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FIN220 Tutorial Chapter 1
FIN220 Tutorial Chapter 1
LO 2 1.10 Ethics and Firm Goals. Can our goal of maximizing the value
of the stock conflict with other goals, such as avoiding unethical or
illegal behavior?
In particular, do you think subjects such as customer and employee
safety, the environment, and the general good of society fit in this
framework, or are they essentially ignored? Try to think of some specific
scenarios to
illustrate your answer.
An argument can be made either way. At one extreme, we
could argue that in a market economy, all of these things are
priced. This implies an optimal level of ethical and/or illegal
behavior and the framework of stock valuation explicitly
includes these. At the other extreme, we could argue that
these are non-economic phenomena and are best handled
through the political process. The following is a classic (and
highly relevant) thought question that illustrates this debate: “A
firm has estimated that the cost of improving the safety of one
of its products is $30 million. However, the firm believes that
improving the safety of the product will only save $20 million in
product liability claims. What should the firm do?”
Question
LO 4 1.12 Agency Problems. 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
company’s management immediately begins fighting off this hostile bid. Is
management acting in the shareholders’ best interests? Why or why not?
Question
1.1 Listing Requirements. This chapter discussed some of the listing requirements for the NYSE and
NASDAQ. Find the complete listing requirements for the New York Stock Exchange at www.nyse.com and
NASDAQ at www.nasdaq.com. Which has more stringent listing requirements? Why don’t they have the
same listing requirements?
Question
1.2 Business Formation. As you may (or may not) know, many companies incorporate
in Delaware for a variety of reasons. Visit BizFilings at www.bizfilings.com to find out
why. Which state has the highest fee for incorporation? For an LLC? While at the site,
look at the FAQ section regarding corporations and LLCs.