FINA 3332- Exam 1- Practice Review
Questions and Answers.
The primary objective of the financial manager is: - Answer Shareholder wealth maximization
Which of the following features of a corporation is LEAST accurate? - Answer Earnings from a
corporation are taxed only once.
True or False? "Shareholders of a corporation have limited liability". Briefly explain your
answer. - Answer TRUE.
The shareholders of a corporation cannot be held personally responsible for the
debt of the corporation.
This is called limited liability. Hence a shareholder's loss is limited to the amount she has
invested in a corporation.
Joe is a general partner in a limited partnership firm, while Jane is a limited partner in the same
firm. Which of the following statements regarding their respective relationships to the firm is
correct? - Answer Jane's liability for the firm's debts consists solely of her investment in the
firm.
_____ are outside of the direct control of financial managers.
A) investment decision - Answer economic environment factors
A major disadvantage of a sole proprietorship is the fact that - Answer the owner has
unlimited personal liability
Valiant Corp. is a C corporation that earned $3.4 per share before it paid any taxes. Valiant
Corp. retained $1 of after‐tax earnings for reinvestment and distributed what remained in
dividend payments. If the corporate tax rate was 35% and dividend earnings were taxed at
12.5%, what was the value of the dividend earnings received after ‐tax by a holder of
100,000 shares of Valiant Corp.? - Answer Corporate tax paid on $3.4 earnings =
$3.4 × 0.35 = 1.19;
Earnings after‐tax = 3.4 - 1.19 = $2.21
, Earnings distributed as dividends = $2.21 ‐ $1 = $1.21
Taxes paid on dividends by a shareholder = $1.21 × 0.125 = $0.15125
After‐tax dividends per share = $1.21 - $0.15125 = $1.05875; hence a holder of 100,000
shares receives
1.05875 × 100,000 = $105,875
You are a shareholder in a corporation which has elected subchapter S tax treatment. The
corporation announces earnings of $6 per share before tax. If the corporate tax rate is 40% and
your personal tax rate is 35%, how much tax must you pay per share? - Answer Tax paid by a
shareholder of S corporation = $6 × 0.35 = $2.10
A ________ is when a rich individual or organization purchases a large
fraction of the stock of a poorly performing firm and in doing so gets enough votes to
replace the board of directors and the CEO. - Answer hostile takeover
On August 19, 2004 Google IPO offered 19,605,052 shares at a price of U.S. $85 per share,
which were sold in an online auction in a bid to make the shares more
widely available. Which of the following statements best describes why these are
considered primary market transactions? - Answer The transactions were between the
corporation and investors.
Using the above information, how much would you pay for a share of BHP Billiton stock? -
Answer $41.93- use the ask brice to buy
You own 1000 shares of Newstar Financial stock, currently trading for $57 per share. You are
offered a deal where you can exchange these stocks for 900 shares of
Amback Financial Group stock, currently trading at $63 per share. What is the value of this
trade, if you choose to make it? - Answer Cost = value of Newstar shares
Benefit = value of Amback shares
Benefit - Costs = (900 × $63) - (1000 × $57) = ‐$300
You are offered the following investment opportunity: In exchange for $50,000 today, you
will receive 2,500 shares of stock in the Ford Motor Company and 10,000 euros today. The
Questions and Answers.
The primary objective of the financial manager is: - Answer Shareholder wealth maximization
Which of the following features of a corporation is LEAST accurate? - Answer Earnings from a
corporation are taxed only once.
True or False? "Shareholders of a corporation have limited liability". Briefly explain your
answer. - Answer TRUE.
The shareholders of a corporation cannot be held personally responsible for the
debt of the corporation.
This is called limited liability. Hence a shareholder's loss is limited to the amount she has
invested in a corporation.
Joe is a general partner in a limited partnership firm, while Jane is a limited partner in the same
firm. Which of the following statements regarding their respective relationships to the firm is
correct? - Answer Jane's liability for the firm's debts consists solely of her investment in the
firm.
_____ are outside of the direct control of financial managers.
A) investment decision - Answer economic environment factors
A major disadvantage of a sole proprietorship is the fact that - Answer the owner has
unlimited personal liability
Valiant Corp. is a C corporation that earned $3.4 per share before it paid any taxes. Valiant
Corp. retained $1 of after‐tax earnings for reinvestment and distributed what remained in
dividend payments. If the corporate tax rate was 35% and dividend earnings were taxed at
12.5%, what was the value of the dividend earnings received after ‐tax by a holder of
100,000 shares of Valiant Corp.? - Answer Corporate tax paid on $3.4 earnings =
$3.4 × 0.35 = 1.19;
Earnings after‐tax = 3.4 - 1.19 = $2.21
, Earnings distributed as dividends = $2.21 ‐ $1 = $1.21
Taxes paid on dividends by a shareholder = $1.21 × 0.125 = $0.15125
After‐tax dividends per share = $1.21 - $0.15125 = $1.05875; hence a holder of 100,000
shares receives
1.05875 × 100,000 = $105,875
You are a shareholder in a corporation which has elected subchapter S tax treatment. The
corporation announces earnings of $6 per share before tax. If the corporate tax rate is 40% and
your personal tax rate is 35%, how much tax must you pay per share? - Answer Tax paid by a
shareholder of S corporation = $6 × 0.35 = $2.10
A ________ is when a rich individual or organization purchases a large
fraction of the stock of a poorly performing firm and in doing so gets enough votes to
replace the board of directors and the CEO. - Answer hostile takeover
On August 19, 2004 Google IPO offered 19,605,052 shares at a price of U.S. $85 per share,
which were sold in an online auction in a bid to make the shares more
widely available. Which of the following statements best describes why these are
considered primary market transactions? - Answer The transactions were between the
corporation and investors.
Using the above information, how much would you pay for a share of BHP Billiton stock? -
Answer $41.93- use the ask brice to buy
You own 1000 shares of Newstar Financial stock, currently trading for $57 per share. You are
offered a deal where you can exchange these stocks for 900 shares of
Amback Financial Group stock, currently trading at $63 per share. What is the value of this
trade, if you choose to make it? - Answer Cost = value of Newstar shares
Benefit = value of Amback shares
Benefit - Costs = (900 × $63) - (1000 × $57) = ‐$300
You are offered the following investment opportunity: In exchange for $50,000 today, you
will receive 2,500 shares of stock in the Ford Motor Company and 10,000 euros today. The
