1. Which one of the following actions by a financial manager least meets the goal of financial management?
a. Increasing current costs in order to increase the market value of the stockholders' equity
b. Agreeing to expand the company at the expense of stockholders' value
c. Refusing to lower selling prices if doing so will reduce the net profits
d. Agreeing to pay bonuses based on the market value of the company stock
e. Refusing to borrow money when doing so will create losses for the firm
2. Which of the following statements regarding agency problems and costs are correct?
I. An agency problem exists when there is a conflict of interest between the stockholders and the management of a firm.
II. An agency problem exists when there is a conflict of interest between a principal and an agent.
III. An agency cost occurs when firm management avoids risky projects that would favorably affect the stock price because the managers are worried about keeping their jobs.
IV. An agency cost occurs when management chooses an action that benefits the shareholders but reduces management compensation.
a. I and II only
b. II and III only
c. I, III, and IV only
d. I, II, and III only
e. II, III, and IV only
3. One year ago, John Doe bought 10,000 shares of Galaxy Entertainment Company at $50 per share. His purchase represents 20 percent ownership in the firm. Today s market value per share is $60. If Galaxy Entertainment is bankrupt and owes $200,000 more in debts than the firm can pay after liquidating all of its assets, what is the maximum loss per share John Doe will incur on this investment?
a. $0 a share
b. $20 a share
c. $55 a share, computed as ($50 + 60)/2
d. $50 a share
e. $4 share, computed as (20% × $200,000)/10,000 share