MBA 601 EXAM 1: QUIZZES
QUESTIONS AND CORRECT
ANSWERS
AA2shareA2ofA2stockA2entitlesA2youA2to:A2-A2Ans--
C.A2AA2percentageA2ofA2theA2earningsA2ofA2theA2company
TheA2costA2ofA2providingA2goodsA2andA2servicesA2toA2customersA2isA2calledA2-A2Ans--
Expenses
BenefitsA2(i.e.A2money)A2thatA2aA2companyA2receivesA2fromA2itsA2customersA2isA2calledA2-
A2Ans--Revenue
RevenueA2-A2expensesA2=A2-A2Ans--NetA2Income
(T/
F):A2AA2companyA2mustA2payA2outA2theA2profitsA2thatA2itA2earnsA2toA2theA2stockholdersA2-
A2Ans--False.
AnA2ordinaryA2dividendA2isA2-A2Ans--distributionA2ofA2earningsA2toA2shareholders
(T/F):A2CompaniesA2thatA2areA2growingA2quicklyA2usuallyA2issueA2dividends.A2-A2Ans--
False.
YouA2canA2makeA2moneyA2investingA2inA2stocksA2by....A2-A2Ans--1.A2CollectingA2dividends
2.A2StockA2PriceA2AppreciationA2(buyA2low,A2sellA2high)
TheA2advantageA2ofA2aA2soleA2proprietorshipA2isA2-A2Ans--
CompleteA2control.A2(OwnersA2=A2managers)
TheA2primaryA2reasonA2forA2startingA2aA2corporationA2isA2-A2Ans--
ToA2raiseA2aA2lotA2ofA2capital.
(T/F):A2AA2corporationA2isA2itsA2ownA2legalA2entity.A2-A2Ans--True.
(T/F):A2InA2aA2corporation,A2theA2ownerA2isA2alsoA2theA2manager.A2-A2Ans--False.
IfA2youA2areA2anA2investorA2inA2aA2corporation,A2limitedA2liabilityA2meansA2-A2Ans--
YouA2areA2onlyA2liableA2forA2yourA2investmentA2inA2theA2company.
WhatA2areA2theA2disadvantagesA2ofA2aA2corporateA2entityA2-A2Ans--DoubleA2taxation
IncreasedA2regulation
LessA2control
,IfA2aA2corporationA2hadA2pre-
taxA2earningsA2ofA2$40,000A2andA2paidA2allA2ofA2thisA2outA2asA2aA2dividend,A2howA2muchA2t
axA2wouldA2theA2federalA2governmentA2collect?
A2AssumeA2aA220%A2federalA2incomeA2taxA2rateA2andA2aA215%A2dividendA2taxA2rate.A2-
A2Ans--12,800
(40,000A2xA2.20A2=A28,000)
(32,000A2xA2.15A2=A24,800)
TheA2primaryA2advantagesA2ofA2investingA2inA2stockA2areA2-A2Ans--unlimitedA2upside
votingA2rights
TheA2primaryA2advantagesA2ofA2investingA2inA2bondsA2areA2-A2Ans--
EasierA2toA2valueA2thanA2stock
KnownA2paymentA2amount
KnowA2whenA2youA2areA2goingA2toA2getA2paid
LessA2riskA2thanA2investingA2inA2stock.
PriorityA2overA2stockholdersA2inA2bankruptcy
WhenA2companiesA2issueA2stockA2theyA2giveA2upA2-A2Ans--Control
OwnershipA2andA2theA2rightA2toA2futureA2earnings
TheA2advantagesA2ofA2issuingA2bondsA2areA2-A2Ans--limitedA2upside
financialA2leverage
IsA2itA2riskierA2forA2aA2companyA2toA2issueA2stocksA2orA2bonds?A2-A2Ans--Bonds.
CompaniesA2raiseA2moneyA2byA2issuingA2stocksA2andA2bondsA2onA2theA2-A2Ans--
primaryA2market
TheA2firstA2timeA2aA2companyA2issuesA2stockA2toA2theA2publicA2itA2isA2calledA2aA2-A2Ans--
initialA2publicA2offeringA2(IPO)
WhatA2typeA2ofA2banksA2helpA2corporationsA2raiseA2moneyA2byA2issuingA2stocksA2andA2bo
nds?A2-A2Ans--investmentA2banks.
WhichA2ofA2theA2followingA2areA2secondaryA2markets?
SA2&A2PA2500
NASDAQ
DowA2JonesA2IndustrialA2Average
AmericanA2StockA2ExchangeA2(AMEX)
NewA2YorkA2StockA2ExchangeA2(NYSE)A2-A2Ans--NASDAQ
NYSE
AMEX
, (T/F):A2YouA2shouldA2believeA2anythingA2youA2readA2fromA2sell-sideA2analytics.A2-A2Ans--
False!!
