Questions
1. When can there arise a conflict between shareholders and managers goals? How does wealth maximization goal take care of this conflict?
2. A company has just tested the market for a new product. The test indicates that the product may capture about 40 percent of the market share. It is also expected that 25 percent of the new product's share will be at the cost of an existing product.
The new product can be manufactured in the existing facilities, which could also be used to meet the expected increase in one of the company's existing products.
The company's financial analyst argues that she would include the test costs in the new product's cash flows since they were incurred for testing the new product but would exclude the lost contribution on an existing product and the value of the existing facilities to be used for the manufacture of the new product because no out-of-pocket cost is incurred. Do you agree with the analyst? Why or why not?
3. Which of the financial ratios of a company would you refer to in each of the following situations? Give reasons.
(i) The company asks you to sell material on credit.
(ii) You are thinking of investing $25,000 in the company's Bonds.
(iii) You are thinking of investing $25,000 in the company's shares.
4. What are the basic financial decisions? How do they involve risk-return trade-off?