财务管理原理第一次作业 (1).doc

Question 1 (15 marks)Briefly explain why wealth maximization is regarded as superior to profit maximization as the principal financial goal of the firm. The preferable goal of the firm should be the maximisation of sharebolder wealth, in other words the maximisation of the price of the existing ordinary shares. Not only will this goal be in the best interest of the ultimate owners of the firm, the shareholders, but it will also provide the most productive use of societys resources. This will come about as scarce resources are directed to their most efficient use by businesses competing to create wealth.Profit maximisation does not consider risk and time value. On the other hand, wealth maximisation consider risk and time value of money. Profit maximisation objective is good in short run, while wealth maximisation is best in long run projects. The shareholders of organisation prefer wealth maximisation over profit maximisation. Wealth maximisation means maximise the share price of any organisation.The goal of maximising wealth is maximisation of the market value of the existing sharesholderss ordinary shares. In formulating the goal of maximisation of shareholder wealth, we are doning nothing more that modifying the goal of profit maximisation to deal with the real-world complexities faced by the firms decision makers. Investors react to poor company decisions by causing the total value of the firms shares to fall, and they react to good decisions by pushing up the price of the shares. In effect, under this goal good decisions are those that create wealth for the shareholder. Obviously, there are some serious practical problems in implementing this goal and in using changes in the firms share fluctuates, often for no apparent reason. However, over the long run, price equals value. We will thus keep this long-run balancing in mind and focus on the effect that our decision should have on the share price if everything else were held constant. The market price of the firms shares reflects the value of the firm as seen by its owners and takes into account the complexities and complications of the real world. As we follow this goal throughout our discussions, we must keep in mind that the shareholders are the legal owners of the firm.Question 2 (20 marks)a. Briefly describe the agency problem and associated costs.The agency problem refers to the fact that a firms managers will not work to maximise benefits to the firms owners unless it is in the managers interests to do so. This problem is the result of a separation of the management and the ownership of the firm.The costs associated with the agency problem are also difficult to measure, but occasionally the effect of this problem is seen in the marketplace. This gives rise to a definition of agency costs as the costs, such as a reduced share price, associated with potential conflict between managers and investors when these two groups are not the same. b. Briefly discuss ways in which agency costs might be minimised (or at least contained). In order to overcome the agency problem and to focus managers minds more on the goal of creating wealth, many companies have adopted the practice of issuing stock potions to their executives. The most straightforward of these options gives the executive the right to buy shares in the company at a predetermined amount-called the exercise price-on a specified,future exercise date. But when that date arrives, the options are worth exercising only if the share price has increased beyond the exercise price.However, the catch is that the incentive is so strong for the executives to make themselves wealthy through these options that some have adopted questionable accounting practices in order to overstate company profits and thus push up the share price. In other words, attempting to overcome the agency problem created an even bigger problem. Qusestion 3 (15 marks)Consider the time line below that shows periodic cash flows and interest rates per period.4%6%8%Interest rate/year012345678Time2,000-1,5002,500-1,000Cash flows($)a. What is the value of the cash flows at T0? 2000b. What is the value of the cash flows at T4? 2000*(1+4%)2-1500*(1+6%)2+2500=3245.17 c. What is the value of the cash flows at T8? 3245.17*(1+6%)*(1+8%)2-1000*(1+8%)=3253.26d. Would you rather receive the cash flows described above, or $2,000 today? Explain your choice.The prevent value in T0 : 2000-1500/(1+4%)2+2500/(1+6%)2*(1+4%)2-1000/(1+8%)2*(1+6%)3*(1+4%)2= 2000-1386.834+2057.1293-665.53088=2004.772000So, I would like to receive the cash flows described above.Question 4 (20 marks)You borrowed a sum of $80,000, repayable by 3 equal, semiannually installments at an interest rate of 8%. Finish the loan amortization table. PMT=PV*i/1-(1+i)-n=80000*0.04/(1-1.04-3)=28827.88 (5 marks)Loan amortization table (15 marks)PeriodOpeningBalanceLoanPaymentInterestAt 4%PrincipalPaymentClosingBalance180,00028827.88320025627.8854372.12254372.1228827.882174.882665327719.12327719.1228827.881108.7627719.120Question 5 (20 marks)A bond has a redemption value of $1,000 and a redemption date five years from now. It has a coupon rate of 6.8% and pays interest twice per year. Its most recent coupon was paid yesterday. What would be todays price of the bond, given each of the following required annual yields?a. 5%;b. 6.8%;c. 8%.Briefly explain any conclusion that might reasonably be drawn from your ans