Corporate Finance Assignment 1

Weight 25%

Answer the following question:

1. What should be the goal of the financial manager of a corporation? Why?

2. List and briefly describe the three basic questions addressed by a financial manager.

3. What advantages does the corporate form of organization have over sole proprietorships
or partnerships?

4. Agency problem:

Suppose you own stock in a company. The current price per share is $25. Another company
has just announced that it wants to buy your company and will pay $35 per share to acquire
all the outstanding stock. Your companys management immediately begins fighting off this
hostile bid. Is management acting in the shareholders best interests? Why or why not?

5. Discuss the difference between book values and market values on the balance sheet and
explain which is more important to the financial manager and why.

6. Sometimes it is not clear if a particular security is debt or equity. Explain the basic
difference between debt and equity?

7. Briefly explain the differences between preferred and common stock.

8. Why do firms rely heavily on internal funds?

9. Briefly explain the term "Initial public offering (IPO)."

10. What is listing? State the advantages of listing

11. What is the relationship between interest rates and bond prices?

12. Briefly explain the difference between beta as a measure of risk and variance as a
measure of risk.
13. Briefly explain the "capital asset pricing model." (CAPM)

14. List and briefly discuss the advantages and disadvantages of the internal rate of return
(IRR) rule.

15. Explain the differences and similarities between net present value (NPV) and the
profitability index (PI).

16. Academic theory states that net present value is the best capital budgeting model. Why
is this the case?

17. Briefly discuss various real options associated with capital budgeting projects.

18. What are the different kinds of risk in finance? Suggest how this / these risk(s) can be
reduced or eliminated.

19. Why are some risks diversifiable and some nondiversifiable? Give an example of each.

20. State the advantages and disadvantages of including debt in the capital structure.

21. Explain how cash dividends affect individual shareholders differently than an equal
amount of funds spent on a repurchase.

22. Explain homemade leverage and why it matters.

23. What are the benefits of merger and acquisition? You may cite any real example to justify
your answer.

24. Differentiate between Friendly and Hostile Takeovers.

25. Briefly explain and evaluate the role of credit rating agencies and the influence of rating
on the creditworthiness of issuers.

(Reading the core text will help you answer these questions)