ANSWER TRUE OR FALSE

If a firm's managers narrowly focused on creating shareholder value, but in the process the company was unresponsive to its employees and customers, hostile to its local community, and indifferent to the effects its actions had on the environment; then in all likelihood society would impose a wide range of costs on the company, and this would ultimately lead to a reduction in shareholder value. True or False

A stock's intrinsic value is the value that an analyst calculates based on the best information available to him or her regarding the stock's future earnings and cash flows. Different investors have different information and different expectations for the future, hence they reach different conclusions about the intrinsic value. If the stock's market price is equal to the intrinsic value as calculated by the marginal investor, then the stock will be in equilibrium. True or False

If a large company with many employees does none of the things discussed just above, then it is likely that at least some of its employees will behave unethically. Similarly, if a university's exams are not proctored carefully, and if no sanctions are imposed on students who cheat, it is likely that some cheating will occur. Then, if some students cheat, grade pressure may cause others who want to be ethical to cheat. Thus, in both businesses and universities it is necessary for the organization to take steps to encourage ethical behavior. True or False

Suppose a company's top executives behave ethically. Also, the firm has a written set of rules regarding behavior which is circulated among all employees, and it has a good training program designed to help its employees distinguish between ethical and unethical behavior. Finally, its compensation system does not put pressure on employees to take unethical actions but does penalize employees who do not follow the rules. Such a firm's employees are likely to behave ethically, and the firm is likely to enjoy a good reputation. True or False

Which of the following is NOT an advantage of the corporate form of organization versus partnerships and proprietorships?

a. Ease of transferring ownership among investors

b. Limited liability

c. Liquidity of investors' holdings in the business

d. Ability to attract large amounts of capital

e. More favorable tax treatment

Suppose a given investment in R&D would sharply lower current earnings but greatly boost future earnings, raise the true intrinsic value, and eventually raise the market price. Assume that for competitive reasons management cannot explain the situation to stockholders. Which of the following statements would be most correct?

a. If management thinks the lower earnings will seriously depress the stock price this year, then it might make sense to not make the investment, even if management thinks the investment will lead to a higher stock price next year. This concern is particularly relevant if management believes that the drop in the current price might encourage some other company to try and buy the firm at a bargain price, which might in turn cause current managers to lose their jobs.

b. Management should make the investment if it will raise the intrinsic value, regardless of the short-run effect on the stock price. It would be easier for management to do this if the managers themselves own 51% of the stock and thus aren't worried about a hostile takeover.

c. Management should make the investment, but also try to inform investors that the depressed earnings will be temporary and that earnings in the long run will be much higher, which would perhaps keep the stock price from declining too sharply. This would be easier if management has a good reputation and good credibility with investors.

d. There is some truth to each of these statements. There aren't always clear-cut answers when it comes to important financial decisions like this. Quantitative analysis is helpful, but judgment and qualitative reasoning must also be applied.