FINANCE FOR NON-FINANCE PROFESSIONALS QUESTIONS FOR REVISION (1) Define shareholder wealth. Explain how it is measured.

(2) What are the differences between shareholder wealth maximization and profit maximization? (3) If a firm chooses to pursue the objective of shareholder wealth maximization, does this preclude the use of profit maximization decision-making rules? Explain. (4) Which type of corporation is more likely to be a shareholder wealth maximizerone with wide ownership and no owners directly involved in the firms management or one that is closely held? (5) Is the shareholder wealth maximization goal a short- or long-term goal? Explain your answer. (6) It has been argued that shareholder wealth maximization is not a realistic normative goal for the firm, given the social responsibility activities that the firm is expected to engage in (such as contributing to the arts, education, etc.). Explain why these social responsibility activities are not necessarily inconsistent with shareholder wealth maximization. (7) Explain why management may tend to pursue goals other than shareholder wealth maximization. (8) Explain what is meant by agency relationships and agency costs. (9) Give some examples of agency costs incurred by shareholders in the agency relationship between the shareholders (owners) and management of a firm. (10) What is the source of potential agency conflicts between owners and bondholders? Who is the agent and who is the principal in this relationship?

11. Read the Mini Case below and answer the questions that follow. Your answers should be
brief and concise. MINI CASE Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firms clients is Michelle Dellatorre, a professional tennis player who has just come to the United States from Chile. Dellatorre is a highly ranked tennis player who would like to start a company to produce and market apparel that she designs. She also expects to invest substantial amounts of money through Balik and Kiefer. Dellatorre is also very bright, and, therefore, she would like to understand, in general terms, what will happen to her money. Your boss has developed the following set of questions which you must ask and answer to explain the U.S. financial system to Dellatorre.
REQUIREMENT: (a) Why is corporate finance important to all managers? (b) Describe the organizational forms a company might have as it evolves from a start-up to a major corporation. List the advantages and disadvantages of each form (c) What should be the primary objective of managers? (d) Do firms have any responsibilities to society at large? (e) Is stock price maximization good or bad for society?

12. Mr. Kofi Atam is a young graduate who has just graduated with an M.A in Business Planning Microfinance. He has inherited GH50,000 in his grandfathers estate and he intends to invest in either of two projects. A consulting firm, Quest and Associates Ltd., provided the following information on the cash flow of the two projects. Project A GH Initial outlay Net cash inflow: Year 1 Year 2 Year 3 Year 4 Year 5 5,000 2,600 1,500 800 600 Project B GH 5,000 1,800 2,000 2,500 2,800 3,000

The initial cash outlay will occur immediately and the net cash inflows will arise at the end of each year. Given that the cost of capital over the five year life span of the project is 12%. You are required to: (a) Outline the 2 merits and 2 demerits of the Payback method of capital investment appraisal. (b) State 2 relative merits and 2 demerits of the net present value (NPV) method of investment appraisal over the pay back method. (c) Assess the two projects above using: (i) Payback period method. (ii) Net Present Value (NPV) method. 2. The financial statements of Sumangbo Ltd for the year ended 31 st December 2007 are set out below: Income statement for the year ended 31st December 2007 GH Revenue 960,550 Cost of sales 620,400 Gross profit 340,150 Selling, general & admin. Expenses (excluding dep) 149,450 Depreciation 25,600 Interest 35,000 Profit before tax 130,100 Tax 36,428 Profit after tax 93,672

Statement of financial position (Balance sheet) as at 31st December 2007 GH GH Property, Plant and Equipment 330,250 Current Assets Inventories 90,600 Trade receivables 55,500 Call account 40,000 Cash 35,000 221,100 Current liabilities Trade payables 65,250 Net current assets 155,850 Net assets 486,100 Financed by: Stated capital 100,000 Income surplus 136,100 236,100 14% Loan 250,000 486,100 Industry Average Ratios Net profit on sales 15% ROCE 25% Average collection period 20 days Fixed assets turnover 8 times Assets turnover 4 times Quick ratio 1:1 Current ratio 2:1 Times interest earned 8 times Dividend cover 8 times Debt to total assets 20 % Inventory turnover 10 times Gearing ratio 20% Additional information: (a) The companys shares were issued many years ago at GH1 per share. The shares are now selling on the Ghana Stock Exchange (GSE) at GH5.50 per share. (b) At the AGM held recently, the shareholders approved dividends of GH0.15 for the year ended 31st December 2007. Required: Calculate the comparable ratios and comment appropriately on the performance of Sumangbo.