Assignment No: 01

Course name :Fundamentals of Finance And Banking

Course code : FIB219
Assignment name : An overview of financial management
Submitted to:
Mohammad Joynul Abedin
Associate Professor
Department of Finance and Banking
Hajee Mohammad Danesh Science And Technology
University Dinajpur -5200
Submitted by:
Name : Md. Abdur Razzak
Student ID No : 1909201
Department of : Economics
Level : 2 Semester : i

Hajee Mohammad Danesh Science And Technology

University Dinajpur -5200

Answer to the question No:1-1

A firm's intrinsic value is the true, real or theoretical value of the firm. This is the
value that investors should expect if they have all the information about the firm’s
risk and return. This can only be reasonably estimated as it is near impossible to
measure it accurately.
The firm’s current stock price is the actual market price of the stock or the price at
which it is currently being traded at. As compared to intrinsic value where
intrinsic value is the “true” value, market price is the “perceived” value of the
stock.
The stocks “true” long-run value should be more closely related to its intrinsic
value since maximizing intrinsic value is a firm's ultimate goal. The current market
price only represents the current market perception of the stock.
Answer to the question No:1-2
A stock is said to be in equilibrium if its intrinsic value and market price are equal.
A stock at any point in time may not Be in equilibrium due to different perception
of the market of the firm’s value. Remember that a firm’s intrinsic value is the
true value that investors expect if they have all the information is not readily
available and is different TO estimate accurately, there will be different in the
perception of market investors.
In other words ‘true’ risk is not always equal to “perceived” risk and will
consequently result to different in market and intrinsic values.
Answer to the question No:1-3
Remember that intrinsic value is the true value of the firm which investors should
expect if they have all the information about the firm’s risk and return. In this
case, we would have the most confidence in the CFO, since a firm’s managers or
executives have better access to such information than outside investors like my
roommate or the Wall Street analysts.
But do take note that those values are only estimates and is not necessarily right
nor a guarantee of what the future price will be.

