Question 1 [5 pts]
Are the following statements True or False? (1 point each)
a) Austin Power Corp., a corporation incorporated in Delaware, has recently gone bankrupt thus failing to pay its suppliers and creditors. The shareholders of Austin Power should be responsible for these unpaid bills.
Answer: True/False
b) According to Fisher’s separation principle, a firm’s investment decision should take into account its different owners’ consumption preferences because they have no ability to borrow or lend money even if the capital market works perfectly.
Answer: True/False
c) Microsoft Corp. issued a 10-year bond in 2018. Because the company already had other bonds outstanding issued in the past, its new bond offering in 2018 is considered a secondary market transaction.
Answer: True/False
d) Because a corporation is not a human being, it cannot enter into contracts or borrow on its name.
Answer: True/False
e) Corporate managers should focus their efforts on maximizing the value of the firms’ equity claims, rather than accounting profits.
Answer: True/False
Question 2 [5 pts]
The current price per share of ABC Inc. is $25. A hostile takeover artist Shark Capital approached ABC Inc. and its shareholders to offer $35 per share for their shares. David, the manager of ABC Inc., is reviewing the takeover bid to decide what to do.
Which of the following is correct? Choose only one.
a) Even if David believes that the shares of ABC Inc. are currently undervalued and that other bidders would pay more than $35 per share to acquire the firm, accepting the Shark Capital’s bid works in the best interest of the shareholders.
b) Fighting off any takeover bid always works in the best interest of the shareholders.
c) David believes the management team of ABC Inc. can enhance the value of the firm so that the share price will exceed $35. In this case, rejecting the bid is in the best interest of the shareholders.
d) ALL of the above
e) NONE of the above
Answer:
Question 3 [5 pts]
When a region is hit by a natural disaster (e.g., New Orleans during Hurricane Katrina in 2005), some companies reportedly increase the price of bottled water by a significant magnitude (e.g., five to ten times more) for the local consumers who already suffer from the disaster. Whether this can be justified and on what ground is debatable. The managers of those firms often argue the increased price is justified because the prices of good are governed by the supply and demand, as well as the costs (e.g., transportation), which increase in the impacted area.
Which of the following is incorrect? Choose only one:
a) Charging high prices may not be justified, because the goal of shareholder value maximization does not mean that firms are allowed to engage in unethical or illegal actions.
b) The managers’ decision to charge higher prices is wrong because the primary objective of the firm is to maximize the benefits of stakeholders.
c) Charging high prices may not be in the best interests of the shareholders, because it can result in adverse effects in the long run, e.g., a legal risk (risk of being sued), bad reputation, and the loss of future customer base.
d) ALL of the above.
Answer:
Part i #2. Fin. statements
Question 4 [5 pts]
Consider the following information from a firm’s income statement for fiscal year 2050:
Sales revenues $865,000
Cost of goods sold $535,000
SG&A expenses $340,000
*SG&A: selling, general, and administrative expenses, including depreciation expenses
In addition, assume the applicable corporate income tax rate is 10% and that the firm pays no tax when its taxable income falls below zero (ignore any tax loss carryforward in case it bothers you). The firm has no debt interest expenses.
a) Determine the firm’s net income.
Answer (show the steps/calculation toward your answer):
b) Note that depreciation expenses are a noncash expense—i.e., no cash outflow is involved. Suppose the firm had reported $170,000 as SG&A by omitting its depreciation. (i) What would its net income be in this scenario? In addition, (ii) determine, without calculating any numbers, whether the cash available at the end of 2050 would increase or decrease.
Answer (show the steps/calculation toward your answer):
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