61FIN2FIM - FINANCIAL MANAGEMENT

TUTORIAL 1 - INTRODUCTION TO FINANCE & FINANCIAL MARKETS

Part 1 (tutorial 1)

1. 1-5 If a company’s board of directors wants management to maximize shareholder wealth,should the CEO’s
compensation ( tiền thù lao) 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 shouldperformance be measured? Would it be easier to measure
performance by the growth rate inreported profits or the growth rate in the stock’s intrinsic value? ( giá trị nội tại cổ
phiếu) Which would be the betterperformance measure? Why?

No, it should not as the division manager is of lower rank. The CEO should be compensated based on
how well the firm performs, because otherwise the CEO would have the tendency to act in his personal
interests, rather than the interest of the shareholders (this is known as the agency problem). By linking
the CEO’s financial rewards to the firm’s performance,it will motivate him to act in the best interest of
the firm and its shareholders. Theoretically, the performance of and reward for the CEO should be
based on his ability to increase the intrinsic value of the firm’s shares. But since intrinsic value of shares
is difficult to measure, increase in the firm’s share price in the long term could be used as a proxy to
determine the CEO’s performance. This is usually implemented as executive stock options that are
vested over a longer period of, say 5 to 10 years.
2. 1-6 What are the four forms of business organization? What are the advantages and disadvantagesof each?
The four forms of business organization are sole proprietorships, partnerships, corporations,
and limited liability corporations and partnerships. The advantages of the first two include
the ease and low cost of formation. The advantages of corporations include limited liability,
indefinite life, ease of ownership transfer, and access to capital markets. Limited liability
companies and partnerships have limited liability like corporations.
The disadvantages of a sole proprietorship are
(1) difficulty in obtaining large sums of capital;
(2) unlimited personal liability for business debts;
(3) limited life.
The disadvantages of a partnership are
(1) unlimited liability,
(2) limited life,
(3) difficulty of transferring ownership,
(4) difficulty of raising large amounts of capital.
The disadvantages of a corporation are
(1) double taxation of earnings
(2) setting up a corporation
(3) filing required state and federal reports, which are complex and time-consuming.
Among the disadvantages of limited liability corporations and partnerships are difficulty in
raising capital and the complexity of setting them up

3. 1-7 Should stockholder wealth maximization 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 of $20 to $25 in 6months and then to $30 in 5 years but another
action keeps the stock at $20 for several yearsbut then increases it to $40 in 5 years, which action would be better? Think of
some specificcorporate actions that have these general tendencies.
The stockholder wealth maximization should be a long-term goal because it will provide the
greatest rewards to the shareholders. The short-term goal of increasing the stock price may be
desirable because it can provide some short-term benefit to the shareholders, but ultimately,
the long-term goal of increasing the stock price will provide the greatest benefit to the
shareholders. Therefore, the action that keeps the stock at $20 for several years but then
increases it to $40 in 5 years would be better because it provides the greatest long-term
benefit to the shareholders
4. What are the three basic areas in finance?
1.The Sole Proprietorship: The sole proprietorship is a business owned by one person. It has
unlimited liability for business debt.
2.The Partnership:a)General Partnership: Each partner is liable for all of the debts of the
 partnership. b)Limited Partnership: require that (1) at least one partner be a generalpartner
and (2) the limited partners do not participate in managing the business.
3.The Corporation ( joint stock company, public limited company, or limited liability
company): is a legal entity tha t is separate and distinct from its owners.
5. What are the four types of firms? What are advantages and disadvantages of each type?
Why do corporations dominate the economy?

The types of firms are private, public, government, and nonprofit. Each type of firm has its
own advantages and disadvantages, but in general the advantages of private firms are that
they are more flexible and responsive to the needs of consumers and market conditions, and
they are typically more efficient than other types of firms. However, the main disadvantages
of private firms are that they may be driven primarily by profit motives and may not always
be committed to the public good. Corporations dominate the economy because they are
well-organized, efficiently and effectively managed, and they have access to a wider variety
of financial resources than other types of firms.
6. What are the financial decisions made by a manager of a firm? Give two examples of each
type.
The financial decisions that a manager of a firm must make include:
1. Strategic planning: A manager must develop a long-term plan for the future of the firm based
on the firm's objectives and goals.
2. Budgeting and forecasting: A manager must create a budget and forecast for the coming year
based on the firm's past performance, market conditions, and other factors.
3. Pricing: A manager must determine the price or rate at which the firm will sell its products or
services.

7. Distinguish between real assets and financial assets. Give two examples of each type.
The similarities between real and financial assets are that their valuation depends on their
cash flow generation potential.

Financial assets (highly liquid) include stocks, bonds, and cash, while real assets are real
estate, infrastructure, and commodities.

The difference between them is that real assets are less liquid than financial assets since real
assets are difficult to trade, and they don’t have a competitive and efficient exchange.

8. What are the three critical factors in finance? Discuss the importance of these factors.
The three critical factors in finance are risk, return, and time.
Risk: The probability that a financial opportunity will produce a negative result. The higher the
risk, the greater the likelihood of a financial loss.
Value ( cash) one kind of return : The financial benefit or profit that is generated by an
investment or other financial activity.
Time: The length of time that an investment is held, as the longer an investment is held the more
likely it is to produce a positive result.
9. What is the primary objective of corporate financial decision making?
To help shareholders and other stakeholders maximize profits and/or minimize risk through
the use of internal and external sources of information while simultaneously avoiding radical
and erratic decisions that could have negative impacts on the business's financial health
”Để giúp các cổ đông và các bên liên quan khác tối đa hóa lợi nhuận và/hoặc giảm thiểu rủi ro
thông qua việc sử dụng các nguồn thông tin bên trong và bên ngoài, đồng thời tránh các quyết
định cấp tiến và thất thường có thể tác động tiêu cực đến tình hình tài chính của doanh
nghiệp”
10. What is agency problem? Why do they exist within a corporation? How to mitigate agency
 problems?
The agency problem refers to the conflict of interest that arises between two parties and
involves the possibility that at least one of the parties is not working honestly, in favor of the
other.
The agency problem exists because managers are ultimately responsible for the day-to-day
operations of the corporation and are therefore vested with considerable discretion (tư lợi).
As a result of their discretion, they can use their power to enrich themselves (i.e., act in their
own self-interest) at the expense of investors.
There are several ways to mitigate agency problems. First, managers can be held
accountable for their decisions by being evaluated based on the performance of the
company. Secondly, open communication between managers and investors can help reduce
the agency problem by establishing mutual trust and respect. Finally, managers can be given
incentive-based compensation packages to make their interests more aligned with those of
the investors

11. 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?

A firm’s intrinsic value is not necessarily the same as its current share price. The intrinsic value is what
the company should be worth based on its fundamentals and poten

tial profitability in the future, while the current stock price may not reflect that value. For example, the
stock price could be artificially inflated or deflated by speculative investors, or it could be influenced by
unexpected events such as world events or natural disasters. The long-run value of the stock will
ultimately depend on the intrinsic value of the firm.
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