The main disadvantage of organizing a business as a corporation is...

Cost incurred when the agent takes actions that negatively influence the principal

AND

Costs of monitoring the agent’s actions to ensure compliance

Shareholders are the principals

Managers are the agents

If the one-year discount factor is 0.8333, what is the discount rate per year?...

The following statements regarding the NPV rule and the rate of return rule are true except:

C. Accept a project if NPV + Cost > 0

Any company whether it is a large corporation such as Microsoft or a small local

business faces two key decisions:

1) The investment or capital budgeting decision: What real and/or intangible assets

should the firm invest in?

• Real asset investments: property, plant and equipment.
• Intangible assets: nonmaterial asset, such as technical expertise, a brand, or a patent.

2) The financing decision: How should the firm raise the money to finance the

investments?

Sources of financing:

• Retained earnings: reinvested profits from previous and/or ongoing investments.
• Bank loans and lines of credit.Professor David C. Mauer Introduction to Corporate Finance, Page 3
• Venture capital funding: private equity infusion of capital to fund a new firm.
• Equity and debt issues and a variety of hybrid securities (e.g., convertible debtand preferred stock).

Make decisions so as to maximize total firm value

i.e., the sum of equity and debt value.

Note: This is almost always taken to mean that the firm should make investment and financing decisions that maximize the stock price.

When a corporation initially issues its securities.

Also called a Primary Issue

Informal markets typically with foreign exchanges 

(currency exchange, ex/ airport)

If the discount rate is 12% per year with annual compounding, the present value of a

perpetuity paying $100,000 per year when its first payment starts 25 years from today is

equal to:

PV = (100,000/.12) *( 1/(1.12)^24) =

$54,901.75

If the discount rate is 13% per year with annual compounding, the present value of an

annuity paying $10,000 per year at the end of years 5 through 25 is equal to:

PV = 10,000 * [(1/.13) - (1/(.13*1.13^21)] * 1/(1.13^4) = 

$43,555.14

If the present value of $1.00 received n years from today at an interest rate of r is 0.497, then

what is the future value of $1.00 invested today at an interest rate of r for n years?

FV = 1/.497 = 

$2.012

Mr. Nash expects to retire in 25 years and would like to accumulate $1.5 million in his

retirement account. If the return on his retirement account is 12% per year with monthly

compounding, how much should Mr. Nash put into the retirement account each month in

order to achieve his goal? Assume that Mr. Nash will deposit the same amount each month

into his retirement account and that his first deposit will be one month from today.

X * [(1.01^300) - 1/.01] = 1,500,000 --> X = $798.36

$798.36

If the discount rate is 10% per year with quarterly compounding, what is the present value of

$1,000 to be received in 18.2 months?

PV = (1,000/(1.025^(18.2/3)) = 1000/(1.10381289^(18.2/12) =

$860.88

The NPV obtained by discounting nominal cash flows using the nominal discount rate is:

The same as the NPV obtained by discounting real cash flows using the real discount rate

Mr. Zip invests $1,000 at a 10% nominal rate for one year. If the expected inflation rate is

4% per year, what is the real value of the investment at the end of one year?

(1000*1.1)/1.04 = 

$1,057.69

The yield-to-maturity of a coupon-paying bond that has a price equal to its par value assumes

that:

The coupon payments can be reinvested at a rate equal to the coupon rate

 - AND - 

The coupon payments can be reinvested at a rate equal to the yield-to-maturity

More sensitive than a short-term bond to fluctuations in interest rates