Chapter 1 Discussion Questions 1-1. Regulation was greatly increased with the Dodd – Frank Act and other measures. 1-2. The student should be prepared to pay a higher price for the promised $2 from the Royal Bank. The risk is lower. 1-3. The goal of shareholder wealth maximization implies that the firm will attempt to achieve the highest possible valuation in the marketplace. It is the one overriding objective of the firm and should influence every decision. The problem with a profit maximization goal is that it fails to take account of risk, the timing of the benefits is not considered, and profit measurement is a very inexact process. 1-4. Agency theory examines the relationship between the owners of the firm and the managers of the firm. In privately owned firms, management and the owners are usually the same people. Management operates the firm to satisfy its own goals, needs, financial requirements and the like. As a company moves from private to public ownership, management now represents all owners. This places management in the agency position of making decisions in the best interest of all shareholders. 1-5. Because institutional investors such as pension funds (Ontario Teachers‘, CPP) and mutual funds own a large percentage of major companies, they are having more to say about the way publicly owned companies are managed. As a group, they have the ability to vote large blocks of shares for the election of a board of directors, which is supposed to run the company in an efficient, competitive manner. The threat of being able to replace poor performing boards of directors makes institutional investors quite influential. Since these institutions, like pension funds and mutual funds, represent individual workers and investors, they have a responsibility to see that the firm is managed in an efficient and ethical way. 1-6. Insider trading occurs when someone has information that is not available to the public and then uses the information to profit from trading in a company‘s common stock. The provincial securities commissions are responsible for protecting against insider trading. 1-7. Regulations set the ―rules of the game‖ in which the firm operates. Shareholder wealth maximization can and should still be sought within the rules, for economic efficiency to be achieved. Society judge‘s deregulation benefits against the costs of regulation. 1-8. Management operates within a competitive market and they should be paid their opportunity cost. If managers do not act to maximize shareholder wealth, share prices will become depressed. To the extent manager‘s compensation is tied to share price