WhyA2doA2companiesA2careA2aboutA2theirA2stockA2priceA2onA2theA2secondaryA2market?A2-
A2Ans--ItA2willA2affectA2themA2ifA2theyA2needA2toA2issueA2moreA2stock.
WhenA2youA2buyA2aA2stockA2youA2areA2typicallyA2buyingA2itA2-A2Ans--
OnA2aA2secondaryA2stockA2exchange/secondaryA2market
TheA2largestA2stockA2exchangesA2inA2theA2worldA2areA2locatedA2inA2-A2Ans--UnitedA2States
WhatA2isA2theA2futureA2valueA2ofA2$500A2todayA21A2yearA2fromA2now?A2AssumeA2aA2risk-
freeA2rateA2ofA26%.A2-A2Ans--530
FV=PV(1+i)^n
FV=500(1.06)
FV=530
TheA2presentA2valueA2ofA2$2,220A2discountedA21A2yearA2atA25%.A2RoundA2toA2theA2neares
tA2dollar.A2-A2Ans--PV=A2FV/(1+i)^N
PV=2,220/(1.05)
PV=2,114
WhichA2ofA2theA2followingA2willA2giveA2youA2theA2presentA2valueA2ofA2aA2futureA2amountA2di
scountedA21A2year?
A.A2PV*(1+i)
B.A2FV/(1+i)
C.A2PV/(1+i)
D.A2FV*(1+i)A2-A2Ans--B.A2FV/(1+i)
AssumingA2aA2discountA2rateA2ofA29%A2choiceA2isA2better:
ChoiceA2A:A2$500A2today
ChoiceA2B:A2$540A21A2yearA2fromA2now.A2-A2Ans--ChoiceA2A.A2
FindA2PVA2ofA2BA2andA2itA2equalsA2toA2495.
PV=540/1.09
AssumingA2aA2discountA2rateA2ofA24%A2choiceA2isA2better:
ChoiceA2A:A2$500A2today
ChoiceA2B:A2$540A21A2yearA2fromA2now.A2-A2Ans--PV=540/1.04
PV=519.23
ChoiceA2B.
AssumingA2aA26%A2discountA2rateA2whichA2choiceA2isA2better:
ChoiceA2A:A2GetA2$500A2today
ChoiceA2B:A2ReceiveA2$600A2inA22A2years
QUESTIONS AND CORRECT
ANSWERS
AA2shareA2ofA2stockA2entitlesA2youA2to:A2-A2Ans--
C.A2AA2percentageA2ofA2theA2earningsA2ofA2theA2company
TheA2costA2ofA2providingA2goodsA2andA2servicesA2toA2customersA2isA2calledA2-A2Ans--
Expenses
BenefitsA2(i.e.A2money)A2thatA2aA2companyA2receivesA2fromA2itsA2customersA2isA2calledA2-
A2Ans--Revenue
RevenueA2-A2expensesA2=A2-A2Ans--NetA2Income
(T/
F):A2AA2companyA2mustA2payA2outA2theA2profitsA2thatA2itA2earnsA2toA2theA2stockholdersA2-
A2Ans--False.
AnA2ordinaryA2dividendA2isA2-A2Ans--distributionA2ofA2earningsA2toA2shareholders
(T/F):A2CompaniesA2thatA2areA2growingA2quicklyA2usuallyA2issueA2dividends.A2-A2Ans--
False.
YouA2canA2makeA2moneyA2investingA2inA2stocksA2by....A2-A2Ans--1.A2CollectingA2dividends
2.A2StockA2PriceA2AppreciationA2(buyA2low,A2sellA2high)
TheA2advantageA2ofA2aA2soleA2proprietorshipA2isA2-A2Ans--
CompleteA2control.A2(OwnersA2=A2managers)
TheA2primaryA2reasonA2forA2startingA2aA2corporationA2isA2-A2Ans--
ToA2raiseA2aA2lotA2ofA2capital.
(T/F):A2AA2corporationA2isA2itsA2ownA2legalA2entity.A2-A2Ans--True.
(T/F):A2InA2aA2corporation,A2theA2ownerA2isA2alsoA2theA2manager.A2-A2Ans--False.
IfA2youA2areA2anA2investorA2inA2aA2corporation,A2limitedA2liabilityA2meansA2-A2Ans--
YouA2areA2onlyA2liableA2forA2yourA2investmentA2inA2theA2company.
WhatA2areA2theA2disadvantagesA2ofA2aA2corporateA2entityA2-A2Ans--DoubleA2taxation
IncreasedA2regulation
LessA2control
,IfA2aA2corporationA2hadA2pre-
taxA2earningsA2ofA2$40,000A2andA2paidA2allA2ofA2thisA2outA2asA2aA2dividend,A2howA2muchA2t
axA2wouldA2theA2federalA2governmentA2collect?
