Principle of Finance

Assignment Questions: (Marks 05) Q1: Explain why each of the following situations is an agency problem and what costs to the firm might result from it. Suggest how the problem might be dealt with short of firing the individual(s) involved. a. The front desk receptionist routinely takes an extra 20 minutes of lunchtime to run personal errands. b. Division managers are padding cost estimates to show short-term efficiency gains when the costs come in lower than the estimates. c. The firm’s chief executive officer has had secret talks with a competitor about the possibility of a merger in which she would become the CEO of the combined firms. d. A branch manager lays off experienced full-time employees and staffs customer service positions with part-time or temporary workers to lower employment costs and raise this year’s branch profit. The manager’s bonus is based on profitability (2 Marks) Q2: Do some reading in periodicals and on the Internet to find out more about the Sarbanes-Oxley Act’s provisions for companies. Select one of those provisions and indicate why you think financial statements will be more trustworthy if company financial executives implement this provision of SOX. (1 Mark) Q3: If Bob and Judy combine their savings of $1,260 and $975, respectively, and deposit this amount into an account that pays 2% annual interest, compounded monthly, what will the account balance be after 4 years? (1 Mark) Q4: Misty needs to have $23,000 at the end of 8 years to fulfill her goal of purchasing a small sailboat. She is willing to invest a lump sum today and leave the money untouched for 8 years until it grows to $23,000, but she wonders what investment return she will need to earn to reach her goal. Use your calculator or spreadsheet to figure out the annually compounded rate of return required if she could invest $16,200 today. (1 Mark)