John won the lottery on Monday and can take either $$50,000$ per year for $20$ years, or $$500,000$ today. Bill won the same lottery on Tuesday and has the same options for receiving the cash. A well respected financial advisor is hired by both John and Bill. The advisor recommends that John take the $$50,000$ per year for $20$ years but advises Bill to take the $$500,000$ up front payment. How is it possible to give different advice to two clients regarding the exact same cash flows?

$2)$ What are the primary differences among a sole proprietorship, a partnership, and a corporation?

$3)$ Your friend, John, believes that since capital markets are efficient, he doesn't need to read the financial press or be involved in stock research before purchasing stocks for his portfolio. He simply throws darts at the stock pages and buys the stocks the darts hit. Is stock research and analysis important when buying and selling stocks in an efficient market?

$4)$ The board of directors of Wireless, Inc. is considering two compensation plans for the CEO of the company. The first would pay the CEO a salary of $$250,000$ for the upcoming year. The second would pay the CEO a salary of $$100,000$ and provide the CEO with a stock option to buy $100,000$ shares of stock for $$11$ per share. The current price per share of Wireless, Inc. stock is $$10$ per share. The stock option expires at the end of the year. Why might shareholders prefer the second payment plan? As part of your answer, calculate the breakeven point for the CEO to obtain the same compensation under option two as he or she would under option one.

$5)$ The manager of Golden Ray Corporation receives a bonus if company profits exceed $$1,000,000$ this year. During the final week of the year, the manager changes an accounting policy that will increase reported profits from $$950,000$ to $$1,025,000,$ triggering his bonus. The change in profits of $$75,000$ will reverse itself in the next year, and the accounting change has no impact on Golden Ray's cash flow. Discuss the above situation as it relates to both an agency problem and efficient markets.

Answer rating: 100% (QA)

1 The difference in advice given to John and Bill regarding the same cash flows can be attributed to the concept of time value of money and individual circumstances While both options offer the same t... View the full answer