# Corporate Investment and Financing

**Question description**

1. What is an advantage of the corporate form?

2. What is the major disadvantage of the corporate
form?

3. What is agency cost and between what two stakeholders does this occur?

4. What are two things that can be done to reduce or mitigate agency cost?

5. What is the difference between a public and private corporation?

6. What is the title of the top financial officer in most corporations?

7. Give two reasons managers should act in the shareholder’s interest?

8. What is the financial goal for most publically traded corporations?

9. How would you find the value of a$100 perpetuity with at required return of 10%?

10. Where would you find an annuity in reality?

11. Is the annual percentage rate or (APR) an effective rate or a simple rate of interest?

12. What is the difference between the present value and the net present value?

13. What happens to the effective rate of return if the nominal rate is compounded more often?

14. How often do bonds issued inside the United States typically pay interest payments?(annual or semi-annual)

15. What is unique about how US treasury bonds are quoted?

16. If overall interest rates increase, which bond would have a greater price change? (a 20 year 6% bond or a 2 year 6% bond)

17. What is the normal shape of the term structure of interest rates?

18. What is the expectations theory of the term structure of interest rates?

19. What is the difference between the real interest rate and the nominal risk-free interest rate?

20. What do we typically use as a proxy for the nominal risk free interest rate in the US?

21. What is the job of the specialist?

22. How could a company have high earnings and yet a
low ability to pay out dividends?

23. What happens to the growth rate as a company matures?

24. How would you use market information to get a ballpark guess at the required return?

25. To be a value increasing growth opportunity the return on the project must be higher than what?

26. What is the payout ratio?

27. What are free cash flows?

28. Which decision model gives its answer as wealth created per dollar initially invested?

29. Which decision model gives its answer in years in present value terms?

30. What are two major weaknesses of the payback method?

31. Between Exxon and a small business, which is more likely to use the profitability index?

32. What causes multiple internal rates of return?

33. What is the difference between soft rationing and hard rationing?

34. Real cash flow should be discounted at what rate of return? Real or nominal?

35. What is meant by the incremental payoff from a project?

36. I have a piece of land that I am currently renting to a farmer. I am considering building a business on this property. Is this an example of an opportunity cost or a sunk cost?

37. My business is growing and accounts payable is expected to increase from $10,000 to $15,000 from this year to next. Would this be a source or use of funds or a positive or negative cash flow?

38. What is the role of depreciation in capital budgeting?

39. What does the equivalent annuity method allow you to do?

40. Where are the interest cost accounted for in the capital budgeting process (in the estimated cash flows or in the discount rate for a project)?

41. Acceptance of the project will cause overhead that is presently $100,000 to increase to $110,000. How much if any overhead should be allocated to the project?

42. What is the present value of $100 expected in two years from today at a discount rate of 6% is:

45. A bond has a coupon rate of 5%, par or maturity value of $1000 and matures in five years. The interest payments are made annually. Calculate the price of the bond if the market rate is 3.5%.

46. A bond has a coupon rate of 5%, par or maturity value of $1000 and matures in three years. The interest payments are made annually. Calculate the yield to maturity of the bond if the price of the bond is $1060.

47.The In-Tech Co. has just paid a dividend of $1 per share and is expected to pay $1.25 in year 1. The dividends are expected to grow at 25% per year for the next three years (years 2,3,4)and at the rate of 5% per year thereafter. If the required rate of return on the stock is 18%(APR), what is the current value of the stock?

Given the following cash flow for project A: C0= -3,000, C1= +500, C2= +1,500 and C3= +5,000. Using a 15% discount rate:

48.Calculate the NPV

49.Calculate the PI

50.Calculate the IRR

51.Calculate the Payback

52.Calculate the PV Payback

53.For project Z, year 5 inventories increase by $6,000, accounts receivables increase by $4,000 and accounts payables increase by $3,000. Calculate the incremental investment in working capital for year 5.

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