Tang 1 Wai Yin Tang Finance 3310 Chapter 1 HW 1.

The firms intrinsic value is an estimate of a stocks true value based on accurate risk and return data and it can be estimated but not measured precisely. The market price is its current stock price that the stock value based on perceived but possibly incorrect information as seen by the marginal investor. The stocks true long-run value is more closely related to its intrinsic value than its current price. 2. When a stocks actual market price is equal to its intrinsic value, the stock is in equilibrium. I would not guess that most stocks are in equilibrium because if the market price and the intrinsic value are not equal, therefore, it would be equilibrium. 5. If a companys board of directors wants management to maximize shareholder wealth, the compensation should depend on how well the firm performs. If it is to be based on performance, it performance should be measured on the long term goal. It is because it sees clearly from the movement or the price in a long term market. I believe it would be easier to measure performance by the growth rate in reported profits and it would also be better. It is because the growth rate in reported profit can be prove and details on a report. On the other hand, the stocks intrinsic value cannot measure better because may be there is chance to improve but it is also a risk taking. 6. The four main forms of business organizations sole proprietorship, partnership, corporations, and limited liability companies and limited liability partnerships. The advantages of sole proprietorship are easiest and least expensive form of ownership to organize, to complete control and within the parameters of the law hey can make decisions as they see fit, receive all income generated by the business to keep or reinvest. The disadvantages of sole proprietorship are that it have unlimited liability and are legally responsible for all debts against the business, and the business and personal assets are at risk and may have some difficulty in raising funds for expansion. The advantages of partnership are relatively easy to establish. However time should be invested in developing the partnership agreement and with more than one owner, the ability to raise funds may be increased; the profits from the business flow directly through to the partners personal tax returns and prospective employees may be attracted to the business if given the incentive to become a partner. The disadvantages of partnership are jointly and individually liable for the actions of the other partners, profit must be shared with others, since decisions are shared, disagreements can occur, some employee benefits are not deductible from business income on tax returns. The advantages of corporation are shareholders have limited liability for the corporations debts or judgments against the corporations, generally, shareholders can only be held accountable for their investment in stock of company, it can raise additional funds through the sale of stock, also may deduct the cost of benefits it provides to officers and employees. The disadvantages of corporation are the process of incorporation requires more time and money than other forms of organization, it 9/17/2011

Tang 2 is monitored by federal, state, some local governments and agencies and as a result may have more paperwork to comply with regulations, and incorporating may result in higher overall taxes. Dividends paid to shareholders are deductible from business income, thus it can be taxed twice. The advantages of limited liability partnership are the owners are members and the formation is more complex and formal than that of a general partnership. The disadvantages of limited liability partnership are that it must not have more than two of the four characteristics which are 1. Limited liability to the extent of assets, 2. Continuity of life, 3. Centralization of management, 4. Free transferability of ownership interests. 9. a) It shows that the company have more possibility on letting people know about the company from the symphony orchestra, but it could be a negative way on if the money had used in a right way, because if it wasnt then it could decrease the stock price. b) This will be a right decision if the company has enough money to set a long term goal in four years of depressing period. Therefore, the stock price will be increase in future. c) It would be much more risky if the future plans to shift its emergency funds from treasury bonds to common stocks. It is because common stocks might not have to the money back for sure. Therefore, the stock price will go down if it happened. 12. If I was a member of Company Xs board of directors and chairperson of the companys compensation committee, I would set the CEOs compensation on how well did the firm performed. The compensation consist of a dollar salary, stock options that depend on the firms performance should be set in a high price at first, then when the company made enough money to set up a long term goal, it is time to reduce price but also based on the market price and the market stock change. I believe if I were also a vice president of Company X, my action might be different than if I was the CEO of some other company.