Fundamentals of Corporate Finance (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
4th Edition
ISBN: 9780134475561
Author: Jonathan Berk, Peter DeMarzo, Jarrad Harford
Publisher: PEARSON
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Chapter 1, Problem 15P
You sit on the board of a public corporation. Your CEO has proposed taking steps to offset the carbon impact of your company's manufacturing process. Doing so will add to the company's overall expenses. Your CEO argues, however, that this action will actually increase the stock price, maximizing shareholder wealth. Why might socially-responsible activities also be value-maximizing?
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In 1970, the great American economist and a Nobel laureate Milton Friedman argued that “the social responsibility of business is to increase its profits”. He wrote that a company has no social responsibility to the public or society, and its only responsibility is to its shareholders. Critically evaluate his statement. Do you agree or disagree? Why?
Chapter 1 Solutions
Fundamentals of Corporate Finance (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
Ch. 1 - Prob. 1CCCh. 1 - Prob. 2CCCh. 1 - Prob. 3CCCh. 1 - Prob. 4CCCh. 1 - Prob. 5CCCh. 1 - Prob. 6CCCh. 1 - Prob. 7CCCh. 1 - Prob. 8CCCh. 1 - What are the important changes that have occurred...Ch. 1 - What is the basic financial cycle?
Ch. 1 - What are the three main roles financial...Ch. 1 - Prob. 1PCh. 1 - What does the phrase limited liability mean in a...Ch. 1 - Prob. 3PCh. 1 - Prob. 4PCh. 1 - Prob. 5PCh. 1 - You are a shareholder in a C corporation. The...Ch. 1 - Prob. 7PCh. 1 - Prob. 8PCh. 1 - Prob. 9PCh. 1 - Prob. 10PCh. 1 - Prob. 11PCh. 1 - Suppose you are considering renting an apartment....Ch. 1 - Prob. 13PCh. 1 - You are a financial manager in a public...Ch. 1 - You sit on the board of a public corporation. Your...Ch. 1 - What is the difference between a public and a...Ch. 1 - What is the difference between a primary and a...Ch. 1 - How are limit orders and market orders different?Ch. 1 - Explain why the bid-ask spread is a transaction...Ch. 1 - What are the tradeoffs in using a dark pool?Ch. 1 - Prob. 21PCh. 1 - What is the financial cycle?Ch. 1 - Prob. 23PCh. 1 - Prob. 24PCh. 1 - Prob. 25P
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- Do you agree or disagree, "some companies only use Corporate Social Responsibility for them to gain publicity and profit"? Defend your answer.arrow_forwardIf a company’s board of directors wants management to maximize shareholder wealth, should the CEO’s compensation 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 should performance is measured? Would it be easier to measure performance by the growth rate in reported profits or the growth rate in the stock’s intrinsic value? Which would be the better performance measure? Why?arrow_forwardDiscuss Mark 10:23-25 and its application to capital rationing and maximizing shareholder wealth. Capital rationing could affect the returns to shareholders. An ethical dilemma is faced by the executives of the business. Capital rationing could affect the stakeholders (other than the shareholder) of the business. Should capital constraints modify the principle of maximizing shareholder wealth?arrow_forward
- If a company’s board of directors wants management to maximize shareholder’s wealth, should the CEO’s compensation be set as a fixed amount, or should the compensation depend on how well the firm performs? If it is based on performance, how should performance be measured? Would it be easier to measure performance by the growth rate in reported profits or the growth rate in the stock’s intrinsic value? Which would be the better performance measure? Why?arrow_forwardFirms often involve themselves in projects that do not result directly in profits. For example, Microsoft corporation donated $10 million to Stanford University hospitals and another $40 million to the African aid organization (Product) RED, a charity fighting against AIDS, tuberculosis, and malaria. Do these projects contradict the goal of maximization of shareholder wealth? Why or why not? What is the agency problem, and how might it impact the goal of maximization of shareholder wealth? What is corporate governance? What role does a corporation’s board of directors play in corporate governance? The manager of Golden Ray Corporation receives a bonus if company profits exceed $1,000,000 this year. During the final week of the year, the manager changes an accounting policy that will increase reported profits from $950,000 to $1,025,000, triggering his bonus. The change in profits of $75,000 will reverse itself in the next year, and the accounting change has no impact on…arrow_forwardDiscuss the topic of maximizing shareholder wealth. This topic has been researched and studied for many years, with mixed results. For example; Irving Fisher, a prominent American Economist, argued that maximizing shareholders wealth should be management’s primary goal. Conversely, Sollars and Tuluca suggested that shareholders should only be rewarded with returns that are commensurate with the risk they take. Explain the advantages and disadvantages of wealth maximization from the perspective of a company’s Chief Financial Officer. Include the effect on company stakeholders – internal (managers, employees) and external (suppliers, shareholders).arrow_forward
- The board of directors is interested in investing in a new technology. Appropriating existing retained earnings is a choice for funding the new technology. You are a consultant to the board. How would you explain this option to the board members so that they could make an educated decision?arrow_forwardWhat is sustainability and how might corporations incorporate sustainability practices into their business?arrow_forwardExplain the Threat and Opportunity of Shareholder Activism ? Explain the Effect of Executive Compensation on the Cost of Equity? Why Corporate Governance Is Important to Investors?arrow_forward
- Corporate Social Responsibility In his book Capitalism and Freedom, economist Milton Friedman wrote on page 133: “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it . . . engages in open and free competition, without deception or fraud.” Required: Explain why you agree or disagree with this quote.arrow_forward1. 1. Consider each of the following points of view and comment on how each point is valid and how each point is flawed: a. Corporations should keep more of their profits (i.e., pay less in tax) because they have a greater ability to use those profits for societal good than the government. b. Corporations cannot be trusted to responsibly use their profits for societal good. The government is better able to distribute those profits in a way that maximizes societal good, so the government should take more (i.e., corporations should pay more in tax) from the corporations Please answer each point or view separately in detail. I would appreciate it.arrow_forwardWhat is sustainability accounting? Discuss the global efforts to make corporations aware of the importance of sustainable environment for their sustainable growth.arrow_forward
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