Order principal forms of business organization
What are the three principal forms of business organization? What are the advantages
and disadvantages of each?
1-2 Would the “normal” rate of return on investment be the same in all industries? Would
“normal” rates of return change over time? Explain.
1-3 Would the role of a financial manager be likely to increase or decrease in importance
relative to other executives if the rate of inflation increased? Explain.
1-4 Should stockholder wealth maximization be thought of as a long-term or a short-term
goal — for example, if one action would probably increase the firm’s stock price from a
current level of $20 to $25 in 6 months and then to $30 in 5 years but another action
would probably keep the stock at $20 for several years but then increase it to $40 in 5
years, which action would be better? Can you think of some specific corporate actions
that might have these general tendencies?
1-5 Drawing on your background in accounting, can you think of any accounting differences
that might make it difficult to compare the relative performance of different firms?
1-6 Would the management of a firm in an oligopolistic or in a competitive industry be
more likely to engage in what might be called “socially conscious” practices? Explain
1-7 What’s the difference between stock price maximization and profit maximization?
Under what conditions might profit maximization not lead to stock price maximization?
1-8 If you were the president of a large, publicly owned corporation, would you make deci-
sions to maximize stockholders’ welfare or your own personal interests? What are some
actions stockholders could take to ensure that management’s interests and those of
stockholders coincided? What are some other factors that might influence manage-
1-9 The president of Southern Semiconductor Corporation (SSC) made this statement in
the company’s annual report: “SSC’s primary goal is to increase the value of the com-
mon stockholders’ equity over time.” Later on in the report, the following announce-
ments 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 in Mexico. No revenues
will be produced by the plant for 4 years, so earnings will be depressed during this
period versus what they would have been had the decision not been made to open the
c. The company is increasing its relative use of debt. Whereas assets were formerly fi-
nanced with 35 percent debt and 65 percent equity, henceforth the financing mix will
d. The company uses a great deal of electricity in its manufacturing operations, and it
generates most of this power itself. Plans are to utilize nuclear fuel rather than coal
to produce electricity in the future.
e. The company has been paying out half of its earnings as dividends and retaining the
other half. Henceforth, it will pay out only 30 percent as dividends.
Discuss how each of these actions would be reacted to by SSC’s stockholders and cus-
tomers, and then how each action might affect SSC’s stock price.
1-10 Assume that you are serving on the board of directors of a medium-sized corporation
and that you are responsible for establishing the compensation policies of senior man-
agement. You believe that the company’s CEO is very talented, but your concern is that
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