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 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:
- What is the appropriate goal for the firm and why?
- What does the risk–return trade-off mean?
- Why are we interested in cash flows rather than accounting profits in determining the value of an asset?
- What is an efficient market, and what are the implications of efficient markets for us?
- What is the cause of the agency problem, and how do we try to solve it?
- What do ethics and ethical behavior have to do with finance?
- Define (1) sole proprietorship, (2) partnership, and (3) corporation.