Tyra Coy, Jennson Cal, Markeisha Santos and Jaheim Garcia
Business Finance
January 15, 2022
Review questions
1-15 Describe the role of corporate ethics policies and guidelines, and discuss the relationship
that is believed to exist between ethics and share price.
 Answer: Employees are required to sign a formal pledge to uphold the firm’s ethics
policies. Such as policies typically apply to employee actions in dealing with all
corporate stakeholders, including the public. An effective ethics program is believed to
enhance corporate value. It can reduce potential litigation, and judgment costs; maintain
positive corporate image build shareholder confidence; gain loyalty, commitment, and
respect.
1-16 How do market forces – both shareholder activism and the threat of takeover-act to prevent
or minimize the agency problem? What role do institutional investors play in shareholder
activism?
 Answer: Managers may place personal goals ahead of corporate goals. With Shareholder
activism, the pressure is always on management to perform, by communicating their
concerns to the firm’s board. They often threaten to exercise their voting rights or
liquidate their holdings if the board does not respond positively to their concerns. With
threat of takeover, another firm believes it can enhance the target firm’s value by
restructuring its management, operations, and financing. The constant threat of takeover
tends to motivate management to act in the best interest of the firm’s owners.
1-17 Define agency costs, and explain their relationship to a firm’s corporate governance
structure. How can the firm structure management compensation to minimize agency problems?
What is the current view with regard to the execution of many compensation plans?
 Answer: Agency cost: These are the costs of maintaining a corporate governance
structure that monitors management behavior, ensures against dishonest acts of
management and gives the managers the financial incentive to maximize share price.
 The current view with respect to compensation plans has been highly scrutinized, and on
some personnel note, appalling. The appropriateness of the multi-million-dollar
compensation packages are hideous.
1-18 Who are the key participants in the transactions of financial institutions? Who are net
suppliers and who are net demanders?
 Answer: The key participants are: Individuals, business, and government. The Net
Suppliers are individuals; while the net demanders are business firms, and the
government.