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Corporate finance issues

I. You may have heard big business criticized for focusing on short-term performance at the expense of long-term results. Explain why a firm that strives to maximize stock price should be less subject to an overemphasis on short-term results than one that simply maximizes profits.

II. We claim that the goal of the firm is to maximize current market value.
Could the following actions be consistent with that goal?
a. The firm adds a cost-of-living adjustment to the pensions of its retired employees.
b. The firm reduces its dividend payment, choosing to reinvest more of earnings in the business.
c. The firm buys a corporate jet for its executives.
d. The firm drills for oil in a remote jungle. The chance of finding oil is only 1 in 5.

III. Explain why each of the following may not be appropriate corporate goals:
a. Increase market share.
b. Minimize costs.
c. Underprice any competitors.
d. Expand profits.

Corporate Financing. Financial markets and intermediaries channel savings from investors to corporate investment. The savings make this journey by many different routes.

Give a specific example for each of the following routes.
a. Investor to financial intermediary, to financial markets, and to the corporation.
b. Investor to financial markets, to a financial intermediary, and to the corporation.
c. Investor to financial markets, to a financial intermediary, back to financial markets, and to the corporation.

Equity Accounts. The authorized share capital of the Alfred Cake Company is 100,000 shares.

The equity is currently shown in the company's books as follows:

Common stock ($1.00 par value) $ 60,000
Additional paid-in capital 10,000
Retained earnings 30,000
Common equity 100,000
Treasury stock (2,000 shares) 5,000
Net common equity 95,000

a. How many shares are issued?
b. How many are outstanding?
c. How many more shares can be issued without the approval of shareholders?

Preferred Stock. In what ways is preferred stock like long-term debt? In what ways is it like common stock?

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1) A company that strives to maximize stock price might be less concerned with the short term because earnings that are cranked up for the current quarter are usually stolen from future quarters. The nature of the stock market is that companies that exceed expectations are rewarded, but those who disappoint are punished even more.

a) This would improve company morale and employee longevity. Maybe the company suffers from high employee turn-over. This would improve profitability.

b) Taking earnings to develop new products, build new production, develop new markets, etc. are all good reasons to invest in the company. Anything that will generate a greater return than cash should be reinvested.

c) If buying a corporate jet can ...

Solution Summary

A company that strives to maximize stock price might be less