Finance

Tutorial 1: Chapter 1 Questions and Problems 1.1, 1.17, 1.19, 1.20, 1.21

Chapter 2 Questions and Problems 2.3, 2.5, 2.18, 2.19, 2.22, 2.23, 2.26

Chapter 1 Questions and Problems 1.1 What are the two basic sources of funds for all businesses? The two basic sources of funds for all businesses are debt and equity. 1.17 Company’s goal: What is the appropriate goal of financial managers? Can managers’ decisions affect this goal in any way? If so, how? The appropriate goal of financial managers should be to maximise the current value of the company’s share price. Managers’ decisions affect the share price in many ways as the value of the share is determined by the future cash flows the company can generate. Managers can affect the cash flows by, for example, selecting what products or services to produce, what type of assets to purchase, or what advertising campaign to undertake. 1.19 Agency conflicts: What is an agency relationship, and what is an agency conflict? How can agency conflicts be reduced in a company? Agency relationships develop when a principal hires an agent to perform some service or represent the company. An agency conflict arises when the agent’s interests and behaviours are at odds with those of the principal. Agency conflicts can be reduced through the following three mechanisms: management compensation, control of the company, and the board of directors. 1.20 Company’s goal: What can happen if a company is poorly managed and its share price falls substantially below its maximum? If the share price falls below its maximum potential price, it attracts corporate raiders, who look for fundamentally sound but poorly managed companies they can buy, turn around, and sell for a handsome profit. 1.21 Agency conflicts: What are some of the regulations that pertain to boards of directors that were put in place to reduce agency conflicts? Some of the regulations include: a. b. c. The majority of board members must be outsiders. A separation of the CEO...