1. You are the CEO of firm A, and your pay is benchmarked to your firms performance relative to firm B. Firm performance is measured by return on equity (ROE). You have tried increasing your firms profitability, and asset use efficiency, but have been unsuccessful on both counts. How might you still increase your firms ROE and thereby increase your pay? Assume you expect positive net income and stockholders equity in the future.

2. Do you think the agency problem exists at every company (in varying degrees), or rather few companies suffer from the problem?

3. Do you think that managements goal of maximizing the present stock price forces management to only consider short-term company performance?

4. What are the purposes of common size financial statements, and financial ratios?

5. What are the arguments for, and against, using the discounted payback investment decision rule?

6. Would you use the payback investment decision rule to decide whether to accept a project? Why or why not.

7. When calculating NPV, the projects discount rate is the return that one can expect to earn on a financial asset of comparable risk. In a single sentence, explain why this is so.

8. If you add a real option to a traditional NPV analysis, will the project value increase or decrease? Why (it is a simple 1 sentence answer)?