Sample Solutions Exam

Agency problems may also arise between owners and creditors such as banks and suppliers, Owners may want to maximize profits by delaying the payment of debts for as long as possible. The following are two major ways agency problems can be reduced in a typical corporation. ; Align management goals with shareholder goals (e.

G. , tie financial performance to share value) ; Replace managers through controlling board of directors elections. 27. Define the three forms of market efficiency. Why should a financial decision maker, such as a corporate treasurer or GO, be concerned With market efficiency? See up.

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352-358 in the textbook) The following are the three forms of market efficiency. ; Strong form efficient-?all information is reflected in stock prices, meaning that al stocks are fairly priced and there is no inside information or insider trading. ; Semi-strong form efficient-?all public information (e.

G. , financial statements) is reflected in stock prices. Thus, it is not possible to “beat the market” by using publicly available information. ; Weak form efficient-?all past prices of a stock are reflected in its current market price.Thus, it is not possible to “beat the market” by simply looking at the trends in the stock prices (e. G.

, using technical analysis of charts). Market efficiency is important to a financial manager because the market determines the cost of UAPITA for the firm’s projects, based on their risk relative to other uses of funds in the market. The cost of capital will then inform the capital budgeting and investment decisions of the firm. These, in turn, will determine the profitability and survival of the firm.Part Ill: Problems Galloway Corporation is expected to pay the following dividends over the next 4 years-?SO. 25, $4. 00, $3. 00, and Afterward, the company pledges to maintain a constant 8% growth rate in dividends forever.

Fifth required return on this stock is 16%, what is the current share price?