Financial Management
Financial Management Questions- Short answers and Multiple Choice
Short Answer
1. What is the difference between stock price maximization and profit maximization? Under what conditions might profit maximization not lead to stock price maximization?
2. Assume that you are serving on the board of directors of a medium-sized corporation and that you are responsible for establishing the compensation policies of senior management. You believe that the company's CEO is very talented, but your concerns is that she is always looking for a better job and may want to boost the company's short-run performance (perhaps at the expense of long-run profitability) to make herself more marketable to other corporations. What effect would these concerns have on the compensation policy you put in place
3. What is free cash flow? Why is it the most important measure of cash flow?
4. If you were starting a business, what tax considerations might cause you to prefer to set it up as a proprietorship or a partnership rather than as a corporation?
5. How does inflation distort ratio analysis comparisons, both for one company over time (trend analysis) and when different companies are compared? Are only balance sheet items of both balance sheet and income statement items affected?
6. Over the past year, my company has realized an increase in its current ratio and a drop in its total assets turnover ratio. However, the company's sales, quick ratio, and fixed assets turnover ratio have remained constant. What explains these changes?
7. If investors' aversion to risk increased, would the risk premium on a high-beta stock increase more or less than that on a low-beta stock? Explain.
8. If a company's beta were to double, would its expected return
Short Answer
1. What is the difference between stock price maximization and profit maximization? Under what conditions might profit maximization not lead to stock price maximization?
2. Assume that you are serving on the board of directors of a medium-sized corporation and that you are responsible for establishing the compensation policies of senior management. You believe that the company's CEO is very talented, but your concerns is that she is always looking for a better job and may want to boost the company's short-run performance (perhaps at the expense of long-run profitability) to make herself more marketable to other corporations. What effect would these concerns have on the compensation policy you put in place
3. What is free cash flow? Why is it the most important measure of cash flow?
4. If you were starting a business, what tax considerations might cause you to prefer to set it up as a proprietorship or a partnership rather than as a corporation?
5. How does inflation distort ratio analysis comparisons, both for one company over time (trend analysis) and when different companies are compared? Are only balance sheet items of both balance sheet and income statement items affected?
6. Over the past year, my company has realized an increase in its current ratio and a drop in its total assets turnover ratio. However, the company's sales, quick ratio, and fixed assets turnover ratio have remained constant. What explains these changes?
7. If investors' aversion to risk increased, would the risk premium on a high-beta stock increase more or less than that on a low-beta stock? Explain.
8. If a company's beta were to double, would its expected return