Question 1

Which of the following groups are referred to as stakeholders?

Accepted Answer

Stakeholders refer to any individual or group that has an interest or concern in an organization's activities, goals, or outcomes. Therefore, employees, customers, shareholders, and suppliers are all considered stakeholders. Option D includes all of these groups, making it the correct answer.

Question 2

Mr. Thomas has $100 income this year and zero income next year. The market interest rate is 10 percent per year. Mr. Thomas also has an investment opportunity in which he can invest $50 this year and receive $80 next year. Suppose Mr. Thomas consumes $50 this year and invests in the project. What will be his consumption next year?

Accepted Answer

Mr. Thomas will have $80 from the investment and $50 from the interest on his savings, for a total of $130. He will consume $50, leaving him with $80 for consumption next year.

Question 3

The line that connects the maximum that one can consume this year (now, on the horizontal axis)and the maximum one can consume next year:

Accepted Answer

The line connecting the maximum one can consume this year and next year is the budget constraint in an intertemporal choice model. Its slope is negative because if you consume more this year, you have less to save and invest, which reduces consumption possibilities next year. The slope is -(1 + r) because for each unit of consumption foregone this year, you get (1 + r) units next year, due to the interest rate r.

Question 4

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?

Accepted Answer

The correct answer is B. Mr. Smith's income next year will be $60,000 + $36,000 = $96,000. He will have to pay back the $30,000 loan, so his consumption next year will be $96,000 - $30,000 = $66,000. However, he has already consumed $50,000 this year, so his total consumption next year will be $66,000 - $50,000 = $16,000.

Question 5

The following are examples of tangible assets except:

Accepted Answer

Tangible assets are physical assets that can be seen and touched. Machinery, office buildings, and warehouses are examples of tangible assets. Training courses for employees are intangible assets, as they cannot be seen or touched.

Question 6

Ms. Venus has $100 income this year and $110 next year. The market interest rate is 10 percent per year. Suppose Ms. Venus consumes $60 this year. What will be her consumption next year?

Accepted Answer

Ms. Venus has $100 income this year and decides to consume $60, leaving her with $40 to save. With a 10% interest rate, her savings will grow to $44 by next year ($40 * 1.10). Next year, she also earns $110, so her total available for consumption next year is $110 (income) + $44 (savings with interest) = $154.

Question 7

Explain the term corporation.

Accepted Answer

The answer of Explain the term corporation....

Question 8

Managers, shareholders, and the firm's debtholders have identical information about the value of the firm.

Accepted Answer

Managers may have access to more detailed information about the firm's operations, strategies, and potential investments that may not be readily available to shareholders and debtholders, giving them an informational advantage. Additionally, debtholders may have different interests compared to shareholders and may prioritize debt repayment over maximizing the firm's value.

Question 9

Briefly explain the term limited liability.

Accepted Answer

The answer of Briefly explain the term limited liability....

Question 10

The board of directors is ultimately responsible for all large investment decisions.

Accepted Answer

The board of directors is the highest governing body of a company and is responsible for making major decisions related to the company, including large investment decisions.

Question 11

Mr. Dell has $100 income this year and zero income next year. The expected return from investing in the stock market is 10 percent a year. Mr. Dell also has an investment opportunity-having the same risk as the market in which he can invest $50 this year and receive $80 next year. Suppose Mr. Dell consumes $50 this year and invests in the project. What is the NPV of the investment opportunity?

Accepted Answer

The NPV is calculated as the present value of future cash flows minus the initial investment. The future cash flow is $80, and the discount rate is 10%. NPV = $80 / (1 + 0.10) - $50 = $72.73 - $50 = $22.73.

Question 12

The ultimate financial goal of a corporation is to:

Accepted Answer

The ultimate financial goal of a corporation is to maximize the value of the corporation to the stockholders. While minimizing stockholder risk and increasing the size of the company are important goals, they are secondary to maximizing profit and value for the stockholders who have invested in the company.  A corporation can always grow in size, but ultimately the focus should be on creating value for its investors.

Question 13

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?

Accepted Answer

Ms. Anderson consumes $80,000 this year, which is $20,000 more than her income of $60,000. To finance this, she borrows $20,000 at a 10% interest rate. Next year, she must repay $22,000 ($20,000 plus $2,000 interest). Her income next year is $40,000, so after repaying the loan, she will have $40,000 - $22,000 = $18,000 for consumption.

Question 14

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

Accepted Answer

A firm's total asset value does not belong entirely to the shareholders. It includes liabilities, which are owed to creditors and other stakeholders. Therefore, the portion of the assets that belongs to the shareholders is the equity value, which is calculated as total assets minus total liabilities.

Question 15

The following are examples of real assets:

Accepted Answer

Real assets are physical assets such as machinery, office buildings, and warehouses that have value due to their tangible qualities. Common stock is not a real asset because it represents ownership in a company but does not physically exist. Therefore, the best choice is A because it includes a variety of tangible real assets.

Question 16

A corporation has a legal existence of its own and is based on "articles of incorporation."

Accepted Answer

A corporation is a separate legal entity from its owners and is created by filing articles of incorporation with the state.

Question 17

Mr. Bird has $100 income this year and zero income next year. The market interest rate is 10 percent per year. Mr. Bird also has an investment opportunity in which he can invest $50 today and receive $80 next year. Suppose Mr. Bird consumes $30 this year and invests in the project. What will be his consumption next year?

Accepted Answer

Mr. Bird consumes $30 this year, leaving him with $70 ($100 - $30). He invests $50 in the project, leaving him with $20. The $20 can be saved at a 10% interest rate, giving him $22 next year. The investment returns $80 next year. Therefore, his total consumption next year is $22 + $80 = $102.

Question 18

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

Accepted Answer

Real assets of a corporation refer to physical assets such as buildings, machinery, and equipment. Financial assets, on the other hand, are monetary claims or investments such as stocks, bonds, and cash. Therefore, claims on financial assets are not the same as real assets.

Question 19

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?

Accepted Answer

Mr. Free will invest $70 in the market at the interest rate of 10 percent, so he will have:

$70 x 1.1 = $77

In the second year, Mr. Free will have no income and will only be able to consume the return from his investment, which is $77. Therefore, his consumption next year will be $77.

Choice A, $50, is incorrect because it assumes that Mr. Free will consume $20 less in the second year. However, Mr. Free will have no income in the second year and will need to consume the return from his investment.

Choice B, $55, is incorrect because it assumes that Mr. Free will consume the same amount in both years, even though he will have no income in the second year.

Choice D, $100, is incorrect because it assumes that Mr. Free will consume his entire income in the first year, even though he could invest some of it for a higher return in the future.

Question 20

Ms. Newcastle has $60,000 income this year and $40,000 next year. The market interest rate is 10 percent per year. Suppose Ms. Newcastle wishes to consume $62,000 next year. What will be her consumption this year?

Accepted Answer

The answer of Ms. Newcastle has $60,000 income this year...

Quiz 1: Introduction to Corporate Finance