TUT 1: Introduction to Corporate Finance

(CQs: 1, 2, 10)

1. 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?

- The shareholders elect and vote the BOD of the corporations or hire managers to control the
firm's management.

- The main cause to agency problems is the misalign of goals and interests between the principals
(shareholders) and the agents (managers). The separation from controling the firm may make the
managers act different for their best interest instead of benefits of the firm and the principals.

- The problem can arise are the agency cost, assymetric information between manager and
shareholders and the loss in net income of the firm.

2. Not-for-Profit Firm Goals Suppose you were the financial manager of a not-forprofit
business (a not-for profit hospital, perhaps). What kinds of goals do you think would be
appropriate?

The goals may for the minimize cost and maximize the equity.

10. Goal of Financial Management Why is the goal of financial management to

maximize the current share price of the company’s stock? In other words, why isn’t the goal to
maximize the future share price?

Because the share price represents the present value of future cash sflows expected so
maximizing the current share price means maximizing the future share price at any future
period.