The final stage in the interview process for an Assistant Financial Analyst at Caledonia
products involves a test of your understanding of basic financial theory and 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 theory and concepts.
Please respond to the following questions:
a. What are the differences between the goals of profit maximization and
maximisation of shareholders wealth? Which goal do you think is more
b. What does the risk-return trade –off mean?
c. Why are we interested in cash flows rather than accounting profits in determining
the value of an asset?
d. What is an efficient market and what are the implications of efficient markets for
e. What is the cause of the agency problem and how do we try to solve it?
f. What do the ethics and ethical behaviour have to do with finance?
g. Define (1) sole proprietorship), (2) partnership, (3) corporation.
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