Iternational University of Leadership
Where Leaders are Born !
Course Code : Fin 350
Student’s Name :
DR Samuel G. Waldron
Homework No.2 FIN 350
Chapters 13, 14,15, 16. 17
1. Explain why each of the following may not be appropriate corporate goals:
a. Increase market can be an inappropriate goal if it requires reducing prices to such an extent
that the firm is harmed financially. Increasing market share can be part of a well-reasoned
strategy, but one should always remember that market share is not a goal in itself. The owners of
the firm want managers to maximize the value of their investment in the firm.
b. Minimize costs can also conflict with the goal of value maximization. For example, suppose a
firm receives a large order for a product. The firm should be willing to pay overtime wages and
to incur other costs in order to fulfill the order, as long as it can sell the additional product at a
price greater than those costs. Even though costs per unit of output increase, the firm still comes
out ahead if it agrees to fill the order.
c. Underprice any competitors is a policy that can lead the firm to sell goods at a price lower than
the price that would maximize market value. Again, in some situations, this strategy might make
sense, but it should not be the ultimate goal of the firm. It should be evaluated with respect to its
effect on firm value.
d. Expand profits is a poorly defined goal of the firm. The text gives three reasons:
(1) There may be a trade-off between accounting profits in one year and accounting profits in
another year. For example, writing off a bad investment may reduce this year’s profits but
increase profits in future years. Which year’s profits should be maximized?
(2) Investing more in the firm can increase profits, even if the increase in profits is insufficient to
justify the additional investment. In this case the increased investment increases profits but can
reduce shareholder wealth.
(3) Profits can be affected by accounting rules, so a decision that increases profits using one set
of rules may reduce profits using another.
2. An annuity is an investment that pays a fixed sum each period for a specified number of
periods
True
False
3. Suppose all possible investment opportunities in the world are limited to the four stocks list in
the table below:
Stock
Price per
Share
Number of Shares
Outstanding (Millions)
Taggart Transcontinental
$15.60
25
Rearden Metal
$13.00
45
Wyatt Oil
$29.25
10
Nielson Motors
$26.25
26
he weight on Taggart Transcontinental stock in the market portfolio is closest to:
A) 15%
B) 20%
C) 25%
D) 30%
4. Which of the following statements is FALSE?
A) All investors should demand the same efficient portfolio of securities in the same proportions.
