Which of the following are real assets, and which are financial?
Which of the following are investment decisions, and which are financing decisions?
Which of the following statements always apply to corporations?
Unlimited liabilityuncheckedCorrect
Limited lifeuncheckedCorrect
Ownership can be transferred without affecting operationscheckedCorrect
Managers can be fired with no effect on ownershipCorrect
Which of the following are correct descriptions of large corporations?
Managers no longer have the incentive to act in their own interests.uncheckedCorrect
The corporation survives even if managers are dismissed.checkedCorrect
Shareholders can sell their holdings without disrupting the business.checkedCorrect
Corporations, unlike sole proprietorships, do not pay tax; instead, shareholders are taxed
on any dividends they receive.uncheckedCorrect
Which of the following statements more accurately describes the treasurer than the controller?
Monitors capital expenditures to make sure that they are not
misappropriateduncheckedCorrect
Responsible for investing the firm’s spare cashcheckedCorrect
Responsible for arranging any issue of common stockcheckedCorrect
Responsible for the company’s tax affairsuncheckedCorrect
We claim that the goal of the firm is to maximize current market value. Could the following
actions be consistent with that goal?
Company A pays its managers a fixed salary. Company B ties compensation to the performance
of the stock.
Which company’s compensation package would most help to mitigate conflicts of interest
between managers and shareholders?
Company A
Company B
Read the following passage and choose the appropriate terms to complete the sentences.
Companies usually buy real Correctassets. These include both tangible assets such as executive
airplanes Correctand intangible assets such as brand names Correct. To pay for these assets,
they sell financial Correctassets such as bonds Correct. The decision about which assets to buy
is usually termed the capital budgeting Corrector investment Correctdecision. The decision
about how to raise the money is usually termed the financing Correctdecision.
Choose the type of company in each case that best fits the description.
https://www.coursehero.com/file/67677036/Week-1-Ch-1-Homeworkdocx/
back to shareholders Correctin the form of a(n) dividend Correctand they can invest it
in financial assets Correct. Shareholders want the company to invest in real assets Correctonly if
the expected return Correctis higher Correctthan they could earn for themselves in equivalent
risk investments. The return that shareholders could earn for themselves is therefore
the opportunity cost of capital Correctfor the firm.
Chapter 2
Consider the table shown below to answer the question posed in part a. Parts b and c are
independent of the given table.
Market
Number of ShareCapitalization
(millions)× Stock Price= ($ millions)
Callaway Golf (ELY)94.6 × $16.36 = $1547.66
Alaska Air Group (ALK)123.4 × $61.96 = $7645.86
Yum! Brands (YUM)332.5 × $85.13 = $28,305.73
Caterpillar Tractor (CAT)147.4 × $597.63 = $88,090.66
703,235.3
7,705.0 × $91.27 = $
Microsoft (MSFT)5
a. The price of Yum! Brands stock has risen to $185. What is the market value of the firm’s
equity if the number of outstanding shares does not change? (Enter your answer in billions
rounded to 3 decimal places.)
b. The rating agency has revised Catalytic Concepts’ bond rating to BBB (use Table 2.2).
What interest rate, approximately, would the company now need to pay on its
bonds? (Enter your answer as a percent rounded to 1 decimal place.)
c. A farmer and a meatpacker use the commodity markets to reduce their risk. One agrees
to buy live cattle in the future at a fixed price, and the other agrees to sell. Which one sells?
A farmer
A meatpacker
Explanation
a.
332.5 million × $185 = $61.513 billion
c.
The farmer sells cattle having raised them. The meat packer buys cattle as the input into
products to be processed and sold.
