Troy University Accounting Discussion

Chapter 1

Questions 1-1: What is a firm’s intrinsic value? Its current stock price? Is the stock’s “true” long-run value more closely related to its intrinsic value or to its current price?

1-5: If a company’s board of directors wants management to maximize shareholder wealth, should the CEO’s compensation be set as a fixed dollar amount, or should the compensation depend on how well the firm performs? If it is to be based on performance, how should performance be measured? Would it be easier to measure performance by the growth rate in reported profits or the growth rate in the stock’s intrinsic value? Which would be the better performance measure? Why?

1-6: What are the various forms of business organizations? What are the advantages and disadvantages of each?

1-7: Should stockholder wealth maximation be thought of as a long-term or a short-term goal? For example, if one action increases a firm’s stock price from a current level $20 to $25 in 6 months and then to $30 in 5 years, but another action keeps the stock at $20 for several years but then increases it to $40 in 5 years, which action would be better? Think of some specific corporate actions that have these general tendencies.

1-8: What are some actions that stockholders can take to ensure that management’s and stockholder interests are aligned?

Chapter 2 Questions

2-2: Describe the different ways in which capital can be transferred from suppliers of capital to those who are demanding capital.

2-3: Is an initial public offering an example of a primary or a secondary market transaction? Explain.

2-7: Differentiate between dealer markets and stock markets that have a physical location.

2-8: Identify and briefly compare the two leading stock exchanges in the United States today.

2-10: Explain whether the following statements are true or false.

1. Derivative transactions are designed to increase risk and are used almost exclusively by speculators who are looking to capture high returns.
2. b. Hedge funds typically have large minimum investments and are marketed to institutions and individuals with high net worths.
3. c. Hedge funds have traditionally been highly regulated.
4. d. The NYSE is an example of a stock exchange that has a physical location.
5. e. A larger bid-ask spread means that the dealer will realize a lower profit