BA 323 Finance - SDSU Exam 1 Questions and Answers(A+ Solution guide)

What is the main goal of the corporation? - To make capital gains for shareholders. Maximize value of the firm. Who ultimately owns the corporation? What is the relationship between shareholders, the board of directors, and management? - Shareholders ultimately own the corporation. Management (managers) are naturally inclined to act in their own interests but that may not be in the best interests of shareholders. The board of directors - elected by the shareholders - can oversee managerial behavior through corporate governance. What are the 3 most important management positions? - CEO, COO, CFO What is the Sarbanes-Oxley legislation? Why was it passed? - Sarbanes-Oxley was passed in 2002 as a result of the Enron and Worldcom scandals. It makes corporate management legally responsible for the accuracy of their financial statements. What is the major disadvantages and advantages of corporations compared to other forms of business organizations? - Advantages: Ease of raising money (BIGGEST ADVANTAGE), Unlimited life, Easy transfer of ownership, and limited liability (you can only lose what you've invested). Disadvantages: Double taxation and cost of setup and report filing. What is a stock's intrinsic value? In an efficient market, will a stock's price equal the stock's intrinsic value? - A stock's intrinsic ("true") value is the value the investor inherently believes the stock to possess, i.e. the 'correct price'. In an efficient market a stock's price should equal it's intrinsic value. Why do shareholders have a conflict of interest with managers? - Managers are naturally inclined to act in their own best interests (which are not always the same as the interest of stockholders).What is corporate governance? - The system of governing a company that aligns the interests of shareholders and managers together. What are various strategies for aligning the interests of shareholders and management? - Stock instead of cash. Long vesting periods. Stronger oversight by board or outside investors