Homework 1

Question 1

What are the differences between shareholder wealth maximization and profit maximization? If a firm chooses to pursue the objective of shareholder wealth maximization, does this preclude the use of profit maximization decision-making rules? Explain.

Question 2

In 2012 Kodak declared bankruptcy. How can you reconcile a bankruptcy declaration with a management pledged to maximize shareholder wealth?

Question 3

Compare the potential for agency problems in sole proprietorships, partnerships, and corporations. In light of your analysis, why is the corporate form of organization so popular?

Question 4

What roles do financial middlemen and financial intermediaries play in the operation of the U.S. financial system? How do the two differ?

Question 5

How do primary and secondary financial markets differ?

Question 6

CHALLENGEThe stock of Tips, Inc., a new firm operating a chain of sports betting parlors, has just been sold in an initial public offering at a price of $25 per share. One week after this offering, the stock has risen in value to $35. You believe the stock will rise to $45 over the coming year. You do not expect Tips to pay any dividends over the year. If you require a rate of return on this stock of 18 percent, do you believe this is a good investment at the current price of $35?