Corporate Finance

1. Managers are considered to be "agents" of the firm's owners because:
C. they have been delegated authority to manage the firm.

2. An investor buying a share of 9 percent, $100 par preferred stock for $81 a share will receive a yield closest to
D. 11.1 percent.

3. According to the authors, the focus of financial managers in a firm should be
C. maximizing the value of the firm's present owners.

4. The most common maturity (face) value of a U.S. corporate bond is ________.
A. $1,000

5. Money market mutual funds _______.
B. enable individuals and small businesses to invest indirectly in money-market instruments

6. The buyer of a zero-coupon bond expects to receive
B. price appreciation.

7. The price of a share of common stock represents
D. the market's evaluation of a firm's present and future performance.

8. Which of the following statements is not correct with respect to both future and present value tables?
A. For all positive rates of interest, the values in each table will be less than one.

9. The primary difference between the corporation and other historically popular forms of business organizations is _______.
D. the separation between ownership and management

10. The purpose of financial markets is to:
C. allocate savings efficiently.

11. You are considering the purchase of an ordinary annuity that will pay $4,000 a year for the next 20 years, to yourself or to a designated survivor. If you can earn 8 percent annual interest over the next 20 years, what is the maximum amount you should pay for the annuity?
4000 x 9.818 = $39,272

12. If you had a set of present value interest factor tables and wanted to know how long it would take for money to triple at 9 percent interest, you would
C. look down the 9 percent column until you found the factor closest to 0.333, then look across the row to determine n.

13. Suppose the market now requires an 11 percent return for a bond that was issued years ago with a 10 percent coupon. This bond will currently be priced
D. at a discount from face value.

14. How much should you pay for the preferred stock of the Dakota Doorknob Company if it has $100 par value, pays $8.50 a share in annual dividends,and your required rate of rerturn is 10 percent?
$8.50/0.10 = $85 per share

15. Which of the following is correct with regard to a sole proprietorship?
D. The owner is personally liable for all business obligations, including any lawsuits brought against the business.

16. If a corporation has an operating loss, it can be
B. carried back 2 years and then forward 20 years.

17. Dolly Dayton holds 1000 shares of Richfield Mining stock. Her dividend received for the current tax year is $5,000. If Dolly has a 15 percent marginal tax rate, what would her federal taxes be on this dividend?
Dividends are taxed at the ordinary income tax rate: ($5,000)(.15) = $750

18. A major advantage of the corporation relative to other forms of business organization is
B. limited owner liability.

19. A hundred dollars deposited in a bank will reach the largest future value if the bank pays ________ interest of __________ percent.
C. compound, 6

20. How much should ou pay for a bond with $1,000 face value, a 14 percent coupon rate, and five years to maturity if your appropriate discount rate is 10 percent and interest is paid annually?
$1,151.63

21. Congratulations! You have just won first prize in a raffle and must choose between $20,000 in cash today or an annuity of $5,000 a year for five years. (The annuity payments would come to you at the end of each year.) Which of these two choices is worth more, assuming a 7 percent discount rate? Show your calculations.

(PVIFAi1n) = (1-[1/(1+i)^n])/i
(1-[1/(1+.07)^5])/.07 = 4.100

(PVA3) = 5000(4.100) = $20,500

Receiving an annuity of $5,000 a year for five years is worth more (haas a higher present value).

22. If the general level of interest rates rise, the prices of already issued bonds will
C. fall.

23. Incentives such as stock options, bonuses, and perquisites are utilized by the corporation
A. to provide an incentive to employees to act in the best interest of shareholders

24. You invest $8,000 in a savings account paying 5 percent interest a year, compounded annually. At the end of four years, your account will contain approximately
D. $9,728

25. The present value of $5,000 received at the end of 5 years, discounted at 10 percent, is closest to
A. $3,105