Castor, Vincent Paul A.

BSA-2B
Activity 2 - Graded

End of the chapter Questions:

After reading and understanding Chapter 1 - Overview of Financial

Management, you are ready to answer the following assigned questions:

1. What are the three (3) areas in Finance that the book covers? Are these
areas independent of one another or are they interrelated in the sense
that someone working one area should know something about each of the
other areas? Explain.

There are three areas in Finance that the book covers. These areas are
Financial Management, Capital Market, and Investments. They are
interconnected to each another. If your work belongs to one particular area,
you still have to be knowledgeable about the other two areas for the proper
execution of your tasks. Understanding all areas gives you the needed
information to interpret and relate all of the three. Knowing one area alone is
not enough to provide you decent results in your operations. One example is
from the book stating, “Banking is under capital markets, but a bank lending
officer in charge of business’ loan request must know about corporate finance
to make good judgment.” A corporate treasurer negotiating with a banker
must also understand banking if the treasurer is to loan on “reasonable”
terms. In addition, a security analyst trying to determine a stock’s true value
must understand corporate finance and capital markets to do his or her job.
Whatever angle you may look or tackle it, all three may be independent fields
but an essential amount of knowledge is still needed for decision-making
purposes.

2. Is maximizing shareholder value inconsistent with being socially

responsible?

No, it is consistent and should be consistent with each other. The main
goal of a firm is to maximize shareholder value and profitability but that should
not disregard being socially responsible. Corporate Social Responsibility or
CSR is the broad field of considerations regarding environment, human
resources or employees, communities, society, and beneficiaries. Showing
social responsibility can give a firm the reputation it deserves which is a good
image among its investors and the public. Most public companies work in
alignment to the interests of the public as well as shareholder value
maximization with careful analysis of results from the course taken. Failure to
show CSR has sever consequences that range from lawsuits, terminating
employees, bankruptcy, to being raided by corporate raiders.

3. What might conflicts arise between stockholders and debtholders?

A sense of conflict of interest may arise from both sides. In the side of the
stockholder, choosing between less risky but lower returns and more risky but
higher returns. In the side of the debtholders, choosing between lending the
firm or not since it is of consensus that most stockholders will go for higher
returns once they loan from banks. The debtholders get a fixed amount paid
with a given interest rate regardless if the firm performs god or bad in a low-
risk project. However, if a project with high risk is presented, the dilemma
arises within the debtholders on letting the firm borrow money or not. If the
firm performs good, they have more benefits since the debtholders only get a
fixed return of interest. However, if they fail to perform good and the results
become severe, the investment's worth will become zero for the debtholders
and get no to low interest return. Amidst this conflict, persistent stockholders
try to convince debtholders to invest in the project although the risk. With this,
the debtholders give higher interest rate conditions or limit the amount that
can be borrowed by firms.

4. If the firm could maximize either its current market price or its intrinsic
value, would stockholders (as a group) wants managers to do? Explain

Stockholders would prefer maximizing their intrinsic or true value. Managers

will do their jobs in maximizing intrinsic value and average price over time.
Intrinsic value focuses on the long-run of the company and in business, it is
important to decide for the stability of the firm.

5. Why ethics matter in Business?

Just like Corporate Social Responsibility, individual ethics and business

ethics as a whole is important for the public reputation of the company. An
ethical company reflects the ethical behavior of employees, managers, and
top executives. The more the firm stays true to being ethical and it is
observant in public, attraction to investors, employees, sponsors, and other
benefits like media will peak. Also, it is obvious that whenever conflicts arise
between profitability and ethics, ethics will be considered in making decisions
since it gives a good impression to externalities.

6. Mini-Case: Ethics

You are the newly hired Finance Officer of FC Products, a large

manufacturer of industrial products. Yesterday morning the president of
the company called you and other senior executives to his office where he
stated that a competitor was about to file suit against FC for patent
infringement. Regardless of the merits of the case, it will tie up the
company’s talent for a long while and will be quite costly to fight. The
effects on the company’s prospects cannot be measured, but it is possible
that they will be severe.

This evening you father called from your home city, where he and
your mother have lived in retirement for a few years. You chatted about
the weather, the children and other such things. Then he told you that he
had just bought shares of stock of FC Products because he knows that
any company you worked at would do well.
 Required: What would you say to your father?

Since the company's concerns haven't been made public, confidentiality must
be maintained by its employees. I would not tell my father anything regarding
the case where FC's competitor has filed a suit against them. As a top officer
entrusted by other officers and higher-ups, I will keep confidential information
to avoid leaks regarding the company's courses of action and for it to be used
against the company's favor leading to potential downfall. Although the current
situation is costly and poses more severe outcomes, the company still has the
chance to get back on its feet and provide improved services to its investors.
Moreover, I would tell my father to be more careful and considerable when
buying shares of stocks. I will enlighten him of the benefits and risks of
investing in such fields and advice him to instead invest on other forms of
businesses. Whatever the circumstance, I will stay loyal and avoid troubles
arising from conflict of interest between company operations and personal
social ties.