Chapter 1

Question 0

List three disadvantages to the corporate form of business organization.

Answer 0

1. Double taxation
2. Cost of setup
3. Multiple decision makers cause agency conflict

Question 1

Identify three responsibilities for which the chief financial officer in most corporations would have oversight.

Answer 1

1. Maximize shareholder wealth
2. Human resources
3. Capital budgeting

Question 2

Name one way that a firms intrinsic value and extrinsic value are dissimilar.

Answer 2

Intrinsic value is estimated and extrinsic value is observed.

Question 3

Name one way that a firm’s intrinsic value and extrinsic value are similar.

Answer 3

Both are influenced by the economic environment

Question 4

What is it called when a firm’s intrinsic value and extrinsic value are equal?

Answer 4

Equilibrium

Question 5

Name three ways a corporation’s Board of Directors might ensure that the actions taken by their financial managers align with the objective of shareholder wealth maximization.

Answer 5

1. Checks and balances
2. Threaten to take over
3. Have an outside auditor look at books

Question 6

What is the role of finance in the value creation process?

Answer 6

Properly resource

Question 7

Who is more likely to want a company to assume additional risk, a stockholder or a bondholder. Why?

Answer 7

Stockholder. Because they receive more benefit with successful projects

Question 8

How should the biblical principle of stewardship found in Matthew 25:14 -30 be reflected in a financial manager’s role in a firm?

Answer 8

Like the servants, financial managers should invest their master/shareholders money to maximize wealth