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Problem Set 01

The document contains 8 questions related to corporate finance and strategy topics such as the differences between stock price maximization, firm value maximization and stockholder wealth maximization, when maximizing market share may work versus fail, recommendations for objectives if the stock market is not efficient, how actions by stockholders can transfer wealth from bondholders and how bondholders can protect themselves, the effects of manager compensation schemes, where the conflict between managerial and stockholder interests is greatest, factors affecting the balance of power between stockholders and managers, and how certain events may alter that balance of power.

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25 views

Problem Set 01

The document contains 8 questions related to corporate finance and strategy topics such as the differences between stock price maximization, firm value maximization and stockholder wealth maximization, when maximizing market share may work versus fail, recommendations for objectives if the stock market is not efficient, how actions by stockholders can transfer wealth from bondholders and how bondholders can protect themselves, the effects of manager compensation schemes, where the conflict between managerial and stockholder interests is greatest, factors affecting the balance of power between stockholders and managers, and how certain events may alter that balance of power.

Uploaded by

Mega troll
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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BF3215 Corporate Finance and Strategy – Problem Set 1 Questions

Q1. What is the difference between stock price maximization, firm value maximization and
stockholder wealth maximization?

Q2. 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?

Q3. Assume that you are advising a Turkish firm on corporate financial questions and that you
do not believe that the Turkish stock market is efficient. Would you recommend stock price
maximization as the objective? If not, what would you recommend?

Q4. 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?

Q5. In recent years, top managers have been given large packages of options, giving them the
right to buy stock in the firm at a fixed price. Will these compensation schemes make managers
more responsive to stockholders? Why or why not? Are lenders to the firm affected by these
compensation schemes?

Q6. The conflict between managerial and stockholder interests is at the heart of the corporate
governance problems. In which of the following firms is the conflict between the two likely to be
greatest?

a) A publicly traded firm which is widely held by institutions and managers hold little stock in
the firm
b) A publicly traded firm with widely dispersed but activist institutional stockholders
c) A privately owned business where the owner is the manager.
d) A publicly traded firm that is widely held by institutions but where the largest stockholder is
also the CEO.

Q7. Explain why each of the statements might be true or false.

a) The CEO should also be the chairman of the board as the CEO knows the company best.
b) We should set a restriction on the tenure of the directors. Directors who have served for a
long time are unlikely to be truly independent.
c) Firms with dual-class shares allow management to focus on the long-term as management do
not need to worry about hostile takeovers or activist shareholders.
d) Passive institutional investors – mutual funds/ ETFs that are designed to rack stock indices
(such as S&P500) rather than actively pick winners – are increasingly holding more stocks of
corporate America. Corporate governance experts worry that the rise of such passive
investors will weaken corporate governance.

Q8. In any firm, the balance of power between stockholders and managers is a function of a
number of factors – internal as well as external. Events can cause the power to shift towards
managers or towards stockholders or leave the balance unchanged. Evaluate how each of the
following events would alter the balance of power.

a) The firm decides to expand its board of directors from 11 members to 22 members and
allows the CEO to pick the additional directors.
b) An activist investor manages to get three of his nominees elected to the board of directors at
the expense of management nominees.
c) A closely held firm (insiders hold 40% of the 100,000 shares) issues 500,000 new nonvoting
shares to the public to raise fresh capital.
d) The state passes a law restricting hostile takeovers.

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