FIN 302 QUIZ 1 PRAC Q'S (from chap 1 + 3)
You are a shareholder in a C corporation. The corporation earns $2.28 per share before taxes. Once it has paid taxes it will distribute the rest of its earnings to you as a dividend. Assume the corporate tax rate is 25% and the personal tax rate on all income is 20%. How much is left for you after all taxes are paid? The amount that remains is $_______ per share. (Round to the nearest cent.)
$1.37 (2.28 x .25 = .57 (tax paid by corp per share) | 2.28 - .57 = $1.71 (dividend paid by corp) | 1.71 x .20 = .342 (tax paid by shareholder on dividend income | 1.71 - .342 = $1.37 (amt left after all taxes r paid))
You are a shareholder in an S corporation. The corporation earns $1.73 per share before taxes. As a pass through entity, you will receive $1.73 for each share that you own. Your marginal tax rate is 20%. How much per share is left for you after all taxes are paid? The amount that remains is $_______ per share. (Round to the nearest cent.)
$1.38 (1.73 - (1.73 * .20) = 1.38)
What is the most important type of decision that the financial manager makes?
-Investing decisions is the most important b/c a manager must decide how to maximize the wealth of shareholders by putting their money to best use. They determine the cost and benefits of each transaction/decision.-Financing is also important because they must raise funds for these investments.
You expect to have $8,000 in one year. A bank is offering loans at 5.0% interest per year. How much can you borrow today? Today you can borrow $____________ (Round to the nearest cent.)
7,619.05 (8,000/1.05 = $7,619.05)
Honda Motor Company is considering offering a $2,000 rebate on its minivan, lowering the vehicle's price from $30,000 to $28,000. The marketing group estimates that this rebate will increase sales over the next year from 40,000 to 55,000 vehicles. Suppose Honda's profit margin with the rebate is $6,000 per vehicle. If the change in sales is the only consequence of this decision, what are its costs and benefits? Is it a good idea? Hint: View this question in terms of incremental profits. The cost of the rebate will be $____________ million.
80 (2,000 * 40,000 = 80,000,000)
Honda Motor Company is considering offering a $2,000 rebate on its minivan, lowering the vehicle's price from $30,000 to $28,000. The marketing group estimates that this rebate will increase sales over the next year from 40,000 to 55,000 vehicles. Suppose Honda's profit margin with the rebate is $6,000 per vehicle. If the change in sales is the only consequence of this decision, what are its costs and benefits? Is it a good idea? Hint: View this question in terms of incremental profits. The benefit of the rebate will be $___________ million. (Round to one decimal place.)
90 (6,000 * (55,000 - 40,000) = 90,000,000)
You are a shareholder in an C corporation. The corporation earns $2.35 per share before taxes. Once it has paid taxes it will distribute the rest of its earnings to you as a dividend. Assume the corporate tax rate is 40% and the personal tax rate is 20%. How much is left for you after all taxes are paid?
Corp Tax earnings: $2.35 * 40% = .94After Tax Earnings: $2.35 - .94 = $1.41Personal Tax (dividends): $1.41 * 20% = 0.282After all Taxes are paid: $1.41 - 0.282 = $1.128
Explain the difference between an S and a C corporation
The profits and losses of the S corporation are passed directly to shareholders and are not subject to corporate taxes, while the C corporation must first pay taxes on any profits before passing the after-tax profits on to shareholders. In addition, the S corporation can have no more than 100 shareholders, all of whom must be US citizens or residents. The C corporation does not have any such restrictions on its shareholders.
Which of the following types of firms does NOT have limited liability? a) sole proprietorships b) limited partnerships c) corporations d) none of the above
a
Why is the stock price of a company an indication of the performance of the company's senior managers? A) In general, people want to invest in a well−managed corporation, which will drive up the price of shares. B) Well−run companies are invariably highly profitable, which leads to a higher share price. C) Larger companies tend to be better run and so have higher stock prices. D) Investors who can see that a company is well−run will hold on to their shares, even if the company faces setbacks, since they know that the stock price will likely rise again.
a
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) 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 B) by the sale of the assets held by the company that hold most of its value 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
a
Bubba is a shrimp farmer. In an ironic twist, Bubba is allergic to shellfish, so he cannot eat any shrimp. Each day he has a one-ton supply of shrimp. The market price of shrimp is $10,200 per ton. a. What is the value of a ton of shrimp to him? A) The value of a tonne of shrimp to Bubba is $10,200 because that is the market price. B) The value of a tonne of shrimp to Bubba is less than $10,200 because Bubba is allergic to shellfish. C) The value of a tonne of shrimp to Bubba is more than $10,200 because he can wait for the market price to go up. D) The value of a tonne of shrimp to Bubba is less than $10,200 because shrimp is a perishable item.
a
You have $600 and a bank is offering 4.0% interest on deposits. If you deposit the money in the bank, how much will you have in one year?
