Question 1

The following are examples of real assets:
A)machinery, office buildings, and warehouses only.
B)machinery and office buildings only.
C)common stock only.
D)machinery only.

Accepted Answer

Real assets refer to physical assets such as machinery, office buildings, and warehouses that have value due to their tangible properties. Common stock, which represents ownership in a company, is not considered a real asset. Therefore, the best choice that includes examples of real assets is A, which lists machinery, office buildings, and warehouses.

Question 2

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?
A)$80
B)$82
C)$100
D)$102

Accepted Answer

If Mr.Bird does not invest in the project, he can only consume $100-$30=$70 this year. And next year, he has no income, so he can consume $0.

If Mr.Bird invests in the project, he will have to pay $50 today, so he can only consume $100-$50-$30=$20 this year. Next year, he will receive $80 from the project, and the investment will earn a 10% interest, so it will be worth $88.

Therefore, his total income next year will be $80+$88=$168, and his consumption next year will be $168-$80=$88.

So, by investing in the project, Mr.Bird can increase his total consumption from $70 to $20+$88=$108. Therefore, the best choice for Mr.Bird is to invest in the project. The option (D) is the closest to $108.

Question 3

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?
A)$50
B)$55
C)$77
D)$100

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 4

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

Accepted Answer

The board of directors is responsible for setting the overall investment strategy and approving large investment decisions for the company.

Question 5

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

Accepted Answer

Real assets are tangible and physical assets that a corporation owns, such as property, equipment, and inventory. Financial assets, on the other hand, are intangible assets like stocks, bonds, and cash. Therefore, real assets are not claims on financial assets.

Question 6

Briefly explain the term limited liability.

Accepted Answer

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

Question 7

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?
A)$120
B)$154
C)$170
D)210

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 8

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?
A)$40,000
B)$52,000
C)$60,000
D)$62,000

Accepted Answer

If Mr. Smith does not invest, he will consume $40,000 this year and $60,000 next year. Considering the market interest rate of 10%, the present value of the $60,000 next year will be:

PV = $60,000 / (1+0.1)^1 = $54,545.45

If Mr. Smith invests, he will consume $50,000 this year ($40,000 income + $10,000 investment) and the present value of the $36,000 next year will be:

PV = $36,000 / (1+0.1)^1 = $32,727.27

Therefore, Mr. Smith's total present value of consumption if he invests will be:

PV(total) = $50,000 + $32,727.27 = $82,727.27

Since $82,727.27 is greater than $54,545.45, the best choice is for Mr. Smith to invest and consume $52,000 next year ($82,727.27 - $30,000 investment).

Question 9

The following are examples of tangible assets except
A)machinery only.
B)machinery and office buildings only.
C)training courses for employees only.
D)machinery, office buildings, and warehouses only.

Accepted Answer

Tangible assets are physical assets that have a physical existence such as machinery, office buildings, and warehouses. Training courses for employees are intangible assets as they do not have a physical existence.

Question 10

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

Accepted Answer

Managers often have access to more information about the firm and its operations compared to shareholders and debtholders. This information asymmetry can impact the decisions and actions of each group in relation to the firm.

Question 11

Explain the term corporation.

Accepted Answer

The answer of Explain the term corporation....

Question 12

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?
A)$19,000
B)$40,000
C)$60,000
D)$70,000

Accepted Answer

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

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?
A)$18,000
B)$30,000
C)$60,000
D)$70,000

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

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?
A)$0
B)$5
C)$22.73
D)None of the options

Accepted Answer

To find the NPV, we need to calculate the present value of the future cash flows adjusted for the opportunity cost of capital (10%):

PV(costs) = -$50

PV(benefits) = $80/(1+10%) = $72.73

NPV = PV(benefits) - PV(costs) = $72.73 - (-$50) = $122.73

Since the initial income of $100 is already taken care of, Mr. Dell can afford to consume the $50 and still be able to invest in the project, yielding a positive NPV of $22.73. Therefore, the best choice is to invest in the project.

Question 15

Which of the following groups are referred to as stakeholders?
A)Employees, customers, and suppliers only
B)Shareholders only
C)Employees and customers only
D)Employees, customers, shareholders, and suppliers

Accepted Answer

Stakeholders refer to any group or individual who can be affected by or have an effect on the actions or decisions of a company. This includes not just employees, customers, and shareholders, but also suppliers or any other parties with a vested interest in the company. Therefore, the best choice is D, which includes all of these groups.

Question 16

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
A)has a slope of (1 + r).
B)has a slope of - (1 + r).
C)has a slope of r.
D)has a slope of 1/r.

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 17

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 that is created under state law through the filing of articles of incorporation.

Question 18

The ultimate financial goal of a corporation is to
A)minimize stockholder risk.
B)maximize profit.
C)maximize the value of the corporation to the stockholders.
D)increase the size of the firm.

Accepted Answer

The ultimate financial goal of a corporation is to maximize the value of the corporation to its stockholders. In other words, it aims to increase the shareholder wealth by ensuring that the stock price increases over time. While maximizing profit is important, it is not the ultimate goal as decisions that may increase short-term profits may have long-term negative impacts on the value of the corporation to its shareholders. Therefore, choice (B) is not the best answer. Minimizing stockholder risk may be a goal, but it is not the ultimate goal as taking risks can lead to higher returns for shareholders. Lastly, increasing the size of the firm is a possible goal, but it is not the ultimate goal as bigger is not always better when it comes to a corporation's financial health.

Question 19

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 is divided among various stakeholders including creditors, suppliers, employees, and government. The shareholders only have claim over the residual value of assets after all other obligations are met.

Question 20

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?
A)$50
B)$55
C)$80
D)$110

Accepted Answer

The answer of Mr.Thomas has $100 income this year and...

Quiz 1: Introduction to Corporate Finance

The following are examples of real assets:

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?

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

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

Briefly explain the term limited liability.

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?

The following are examples of tangible assets except

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

Explain the term corporation.

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?

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?

Which of the following groups are referred to as stakeholders?

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

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

The ultimate financial goal of a corporation is to

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