Corporate Finance Homework 1

The correct answer is capital structure. Capital structure refers to the mix of debt and equity financing that a company uses to fund its operations and investments. In this case, Stadford, Inc. is financed with 40 percent debt and 60 percent equity, indicating its capital structure. This composition of debt and equity determines the financial risk and cost of capital for the firm.

The potential conflict of interest between a firm's owners and its managers is referred to as agency conflict. This conflict arises because managers may prioritize their own interests over the interests of the owners, leading to a divergence in goals and objectives. The owners want to maximize shareholder value, while managers may focus on their own job security, power, and compensation. This conflict can be mitigated through various mechanisms such as aligning incentives, monitoring, and effective corporate governance.

The daily financial operations of a firm, such as managing cash flow, inventory, and short-term liabilities, are primarily controlled by working capital. Working capital represents the difference between a company's current assets and current liabilities, and it is used to finance the day-to-day operations of the business. It ensures that the company has enough funds to cover its short-term obligations and maintain smooth operations. Total debt level, long-term liabilities, capital budget, and capital structure are all important factors in managing a firm's finances, but they do not directly control the daily financial operations like working capital does.

Establishing the preferred debt-equity level is a capital structure decision because it involves determining the proportion of debt and equity financing that a company will use to fund its operations and investments. This decision has a significant impact on the company's overall financial risk, cost of capital, and potential for growth and profitability. By setting the preferred debt-equity level, the company is making a strategic choice about how it will finance its activities and structure its balance sheet.

The correct answer is South Wind Products sold 1,000 shares of newly issued stock to Mike. This transaction occurred in the primary market because South Wind Products is selling newly issued stock directly to an investor, Mike. In the primary market, companies raise capital by issuing new securities, such as stocks or bonds, directly to investors. This is different from the secondary market, where investors trade previously issued securities among themselves. The other transactions mentioned involve the transfer of existing shares between individuals, which would typically occur in the secondary market.

The primary intent of the Sarbanes-Oxley Act of 2002 is to increase protection against corporate fraud. This act was enacted in response to several high-profile corporate scandals, such as Enron and WorldCom, which involved accounting fraud and misconduct. The act aims to improve corporate governance, enhance financial disclosures, and strengthen internal controls to prevent fraudulent activities within publicly traded companies. It establishes stricter regulations and requirements for financial reporting and auditing, with the goal of restoring investor confidence and promoting transparency and accountability in the corporate sector.

The treasurer is responsible for managing the organization's cash flow, including monitoring and controlling the company's cash balances, optimizing liquidity, and making decisions related to short-term investments and financing. Cash management involves activities such as cash forecasting, budgeting, and managing working capital. On the other hand, the controller is responsible for financial reporting, budgeting, and financial analysis. While both roles are important, cash management specifically falls under the treasurer's purview as it requires a focus on liquidity and short-term financial decision-making.

Valerie's purchase of 200 shares of Able stock today occurred in the secondary market. The secondary market refers to the trading of existing securities among investors, rather than the initial issuance of securities. Since Able stock has been trading for some time on the NYSE, Valerie's purchase would fall into the secondary market category.

The primary goal of financial management is to maximize the market value of existing stock for a corporation. This means that the financial management team aims to increase the value of the company's stock, which is determined by factors such as profitability, growth potential, and market perception. By maximizing the market value of the stock, the company can attract more investors and potentially raise more capital for future growth and expansion.

The Sarbanes-Oxley Act of 2002 holds officers of publicly traded firms personally responsible for the accuracy and integrity of the company's financial statements. This means that executives can be held personally liable for any misrepresentation or fraud in the financial reports. The act was enacted in response to accounting scandals such as Enron and WorldCom, with the aim of improving corporate governance and financial transparency. By making officers accountable for the accuracy of financial statements, the act seeks to prevent fraudulent practices and protect investors.

Separating management from ownership is most apt to create a situation where an agency conflict could arise. When management is separated from ownership, the interests of the managers may not align with the interests of the shareholders/owners. This can lead to conflicts of interest, as managers may prioritize their own goals and objectives over maximizing shareholder value. This separation can create a principal-agent problem, where the owners (principals) need to monitor and align the actions of the managers (agents) to ensure that their interests are being protected.

Limited liability companies (LLCs) are primarily designed to provide limited liability while avoiding double taxation. This means that the owners or members of an LLC are not personally liable for the company's debts or liabilities. Additionally, an LLC is not subject to corporate taxation, as the profits and losses are passed through to the owners and reported on their individual tax returns. This allows the owners to avoid the double taxation that occurs with traditional corporations, where both the corporation and the shareholders are taxed on the company's profits.

The question asks for a working capital decision, which refers to the management of a company's short-term assets and liabilities. Out of the given options, "How much cash should the firm keep in reserve?" is the only one that directly relates to working capital. This decision involves determining the appropriate level of cash reserves that the company should maintain to meet its short-term obligations, such as paying suppliers and covering unexpected expenses.

Rejecting a profitable project to protect employee jobs can create an agency conflict because it prioritizes the job security of employees over the financial success of the firm. This decision may be driven by the self-interest of managers who want to avoid the potential negative consequences of laying off employees, even if it is not in the best interest of the shareholders. This conflict arises because managers may prioritize their own goals and preferences over the goals of the shareholders, leading to a divergence of interests and potential loss of value for the firm.

The "Say on Pay" bill requires corporations to give shareholders a nonbinding vote on executive pay. This means that shareholders have the opportunity to express their opinion on executive compensation, but the vote does not have the power to directly enforce changes in pay. The purpose of this requirement is to increase transparency and accountability in corporate governance by giving shareholders a voice in executive compensation decisions.