FINA351- Managerial Finance, Ch. 1 Questions (Ref. 1b)
Read Chapter 1 and then briefly answer the following questions. One-or-two sentence answers should suffice - - no dissertations
please. Reminder: This assignment is due no later than mid-night Thursday, after which it will be considered late . . . and late
assignments are not accepted. Assignments should be emailed to fina351@wallawalla.edu. Please put the assignment reference
number in the subject line of your email (e.g. “1b”).
FINANCE: A QUICK LOOK
1.
Identify the four basic areas of finance.
2.
Define three primary areas that concern a financial manager (and are thus covered in this Managerial Finance course).
GOAL OF A FINANCIAL MANAGER
3.
(A) True or false: In general, financial managers are hired to maximize the value of existing owners’ stock (wealth).
(B) The business commentator, Alfred Sloan, once quipped that “General Motors is not in the business of making
automobiles – it’s in the business of making money.” (In other words, the goal is to return value to stockholders in
whatever ways are most effective.) Do you agree? Why or why not?
(C) True or false in your opinion: Most stockholders don’t really care about the business of their company (e.g. the
product or service provided), as long as they get a good return on their stock investment.
(D) In 1950, individual investors owned about 90% of U.S. common stock -- the rest was owned by institutional
investors (e.g. pension funds, mutual funds, etc.). Today, individual investors own only about 25% of common stock.
Do you think most institutional investors view the goal of a corporation differently than individual investors? Why?
(E) Do you think Christians should view the goal of a business differently? Why or why not?
4.
Johnson & Johnson is a large pharmaceutical and household products company that makes Tylenol and Baby Shampoo
among other things. Below is J&J’s Credo (or corporate code of conduct), which it takes very seriously and treats with
religious reverence. The Credo is etched in an 8-foot-tall limestone structure at corporate headquarters and is displayed
in company offices around the world. One full day is devoted to the Credo during executive training programs and the
company regularly surveys its employees to see how well it is living up to the Credo. J&J gives partial credit to the
Credo for consistently receiving top votes in surveys about reputation.
After reading the Credo (below), answer the following question: If the primary goal of a business is to maximize
owners’ wealth, why does the Credo ignore the owners until the last paragraph?
Johnson & Johnson’s Credo
We believe our first responsibility is to the doctors, nurses and patients, to mothers and all others who use our products
and services. In meeting their needs everything we do must be of high quality. We must constantly strive to reduce our
costs in order to maintain reasonable prices. Customers' orders must be serviced promptly and accurately. Our suppliers
and distributors must have an opportunity to make a fair profit.
We are responsible to our employees, the men and women who work with us throughout the world. Everyone must be
considered as an individual. We must respect their dignity and recognize their merit. They must have a sense of security
in their jobs. Compensation must be fair and adequate, and working conditions clean, orderly and safe. Employees must
feel free to make suggestions and complaints. There must be equal opportunity for employment, development and
advancement for those qualified. We must provide competent management, and their actions must be just and ethical.
We are responsible to the communities in which we live and work and to the world community as well. We must be good
citizens-support good works and charities and bear our fair share of taxes. We must encourage civic improvements and
better health and education. We must maintain in good order the property we are privileged to use, protecting the
environment and natural resources.
Our final responsibility is to our stockholders. Business must make a sound profit. We must experiment with new ideas.
Research must be carried on, innovative programs developed and mistakes paid for. New equipment must be purchased,
new facilities provided and new products launched. Reserves must be created to provide for adverse times. When we
operate according to these principles, the stockholders should realize a fair return.
SOCIAL AND ETHICAL RESPONSIBILITIES
5.
(A) The late Milton Friedman, one of America’s most influential economists, said that “there is one and only one social
responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays
within the rules of the game, which is to say, engages in open and free competition, without deception or fraud.”
True or false, in your opinion: A business has no responsibility to society except to generate profits for owners by
producing quality products/services, hiring good employees, paying its legal taxes, and abiding by environmental and
other laws.
(B) True or false in your opinion: Because the goal of a corporation is to maximize shareholder wealth, saving taxes by
moving Burger King’s headquarters to Canada is a perfectly logical/ethical action. (The corporate tax rate is 26.5% in
Canada and 40% in the U.S.).
(C) When U.S. businesses outsource labor-intensive tasks to developing countries at a fraction of the cost, this often
reflects an incongruence between Main Street and Wall Street -- Americans want jobs and Wall Street wants profits.
True or false in your opinion: It is unethical for U.S. firms to outsource jobs internationally.
6.
(A) True or false in your opinion: A corporation cannot maximize owner wealth over the long-term if it ignores its other
stakeholders (customers, employees, communities, suppliers, environment, etc.).
(B) True or false in your opinion: The same actions that maximize owner wealth will, over the long-term, also benefit
society.
(C) True or false in your opinion: A business will be a socially responsible citizen (to its community, its environment,
etc.) on its own freewill without government regulation or other external pressure.
(D) True or false in your opinion: The market will eventually punish dishonest companies whether or not there is
government oversight or regulation.
AGENCY PROBLEM
7.
(A) What is meant by the terms “the agency problem”?
(B) Would the agency problem more likely occur in a large corporation or in a small “mom & pop” business? Why?
(C) List five ways that owners can keep managers working in the owners’ best interests (see instructor notes).
(D) List four ways that managers can protect their jobs against angry owners (see instructor notes).
(E) On March 24, 2016, Starboard Value, an unhappy investor, announced that it would attempt to replace Yahoo!’s
Board and management (including CEO Marissa Mayer) in a proxy fight. Mayer vowed to oppose Starboard’s efforts
(one reason is that she would lose her job!). How does this fight illustrate the agency problem?
(F) The average CEO-to-worker pay ratio is over 200 times for the S&P500 companies (note: the ratio is much lower in
other countries, such as Japan and in Europe.) Many CEOs have received large compensation packages (and huge
severance pay) despite poor stock performance. How does this illustrate the agency problem?