finance chapter 1
You are a shareholder in a corporation which has elected subchapter S tax treatment. The corporation announces a profit of $6 per share, of which it retains $1 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?
$1.75
Valiant Corp. is a C corporation that earned $3.4 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 35% 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.?
$105,875
Stella places a market order with her broker to buy 1,000 shares of OneWorld Corp. The broker buys 1,000 shares at $15.80 each, and sells them to Stella at $15.95 each. He also charges a commission of $12.00. What is bid-ask spread in this case?
$150
Helen owns 10.2% of the stock of the Median Corporation. If Median makes a dividend paymentof$25,000,000 paidproportionallytoitsshareholders,howmuchofthisamount would Helen receive, disregarding tax?
$2,550,000
A C corporation earns $4.30 per share before taxes. The corporate tax rate is 35%, the personal tax rate on dividends is 20%, and the personal tax rate on non-dividend income is 39%. What is the total amount of taxes paid if the company pays a $3.00 dividend?
$2.11
An S corporation earns $6.00 per share before taxes. The corporate tax rate is 35%, the personal tax rate on dividends is 20%, and the personal tax rate on non-dividend income is 39%. What is the total amount of taxes paid if the company pays a $2.00 dividend?
$2.34
How much money would a stock exchange make from buying and selling 500 shares of the stock under the conditions shown above?
$250
A C corporation earns $8.30 per share before taxes. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the total amount of taxes paid if the company pays a $6.00 dividend?
$4.14
Using the above information, how much would you pay for a share of BHP Billiton stock?
$41.93
Which of the following should be true for an asset to be considered liquid?
It can be easily bought and sold and the selling price is very close to the buying price at a given point in time.
Joe is a general partner in a limited partnership firm, while Jane is a limited partner in the same firm. Which of the following statements regarding their respective relationships to the firm is correct?
Janeʹs liability for the firmʹs debts consists solely of her investment in the firm.
Which of the following is typically the major factor in limiting the growth of sole proprietorships?
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.
What is the process of double taxation for the stockholders in a C corporation?
The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them
How do the shareholders of most corporations exercise their control of that corporation?
by electing members of a board of directors
What is the most common way that agency conflict problems are addressed in most corporations?
by minimizing the number of decisions that a manager makes where there is a conflict between the managers interests and those of the shareholders
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.
hostile takeover
What is the bid-ask spread?
the difference in price available for an immediate sale of a stock and the immediate purchase of the stock
In which of the following relationships is an agency conflict problem LEAST likely to arise?
the relationship between a driver and the passengers in a car regarding the safe driving of that car
Whose interests should a financial manager consider paramount when making a decision?
the stockholders who have risked their money to become owners of the company
What is the most important duty of a firmʹs financial officer?
to make investment decisions
Which of the following is NOT an advantage of a sole proprietorship?
unlimited liability
Based on the information shown above, how much would you receive from selling 2,000 shares of the above stock?
€40,740
Which of the following features of a corporation is LEAST accurate?
Earnings from a corporation are taxed only once.
An S corporation earns $9.10 per share before taxes. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the total amount of taxes paid if the company pays a $5.00 dividend?
$3.28
A C corporation earns $8.30 per share before taxes and the company pays a dividend of $4.00 per share. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the after-tax amount an individual would receive from the dividend?
$3.40
Using the above information, how much would you receive if you sold a share of Washington Post stock?
$677.62
Based on the information shown above, what would it cost to buy 1,000 shares of the above stock?
$91,650
What is the bid-ask spread on the stock shown above?
3 cents
What is the major advantage corporations have over other business entities?
All of the above are advantages that a corporation has over other business forms.
Which of the following would be best considered to be an agency conflict problem in the behavior of the following financial managers?
Bill chooses to pursue a risky investment for the companyʹs funds because his compensation will substantially rise if it succeeds.
Which of the following organization forms has the most revenue?
C corporation
Which of the stock markets listed below is the smallest, as judged by trading volume?
