BA 323 Finance - SDSU Exam 1
Questions and Answers
What is the main goal of the corporation? - -To make capital gains for
shareholders. Maximize value of the firm.
- Who ultimately owns the corporation? What is the relationship between
shareholders, the board of directors, and management? - -Shareholders
ultimately own the corporation. Management (managers) are naturally
inclined to act in their own interests but that may not be in the best interests
of shareholders. The board of directors - elected by the shareholders - can
oversee managerial behavior through corporate governance.
- What are the 3 most important management positions? - -CEO, COO, CFO
- What is the Sarbanes-Oxley legislation? Why was it passed? - -Sarbanes-
Oxley was passed in 2002 as a result of the Enron and Worldcom scandals. It
makes corporate management legally responsible for the accuracy of their
financial statements.
- What is the major disadvantages and advantages of corporations
compared to other forms of business organizations? - -Advantages: Ease of
raising money (BIGGEST ADVANTAGE), Unlimited life, Easy transfer of
ownership, and limited liability (you can only lose what you've invested).
Disadvantages: Double taxation and cost of setup and report filing.
- What is a stock's intrinsic value? In an efficient market, will a stock's price
equal
the stock's intrinsic value? - -A stock's intrinsic ("true") value is the value the
investor inherently believes the stock to possess, i.e. the 'correct price'. In an
efficient market a stock's price should equal it's intrinsic value.
- Why do shareholders have a conflict of interest with managers? - -
Managers are naturally inclined to act in their own best interests (which are
not always the same as the interest of stockholders).
- What is corporate governance? - -The system of governing a company that
aligns the interests of shareholders and managers together.
- What are various strategies for aligning the interests of shareholders and
management? - -Stock instead of cash. Long vesting periods. Stronger
oversight by board or outside investors.
, - Change in CEO Compensation starting in the 1980s? - -Movement away
from salaries to stock options to foster growth, innovation and risk-taking.
- Why is it a good idea for CEO compensation to track an overall market
index like the S&P 500? - -To align interests of shareholder and
management. Expect CEO compensation to track S&P 500; as opposed to a
bond-market which would discourage risks.
- What is the bondholder-stockholder conflict? Do bondholders prefer safer
or risky corporate investments? - -Bondholders prefer safe, secure
investments while stockholders prefer riskier business maneuvers for
possible greater capital gains.
- What is the difference between shareholder theory and stakeholder
theory? - -Shareholder Theory = Maximize capital gains for shareholders.
Stakeholder Theory = consider other objectives such as the impact on
employees, suppliers and the environment.
- What are the three ways that capital is transferred between savers and
borrowers? - -- Direct transfers: Business sells its stocks or bonds directly to
savers without going through any financial
institution
- Investment Banks/Underwriters: Transfers that go through an investment
bank
such as Goldman Sachs or Morgan Stanley. Companies sells stock or bonds
to the
underwriter, which is then sold by the
investment bank to savers. Underwriters are taking on risk. Also called
primary market transactions
- Financial Intermediaries (Banks): Loans made through a financial
intermediary
such as a bank, insurance company, or a mutual
fund. The intermediary obtains funds from savers in
exchange for securities
- Why do most companies use underwriters to raise capital instead of using
direct transfers? What purpose do investment banks serve in the
underwriting process? - -Most companies use underwriters instead of direct
transfers because of the ability to raise much larger amounts of capital. In
the underwriting process the investment banks are taking on a share of risk.
- Describe the capital allocation process and what role the suppliers of
capital plays and the role that the users of capital play. Why is the financial
Questions and Answers
What is the main goal of the corporation? - -To make capital gains for
shareholders. Maximize value of the firm.
- Who ultimately owns the corporation? What is the relationship between
shareholders, the board of directors, and management? - -Shareholders
ultimately own the corporation. Management (managers) are naturally
inclined to act in their own interests but that may not be in the best interests
of shareholders. The board of directors - elected by the shareholders - can
oversee managerial behavior through corporate governance.
- What are the 3 most important management positions? - -CEO, COO, CFO
- What is the Sarbanes-Oxley legislation? Why was it passed? - -Sarbanes-
Oxley was passed in 2002 as a result of the Enron and Worldcom scandals. It
makes corporate management legally responsible for the accuracy of their
financial statements.
- What is the major disadvantages and advantages of corporations
compared to other forms of business organizations? - -Advantages: Ease of
raising money (BIGGEST ADVANTAGE), Unlimited life, Easy transfer of
ownership, and limited liability (you can only lose what you've invested).
Disadvantages: Double taxation and cost of setup and report filing.
- What is a stock's intrinsic value? In an efficient market, will a stock's price
equal
the stock's intrinsic value? - -A stock's intrinsic ("true") value is the value the
investor inherently believes the stock to possess, i.e. the 'correct price'. In an
efficient market a stock's price should equal it's intrinsic value.
- Why do shareholders have a conflict of interest with managers? - -
Managers are naturally inclined to act in their own best interests (which are
not always the same as the interest of stockholders).
- What is corporate governance? - -The system of governing a company that
aligns the interests of shareholders and managers together.
- What are various strategies for aligning the interests of shareholders and
management? - -Stock instead of cash. Long vesting periods. Stronger
oversight by board or outside investors.
, - Change in CEO Compensation starting in the 1980s? - -Movement away
from salaries to stock options to foster growth, innovation and risk-taking.
- Why is it a good idea for CEO compensation to track an overall market
index like the S&P 500? - -To align interests of shareholder and
management. Expect CEO compensation to track S&P 500; as opposed to a
bond-market which would discourage risks.
- What is the bondholder-stockholder conflict? Do bondholders prefer safer
or risky corporate investments? - -Bondholders prefer safe, secure
investments while stockholders prefer riskier business maneuvers for
possible greater capital gains.
- What is the difference between shareholder theory and stakeholder
theory? - -Shareholder Theory = Maximize capital gains for shareholders.
Stakeholder Theory = consider other objectives such as the impact on
employees, suppliers and the environment.
- What are the three ways that capital is transferred between savers and
borrowers? - -- Direct transfers: Business sells its stocks or bonds directly to
savers without going through any financial
institution
- Investment Banks/Underwriters: Transfers that go through an investment
bank
such as Goldman Sachs or Morgan Stanley. Companies sells stock or bonds
to the
underwriter, which is then sold by the
investment bank to savers. Underwriters are taking on risk. Also called
primary market transactions
- Financial Intermediaries (Banks): Loans made through a financial
intermediary
such as a bank, insurance company, or a mutual
fund. The intermediary obtains funds from savers in
exchange for securities
- Why do most companies use underwriters to raise capital instead of using
direct transfers? What purpose do investment banks serve in the
underwriting process? - -Most companies use underwriters instead of direct
transfers because of the ability to raise much larger amounts of capital. In
the underwriting process the investment banks are taking on a share of risk.
- Describe the capital allocation process and what role the suppliers of
capital plays and the role that the users of capital play. Why is the financial
