FIN 321 MIDTERM 1 CONCEPTS

Which of the following work to reduce agency conflicts between stockholders and​ bondholders?

• 
  A. Including restrictive covenants in the​ company’s bond contract.

• B. Providing managers with a large number of stock options.

• 
  C. The passage of laws which make it easier for companies to resist hostile takeovers.

• Statements b and c are correct.

• 
  All of the statements above are correct.

Which of the following actions are likely to reduce the agency problem between stockholders and​ managers?

• 
  A.

  Congress passes a law that severely restricts hostile takeovers.

• B.

  A manager receives a lower salary but receives additional shares of the​ company’s stock.

• 
  C.

  The board of directors has become more vigilant in its oversight of the​ company’s management.

• 
  Statements b and c are correct.

• All of the statements above are correct.

The primary goal of a​ publicly-owned firm interested in serving its stockholders should be to

• Maximize expected EPS

• Maximize the stock price per share.

• Maximize expected total corporate profit.

• Maximize expected net income.

Until this​ year, Cheers Inc. was organized as a partnership. This​ year, the partners have decided to organize the business as a corporation. As a result of this change in organizational​ form, which of the following statements is most​ correct?

• Cheers will now be subject to fewer regulations.

• 
  ​Cheers’ investors will now find it more difficult to transfer ownership.

• Cheers’ shareholders​ (the ex-partners) will now have limited liability.

• Cheers will now find it more difficult to raise additional capital.

A bond will trade at a discount if its coupon rate is less than its yield to maturity.

• True

• False

Which of the following will be a source of cash flows for a shareholder of a certain​ stock?

I. Sale of the shares at a future date

II. The firm in which the shares are held paying out cash to shareholders in the form of dividends

III. The firm in which the shares are held increasing the total number of shares outstanding through a stock split

• I only

  
  

• II only

  
  

• I and II

  
  

• II and III

  
  

How are investors in

zero−coupon

bonds compensated for making such an​ investment?

• Such bonds are purchased at their face value and sold at a premium on a later date.

• Such bonds are purchased at a​ discount, below their face value.

  
  

• Such bonds make regular interest payments.

  
  

• Such bonds have a lower face value as compared to other bonds of similar term.

  
  

You are given two choices of​ investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of​ 4%, and Investment B has a discount rate of​ 5%. Which of the following is​ true?

• The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B.

• The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B

• The present value of cash flows in Investment A is equal to the present value of cash flows in Investment B.

• 
  No comparison can be

  made - we need to know the cash flows to calculate the present value.

The present value​ (PV) of a stream of cash flows is just the sum of the present values of each individual cash flow.

• True

• False

Stocks have both diversifiable risk and undiversifiable​ risk, but only diversifiable risk is rewarded with higher expected returns.

• True

• False