Question

Which of the following statements is CORRECT? 

The financial manager should seek that combination of assets, liabilities, and capital that will generate the largest expected projected after-tax income over the relevant time horizon, generally the coming year. 

Large, publicly owned firms like IBM and GE are controlled by their management teams. Ownership is generally widely dispersed; hence managers have great freedom in how they run the firm. Managers may operate in stockholders' best interests, but they also may operate in their own personal best interests. As long as they stay within the law, there is no way to either force or motivate managers to act in the stockholders' best interests. 

The riskiness inherent in a firm's earnings per share (EPS) depends on the characteristics of the projects the firm selects, and thus on the firm's assets. However, EPS is not affected by the manner in which those assets are financed. 

The financial manager's proper goal should be to attempt to maximize the firm's expected profits, since that will add the most to the individual shareholders' wealth. 

Potential agency problems can arise between managers and stockholders, because managers hired as agents to act on behalf of the owners may instead make decisions favorable to themselves rather than the stockholders.

Answer 1

The 5th statement is correct.

Potential agency problens can arise, if the managers who are appointed as agents to act in the shareholder best interest , think about their own interest rather than the best interest of the shareholdes.

the 4th statement is correct because, the management 's main objective should be to act in the best interest of the shareholders.They should think about maximizing the firm's profits , minimizing expenses to maximize the vaue of the shares.

The EPS depends on the capital structure. when debt is present in the capital structure, it carries the burden of interest along with it, which reduces the net profit.

No, the managers are supposed to operate in the best interest of the shareholders. There are a lot of motivational technique to make them do so.