Finance Answers

On what bases could you argue the collapse of HIH was an example of the principal-agent problem?

Dan Levy is in partnership with three others in their business, Outdoor Camping World. (Outdoor World had been Dan’s business and Camping World had been run by the other three until they merged the businesses last year. They merged the names too, so they might keep all their old customers, even though it doesn’t make much sense.) Dan argues that the firm should maximise gross profit margins [(selling price – buying price)/ selling price] on each item of stock. (a) Do you think this is a valid financial objective? (b) Is this objective consistent with maximisation of partners’ wealth? (c) What problems do you see in operationalising this objective?

Dan Levy is in partnership with three others in their business, Outdoor Camping World. (Outdoor World had been Dan’s business and Camping World had been run by the other three until they merged the businesses last year. They merged the names too, so they might keep all their old customers, even though it doesn’t make much sense.) Dan argues that the firm should maximise gross profit margins [(selling price – buying price)/ selling price] on each item of stock. (a) Do you think this is a valid financial objective? (b) Is this objective consistent with maximisation of partners’ wealth? (c) What problems do you see in operationalising this objective?

Toowoomba Computer Works (TCW) has employed a programmer towrite business programs for their clients. She writes a program which will be ideal to use to teach first-year accounting students the rudiments of electronic financial record-keeping. It sells for $200 per copy. TCW decides to give 100 copies free to the local university to be distributed to students in whatever way the course lecturer decides. The firm also gives the university a free site licence. Chapter One: Introducing the firm and its goals (a) Would this action tend to work against TCW’s avowed objective of wealth maximisation? (b) Is there an ethical problem here for any of the parties? 

Toowoomba Computer Works (TCW) has employed a programmer towrite business programs for their clients. She writes a program which will be ideal to use to teach first-year accounting students the rudiments of electronic financial record-keeping. It sells for $200 per copy. TCW decides to give 100 copies free to the local university to be distributed to students in whatever way the course lecturer decides. The firm also gives the university a free site licence.

An investment firm supports the coal-mining industry with infrastructure funds and also invests in tree plantations for paper-pulp production. Are the environmental ‘goods’ attached to the plantations cancelled out by the environmental ‘bads’ of the coal mining?

Genuine Used Cars is a second-hand car dealer with a landscaped yard on a busy highway serving Sydney. The plants used to ‘decorate’ the yardare all high water users. Drought is setting in and the local council has asked businesses to conserve as much water as possible. Town water is still available, bore water may be accessed in fairly shallow bores and the council is encouraging businesses to install underground tanks to conserve rain water. Which source of water should be used to gain the most browniepoints ethically? Should the firm change the plants for more efficient water users? 

What are some of the reasons that might motivate a corporate chief executive officer (CEO) not to try to maximise his shareholders’ wealth in relation to the firm’s activities?

Why would a firm not want to keep more working capital than necessary in a cheque account?

Internal auditors normally report to the chief financial officer. (a) What do you think are the roles of the internal auditor? (b) Is there likely to be an adversarial or collegial relationship between the internal auditor and the chief financial officer? (c) Which type of relationship is likely to be most beneficial to the firm?