IFM Chapter 1

NAME
: LIDYA VELESIA
STUDENT ID: 1566049

ESSENTIAL OF FINANCIAL MANAGEMENT
CHAPTER 1
Answer the questions below!
1-3 Suppose three honest individuals gave you their estimates of Stock Xs intrinsic
value. One person is your current roommate, the second person is a professional
security analyst with an excellent reputation on Wall Street, and the third person is
company Xs CFO. If the three estimated differed, in which one would you have the
most confidence? Why?
Answer:
I have the most confidence in Company Xs CFO estimation because its determined
by strict estimation of stocks true value based on analysis of accurate risk and return
data that shown companys information of future prospects, and generally estimation
of CFOs of the company are generally better than outside investor.
1-4 Is it better for a firms actual stock price in the market to be under, over, or equal
to its intrinsic value? Would your answer be the same from the standpoints of
stockholders in the general and s CEO who is about to exercise a million dollars in
options and then retire? Explain.
Answer:
If the stock market price and intrinsic value are equal, then the stock market price is
equilibrium to intrinsic value, so that there are no indications of pressure market to
change the stock price. Theoretically it is better for both stock market price and
intrinsic value to be equal. But in the end, intrinsic value is a long-run concept that
managers objective should increase intrinsic value of firm maximally, so that
maximize the intrinsic value will maximize the average price over the long run but not
necessarily the current price at each point in time. In general, stockholders may expect
the market price to be under the intrinsic value when the objective is accomplished
(management accomplished their objective to not necessarily need maximize the
current price at each point in time). In standpoint of CEO, CEO may prefer market
price be high, then since the current price he can receives when exercise the stock
options. When he retires after exercising million dollars, so there will be no impact to
him if the market price is decrease, unless he did not work illegally during his
occupancy as CEO.
1-6 What are the four forms of business organization? What are the advantages and
disadvantages of each?
Answer:
The four forms of business organizations are proprietorships, partnerships,
corporations, and limited liability companies (LLCs) and limited liability partnerships
(LLPs). Advantages and disadvantages of each business forms are:
Form of Business
Proprietorships
Partnerships
Corporations
LLCs and LLPs
Advantages
Ease of formation and low
cost formation
Subject to few government
regulations
Lower income taxes than
corporations
Companys income
is
allocated on a pro data
basis to the partners and is
taxed on an individual
basis.
Low cost formation
Limited liability
Indefinite life
Easy to transfer shares of
stock
Easy to raise capital
necessary to operate large
business
Limited
liability
for
investors
Disadvantages
Unlimited personal for
debts
Limited life of business to
the life of the individual
who created it
Have
difficulty
in
obtaining large sums of
capital
Unlimited
personal
liability makes id difficult
for partnership to raise
amounts of capital
Difficulty of transferring
ownership
Double taxation
Cost of report filling
Time consuming and
complexity of filling
requirement for federal
reports and state
Complexity of value of an
asset
Higher
advantage
of
growth opportunities
Has full control of business
1-8 What are some actions that stockholders can take to ensure that managements and
stockholders interest are aligned?
Answer:
Actions that aligned stockholders and managements interest are direct intervention
by shareholders including taking action when managers or management whom dont
perform professionally and ethically, then aligned their action by giving reasonable
compensation package, always updating information related to company with
stockholders.
1-15 In the mid-2000s, many countries paid attention to the solar energy industry for
energy conservation policies. Public firms that produce solar wafers had high stock
prices. However, the stock prices of these firms dropped gradually and significantly
because consumers realized that the energy-producing efficiency of solar wafers is
quite low. What was wrong with the investors expectation about the valuation of solar
wafer firms?
Answer:
Investment for firms that produce solar wafers or any firms is relate to decisions
between stakeholders and bondholders after analyzing with three main things to
analyses market stock market such as security analysis, market analysis, and portfolio.
In the view of investor expectation, the valuations of solar wafer firms that they
bought related to the interest rates. Interest rates for solar energy is still low and many
people still interest for having oil energy or coal energy as their interest rates, then
many stockholders and bondholders to invest in business.

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STUDENT ID: 1566049

LLCs and LLPs

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