Ch 1, Q 1-1, Q 1-4

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Ch 1, Q 1-1

Define each of the following terms:

a. Stockholder wealth

is the primary goal of financial management. It is a long-run goal. Companies, and consequently the stockholders, prosper by management making decisions which will produce long-term increases in earnings. It is an appropriate goal for management decision. The risk and timing associated with expected earnings per share and cash flows are considered in order to maximize the price of firm’s common stock, .(Anonymous, 2012)

b. Production opportunities

is the ability to turn capital into benefits. If a business raises capital, the benefits are determined by the expected rates of return on its production opportunities; (Anonymous, 2012).

time preferences for consumption

is a major impact on the cost of money. It varies for different individuals, for different age groups and for different cultures, (Anonymous, 2012).

c. Foreign trade deficit

is a deficit that occurs when businesses and individuals in the U.S. import more goods from foreign countries than are exported. Trade deficits must be financed, and the main source of financing is debt. Therefore, as the trade deficit increases, the debt financing increases, driving up interest rates. U. S. interest rates must be competitive with foreign interest rates; if the Federal Reserve attempts to set interest rates lower than foreign rates, foreigners will sell U.S. bonds, decreasing bond prices, resulting in higher U. S. Rates. Thus, if the trade deficit is large relative to the size of the overall economy, it may hinder the Fed’s ability to combat a recession by lowering interest rates, (Anonymous, 2012)

d. Agent; principal; agency relationship

is the arrangement that exists when one person or entity (called the agent) acts on behalf of another (called the principal). For example, shareholders of a company (principal) elect management (agent) to act on their behalf.

An agency relationship arises whenever an...