HW1 Corporate Finance

midterm 1

Finance is a discipline that shows how to make the costs and benefits of a decision comparable so it can be evaluated properly.

True

The primary goal of corporate management should be to:

A) maximize stakeholder wealth

B) Maximize employee satisfaction

C) promote sustainability

D) priorities ethical and societal objective

e) all of the above

f) none of the above

The separation of ownership and management is one distinctive feature of corporations.

True

Financial assets have value because they are claims on the firm’s real assets and the cash that those assets will produce

True

which of the following best describes the concept of limited liability?

It protects the personal property and wealth of the company owners

Maximizing profit is the same as maximizing the value of the firm

False

When a corporation fails, the maximum that can be lost by an individual shareholder is:

The amount of his or her initial investment.

An IOW (“I owe You”) from your brother-in-law is a financial asset

True

shareholder wealth is measure by the:

price of the company’s common stock

An advantage of the stakeholder model over the shareholder model is that success is more easily measured.

false

Which of the following is true regarding real assets?

Real assets are used to produce the goods and services of the company

Making good investment and financing decisions is the chief task of the financial manager.

True

which one of the following can best be characterized as an agency problem?

Differing incentives between managers and owners

Corporations have become the dominate form of business structure because of their ability to raise large amounts of capital by selling shares to anonymous outside investors.

True

which of the following will most likely help to reduce agency problems?

Tying management compensation to the value of the company

A successful investment is one that increases the value of the firm

True

“Double Taxation” refers to:

Paying taxes on profits at the corporate level and dividends at the personal level

All real assets are tangible

False

A board of directors is elected as a representative of the corporations:

Shareholders

A board of directors is generally appointed by the firm’s senior officers

False

Success in a capital budgeting decision is measured by how it:

Maximizes the value added to the firm

the legal “life” of a corporation is:

Permanent, regardless of current ownership

Capital budgeting decisions are used to determine how to raise the cash necessary for investments

False

which one of the following gives a corporation its permanence?

Separation of ownership and control

A corporate raider gains controlling interest of the shares in a poorly managed corporation and replaces the board of directors. How does the corporate raider expect to make a profit in this case?

By the rise in price of his shares when the new board is proven to be superior to the ousted board

which of the following is NOT an objective of the Stakehold Theory Hypothesis?

Focus on short-term success not long-term profit

Buddy owns 2.78% of the stock in Norman Petty Recording Studios which just paid dividends totaling $1.7 million. How much of this amount would Buddy receive?

D=$1,700,000 X 0.0278 = $47,260

Peggy Sue owns 59 shares of Fool’s Paradise stock. The company plans to pay a dividend of $14.35 per share. if the corporate tax rate is 21% and the tax rate on dividend is 18%, how much in total dollars will she receive?

D = $14.35 x(1-0.18) X 59 = $694.25

The Holley Tile Company earned a pretax profit of $8.6 per share. if the corporate tax rate is 35% dividends are taxed at 20%, what is the after-tax value of the earning received by shareholders?

D = $8.60 x(1-0.35) x(1-0.20) = $4.47

The Surf Ballroom earned a pretax profit of $26 per share. The corporate tax rate is 32% and the tax rate on dividends is 18%. If the company pays out all of its earnings as a dividend, how much in total taxes will be paid per share?

1) D = $26 x (1-0.32) x (1-0.18) = $14.50

2) T = $26 - $14.50 = $11.50