Integrative Problem (Page 27) Essay

1089 Words Nov 25th, 2010 5 Pages
Integrative Problem (Page 27)

The final stage in the interview process for an Assistant Financial Analyst at Caledonia Products involves a test of your understanding of basic financial concepts. You are given the following memorandum and asked to respond to the questions. Whether or not you are offered a position at Caledonia will depend on the accuracy of your response.

To: Applicants for the position of Financial Analyst

From: Mr. V. Morrison, CEO, Caledonia Products

Re: A test of your understanding of basic financial concepts and of the Corporate Tax Code

Please respond to the following questions:

1. What are the differences between the goals of profit maximization and maximization of shareholder wealth? Which goal
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When measuring value, it’s better to use cash flows instead of accounting profits since we are more concerned with how and when we will receive the money. In addition, we want to be able to invest, start earning interest, and return it back to the shareholders in the form of dividends as soon as possible. It is the cash flow, not the profits that are received from the firm. Plus, the cash flow will allow us to reinvest. Accounting profits only appear when they are earned; therefore, the firm’s cash flow and accounting profit may not be the same.

4. What is an efficient market and what are the implications of efficient markets for us?

An efficient market is a market in which the values of all assets and securities at any instant in time fully reflect all available public information. An efficient market is also characterized by a large number of profit-driven individuals who act independently. In addition, new information regarding securities arrives in the market in a random manner. Given this setting, investors adjust to new information immediately and buy and sell the security until they feel the market price correctly reflects the new information. The implications of efficient markets for us are as follow. First, if the price is right, stock prices reflect all publicly available information regarding the value of the company. Therefore, we can

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