Question 1

Briefly discuss the issues in the principal-agent problem.

Accepted Answer

The principal-agent problem arises out of the principal-agent relationship existing between the shareholders and managers of a corporation.Although managers are required to put the shareholders interest ahead of their own,in practice they tend to put their own interest ahead of the shareholders' interests.

Question 2

A company's board of directors chooses to provide a comprehensive health care plan for the families of all employees,despite the large cost.They argue that this will not only increase the number of employees who stay with the firm,and thus reduce some costs involved in employee turnover,but also increase the employees' diligence and industry.What general principle is being argued by the board of directors?

Accepted Answer

A)  In a conflict between stakeholders in a company, the most important stakeholder is not always the stockholders. 
B)  Some activities that decrease shareholders' wealth may have intangible benefits which increase the strength of the company overall. 
C)  When a conflict of interest arises between shareholders and other stakeholders, in general, the correct solution is the one that creates the greatest good for the greatest number of stakeholders. 
D)  Ethical decisions should be assessed on their moral value, not on their value in dollars and cents. 
E)  Decisions involving employees must take fairness into account. 
A)  In a conflict between stakeholders in a company, the most important stakeholder is not always the stockholders. 
B)  Some activities that decrease shareholders' wealth may have intangible benefits which increase the strength of the company overall. 
C)  When a conflict of interest arises between shareholders and other stakeholders, in general, the correct solution is the one that creates the greatest good for the greatest number of stakeholders. 
D)  Ethical decisions should be assessed on their moral value, not on their value in dollars and cents. 
E)  Decisions involving employees must take fairness into account. B

Question 3

Which type of financial institution receives money in the form of investments by wealthy individuals and endowments and invests in any kind of investment with an attempt to maximize returns for relatively low risk?

Accepted Answer

A)  Mutual funds 
B)  Pension funds 
C)  Hedge funds 
D)  Venture capital funds 
E)  Private equity funds 
A)  Mutual funds 
B)  Pension funds 
C)  Hedge funds 
D)  Venture capital funds 
E)  Private equity funds C

Question 4

In most corporations the owners exercise direct control of the corporation.

Accepted Answer

A) True 
 B)False

Question 5

Use the figure for the question(s) below.
  
-Based on the information shown above,what would it cost to buy 1000 shares of the above stock?

Accepted Answer

A)  $91,110 
B)  $91,300 
C)  $91,320 
D)  $91,650 
E)  $91,350 
A)  $91,110 
B)  $91,300 
C)  $91,320 
D)  $91,650 
E)  $91,350

Question 6

What is the general relation of the two types of prices quoted for a stock on a exchange?

Accepted Answer

The two prices are bid price a

Question 7

Moncton Meats is a corporation that earned $3 per share before it paid any taxes.The firm retained $1 of after-tax earnings for reinvestment,and distributed what remained in dividend payments.You hold 20,000 shares of Moncton Meats in a tax-free savings account.If the corporate tax rate was 30% and dividend earnings were taxed at 20%,what was the value of your dividend earnings received after all taxes are paid?

Accepted Answer

A)  $40,000 
B)  $16,000 
C)  $20,000 
D)  $17,600 
E)  $22,000 
A)  $40,000 
B)  $16,000 
C)  $20,000 
D)  $17,600 
E)  $22,000

Question 8

Whose interests should a financial manager consider paramount when making a decision?

Accepted Answer

A)  the stockholders who have risked their money to become owners of the company 
B)  the employees and associated stakeholders who are employed by the company 
C)  the public who consume the company's goods and services 
D)  the senior management and associated colleagues at the executive level within the company 
E)  the financial manager's own interests 
A)  the stockholders who have risked their money to become owners of the company 
B)  the employees and associated stakeholders who are employed by the company 
C)  the public who consume the company's goods and services 
D)  the senior management and associated colleagues at the executive level within the company 
E)  the financial manager's own interests

Question 9

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

Accepted Answer

A)  by the sale of the assets held by the company that hold most of its value 
B)  by the rise in the value of the stock held by the raider when the new board of directors is judged to be superior to the ousted board of directors 
C)  by motivating the board of directors and other stakeholders in the company to make difficult short-term decisions that will increase the long-term viability of the company 
D)  by removing the employees' expectations of the continued poor performance of the company 
E)  by paying itself a large portion of the firm's cash flows 
A)  by the sale of the assets held by the company that hold most of its value 
B)  by the rise in the value of the stock held by the raider when the new board of directors is judged to be superior to the ousted board of directors 
C)  by motivating the board of directors and other stakeholders in the company to make difficult short-term decisions that will increase the long-term viability of the company 
D)  by removing the employees' expectations of the continued poor performance of the company 
E)  by paying itself a large portion of the firm's cash flows