$624 (600 (1+.04)^1 = 624)
You are a shareholder in an S corporation. The corporation earns $2.35 per share before taxes. As a pass through entity, you will receive @2.35 for each share that you own. Your marginal tax rate is 28%. How much per share is left for you after all taxes are paid?
Amount that remains = Price per share - (Price per share X tax rate)1.69
Which organizational forms give their owners limited liability?
Limited partnership for limited partners, corporation
Bubba is a shrimp farmer. In an ironic twist, Bubba is allergic to shellfish, so he cannot eat any shrimp. Each day he has a one-ton supply of shrimp. The market price of shrimp is $10,200 per ton. b. Would this value change if he were not allergic to shrimp? Why or why not? A) No. As long as he can buy or sell shrimp at $10,200 per ton, his personal preference or use for shrimp is irrelevant to the value of the shrimp. B) Yes. If he is allergic to shrimp, he puts a low value on it, but if he is not allergic to shrimp, he values it highly. C) Yes. If he is not allergic to shrimp, then he may prefer to eat the shrimp instead of selling it. D) No. Even if he isn't allergic to shrimp, he can't eat a ton of it.
a
You are a shareholder in a corporation which has elected subchapter S tax treatment. The corporation announces a profit of $4 per share, of which it retains $2 for reinvestment and distributes the rest as dividend payments. Given that the personal tax rate is 35%, how much tax must you pay per share? A) $1.4 B) $0 C) $1.68 D) $0.7
a (4 x .35 = $1.4 per share)
You are the CEO of a company and you are considering entering into an agreement to have your company buy another company. You think the price might be too high, but you will be the CEO of the combined, much larger company. You know that when the company gets bigger, your pay and prestige will increase. What is the nature of the agency conflict here and how is it related to ethical considerations? (Select all the choices that apply.) A) There is an ethical dilemma when the CEO of a firm has incentives that are opposite to those of the shareholders. B) There is a legal issue when the CEO of a firm has incentives that are opposite to those of the shareholders. C) In this case, you (as the CEO) have an incentive to potentially overpay for another company (which would be damaging to your shareholders) because the value of the combined company will improve. D) In this case, you (as the CEO) have an incentive to potentially overpay for another company (which would be damaging to your shareholders) because your pay and prestige will improve.
a, d
A company that produces racing motorbikes has several models that sell well within the motorcycle racing community and which are very profitable for the company. Despite having a profitable product, why must this company take care to ensure that it has sufficient cash on hand to meet its obligations? A) The company will have built up debts which must be repaid in order to bring the current models to market. B) New models will require a lot of money to develop and bring to market before they generate any revenue. C) Profits from the sales of popular models will be lost when returned to the shareholders in the form of dividends. D) Equity must be raised to finance the development of new models to replace the existing models.
b
Helen owns 10.10% of the stock of the Median Corporation. If Median makes a dividend payment of $25,000,000 paid proportionally to its shareholders, how much of this amount would Helen receive, disregarding tax? A)$3,030,000 B) $2,525,000 C) $2,020,000 D) $3,535,000
b (25,000,000 x .1010 = 2,525,000)
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. A) shareholder action B) leveraged buyout C) hostile takeover D) shareholder proposal
c
In which of the following ways is a limited liability company like a corporation? a) It was created and developed first in the US b) It can choose to b considered a partnership for tax purposes c) It's owners' liability is restricted to their investment d) It is directly managed by the owners
c
Over four−fifths of all U.S. business revenue is generated by which type of firm? A) sole proprietorships B) partnerships C) corporations D) limited partnerships
c
Which of the following would be best considered to be an agency conflict problem in the behavior of the following financial managers? A) James ignores an opportunity for his company to invest in a new drug to fight Alzheimer's disease, judging the drug's chances of succeeding as low. B) Michael chooses to enhance his firm's reputation at some cost to its shareholders by sponsoring a team of athletes for the Olympics. C) Bill chooses to pursue a risky investment for the company's funds because his compensation will substantially rise if it succeeds. D) Sue instructs her staff to skip safety inspections in one of the company's factories, knowing that it will likely fail the inspection and incur significant costs to fix.
