FIN 3403 EXAM 1 REVIEW QUESTIONS WITH
VERIFIED SOLUTIONS
What are the main advantages and disadvantages of organizing a firm as a C corporation?
Advantages:
There is no limit on the number of owners a C corporation may have, thus allowing the
corporation to raise substantial amounts of capital
The life of the business can continue beyond the death of any of the owners.
the liability of the owners is limited to the amount of their investment in the firm.
What are the main advantages and disadvantages of organizing a firm as a C corporation?
Disadvantages:
Income to a C corporation is subject to double taxation, once at the corporate level and again
when received by the owners in the form of a dividend
The C corporation is more complicated and more expensive to set up than other business entities.
The profits and losses of the
S corporation
are passed directly to shareholders and are not subject to corporate taxes, while the
C corporation
must first pay taxes on any profits before passing the after-tax profits on to shareholders.
In addition, the
S corporation
can have no more than 100 shareholders, all of whom must be U.S. citizens or residents.
The
C corporation
does not have any such restrictions on its shareholders.
You are a shareholder in a C corporation. The corporation earns $1.98 per share before
taxes. Once it has paid taxes it will distribute the rest of its earnings to you as a dividend.
Assume the corporate tax rate is 35% and the personal tax rate on (both dividend and non-
dividend) income is 28%. How much is left for you after all taxes are paid?
,The amount that remains is
$. 93.93
per share.
$1.98x.35=0.693
1.98-0.693=1.287
1.287x.28=0.36036
1.287-0.36036= $0.93
You are a shareholder in an S corporation. The corporation earns $1.69 per share before
taxes. As a pass through entity, you will receive $1.69 for each share that you own. Your
marginal tax rate is 35%. How much per share is left for you after all taxes are paid?
$1.69x.35=0.5915
$1.69-0.5915= 1.10
What is the most important type of decision that the financial manager makes?
The financial manager's most important job is to make the firm's investment decisions.
Why do all shareholders agree on the same goal for the financial manager?
All of the decisions by the financial manager are made within the context of the overriding goal
of financial
management—to
maximize the wealth of the owners, the
stockholders.
The stockholders have invested in the corporation, putting their money at risk to become the
owners of the corporation.
You are the CEO of a company and you are considering entering into an agreement to have
your company buy another company. You think the price might be too high, but you will
be the CEO of the combined, much larger company. You know that when the company gets
bigger, your pay and prestige will increase. What is the nature of the agency conflict here
and how is it related to ethical considerations?
There is an ethical dilemma when the CEO of a firm has incentives that are opposite to those of
the shareholders.
In this case, you (as the CEO) have an incentive to potentially overpay for another company
(which would be damaging to your shareholders) because your pay and prestige will improve.
You sit on the board of a public corporation. Your CEO has proposed taking steps to offset
the carbon impact of your company's manufacturing process. Doing so will add to the
company's overall expenses. Your CEO argues, however, that this action will actually
, increase the stock price, maximizing shareholder wealth. Why might socially-responsible
activities also be value-maximizing?
Socially responsible actions are not necessarily at odds with shareholder wealth maximization. If
potential customers value these actions highly, they will be more likely to purchase your
products and may even be willing to pay more for them if doing so helps a social goal that is
important to them. Further, some potential employees may value working for socially
responsible firms, helping you attract the best talent.
The
primary market
refers to a corporation issuing new shares of stock and selling them to investors. After this
initial transaction between the corporation and investors, the shares continue to trade in a
secondary market
between investors without the involvement of the corporation.
How do financial institutions help with risk-bearing?
Insurance companies spread out risk by pooling premiums together from policy holders and pay
the claims of those who have an accident, fire, medical need or die. This process spreads the
financial risk of these events out across a large pool of policyholders and the investors in the
insurance company.
Mutual funds and pension funds take your savings and spread them out among the stocks and
bonds of many different companies, limiting your exposure to any one company.
Financial institutions not only assist with the risk-bearing of savers and investors, but must also
be concerned about their own risk, spreading their loans out among a variety of clientele.
You are an international shrimp trader. A food producer in the Czech Republic offers to
pay you 2.3 million Czech koruna today in exchange for a year's supply of frozen shrimp.
Your Thai supplier will provide you with the same supply for 3.2 million Thai baht today.
If the current competitive market exchange rates are 25.91 koruna per dollar and 41.26
baht per dollar, what is the value of this exchange to you?
To compute the value of the Thai supplier's offer in dollars we use:
Thai Supplier's Offer in Dollars=Price in THB /( Exchange Rate THB/$)
The cost of the shrimp from the Thai supplier in dollars is
$77556.96
(3,200,000/41.26)
The amount the Czech producer is willing to pay for the shrimp in dollars is
$88768.82
VERIFIED SOLUTIONS
What are the main advantages and disadvantages of organizing a firm as a C corporation?
