Fin 4424 Quiz 1

Ms. Anderson has $60,000 income this year and $40,000 next year. The market interest rate is 10 percent per year. Suppose Ms. Anderson consumes $80,000 this year. What will be her consumption next year?

$18,000 Borrow $20,000 this year to consume 60,000 + 20,000 = 80,000. Consumption next year = 40,000 - (20,000 × 1.1) = 18,000.

Mr. Smith has an income of $40,000 this year and $60,000 next year. He can invest in a project that costs $30,000 this year, which generates an income of $36,000 next year. The market interest rate is 10 percent. What will be his consumption next year if Mr. Smith invests in the project and consumes $50,000 this year?

$52,000 Consumption next year = [40,000 - 30,000 - 50,000] × 1.1 + (60,000 + 36,000) = 52,000.

Mr. Free has $100 income this year and zero income next year. The market interest rate is 10 percent per year. If Mr. Free consumes $30 this year and invests the rest in the market, what will be his consumption next year?

77 Consumption next year = (100 − 30) × (1.1) = 77.

Generally, a corporation is owned by its

shareholders.

Which of the following assets is tangible?

ExxonMobil's corporate headquarters building

A firm's total asset value belongs entirely to the shareholders.

False

Real assets of a corporation are claims on their financial assets.

False

Costs associated with the conflicts of interest between the bondholders and the shareholders of a corporation are called

agency costs.

A firm's investment decision is also called its

capital budgeting decision.

Limited liability is an important feature of

corporations.

The financial goal of a corporation is to

maximize the value of the firm for the shareholders.