Deutsche Börse
Put the following steps of the financial cycle in the correct order.
II, I, and III
A typical company has many types of shareholders, from individuals holding a few shares, to large institutions that hold very large numbers of shares. How does a financial manager ensure that the priorities and concerns of such disparate stockholders are met?
In general, all shareholders will agree that they are better off if the financial manager works to maximize the value of their investment.
Why is the stock price of a company an indication of the performance of the companyʹs senior managers?
In general, people want to invest in a well-managed corporation, which will drive up the price of shares.
Why is it possible for a corporation to enter into contracts, acquire assets, incur obligations, and enjoy protection against the seizure of its property?
It is a legally defined, artificial entity that is separate from its owners.
Which of the following best describes why the Valuation Principle is a key concept in making financial decisions?
It shows how to make the costs and benefits of a decision comparable so that we can weigh them properly.
In which of the following ways is a limited liability company like a corporation?
Its ownersʹ liability is restricted to their investment.
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?
New models will require a lot of money to develop and bring to market before they generate any revenue.
Which of the following is unique for an S corporation?
None of the above statements is unique.
Which of the following is a measure of the aggregate price level of collections of pre-selected stocks?
S&P 500
Why is a stock exchange like NASDAQ considered a secondary market?
Shares sold on it are exchanged between investors without any involvement of the issuing corporation.
A companyʹs board of directors chooses to provide a comprehensive health care plan for the families of all employees, despite the large cost. They argue that this will not only increase the number of employees who stay with the firm, and thus reduce some costs involved in employee turnover, but also increase the employeesʹ diligence and industry. What general principle is being argued by the board of directors?
Some activities that decrease shareholdersʹ wealth may have intangible benefits which increase the strength of the company overall.
What is the major way in which the roles and obligations of the owners of a limited liability company differ from the roles and obligations of limited partners in a limited partnership?
The owners of a limited liability company can take an active role in running the company.
On August 19, 2004 Google IPO offered 19,605,052 shares at a price of U.S. $85 per share, which were sold in an online auction in a bid to make the shares more widely available. Which of the following statements best describes why these are considered a primary market transaction?
The transaction was between the corporation and investors.
Why in general do financial managers make financial decisions in a corporation, rather than the owners making these decisions themselves?
There are often many owners, and they can often change as they buy and sell stock.
Why is it difficult to determine the market price of a private corporationʹs shares at any point in time?
There is no organized market for its shares.
Which of the following is NOT a reason why a firmʹs financial managers must take great care when making investment decisions?
These investment decisions determine the corporationʹs mix of debt and equity.
A limited liability company is essentially ________.
a limited partnership without a general partner
Which of the following is a major duty of a financial manager?
all of the above
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?
by raising the companyʹs equity by encouraging new owners to take a stake in the company
8) A factory owner wants his workers to produce as many widgets as they can so he pays his workers based on how many widgets they produce. However, in order to make sure that the workers do not rush and produce a large number of poorly made widgets, he checks the widgets at random at various stages of their manufacture. If a defect is found in a widget, the pay of the entire section of the factory responsible for that defect is docked. How is this factory owner seeking to solve the agency conflict problem in this case?
by supplying incentives so the agents act in the way principal desires
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?
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
Over four-fifths of all U.S. business revenue is generated by which type of firms?
corporations
Which of the following is NOT a function of the board of directors?
day-to-day running of the company
Which of the following people may not manage the operations of a firm in which they are part or full owners?
limited partners in a limited partnership
Investments by wealthy individuals and endowments is a major source of money for each of the following EXCEPT ________.
mutual funds
A sole proprietorship is owned by ________
one person
Which of the following would be more typically the responsibility of a controller rather than a treasurer?
overseeing accounting and tax functions
Which of the following is NOT a role of financial institutions?
printing money for borrowers
What is the most common type of firms in the United States and the world?
sole proprietorships
Which of the following types of firms does NOT have limited liability?
sole proprietorships
In most corporations, to whom does the chief financial officer report?
the chief executive officer
