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CHAPTER 1
INTRODUCTION TO CORPORATE
FINANCE
Answers to Concept Questions
1. In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect
the directors of the corporation, who in turn appoint the firm’s management. This separation of
2. Such organizations frequently pursue social or political missions, so many different goals are
conceivable. One goal that is often cited is revenue minimization; i.e., provide whatever goods and
4. An argument can be made either way. At the one extreme, we could argue that in a market economy,
all of these things are priced. There is thus an optimal level of, for example, ethical and/or illegal
behavior, and the framework of stock valuation explicitly includes these. At the other extreme, we
could argue that these are non-economic phenomena and are best handled through the political process.
A classic (and highly relevant) thought question that illustrates this debate goes something like this:
5. The goal will be the same, but the best course of action toward that goal may be different because of
differing social, political, and economic institutions.
6. The goal of management should be to maximize the share price for the current shareholders. If
management believes that it can improve the profitability of the firm so that the share price will exceed
$35, then they should fight the offer from the outside company. If management believes that this
7. We would expect agency problems to be less severe in other countries, primarily due to the relatively
small percentage of individual ownership. Fewer individual owners should reduce the number of
8. The increase in institutional ownership of stock in the United States and the growing activism of these
large shareholder groups may lead to a reduction in agency problems for U.S. corporations and a more
9. How much is too much? Who is worth more, Larry Ellison or Tiger Woods? The simplest answer is
10. Maximizing the current share price is the same as maximizing the future share price at any future
period. The value of a share of stock depends on all of the future cash flows of company. Another way
to look at this is that, barring large cash payments to shareholders, the expected price of the stock must
