Tutorial 1

FIN2014 / BMB 2207 / BAB2203: Financial Management
Tutorial 1
1. Compare and contrast the goals of profit maximisation and
maximisation of shareholder wealth.
2. Firms often involve themselves in projects that do not result
directly in profits, for example by supporting sporting events and
the arts. Do these projects contradict the goal of maximisation of
shareholder wealth? Why or why not?
3. If you bought a share of stock, what would you expect to receive,
when would you expect to receive it, and would you be certain
that your expectations would be met?
When you purchase a stock, you expect to receive dividends plus
capital gains. Not all stocks pay dividends immediately, but those
corporations that do, typically pay dividends quarterly. Capital gains
(losses) are received when the stock is sold. Stocks are risky, so you
would not be certain that your expectations would be metas you
would if you had purchased a U.S. Treasury security, which offers a
guaranteed payment every 6 months plus repayment of the purchase
price when the security matures.
4. The president of Southern Semiconductor Corporation (SSC)
made this statement in the companys annual report: SSCs
primary goal is to increase the value of our common
stockholders equity.
Later in the report, the following
announcements were made:
a. The company contributed $1.5 million to the symphony
orchestra in Birmingham, Alabama, its headquarters city.
b. The company is spending $500 million to open a new plant and
expand operations in China. No profits will be produced by the
Chinese operation for 4 years, so earnings will be depressed
during this period versus what they would have been had the
decision been made not to expand in China.
c. The company holds about half of its assets in the form of U.S.
Treasury bonds, and it keeps these funds available for use in
emergencies. In the future, though, SSC plans to shift its
emergency funds from Treasury bonds to common stocks.
Discuss how the above announcements may affect the movements
of the SSCs share price.
Corporate philanthropy is always a sticky issue, but it can be justified in
terms of helping to create a more attractive community that will make
it easier to hire a productive work force. This corporate philanthropy
1
could be received by stockholders negatively, especially those

stockholders not living in its headquarters city. Stockholders are
interested in actions that maximize share price, and if competing firms
are not making similar contributions, the "cost" of this philanthropy has
to be borne by someone--the stockholders. Thus, stock price could
decrease.
b. Companies must make investments in the current period in order to
generate future cash flows. Stockholders should be aware of this, and
assuming a correct analysis has been performed, they should react
positively to the decision. The Chinese plant is in this category. Capital
budgeting is covered in depth in Part 4 of the text. Assuming that the
correct capital budgeting analysis has been made, the stock price
should increase in the future.
c. U.S. Treasury bonds are considered safe investments, while common
stocks are far more risky. If the company were to switch the emergency
funds from Treasury bonds to stocks, stockholders should see this as
increasing the firm's risk because stock returns are not guaranteed
sometimes they increase and sometimes they decline. The firm might
need the funds when the prices of their investments were low and not
have the needed emergency funds. Consequently, the firm's stock
price would probably fall.
1. -Good publicity for company
-Can get a tax write-off
-Diversity of cultural attraction
-Investment in community
-overall good!
2. -Stockholders care about long-term so its a good idea
-Markets are expanding, stock prices will increase
-Stock price is based upon Wall Street's forecast of the future of the company,
not short-term earnings
-overall good idea!
5.
Corporate managers work for the owners of the corporation.

Consequently, they should make decisions that are in the
interests of the owners, rather than their own. What strategies
are available to shareholders to help ensure that managers are
motivated to act this way?
1. Ensure that employees are paid with company stock/stock options.

2. Ensure that underperforming managers are fired.
3. Write contracts that ensure that the interests of the managers and
shareholders are closely aligned.
4. Mount hostile takeovers.

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FIN2014 / BMB 2207 / BAB2203: Financial Management

could be received by stockholders negatively, especially those

Corporate managers work for the owners of the corporation.

1. Ensure that employees are paid with company stock/stock options.

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