off. Either it can invest its cash in real assets or it can give the cash back to shareholders in the form of a dividend and they can invest it in financial assets. Shareholders want the company to invest in real assets only if the expected return is higher. Incorrect than they could earn for themselves. The return that shareholders could earn for themselves is therefore the opportunity cost of capital for the firm.