Finance 301 Module 2 Questions (OWL QUIZ 3+4 + Definitions)

In the context of corporate finance, what comes closest to the definition of equity?

The value of the firm's assets minus debt

In well functioning financial markets, and assuming rational behavior, why would a vegetarian prefer $100 worth of beef to $90 worth of vegetables?

The vegetarian could choose the beef, sell the beef, buy the vegetables, and make him or her self better off.

Suppose you invest $20,000 of your own money in a business as a sole proprietor, and then borrow an additional $10,000 from a bank. Suppose the business fails. Which of the following describes your situation, and what is your total loss?

Unlimited liability, $30,000

Which of the following are argued to be distinctive characteristics of the corporation?

1. The ability of the shareholders to declare bankruptcy and therefore enjoy the protective shield of limited liability. 2. The fact that corporate earnings are taxed according to a separate set of tax rules. 3. The fact that corporations are often large enough that owners hire managers to run the firm day-to-day. All three are correct.

Corporation

A legal entity defined by collections of contracts that serve to link groups of people together. The main purpose of these contracts is to engage in economic activity

Suppose that the Board of Directors pays the CEO a bonus in any year that the share price goes up compared to the previous year, but no bonus if the share price either falls or stays the same. What would this particular type of compensation scheme be designed to control?

Agency Costs

An agency relationship is one in which one or more persons contracts with one or more other persons to perform a decision-making task for them. What is the set of labels that we assign to these groups?

Agents and Principals

According to the information in text on types of business organizations (Window 1.1 on page 8), which of the following is NOT true?

Compared with sole proprietorships and parterships, corporations require little paperwork and regulations.

Which form of business organization contains the feature known as limited liability?

Corporations

According to Modern Corporate Finance, which is NOT among the four economic principles of finance?

Depreciation of Value

Last year, Alice's wealth increased by $X and it gave her z units of happiness (or utility). This year Alice's wealth increased again by $X but her utility went up by less than z units. What economic law does this describe?

Diminishing Marginal Utility of Wealth

Positive Marginal Utility

Given a choice, rational people prefer more wealth to less wealth, where wealth is the value of all of the things owned

Conservation of Value

(Law of One Price) Identical goods must have identical values. Implication: You can't create something of value simply by combining things together or breaking things apart

Farmer Ben knows that feeding a grain supplement to his cows will produce more milk according to the following schedule: Total Pounds.....................Total Extra Pounds of Supplement Used.....................of Milk 1.....................................................5 2.....................................................9 3..................................................12.3 4..................................................15.5 5....................................................18 6.................................................. 20 7..................................................21.5 8..................................................22.5 9....................................................23 Ignoring all other issues, how many pounds of grain supplement should Farmer Ben feed his cows if the price of milk is $0.20 per pound and the price of grain supplement is $0.70 per pound?

2

Mike loves to eat burgers and chips at Burger King. His utility (happiness) from these two fast foods is listed as follows: Burgers: 1/5 2/9 3/13 4/15 5/17 6/18 Chips: 1/8 2/11 3/12 4/13 5/14 6/14.5 where the first value reports the number of bugers or chips consumed, and the second number reports the total amount of happiness that number provides. For example, 4/15 means that if 4 burgers are consumed, Mike will enjoy 15 units of happiness. If each burger and each order of chips cost $5 each, and if Mike has $25, Mike will buy how many burgers (the first number listed) and how many orders of chips (the second number listed)?

3 burgers, 2 chips

Jeff knows that adding a special grain supplement to his cows will produce more milk according to the following schedule: 1/4 2/7 3/10 4/12 5/13 6/14 where the first number reports the total number of pounds of grain supplement, and the second number reports the total amount of milk produced. For example, 3/10 means that if the cow is fed 3 pounds of grain supplement, the cow will produce 10 units of milk. How many pounds of grain supplement should Jeff feed the cows if the farm receives $0.30 per unit of milk and the price of grain supplement is $0.80 per pound?

3 pounds

Mike loves to eat burgers and chips at Burger King. His utility (happiness) from these two fast foods is listed as follows: Burgers: 1/5 2/9 3/13 4/15 5/17 6/18; Chips: 1/8 2/11 3/12 4/13 5/14 6/14.5; where the first value reports the number of bugers or chips consumed, and the second number reports the total amount of happiness that number provides. For example, 4/15 means that if 4 burgers are consumed, Mike will enjoy 15 units of happiness. If the price of each order of chips rises to $10 while the price of each burger remains at $5. If Mike has $30, then how many burgers should he buy (the first number listed) and how many chips should he order (the second number listed) in order to maximize his happiness?

4 burgers, 1 chip

Joe knows that adding a special grain supplement to his cows will produce more milk according to the following schedule: 1/3 2/6 3/8 4/10 5/11 6/12; where the first number reports the total number of pounds of grain supplement, and the second number reports the total amount of milk produced. For example, 3/10 means that if the cow is fed 3 pounds of grain supplement, the cow will produce 10 units of milk. How many pounds of grain supplement should Joe feed the cows if the farm receives $0.30 per unit of milk and the price of grain supplement is $0.50 per pound?

4 pounds

Jack knows that adding a special grain supplement to his cows will produce more milk according to the following schedule: 1/3 2/5 3/7 4/8 5/8.65 6/8.75; where the first number reports the total number of pounds of grain supplement, and the second number reports the total amount of milk produced. For example, 3/7 means that if the cow is fed 3 pounds of grain supplement, the cow will produce 7 units of milk. How many pounds of grain supplement should Jack feed the cows if the farm receives $0.50 per unit of milk and the price of grain supplement is $0.30 per pound?

5 pounds

Diminishing Marginal Return

Investment occurs to the point where benefits and costs are equal

Modern Finance

Knowledge constructed by carefully developing models and rigorously testing the model's ability to explain behavior

According to modern corporate finance, and the notion of shareholders as owners of the firm, the arguments made in the text, what is the primary objective of the corporation?

Maximize the wealth of shareholders

Diminishing Marginal Utility

More units of consumption create less additional happiness when compared with previous units of consumption

Finance

The study of the allocation of scarce resources through time and with risk

Of the following groups, and in a legal sense, which group has ownership rights?

Shareholders

Shareholder Wealth Maximization

Shareholders desire to have their wealth maximized and so the best decisions are the ones that make the stock price as high as possible

Stakeholder View

States that the corporation can be influenced by and therefore to some extent owned by anyone who has a stake in the corporations actions. It should be the primary goal of the firm to benefit all stakeholders not just stockholders

With respect to investment within the firm, which of the following describes the optimal level of investment?

Where marginal benefits are equal to marginal costs