FINANCIAL MANAGEMENT (FIN5FMA), SEMESTER 2, 2014 – ASSIGNED QUESTIONS FOR TUTORIAL 1
This assigned tutorial work is taken from Chapter 1 of Fundamentals of Financial Management 13th Edition, Brigham and Houston (2013).
Suppose three honest individuals gave you their estimates of Stock X’s intrinsic value. One is your current roommate, the second is a professional security analyst with an excellent reputation on Wall Street, and the third is Company X’s CFO. If the three estimates differed, in which one would you have the most confidence? Why?
Should stockholder wealth maximization be thought of as a long-term or short-term goal? For example, if one action increases a firm’s stock price from a current level of $20 to $25 in 6 months and then to $30 in 5 years but another action keeps the stock at $20 for several years but then increases it to $40 in 5 years, which action would be better? Think of some specific corporate actions that have these general tendencies.
The president of Southern Semiconductor Corporation (SSC) made this statement in the company’s annual report: “SSC’s primary goal is to increase the value of our common stockholders’ equity.” Later in the report, the following announcements were made: a. The company contributed $1.5 million to the symphony orchestra in Birmingham, Alabama, its headquarters city. b. The company is spending $500 million to open a new plant and expand operations in China. No profits will be produced by the Chinese operation for 4 years, so earnings will be depressed during this period versus what they would have been had the decision been made not to expand in China. c. The company holds about half of its assets in the form in U.S. Treasury bonds, and it keeps these funds available for use in emergencies. In the future, though, SSC plans to shift its emergency funds from Treasury bonds to common stocks.
Discuss how SSC’s stockholders might view each of these actions...
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