Question 10

You own 100 shares in each of two different companies,Ace Holdings,and Beta Inc.Ace Holdings earns $6.00 per share before taxes,has a corporate tax rate of 25%,and pays out 50% of its after-tax earnings as dividends.Beta Inc.earns $4.00 per share before taxes,has a corporate tax rate of 15%,and pays out 100% of its after-tax earnings as dividends.The tax rate on dividend income is 15%.If all of your shares are held outside a TFSA,what is the total after-tax income you receive from your dividends?

Accepted Answer

A)  $191.25 
B)  $289.00 
C)  $480.25 
D)  $565.00 
E)  $739.00 
A)  $191.25 
B)  $289.00 
C)  $480.25 
D)  $565.00 
E)  $739.00

Question 11

You hold 1,000 units of Calgary Commercial Property,a real estate investment trust (REIT).500 of those units are held inside a tax-free savings account,the other 500 are outside the tax-free savings account.The REIT announces a profit of $10 per share,of which it retains $4 for reinvestment and distributes the rest as dividend payments.Given your personal tax rate of 30%,and the tax rate on dividends is 15%,how much tax must you pay on your holdings?

Accepted Answer

A)  $900 
B)  $450 
C)  $1,800 
D)  $1,500 
E)  $1,600 
A)  $900 
B)  $450 
C)  $1,800 
D)  $1,500 
E)  $1,600

Question 12

A ________ is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO.

Accepted Answer

A)  shareholder proposal 
B)  leveraged buyout 
C)  shareholder action 
D)  hostile takeover 
E)  merger 
A)  shareholder proposal 
B)  leveraged buyout 
C)  shareholder action 
D)  hostile takeover 
E)  merger

Question 13

What is the major way in which the roles and obligations of the owners of a limited liability partnership differ from the roles and obligations of limited partners in a limited partnership?

Accepted Answer

A)  The owners of a limited liability partnership have personal obligation for debts incurred by the company. 
B)  There is no separation between the company and its owners in a limited liability partnership. 
C)  The owners of a limited liability partnership can withdraw from the company without the company being dissolved. 
D)  The owners of a limited liability partnership can take an active role in running the company. 
E)  The owners of a limited liability partnership are responsible for the negligence of other partners. 
A)  The owners of a limited liability partnership have personal obligation for debts incurred by the company. 
B)  There is no separation between the company and its owners in a limited liability partnership. 
C)  The owners of a limited liability partnership can withdraw from the company without the company being dissolved. 
D)  The owners of a limited liability partnership can take an active role in running the company. 
E)  The owners of a limited liability partnership are responsible for the negligence of other partners.

Question 14

What is the process of double taxation for the stockholders in a corporation?

Accepted Answer

A)  Their shares are taxed when they are both bought and sold. 
B)  The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them. 
C)  The owners of a corporation are taxed when they receive dividend payments and when they make a profit from the sale of shares. 
D)  The corporation must pay taxes on any profits it makes, and the capital raised by the sale of shares is also subject to taxation. 
E)  The corporation is taxed on any profits it makes, and owners are taxed when they sell their shares. 
A)  Their shares are taxed when they are both bought and sold. 
B)  The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them. 
C)  The owners of a corporation are taxed when they receive dividend payments and when they make a profit from the sale of shares. 
D)  The corporation must pay taxes on any profits it makes, and the capital raised by the sale of shares is also subject to taxation. 
E)  The corporation is taxed on any profits it makes, and owners are taxed when they sell their shares.

Question 15

A typical company has many types of shareholders,from individuals holding a few shares,to large institutions that hold very large numbers of shares.How does a financial manager ensure that the priorities and concerns of such disparate stockholders are met?

