Problems and Questions: Management Objectives
1. The objective of decision making in corporate finance is
(a) to maximize earnings
(b) to maximize cash flows
(c) to maximize the size of the firm
(d) to maximize market share
(e) to maximize firm value / stock prices.
2. For maximization of stock prices to be the sole objective in decision making, and to be socially desirable, the following assumption or assumptions have to hold true.
(a) Managers act in the best interests of stockholders.
(b) There is no conflict of interest between stockholders and bondholders.
(c) Financial markets are efficient.
(d) There are no costs that are created by the firm that cannot be traced back and
charged to the firm.
(e) All of the above.
3. There is a conflict of interest between stockholders and managers. In theory, stockholders are expected to exercise control over managers through the annual meeting or the board of directors. In practice, why might these disciplinary mechanisms not work?
4. Stockholders can transfer wealth from bondholders through a variety of actions. How would the following actions by stockholders transfer wealth from bondholders?
(a) An increase in dividends
(b) A leveraged buyout
(c) Acquiring a risky business
How would bondholders protect themselves against these actions?
5. Financial market prices are much too volatile, for financial markets to be efficient. Comment.
6. Maximizing stock prices does not make sense because investors focus on short term results, and not on the long term consequences. Comment.
7. There are some corporate strategists who have suggested that firms focus on maximizing market share rather than market prices. When might this strategy work, and when might it fail?
8. Anti-takeover amendments can be in the best interests of stockholders.
Under what conditions is this likely to be true?