HFT 4464 TEST WITH COMPLETE
SOLUTION
The three major decisions in financial management involve - ANSWER
investing, financing, and the payment of dividens
When does a project create value? - ANSWER incremental benefits exceed
incremental costs
Advantages and disadvantages of the different forms of business
organizations - ANSWER Sole Proprietorship: ease of formation, greater
control, single taxation. Disadvantages: unlimited liability relative difficulty in
raising capital. Partnership: ease of formation, greater control, single
taxation. Disadvantages: unlimited liability, relative difficulty in raising
capital.. Corporation: unlimited life,limited liability, relative ease in raising
capital. Disadvantages: relatively difficult to form, increased regulation,
double taxation on dividends.
The difference between preferred stocks and common stocks. - ANSWER
Common stockholders can vote for the board of directors
How to maximize value for the owners of stocks. - ANSWER By receiving a
stream of dividend payments and by eventually selling their stock at a higher
price than they paid aka capital gain
Factors that determine the value of the future dividends. - ANSWER 1.) size
of dividends, all else being equal, larger dividends will yield a higher stock
price
2.)The timing of the dividends
, 3.) The risk associated with the dividends
Who do we satisfy first if we want to maximize wealth? - ANSWER The goal
of wealth maximization for the owners makes sense for the firm because if
we have satisfied owners, we have satisfied all other parties as well
What is an agency problem: examples? - ANSWER EXP:lenders disagreeing
with hotel owners about dividend payments
EXP:Shirking is when a manager receives a guaranteed high, fixed salary but
has no other reasons to be invested in the company's success
Why does an agency problem arise? - ANSWER People usually act in their
own best interest.
How to address an agency problem? - ANSWER design the initial contract
properly with appropriate incentives
How did McDonald's, Marriott, and holiday Inns create value for themselves?
- ANSWER Marriott: international hotel management McDonalds: Breakfast
sandwich Holiday inn: offered swimming pool food and beverage and
children to stay with no charge, first reservation system
Why do people invest? - ANSWER Giving something up today to own
something bigger in the future. Deferring present consumption in hopes of
increased future consumption.
Factors that affect the present value of future cash flows. - ANSWER PV of
cash flows is cash flow discounted and rounded to nearest dollar
What happens to a price of a bond if interest rates fluctuate? - ANSWER it is
unlikely that investor will reinvest all coupons at promised yield; if interest
rates increase, coupons reinvested at higher yields, increasing reinvestment
SOLUTION
The three major decisions in financial management involve - ANSWER
investing, financing, and the payment of dividens
When does a project create value? - ANSWER incremental benefits exceed
incremental costs
Advantages and disadvantages of the different forms of business
organizations - ANSWER Sole Proprietorship: ease of formation, greater
control, single taxation. Disadvantages: unlimited liability relative difficulty in
raising capital. Partnership: ease of formation, greater control, single
taxation. Disadvantages: unlimited liability, relative difficulty in raising
capital.. Corporation: unlimited life,limited liability, relative ease in raising
capital. Disadvantages: relatively difficult to form, increased regulation,
double taxation on dividends.
The difference between preferred stocks and common stocks. - ANSWER
Common stockholders can vote for the board of directors
How to maximize value for the owners of stocks. - ANSWER By receiving a
stream of dividend payments and by eventually selling their stock at a higher
price than they paid aka capital gain
Factors that determine the value of the future dividends. - ANSWER 1.) size
of dividends, all else being equal, larger dividends will yield a higher stock
price
2.)The timing of the dividends
, 3.) The risk associated with the dividends
Who do we satisfy first if we want to maximize wealth? - ANSWER The goal
of wealth maximization for the owners makes sense for the firm because if
we have satisfied owners, we have satisfied all other parties as well
What is an agency problem: examples? - ANSWER EXP:lenders disagreeing
with hotel owners about dividend payments
EXP:Shirking is when a manager receives a guaranteed high, fixed salary but
has no other reasons to be invested in the company's success
Why does an agency problem arise? - ANSWER People usually act in their
own best interest.
How to address an agency problem? - ANSWER design the initial contract
properly with appropriate incentives
How did McDonald's, Marriott, and holiday Inns create value for themselves?
- ANSWER Marriott: international hotel management McDonalds: Breakfast
sandwich Holiday inn: offered swimming pool food and beverage and
children to stay with no charge, first reservation system
Why do people invest? - ANSWER Giving something up today to own
something bigger in the future. Deferring present consumption in hopes of
increased future consumption.
Factors that affect the present value of future cash flows. - ANSWER PV of
cash flows is cash flow discounted and rounded to nearest dollar
What happens to a price of a bond if interest rates fluctuate? - ANSWER it is
unlikely that investor will reinvest all coupons at promised yield; if interest
rates increase, coupons reinvested at higher yields, increasing reinvestment
