Session 2017/2018 Semester I

EIA1001 Introduction to Financial Management

TUTORIAL 1

Coverage: Lecture Topic 1

Tutorial: Week 3

1. Suppose three honest individuals gave you their estimates of Stock Xs intrinsic value. One
person is your current roommate, the second person is a professional security analyst with an
excellent reputation on Wall Street, and the third person is Company Xs CEO.

If the three estimates differed, in which one would you have the most confidence? Why?

2. Suppose you were a member of Company Ys board of directors and chairperson of the
companys compensation committee. What factors should your committee consider when
setting the CEOs compensation? Should the compensation consist of a dollar salary, stock
options that depend on the firms performance, or a mix of the two?

3. Suppose you are a director of an energy company that has three divisions natural gas, oil and
retail (gas stations). These divisions operate independently from one another, but all division
managers report to the firms CEO.

If you were on the compensation committee and your committee was asked to set the
compensation for the three division managers, would you use the same criteria as that used in
Question 2 for the firms CEO?

4. In the mid-2000s, many countries paid attention to the solar energy industry for energy
conservation policies. Public firms that produce solar wafers had high stock prices. However,
the stock prices of these firms dropped gradually and significantly because consumers realized
that the energy-producing efficiency of solar wafers is quite low. What was wrong with the
investors expectation about the valuation of solar wafer firms?

5. The president of Southern Semiconductor Corporation (SSC) made this statement in the
companys annual report: SSCs primary goal is to increase the value of our common
stockholders equity. Later in the report, the following announcements were made:

a) The company contributed $15 million to the symphony orchestra in its headquarters city.
b) The company holds about half of its assets in the form of U.S. Treasury bonds, and it
keeps these funds available for use in emergencies. In the future, though, SSC plans to
shift its emergency funds from Treasury bonds to common stocks.

Discuss how SSCs stockholders might view each of these actions and how the actions might
affect the stock price.