A2AssumeA2aA220%A2federalA2incomeA2taxA2rateA2andA2aA215%A2dividendA2taxA2rate.A2-
A2Ans--12,800
(40,000A2xA2.20A2=A28,000)
(32,000A2xA2.15A2=A24,800)
TheA2primaryA2advantagesA2ofA2investingA2inA2stockA2areA2-A2Ans--unlimitedA2upside
votingA2rights
TheA2primaryA2advantagesA2ofA2investingA2inA2bondsA2areA2-A2Ans--
EasierA2toA2valueA2thanA2stock
KnownA2paymentA2amount
KnowA2whenA2youA2areA2goingA2toA2getA2paid
LessA2riskA2thanA2investingA2inA2stock.
PriorityA2overA2stockholdersA2inA2bankruptcy
WhenA2companiesA2issueA2stockA2theyA2giveA2upA2-A2Ans--Control
OwnershipA2andA2theA2rightA2toA2futureA2earnings
TheA2advantagesA2ofA2issuingA2bondsA2areA2-A2Ans--limitedA2upside
financialA2leverage
IsA2itA2riskierA2forA2aA2companyA2toA2issueA2stocksA2orA2bonds?A2-A2Ans--Bonds.
CompaniesA2raiseA2moneyA2byA2issuingA2stocksA2andA2bondsA2onA2theA2-A2Ans--
primaryA2market
TheA2firstA2timeA2aA2companyA2issuesA2stockA2toA2theA2publicA2itA2isA2calledA2aA2-A2Ans--
initialA2publicA2offeringA2(IPO)
WhatA2typeA2ofA2banksA2helpA2corporationsA2raiseA2moneyA2byA2issuingA2stocksA2andA2bo
nds?A2-A2Ans--investmentA2banks.
WhichA2ofA2theA2followingA2areA2secondaryA2markets?
SA2&A2PA2500
NASDAQ
DowA2JonesA2IndustrialA2Average
AmericanA2StockA2ExchangeA2(AMEX)
NewA2YorkA2StockA2ExchangeA2(NYSE)A2-A2Ans--NASDAQ
NYSE
AMEX
, (T/F):A2YouA2shouldA2believeA2anythingA2youA2readA2fromA2sell-sideA2analytics.A2-A2Ans--
False!!
WhyA2doA2companiesA2careA2aboutA2theirA2stockA2priceA2onA2theA2secondaryA2market?A2-
A2Ans--ItA2willA2affectA2themA2ifA2theyA2needA2toA2issueA2moreA2stock.
WhenA2youA2buyA2aA2stockA2youA2areA2typicallyA2buyingA2itA2-A2Ans--
OnA2aA2secondaryA2stockA2exchange/secondaryA2market
TheA2largestA2stockA2exchangesA2inA2theA2worldA2areA2locatedA2inA2-A2Ans--UnitedA2States
WhatA2isA2theA2futureA2valueA2ofA2$500A2todayA21A2yearA2fromA2now?A2AssumeA2aA2risk-
freeA2rateA2ofA26%.A2-A2Ans--530
FV=PV(1+i)^n
FV=500(1.06)
FV=530
TheA2presentA2valueA2ofA2$2,220A2discountedA21A2yearA2atA25%.A2RoundA2toA2theA2neares
tA2dollar.A2-A2Ans--PV=A2FV/(1+i)^N
PV=2,220/(1.05)
PV=2,114
WhichA2ofA2theA2followingA2willA2giveA2youA2theA2presentA2valueA2ofA2aA2futureA2amountA2di
scountedA21A2year?
A.A2PV*(1+i)
B.A2FV/(1+i)
C.A2PV/(1+i)
D.A2FV*(1+i)A2-A2Ans--B.A2FV/(1+i)
AssumingA2aA2discountA2rateA2ofA29%A2choiceA2isA2better:
ChoiceA2A:A2$500A2today
ChoiceA2B:A2$540A21A2yearA2fromA2now.A2-A2Ans--ChoiceA2A.A2
FindA2PVA2ofA2BA2andA2itA2equalsA2toA2495.
PV=540/1.09
AssumingA2aA2discountA2rateA2ofA24%A2choiceA2isA2better:
ChoiceA2A:A2$500A2today
ChoiceA2B:A2$540A21A2yearA2fromA2now.A2-A2Ans--PV=540/1.04
PV=519.23
ChoiceA2B.
AssumingA2aA26%A2discountA2rateA2whichA2choiceA2isA2better:
ChoiceA2A:A2GetA2$500A2today
ChoiceA2B:A2ReceiveA2$600A2inA22A2years