Advantages:
There is no limit on the number of owners a C corporation may have, thus allowing the
corporation to raise substantial amounts of capital
The life of the business can continue beyond the death of any of the owners.
the liability of the owners is limited to the amount of their investment in the firm.
What are the main advantages and disadvantages of organizing a firm as a C corporation?
Disadvantages:
Income to a C corporation is subject to double taxation, once at the corporate level and again
when received by the owners in the form of a dividend
The C corporation is more complicated and more expensive to set up than other business entities.
The profits and losses of the
S corporation
are passed directly to shareholders and are not subject to corporate taxes, while the
C corporation
must first pay taxes on any profits before passing the after-tax profits on to shareholders.
In addition, the
S corporation
can have no more than 100 shareholders, all of whom must be U.S. citizens or residents.
The
C corporation
does not have any such restrictions on its shareholders.
You are a shareholder in a C corporation. The corporation earns $1.98 per share before
taxes. Once it has paid taxes it will distribute the rest of its earnings to you as a dividend.
Assume the corporate tax rate is 35% and the personal tax rate on (both dividend and non-
dividend) income is 28%. How much is left for you after all taxes are paid?
,The amount that remains is
$. 93.93
per share.
$1.98x.35=0.693
1.98-0.693=1.287
1.287x.28=0.36036
1.287-0.36036= $0.93
You are a shareholder in an S corporation. The corporation earns $1.69 per share before
taxes. As a pass through entity, you will receive $1.69 for each share that you own. Your
marginal tax rate is 35%. How much per share is left for you after all taxes are paid?
$1.69x.35=0.5915
$1.69-0.5915= 1.10
What is the most important type of decision that the financial manager makes?
The financial manager's most important job is to make the firm's investment decisions.
Why do all shareholders agree on the same goal for the financial manager?
All of the decisions by the financial manager are made within the context of the overriding goal
of financial
management—to
maximize the wealth of the owners, the
stockholders.
The stockholders have invested in the corporation, putting their money at risk to become the
owners of the corporation.
You are the CEO of a company and you are considering entering into an agreement to have
your company buy another company. You think the price might be too high, but you will
be the CEO of the combined, much larger company. You know that when the company gets
bigger, your pay and prestige will increase. What is the nature of the agency conflict here
and how is it related to ethical considerations?
There is an ethical dilemma when the CEO of a firm has incentives that are opposite to those of
the shareholders.
In this case, you (as the CEO) have an incentive to potentially overpay for another company
(which would be damaging to your shareholders) because your pay and prestige will improve.
You sit on the board of a public corporation. Your CEO has proposed taking steps to offset
the carbon impact of your company's manufacturing process. Doing so will add to the
company's overall expenses. Your CEO argues, however, that this action will actually
, increase the stock price, maximizing shareholder wealth. Why might socially-responsible
activities also be value-maximizing?
Socially responsible actions are not necessarily at odds with shareholder wealth maximization. If
potential customers value these actions highly, they will be more likely to purchase your
products and may even be willing to pay more for them if doing so helps a social goal that is
important to them. Further, some potential employees may value working for socially
responsible firms, helping you attract the best talent.
The
primary market
refers to a corporation issuing new shares of stock and selling them to investors. After this
initial transaction between the corporation and investors, the shares continue to trade in a
secondary market
between investors without the involvement of the corporation.
How do financial institutions help with risk-bearing?
Insurance companies spread out risk by pooling premiums together from policy holders and pay
the claims of those who have an accident, fire, medical need or die. This process spreads the
financial risk of these events out across a large pool of policyholders and the investors in the
insurance company.
Mutual funds and pension funds take your savings and spread them out among the stocks and
bonds of many different companies, limiting your exposure to any one company.
Financial institutions not only assist with the risk-bearing of savers and investors, but must also
be concerned about their own risk, spreading their loans out among a variety of clientele.
You are an international shrimp trader. A food producer in the Czech Republic offers to
pay you 2.3 million Czech koruna today in exchange for a year's supply of frozen shrimp.
Your Thai supplier will provide you with the same supply for 3.2 million Thai baht today.
If the current competitive market exchange rates are 25.91 koruna per dollar and 41.26
baht per dollar, what is the value of this exchange to you?
To compute the value of the Thai supplier's offer in dollars we use:
Thai Supplier's Offer in Dollars=Price in THB /( Exchange Rate THB/$)
The cost of the shrimp from the Thai supplier in dollars is
$77556.96
(3,200,000/41.26)
The amount the Czech producer is willing to pay for the shrimp in dollars is
$88768.82
