HW1 solutions
1. Which of the following is a financial asset?
An experienced and hardworking sales force.
A trademark
A bank loan agreement [correct]
Undeveloped land
2. Capital structure refers to the mix of a firm’s long-term debt financing and equity financing. Suppose that a firm has $4 billion debt. The market values the firm’s 100 million (equity) shares at $60 per share. Earnings per share is $5. Dividend per share is $1.What is the fraction of equity in the firm’s capital structure?
40%
60% [correct]
11%
24%
[(Market) value of equity is how much the stocks are valued by the market. In other words, it is the shareholder value, which equals to the price of the stock * number of shares outstanding: $60 * 100 million = $6 billion. Therefore, the firm has a capital structure with $4 billion debt and $6 billion equity. The fraction of equity is 60%.]
3. Which of the following decisions will affect the firm’s capital structure and therefore is a financing decision?
Acquire another company using cash
Issue new corporate bonds [correct]
Spend $7.6 billion on research and development
Laying off workers
4. The agency problem in a corporation is due to:
Its limited liability
Perpetual life of the corporation
Double taxation for corporations
The separation of ownership and management [correct]
5. A manager's compensation plan that only offers financial incentives for increases in quarterly profitability may create agency problems in that:
It does not help to improve the social responsibility performance of the firm.
The managers are not motivated by personal gain.
Short-term profits, not long-term shareholder values become the focus. [correct]
The board of directors may claim the credit.
6. Today, Kate bought 1,000 shares of Apple Inc. for $119.46 per share (market value per share) in the secondary market. The book value per share is $20. Apple Inc. receives
________ from Katherine:
$119,460
$119,460 less brokerage fees
$20,000
Nothing [correct]
[The secondary market
An experienced and hardworking sales force.
A trademark
A bank loan agreement [correct]
Undeveloped land
2. Capital structure refers to the mix of a firm’s long-term debt financing and equity financing. Suppose that a firm has $4 billion debt. The market values the firm’s 100 million (equity) shares at $60 per share. Earnings per share is $5. Dividend per share is $1.What is the fraction of equity in the firm’s capital structure?
40%
60% [correct]
11%
24%
[(Market) value of equity is how much the stocks are valued by the market. In other words, it is the shareholder value, which equals to the price of the stock * number of shares outstanding: $60 * 100 million = $6 billion. Therefore, the firm has a capital structure with $4 billion debt and $6 billion equity. The fraction of equity is 60%.]
3. Which of the following decisions will affect the firm’s capital structure and therefore is a financing decision?
Acquire another company using cash
Issue new corporate bonds [correct]
Spend $7.6 billion on research and development
Laying off workers
4. The agency problem in a corporation is due to:
Its limited liability
Perpetual life of the corporation
Double taxation for corporations
The separation of ownership and management [correct]
5. A manager's compensation plan that only offers financial incentives for increases in quarterly profitability may create agency problems in that:
It does not help to improve the social responsibility performance of the firm.
The managers are not motivated by personal gain.
Short-term profits, not long-term shareholder values become the focus. [correct]
The board of directors may claim the credit.
6. Today, Kate bought 1,000 shares of Apple Inc. for $119.46 per share (market value per share) in the secondary market. The book value per share is $20. Apple Inc. receives
________ from Katherine:
$119,460
$119,460 less brokerage fees
$20,000
Nothing [correct]
[The secondary market