FIN351 In Class Work No.

1 . Generally, a corporation is owned by the:

A) Managers
B) Board of Directors
C) Shareholders
D) All of the above.

2. A firm's investment decision is also called the:

A) Financing decision
B) Capital budgeting decision
C) Liquidity decision
D) None of the above

3. An example of a firm's capital structure decision would be:

A) acquisition of a competitive firm.
B) how much to pay for a specific asset.
C) the issuance of ten-year bonds versus the issuance of more stocks.
D) whether or not to increase the price of its products.

4. The goal of a financial manager is to:

A) Maximize sales
B) Maximize profits
C) Maximize the value of the shareholders
D) Maximize the value of the firm with both bond and stock holders

This is because shareholders are the owners and managers are hired by them.

5. One common reason for partnerships to convert to a corporate form of

organization is that the partnership:
A) faces rapidly growing marketing requirements.
B) wishes to avoid taxation of profits.
C) has issued all of its allotted shares.
D) agreement expires after ten years of use.
E) faces rapidly growing capital needs

This is the reason for the firm to go public to raise capital.

6. In a corporation, creditor’s interest might be hurt when management take which of

the following project?
A) a very profitable project
B) a very safe project
C) a very risky project
D) a government-contracted project

(answer: CBCCE C)

7. Making more investment than optimal and making firm sizes too big are called the
________ agency problem.

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 A) shirking
B) empire building
C) entrenchment
D) excessive perks
E) all of above

8. Compared to other years, double taxation for corporate shareholders in year 2003
to 2012 is _________ .
A) less severe
B) more severe
C) no different

9. Which of the following is least likely to represent an agency problem?

A) lavish spending on expense accounts.
B) plush remodeling of the executive suite.
C) excessive investment in “safe” projects.
D) executive incentive compensation plans.

10. Profit maximization is not a well-defined corporate objective because:

A) it leaves open the question of which year’s profits.
B) higher profits does not necessarily mean a better rate of return.
C) profits can be changed by using different accounting rules.
D) all of the above.

11. Which of the following statements is true regarding the corporate form of
organization compared to that of the sole proprietorship?
A) The owners of the sole proprietorship have limited liability for the firm's
debts.
B) The sole proprietorship is the simplest business form to start-up.
C) The corporation has a limited life.
D) Dividends received by the corporation's shareholders are tax-exempt.
E) It is more difficult to transfer ownership in a corporation.

12. Unlimited liability is faced by the owners of:

A) corporations.
B) partnerships and corporations.
C) sole proprietorships and partnerships.
D) all forms of business organization.

13. A board of directors is elected as a representative of the corporation’s:

A) top management.
B) stakeholders.
C) shareholders.
D) customers.
E) bond and stock holders

(answer BADDB CC)

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14. Corporations are referred to as public companies when their:
A) shareholders have no tax liability.
B) shares are held by the federal or state government.
C) stock is widely traded.
D) products or services are available to the public.

15.Corporations that do not issue more financial securities such as stock or debt
obligations:
A) will not be able to increase sales.
B) have internal cash flows to fulfill their needs
C) cannot be profitable.
D) generate insufficient funds to fulfill their needs.
E) do not face taxation of their profits.

To finance good projects, firms can also use internal cash flows.

16.Which of the following statements best distinguishes the difference between real and
financial assets?
A) Real assets have less value than financial assets.
B) Real assets are tangible; financial assets are not.
C) Financial assets represent the voting power on real assets.
D) Financial assets claim to cash flows that are generated by real assets.
E) Financial assets appreciate in value; real assets depreciate in value.

Please use the following information below for questions 17 – 21

You have a car loan of $30,000 (which is called the principal) with the interest rate of
6.5%. You decide to pay off this loan in next four years with equal payment each year.

17. what is the total payment in each year?

A) $7,621
B) $8,757
C) $9,523
D) $ 8,223
E) none of the above

That is, 30000=C(1/r-1/(r.(1+r)4)), where r=0.065. So C=$8,757

18. what is the principal payment in the first year?

