Please answer the questions accurately!

PROBLEM SET 15 ECO389

? SPRING 2017

Corporate Finance Instructor: Ramiro Malaga Ortega

Due date: Monday 8 th May 2017 at 11:00 p.m.

Problem 1 Limited liability is about: A. Corporations pay taxes. B. Shareholders do not pay taxes. C. Shareholders are liable only for their capital in the corporation. D. Corporations do not pay taxes. E. Shareholders have more risk with limited liability.

Problem 2 Choose the FALSE statement: A. Generally, a corporation is owned by its shareholders. B. A corporation, potentially, has infinite life because it not a real person. C. A patent is an intangible asset. D. A building is a tangible asset. E. Corporations can sue and be sued.

Problem 3 In the principal-agent framework, from the point of view of shareholders: A. Shareholders are the agents. B. Shareholders are the principals. C. Managers are the principals. D. Managers are the agents. E. B and D.

Problem 4 The ultimate financial goal of a corporation is to: A. Minimize costs B. Minimize stockholder risk. C. Maximize profits for the shareholders. D. Maximize value of the corporation to the stockholders. E. Increase size of the firm.

Problem 5 What is the FALSE statement? A. When we move money from the future we say we are ?discounting?. B. One risky dollar worth more than a safe dollar. C. When we move money to the future we say we are ?compounding?. D. One dollar today worth more than one dollar tomorrow. E. None of the above options.

Problem 6 Suppose you know that tomorrow the interest rate will reduce but the market still is not aware of that. What will be your best decision? A. Will the same to hold cash or bonds. B. It is not possible to determine. C. Sell your bonds. 2 D. Buy bonds. E. None of the above options.

Problem 7 Suppose you have the option of two bonds, both with the same price. Duration of bond A is much longer than duration of Bond B. Suppose that you know that tomorrow the interest rate will increase but the market still is not aware of that. What will be your best decision? A. It is not possible to determine. B. Sell all your bonds. C. Invest in Bond A. D. Invest in Bond B. E. None of the above options.

Problem 8 If an investment project (normal project) has an IRR equal to the cost of capital, the NPV for that project is: A. Zero B. Positive C. Negative D. Unable to determine E. None of the above options

Problem 9 The profitability index is the ratio of the: A. Future value of cash flows to investment B. Net present value of cash flows to IRR C. Present value of cash flows to IRR D. Net present value of cash flows to investment E. None of the above options

Problem 10 Suppose a firm sets aside assets to protect particular investors. These assets are called: A. Repurchased shares. B. Collateral. C. Subordinated debt. D. Senior debt. E. Time preference

PROBLEM SET 15 ECO389 - SPRING 2017 Corporate Finance Instructor: Ramiro Malaga Ortega Due date: Monday 8th May 2017 at 11:00 p.m. Problem 1 Limited liability is about: A. B. C. D. E. Corporations Shareholders Shareholders Corporations Shareholders pay taxes. do not pay taxes. are liable only for their capital in the corporation. do not pay taxes. have more risk with limited liability. Problem 2 Choose the FALSE statement: A. Generally, a corporation is owned by its shareholders. B. A corporation, potentially, has infinite life because it not a real person. C. A patent is an intangible asset. D. A building is a tangible asset. E. Corporations can sue and be sued. Problem 3 In the principal-agent framework, from the point of view of shareholders: A. B. C. D. E. Shareholders Shareholders Managers are Managers are B and D. are are the the the agents. the principals. principals. agents. Problem 4 The ultimate financial goal of a corporation is to: A. B. C. D. E. Minimize Minimize Maximize Maximize Increase costs stockholder risk. profits for the shareholders. value of the corporation to the stockholders. size of the firm. Problem 5 What is the FALSE statement? A. B. C. D. E. When we move money from the future we say we are \"discounting\". One risky dollar worth more than a safe dollar. When we move money to the future we say we are \"compounding\". One dollar today worth more than one dollar tomorrow. None of the above options. Problem 6 Suppose you know that tomorrow the interest rate will reduce but the market still is not aware of that. What will be your best decision? A. Will the same to hold cash or bonds. B. It is not possible to determine. C. Sell your bonds. 1 D. Buy bonds. E. None of the above options. Problem 7 Suppose you have the option of two bonds, both with the same price. Duration of bond A is much longer than duration of Bond B. Suppose that you know that tomorrow the interest rate will increase but the market still is not aware of that. What will be your best decision? A. B. C. D. E. It is not possible to determine. Sell all your bonds. Invest in Bond A. Invest in Bond B. None of the above options. Problem 8 If an investment project (normal project) has an IRR equal to the cost of capital, the NPV for that project is: A. B. C. D. E. Zero Positive Negative Unable to determine None of the above options Problem 9 The profitability index is the ratio of the: A. B. C. D. E. Future value of cash flows to investment Net present value of cash flows to IRR Present value of cash flows to IRR Net present value of cash flows to investment None of the above options Problem 10 Suppose a firm sets aside assets to protect particular investors. These assets are called: A. B. C. D. E. Repurchased shares. Collateral. Subordinated debt. Senior debt. Time preference. 2