Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
10th Edition
ISBN: 9781337902571
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Chapter 14, Problem 7Q

(1)

Summary Introduction

To explain: The interrelationship for the cost of capital, investment opportunities and new investment with size of firm and executive’s salary.

Introduction:

Cost of capital: The amount or funds or the opportunity cost is that cost which a business uses to make an investment. It is the rate of return which can be generated by investing the same amount of money into different investment having an equal risk rate.

(2)

Summary Introduction

To explain: The implied relationship between dividend policy and stock prices.

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Students have asked these similar questions
Executive salaries have been shown to be more closely correlated to the size of the firm thanto its profitability. If a firm’s board of directors is controlled by management rather than outside directors, this might result in the firm’s retaining more earnings than can be justifiedfrom the stockholders’ point of view. Discuss those statements, being sure (1) to discussthe interrelationships among cost of capital, investment opportunities, and new investmentand (2) to explain the implied relationship between dividend policy and stock prices.
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?
Which of the following statements is true? a. Determining how day-to-day financial matters should be managed is not a function of financial managers.  B. The goal of the firm is to maximize market share.  C. Working capital management refers to identifying productive long-term assets the firm could acquire to maximize net benefits.  D. Capital budgeting refers to identifying productive long-term assets the firm could acquire to maximize net benefits.
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