Blake Daniels

Finance

Sept 6th, 2018

Homework

#2 Sole Proprietorships and Partnerships - What are the four primary disadvantages of the sole
proprietorship and partnership forms of business organization? What benefits are there to these
types of business organization as opposed to the corporate form?

● Unlimited Liability
● Limited Life
● Difficulty in transferring ownership
● Hard to raise capital funds

#6 Goal of Financial Management - What goal should always motivate the actions of a firm's
financial manager?

● The goal of a Financial Manager is to maximize the current value per share of existing
stock. This can be taken as maximizing the price per share. The other goal is to manage
exposure risk. Financial Managers try to minimize costs. They are driven and motivated
by trying to avoid insolvency and financial burden.

#7 Agency Problems - Who owns a corporation? Describe the process whereby the owners
control the firm's management. What is the main reason that an agency relationship exists in the
corporate form of organization? In this context, what kinds of problems can arise?

● In the corporate form of ownership, the shareholders are the owners of the firm. The
shareholders elect the directors of the corporation, who in turn appoint the firms
management. The separation of the ownership from control in the corporate form of
organization causes agency problems. Management may act on its own or someone else’s
best interest, rather than those of shareholders. If such events occur, they may contradict
the goal of maximizing the share price of the equity of the firm.

#14 Agency Problems - Suppose you own stock in a company. The current price per share is $25.
Another company has just announced that it wants to buy your company and will pay $35 per
share to acquire all the outstanding stock. Your company's management immediately begins
fighting off this hostile bid. Is management acting in the shareholders' best interests? Why or
why not?

● The goal of management should be to maximize the the share price and current

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 shareholders. If management believes that it can improve the profitability of the firm so
that the share price will exceed $35, then they should fight the offer from the outside
company. If management believes they will pay more than $35 for the company, then
they should still fight the offer. Poorly monitored managers usually try and have an
incentive to fight corporate takeovers in situations such as this.

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