Answer to the question No:1-4

Answers may vary depending on the perspective.
Theoretically, a firm’s actual stock price should be equal to the intrinsic value
since this puts the stock in equilibrium. If the stock is always in equilibrium or if
investors know all of the stock’s intrinsic value then investing would be risk free.
No, the answer would be different. From the standpoint of stockholders in
general, it is better for the firm’s actual stock price to go higher in the future. This
gives stockholders a chance for capital gains.
From the standpoint of a retiring CEO with options, then it is better for the firm’s
actual prices to be higher than the intrinsic value since this allows the CEO to
exercise the options and sell the stock at a higher prices.
Answer to the question No:1-5
There are advantages and disadvantages between the two.
If the CEO's compensation is set as a fixed dollar amount, this allows the CEO to
focus on proper long run objectives and make logical decision which is better for
the firm overall.
On the other hand, if the CEO's compensation is based on performance, this
encourage the CEO to perform better. However, this might lead to earnings
management or making risky decisions to increase profits in the short-run, even if
it is not beneficial to the firm in the long-run if the compensation be based on
performance over the long-run. It would be easier to measure performance by
the growth rate in the stock’s intrinsic value since the stock’s intrinsic value has
too many variables which is not readily available and different to estimate.
Overall the compensation should be based on a combination of both ,in a way
that it encourages the CEO to perform better and at the same time make logical
decision for the benefit of the firm in the long-run.
Answer to the question No :1-6
There are 4 main forms of business organization :
1.Proprietorships
2. Partnerships
 3. Corporations
4. Limited liability company
1.Proprietorship is a business organization that is owned by the single individual.
Advantages of sole proprietorships:
(a) Relatively simple and inexpensive to form.
(b) Owner has full control of business and takes all profits.
(c) Has generally lower taxes than corporations
Disadvantages of sole proprietorship
(a) Owner will be personally liable for the business obligations and expenses
(b) Less access to capital than partnerships and corporation.
(c) Limited life -business life is limited to the life of water
2.Partnership is a business organization that is formed by two or more persons.
Advantages of partnerships:
(a) Relatively simple and inexpensive to from
(b) Has generally lower taxes than corporation
Disadvantages of partnerships:
(a) Owners will be personally liable for the business obligations and expenses
(b) Prone to disagreements between the partners
3.Corporation is business organization that is formed by certain number of
persons.
Advantages of Corporation :
(a) Limited liability -owners or stockholders liability are only up to their share
or investment in the firm.
(b) Ease of access to more capital
(c) Unlimited life
Disadvantages of corporations:
(a) Taxes-income are subject to double taxation.
 (b) Management and stockholders have conflicting interest which may lead to
the detriment of the firm overall.
4.Limited liability company is a business organization that is combination of
partnerships and corporations.
Advantages of limited liability companies :
(a) Ease of access to more capital
(b) Limited liability
(c) Unlimited life
Disadvantages of limited liability companies :
(a) Complex to setup and from
(b) Difficulty of raising capital as compared to corporation.
Answer to the question No : 1-7
Stockholder wealth maximization should be a long term goal since it is assumed
that shareholders invest in a company to meet their long-term financial goal, may
it’s be for a new house, retirement or education of children.
Also, in the perspective of the company we can see in previous chapters that the
value of a stock, project or asset is the present value of its expected cash flows
throughout its life which may extend to several years. Thus Stockholder wealth
maximization should be a long-term goal.
The latter would be the better action since it provides a higher average return in
the span of 5 years.100% vs 5%.
Answer to the question No :1-8
Actions that stockholders may take to ensure management's and stockholders
interest are aligned :
1. Create a fair and effective executive compensation plan in a way that it
encourages managers and executives to perform well, at the some time,
make logical decisions that will benefit the company in the long-run.
 2. Director stockholder intervention shareholders with controlling interest
may vote for execution of decision, like firing of managers, regardless of the
opinion of management of the decision.
3. Threaten a hostile takeover this is part of 2 above. Shareholders may
threaten management to acquired the firm and fire executives and
managers who are not performing well.
Answer to the question No :1-9
Answer may vary.
(a)
This may be viewed by stockholders positively or negatively. Questions like “why
is this contribution decision made or what’s the purpose? Is $1.5 million a
relatively large amount or the firm?” should be asked and answered.
Corporate philanthropy is always a sticky issue, but it can be justified in terms of
helping to create a more attractive community that will make it easier to hire a
productive work force. Stockholders are interest in actions that maximize share
price, and if competing firms are not making similar contributions, the “cost” of
this philanthropy has to be borne by someone the stockholders. Thus, stick price
could decrease.
(b)
For this case, it may also be viewed by stockholders positively or negatively. If the
Chinese operation will lead to higher profits in the long-run, then even tough
earnings are depressed, it will, in the end be beneficial to the firm and to the
stocks intrinsic value. In that case, then this decision should be positively viewed.
It might decrease the stock price in the short-run but will be off set in the long-
run.
(c)
For this case, it may also be viewed by stockholders positively or negatively. While
shifting some of the investment to common stock may increase overall return,
this may also increase risk if not properly managed. Overall, this is a good
decision since the percentage holding of 50% of assets to only U.S. treasury bonds
is too high of a share and may be ineffective. The actions may also increase or
decrease stock price.

Answer to the question No : 1-10

(a)
No, TIAA-CREF is not an ordinary shareholder. Because it is one of the largest
institutional shareholders in the United States and it controls more than$350
billion in pension funds, its voice carries a lot of weight. This “shareholder” in
effect consist of many individual shareholders whose pensions are invested with
this group.
(b)
For TIAA-CREF to be effective in wielding its weight. It must act as a coordinated
unit. In order to do this, the fund's mangers should solicit from the individual
shareholders their “votes” on the funds practices and from those “votes” act on
the majority wishes. In so doing, the individual teachers whose pensions are
invested in the fund have, in effect, determined the funds voting practices.
Answer to the question No : 1-11
Earnings per share in thaw the current year will decline due to the cost of the
investment made in the current year and no significant performance impact in the
short run. However, the company’s stock price should increase due to the
significant cost saving expected in the future.
Answer to the question No : 1-12
The board of directors should set CEO compensation dependent on how well the
firm performance. The compensation package should be sufficient to attract and
retain the CEO but not go beyond the stock’s performance over the long-run, not
the stock in an option exercise date. If the intrinsic value could be measured in an
objective and verifiable manner, the performance pay could be based on changes
in intrinsic value, since intrinsic value is not observable, compensation must be
based on the stock’s market price but the price used should be an average over
time rather than on a specific date. The board should probably set the CEO’s
compensation as mix between a fixed salary and stock options. The actions of
the vice president of company X would be different than if he were CEO of some
other company.

Answer to the question No : 1-13

Setting the compensation policy for three division manager would be different
than setting the compensation policy for a CEO because performance of each of
these managers could be more easily observed. For a CEO an award based on
stock price performance make sense, while basing the compensation for division
managers on stock price performance doesn’t make sense. Each of the managers
could still be given stock award. However, rather than the award being based on
stock price it could be determined from some observable measure like increase
gas output, oil output etc.