c
The financial manager of a well−regarded book publishing firm wishes to buy a small Internet publishing company to provide an avenue for sale of its materials online. In order to raise the funds to make this purchase, the financial manager decides to sell more stock in the company. How is the financial manager raising funds in this case? A) by increasing the value of shares held by the existing owners of the company B) by decreasing the ratio of equity to debt held by the company C) by increasing the debt burden carried by the company D) by raising the company's equity by encouraging new owners to take a stake in the company
d
What is the major advantage corporations have over other business entities? A) A corporation is treated as a separate legal entity for tax and legal purposes. B) A corporation's shares can be freely traded among its shareholders. C) It is easier for a corporation to raise capital than other forms of businesses. D) All of the above are advantages that a corporation has over other business forms.
d
Which of the following is NOT a function of the board of directors? A) answering to shareholders of the company B) monitoring the performance of the company C) determining how top executives should be compensated D) day−to−day running of the company
d
Which of the following is typically the major factor in limited the growth of sole proprietorships? a) Investors have a great deal of control over the day−to−day running of such firms, leading to confusion when conflicts in direction arise. b) The organizational structure of such firms tends to become extremely complicated over time. c) It is extremely difficult to transfer control of such firms to a new owner if the present owner dies or wishes to sell the firm. d) The amount of money that can be raised by such firms is limited by the fact that the single owner must make good on all debts.
d
You sit on the board of a public corporation. Your CEO has proposed taking steps to offset the carbon impact of your company's manufacturing process. Doing so will add to the company's overall expenses. Your CEO argues, however, that this action will actually increase the stock price, maximizing shareholder wealth. Why might socially-responsible activities also be value-maximizing? Why might socially-responsible activities also be value-maximizing? (Select the best answer below.) A) Socially responsible actions are at odds with shareholder wealth maximization. If potential customers value these actions highly, they will be less likely to purchase your products and may even be willing to pay less for them if doing so helps a social goal that is not important to them. Further, some potential employees may not value working for socially responsible firms, causing you to lose the best talent. B) Socially responsible actions are not necessarily at odds with shareholder wealth maximization. If potential customers value these actions highly, they will be more likely to purchase your products, but would not be willing to pay more for them, even if doing so helps a social goal that is important to them. Further, while some potential employees may value working for socially responsible firms, it may not help you attract the best talent. C) Socially responsible actions are not necessarily at odds with shareholder wealth maximization. If potential customers value these actions highly, they will be more likely to purchase your products and may even be willing to pay more for them if doing so helps a social goal that is important to them. Further, some potential employees may value working for socially responsible firms, helping you attract the best talent. D) Socially responsible actions are not necessarily at odds with shareholder wealth maximization. If potential customers do not value these actions, they will be more likely to purchase your products and may even be willing to pay less for them if doing so helps a social goal that is important to them. Further, some potential employees may value working for socially responsible firms, helping you attract the best talent.
d
Valiant Corp. is a C corporation that earned $3.2 per share before it paid any taxes. Valiant Corp. retained $1 of after−tax earnings for reinvestment and distributed what remained in dividend payments. If the corporate tax rate was 30% and dividend earnings were taxed at 12.5%, what was the value of the dividend earnings received after−tax by a holder of 100,000 shares of Valiant Corp.? A) $86,800 B) $130,200 C) $151,900 D) $108,500
d [3.2(1-.30) = 2.24 -1 = 1.24 x (1-.125) = 1.085 x 100,000 = 108,500]
What are the main advantages of organizing a firm as a corporation?
no limited # of owners for a corp - allows corp to raise substantial amts of capital, life of business can continue beyond death of any owners
What does the phrase limited liability mean in a corporate context?
owner's liability is limited to the amt they invested in the firm
What is the most important difference between a corporation and all other organizational forms?
the way they r taxed (double taxation w corps)