Accepted Answer

A)  The financial manager should seek to make investments that do not harm the interests of the stockholders. 
B)  The decisions taken by the financial manager should be solely influenced by the benefit to the company since, by maximizing its fitness, he or she will also maximize the benefits of that company to the shareholders. 
C)  The financial manager should consider the interests and concerns of large shareholders a priority, so the needs of those who hold a controlling interest in the company are met. 
D)  In general, all shareholders will agree that they are better off if the financial manager works to maximize the value of their investment. 
E)  The financial manager will consider the priorities of all the shareholders at the annual shareholders' meeting. 
A)  The financial manager should seek to make investments that do not harm the interests of the stockholders. 
B)  The decisions taken by the financial manager should be solely influenced by the benefit to the company since, by maximizing its fitness, he or she will also maximize the benefits of that company to the shareholders. 
C)  The financial manager should consider the interests and concerns of large shareholders a priority, so the needs of those who hold a controlling interest in the company are met. 
D)  In general, all shareholders will agree that they are better off if the financial manager works to maximize the value of their investment. 
E)  The financial manager will consider the priorities of all the shareholders at the annual shareholders' meeting.

Question 16

Joe is a general partner in a limited partnership firm,while Jane is a limited partner in that same firm.Which of the following statements regarding their respective relationships to the firm is correct?

Accepted Answer

A)  Joe has no management authority within the partnership. 
B)  Jane is legally involved in the managerial decision making of the firm. 
C)  Jane's liability for the firm's debts consists solely of her investment in the firm. 
D)  Withdrawal of Jane from the partnership will dissolve that partnership. 
E)  Jane's liability consists of all the firm's outstanding debts. 
A)  Joe has no management authority within the partnership. 
B)  Jane is legally involved in the managerial decision making of the firm. 
C)  Jane's liability for the firm's debts consists solely of her investment in the firm. 
D)  Withdrawal of Jane from the partnership will dissolve that partnership. 
E)  Jane's liability consists of all the firm's outstanding debts.

Question 17

If a broker will buy a share of stock from you at $3.85 and sell it to you at $3.87,the ask price would be $3.85.

Accepted Answer

A) True 
 B)False

Question 18

Which type of financial institution receives money in the form of investments by wealthy individuals and endowments and purchases whole companies by using a small amount of equity and borrowing the rest?

Accepted Answer

A)  Mutual funds 
B)  Pension funds 
C)  Hedge funds 
D)  Venture capital funds 
E)  Private equity funds 
A)  Mutual funds 
B)  Pension funds 
C)  Hedge funds 
D)  Venture capital funds 
E)  Private equity funds

Question 19

The Valuation Principle shows how to make the costs and benefits of a decision comparable so that we can evaluate them properly.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following are major duties of a financial manager? 
I. To make investment decisions
II. To make financing decisions
III. To manage cash flow from operating activities

Accepted Answer

A)  I only 
B)  I and II only 
C)  I and III only 
D)  II and III only 
E)  I, II and III 
A)  I only 
B)  I and II only 
C)  I and III only 
D)  II and III only 
E)  I, II and III

Exam 1: Corporate Finance and the Financial Manager

Briefly discuss the issues in the principal-agent problem.

Which type of financial institution receives money in the form of investments by wealthy individuals and endowments and invests in any kind of investment with an attempt to maximize returns for relatively low risk?

In most corporations the owners exercise direct control of the corporation.

Use the figure for the question(s) below. -Based on the information shown above,what would it cost to buy 1000 shares of the above stock?

What is the general relation of the two types of prices quoted for a stock on a exchange?

Whose interests should a financial manager consider paramount when making a decision?

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

A ________ is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO.

What is the major way in which the roles and obligations of the owners of a limited liability partnership differ from the roles and obligations of limited partners in a limited partnership?

What is the process of double taxation for the stockholders in a corporation?

A typical company has many types of shareholders,from individuals holding a few shares,to large institutions that hold very large numbers of shares.How does a financial manager ensure that the priorities and concerns of such disparate stockholders are met?

Joe is a general partner in a limited partnership firm,while Jane is a limited partner in that same firm.Which of the following statements regarding their respective relationships to the firm is correct?

If a broker will buy a share of stock from you at $3.85 and sell it to you at $3.87,the ask price would be $3.85.

Which type of financial institution receives money in the form of investments by wealthy individuals and endowments and purchases whole companies by using a small amount of equity and borrowing the rest?

The Valuation Principle shows how to make the costs and benefits of a decision comparable so that we can evaluate them properly.

Which of the following are major duties of a financial manager? I. To make investment decisions II. To make financing decisions III. To manage cash flow from operating activities

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters