SHORT ANSWER

Corporate and International Finance (N1563) Seminar 1 (Questions)

1) Briefly explain the sequence of cash flows between financial markets and the firm.

2) Briefly discuss the role of financial managers.

3) Briefly discuss principal–agent problems as related to a corporation.

4) Explain why “maximization of shareholders' wealth” is the appropriate ultimate long-term goal of the firm.

5) Define the term economic value added (EVA). Briefly explain how a plant manager can improve EVA (economic value added)?

6) Is value maximization at odds with ethics?

MULTIPLE CHOICE

1) "Double taxation" refers to:

A) all partners paying equal taxes on profits.

B) paying taxes on profits at the corporate level and dividends at the personal level. C) the fact that marginal tax rates are doubled for corporations.

D) corporations paying taxes on both dividends and retained earnings.

2) Which of these duties are responsibilities of the corporate treasurer? A) Cash management and banking relationships

B) Financial statements and taxes

C) Raising capital and financial statements

D) Cash management and tax reporting

3) Which of the firm's financial managers is most likely to be involved with obtaining financing for the firm?

A) Treasurer

B) Board of directors

C) Controller

D) Chief Operating Officer

4) A firm with spare cash

A) should always invest it in U.S. equities.

B) should invest it in the safest projects available.

C) should pay it out to shareholders unless the firm can earn a higher rate of return on the cash than the shareholders can earn by investing in the capital market.

D) should always reinvest it in new equipment.

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5) Ethical decision making by management has a payoff for shareholders in terms of: A) increased managerial benefits.

B) higher current dividend payments.

C) improved capital structure.

D) enhanced firm reputation value.

6) Which one of the following can best be characterized as an agency problem?

A) differing opinions among directors as to the merits of paying a higher dividend. B) persistently late delivery times by a major supplier.

C) differing incentives between managers and owners.

D) geological problems in the company's new gold mine.

7) When managers' compensation plans are tied in a meaningful manner to the value of the firm, agency problems:

A) will be created.

B) are eliminated entirely from the firm.

C) can be reduced.

D) are shifted to other stakeholders.

8) A firm has an average investment of $10,000 during the year. During the same time, the firm generates after-tax income of $2,000.

Calculate the economic value added (EVA) for the firm. (The cost of capital is 15%.)

A) $500 B) $1,500 C) $2,000 D) $1,000

9) One calculates economic value added (EVA) as follows:

A) EVA = income earned - (cost of debt) × (investment) B) EVA = income earned - (cost of equity) × (investment) C) EVA = income earned - (cost of capital) × (investment) D) EVA = income earned - (investment) / (cost of capital)

10) One calculates economic profit (EP) as follows:

A) EP = (ROI - r) × (capital invested), where r = cost of capital B) EP = (ROI + r) × (capital invested), where r = cost of capital C) EP = (ROI) × (capital invested)

D) EP = (ROI)/(capital invested)

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