Cheveem Grace C.

Emnace C07

Actiivty 2:

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 working one area should know
something about each of the other. Explain.

The three areas in Finance that the book covers are Financial management, Capital market, and
Investments. These three areas are interconnected to one another, working in an area, you
should be knowledgeable about each of the other, because each area is needed to fulfill the
other areas. In order to understand the one area you need to have an understanding to
another so that you can fully interpret the others. The skills you have in one area is not enough
to have a good outcome in your work.

2. Is maximizing shareholder value inconsistent with being socially responsible?

No, it should be consistent with being socially responsible. Companies maximizing shareholder
value must be mindful of the broader interests. Being socially responsible will give you a good
image in the market, it will improve your products, you will be able to attract top-notch
employees, and have more customers and investors. Being socially responsible will avoid facing
lawsuits and regulation that will result to a good publicity.

3. What might conflicts arise between stockholders and debtholders?

The conflicts might be conflict in how much they will get in a project, like a conflict of interest.
The debtholders receive fixed payments regardless of how the company does, while the
stockholders do better when the company does better, there are instances and projects that
the stockholders can get more benefits that the debtholders, the stockholders won’t lose
something while the debtholders won’t have a benefit and they might lose everything depends
to the market. Another type of conflict arises over the use of additional debt, the more debt a
firm uses to finance a given amount of assets, the riskier the firm becomes, that gives the
bondholders instances to suffer a loss even if the value of assets declines only slightly.

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

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 The stockholders want managers to maximize its intrinsic value because its a long-run concept
and will maximize the average price over time. As a part of a business, it is good to have an
assurance that your company is stable and that your company will not fall in a long run.

5. Why ethics matter in Business? Explain.

Ethics matter in business because having a good reputation reflects how firms and people are
ethical. Having ethics in business will ensure employees on the proper behaviors in different
situations. When conflicts arise involving profits and ethics, ethical considerations sometimes
are so obviously important. When people in the business are ethical when it comes to making
decisions, it will give a good impression to people.

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?

I will not tell him about the ongoing case of the company because of confidentiality, saying it to
my father would be unethical. Instead, I would tell him to be careful when it comes to buying
shares of stock. I would tell him the possibilities of buying the stocks, both positive and
negative, and if there is a chance I would persuade him to have a different business if possible.
If he would ask me about the company’s update, still, I will not tell him what happened.

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