1. Who owns a corporation Describe the process whereby the owners control the firm’s management. What is the main reason that an agency relationship exists in the corporate form of organization What kinds of problems can ariseAnswer: In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect the directors of the corporation, who in turn appoint the firm’s management. This separation of ownership from control in the corporate form of organization is what causes agency problems to exist. Management may act in its own or someone else’s best interests, rather than those of the shareholders. If such events occur, they may contradict the goal of maximizing the share price of the equity of the firm.2. According to the CAPM, the expected return on a risky asset depends on three components. Describe each component, and explain its role in determining expected return.Answer: The CAPM suggests that the expected return is a function of (1) the risk-free rate of return, which is the pure time value of money, (2) the market risk premium, which is the reward for bearing systematic risk, and (3) beta, which is the amount of systematic risk present in a particular asset. Better answers will point out that both the pure time value of money and the reward for bearing systematic risk are exogenously determined and can change on a daily basis, while the amount of systematic risk for a particular asset is determined by the firm’s decision-makers.3. Based on M&M without taxes and with taxes, what is optimal capital structure theory of M& M under these two casesAnswer: 1. the no-tax case Proposition Ⅰ: Vl = Vu •The value of the firm is NOT affected by chan...