A) $7,621
B) $8,757
C) $9,523
D) $ 8,223
E) none of the above

First calculate the interest payment in the first year, which is

30000*0.065 =$1,950. So principal payment is 8757 -1950 =$6,807
(Answer CBDBE)

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19. what is the interest payment in the first payment?
A) $7,621
B) $8,757
C) $1,950
D) $ 6,807
E) none of the above

As shown in the above question.

20. what is the principal payment in the last payment?

A) $7,621
B) $8,757
C) $9,523
D) $ 8,223
E) none of the above

First use the annuity formula to calculate the total payment in each year, which is
C=$8,757
Let the remaining principal be x before the last payment. Then, the interest payment in
the last period is 0.065x. Since principal + interest payment = total payment, we
have x + 0.065x =C=8757. x = 8757.082/(1+0.065)=$8,223

21. what is the interest payment in the last payment?

A) $7,621
B) $8,757
C) $9,523
D) $ 8,223
E) none of the above

As shown in the above question, the interest payment is 0.065*8223=$534

22. Which of the following statements is true?

A) Discounting means the procedure to find future values.
B) On loans with monthly compounding, the EAR will exceed the APY.
C) All else the same, the longer the term of a loan the lower will be the total
interest you pay on it.
D) Present values and interest rates (discount rates) move in the same direction
with one another.
E) Compounding essentially means earning interest on both principal and past
interest.

(answer CDEE)

23. You want to go to grad school 4 years from now, and you can save $5,000 per year,
beginning one year from today. You plan to deposit the funds in a mutual fund
which you expect to return 9% per year. Under these conditions, how much will
you have just after you make the 4th deposit, 4 years from now?

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 a. $22,865.65
b. $20,199.47
c. $21,513.78
d. $17,976.84
e. $19,390.50

24. What is the net present value of the following cash flows at a discount rate on
12%?

t = 0 t = 1 t= 2 t= 3
-2 5 0 ,0 0 0 1 0 0 ,0 0 0 1 5 0 ,0 0 0 2 0 0 ,0 0 0

A) $101,221
B) $200,000
C) $142,208
D) None of the above

NPV = -250,000 + (100,000/1.12) + (150,000/(1.12^2)) + 200,000/(1.12^3) =

101,221

25. You would like to have enough money saved to receive a perpetuity, with the first
payment being $60,000, after retirement so that you and your family can lead a
good life. How much would you need to save in your retirement fund to achieve
this goal (assume that the perpetuity payments start one year from the date of
your retirement. The interest rate is 10%)?
A) $7,500,000
B) $1,500,000
C) $600,000
D) None of the above

After your retirement, you will receive a standard perpetuity.

PV = 60,000/0.1 = 600,000

26. 10 years from now, you will receive a payment, which is 1.5 times the present
value of this payment? If the discount rate is the same for every year, what is the
annual discount rate ?
A) 8.10%
B) 8.18%
C) 7.18%
D) 4.14%
E) none of the above

(answer AACD)

Let the present value be $1. The future value will be $1.5. Then, we have

1=1.5/(1+r)10. Then (1+r)10=1.5. r = (1.5)1/10 -1 = 4.14%.

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 27. You need $4,500 to buy a new stereo for your car. If now you have $1,800 to
invest at 6% compounded daily, how long will you have to wait to buy the
stereo?
A) 15.28 years
B) 18.42 years
C) 8.60 years
D) 14.58 years
E) 15.73 years

28. How much would you pay for a perpetuity that pays $800 per month when interest
rate (APR) is 12% monthly?

a. $80,000
b. $6,666.66
c. $960,000
d. $66,666.66
e. $92,000

29. A perpetuity of $1,000 per year beginning today is said to offer a 10% interest rate.
What is its present value?
A) $10,000
B) $1,000
C) $11,000
D) $9,000

30. Which account would be preferred by a depositor: a 6.2% APR with semi-
annual compounding or a 6% APR with monthly compounding?
A) 6.2% with semi-annual compounding
B) 6% with monthly compounding
C) The depositor would be indifferent.
D) The time period must be known to select the preferred account.

31.

A) $105*3
B) $386.74
C) $311.80
D) $331.80
E) $333.81

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(answer AACAD)