Finance 3300 Exam #1 with Complete
Solutions
Bondholders - ANS-a. lenders
b. interest (usually semi-annually) and face value at maturity guaranteed
c. first in line when company goes bankrupt
Stockholders - ANS-a. owners
b. dividends/capital gains are not guaranteed
c. last in line when company goes bankrupt
preferred stockholders - ANS-a. neither the owner (no voting right) nor lender (dividend
is not guaranteed)
b. dividends is not guaranteed
c. second in line when company goes bankrupt
1. preferred; common
2. ahead - ANS-why are they called preferred?
- dividends must be paid to ________ before they are paid to __________ stockholders
- they are ________ of common stockholders when the company goes bankrupt
Subchapter S - ANS-limited number ownership, limited liability, protects people in a
partnership
corporation - ANS-A legal entity created by a state, separate and distinct from its
owners and managers, having unlimited life, sue and be sued, make and be party to
contracts, and acquire property in its own name
1. limited liability
2. transferability of ownership
3. continuity
4. greater fund-raising capability - ANS-what are the 4 strengths of a corporation?
1. double taxation
2. more expensive to organize
3. subject to greater regulation
4. lacks secrecy - ANS-what are the 4 weaknesses of a corporation?
Primary market Chain - ANS-issuing firm -> investment banker -> selling group ->
original investors -> other investors
, Secondary market - ANS-are markets in which existing, already outstanding securities
are traded among investors. OTC and organized exchanges
OTC (over the counter) - ANS-no centralized market place; dealers are linked with the
purchasers and sellers quotation (NASDAQ) system. price determined by competitive
bids and negotiation
organized exchange - ANS-central market place (floor); specialists; auction-determined
price
the goal of a finance manager - ANS-maximizing shareholders wealth is the most
comprehensive goal because it takes into account the amount of timing of cash flows as
well as risk incurred to generate these cash flows (how much cash flows, when, and
what risk)
maximizing share price - ANS-which is the better goal in business?
- maximize share price
- maximize firm's profit
facts - ANS-maximizing share price versus maximizing firm's profit:
- conflicting interests because the goal of maximizing firm's profits focuses only on the
profit, potentially ignoring the risk or timing of the profit (cash flows)
the managers don't always work in the best interest of the shareholders - ANS-"you can
take the horse to water, but you cant make them drink it"
what does this quote he mention in class mean?
agency relationships - ANS-- conflicts between shareholders (owners) and managers
- aligning managers and shareholders interest
- conflicting interest between bondholders and shareholders
1. managerial incentives
2. direct intervention
3. threat of firing
4. takeover by the company - ANS-what are the 4 aspects of aligning managers and
shareholders' interests?
managerial incentives - ANS-performance based incentives plan
ex: executive stock options. performance shares
direction intervention - ANS-by (institutional) shareholders that can elect members of
board
threat of firing managers - ANS-proxy war is followed by a stock price appreciation of
shareholders (discipline managers)
Solutions
Bondholders - ANS-a. lenders
b. interest (usually semi-annually) and face value at maturity guaranteed
c. first in line when company goes bankrupt
Stockholders - ANS-a. owners
b. dividends/capital gains are not guaranteed
c. last in line when company goes bankrupt
preferred stockholders - ANS-a. neither the owner (no voting right) nor lender (dividend
is not guaranteed)
b. dividends is not guaranteed
c. second in line when company goes bankrupt
1. preferred; common
2. ahead - ANS-why are they called preferred?
- dividends must be paid to ________ before they are paid to __________ stockholders
- they are ________ of common stockholders when the company goes bankrupt
Subchapter S - ANS-limited number ownership, limited liability, protects people in a
partnership
corporation - ANS-A legal entity created by a state, separate and distinct from its
owners and managers, having unlimited life, sue and be sued, make and be party to
contracts, and acquire property in its own name
1. limited liability
2. transferability of ownership
3. continuity
4. greater fund-raising capability - ANS-what are the 4 strengths of a corporation?
1. double taxation
2. more expensive to organize
3. subject to greater regulation
4. lacks secrecy - ANS-what are the 4 weaknesses of a corporation?
Primary market Chain - ANS-issuing firm -> investment banker -> selling group ->
original investors -> other investors
, Secondary market - ANS-are markets in which existing, already outstanding securities
are traded among investors. OTC and organized exchanges
OTC (over the counter) - ANS-no centralized market place; dealers are linked with the
purchasers and sellers quotation (NASDAQ) system. price determined by competitive
bids and negotiation
organized exchange - ANS-central market place (floor); specialists; auction-determined
price
the goal of a finance manager - ANS-maximizing shareholders wealth is the most
comprehensive goal because it takes into account the amount of timing of cash flows as
well as risk incurred to generate these cash flows (how much cash flows, when, and
what risk)
maximizing share price - ANS-which is the better goal in business?
- maximize share price
- maximize firm's profit
facts - ANS-maximizing share price versus maximizing firm's profit:
- conflicting interests because the goal of maximizing firm's profits focuses only on the
profit, potentially ignoring the risk or timing of the profit (cash flows)
the managers don't always work in the best interest of the shareholders - ANS-"you can
take the horse to water, but you cant make them drink it"
what does this quote he mention in class mean?
agency relationships - ANS-- conflicts between shareholders (owners) and managers
- aligning managers and shareholders interest
- conflicting interest between bondholders and shareholders
1. managerial incentives
2. direct intervention
3. threat of firing
4. takeover by the company - ANS-what are the 4 aspects of aligning managers and
shareholders' interests?
managerial incentives - ANS-performance based incentives plan
ex: executive stock options. performance shares
direction intervention - ANS-by (institutional) shareholders that can elect members of
board
threat of firing managers - ANS-proxy war is followed by a stock price appreciation of
shareholders (discipline managers)
