Midterm Exam 1

Question 1

the objective of corporate finance

Answer 1

to maximize the value of the company

Question 2

the greatest sports deal of all time

Answer 2

silnas got the viewer/broadcast rights which lasted into perpetuity, they made over 800 million dollars

Question 3

facebook article

Answer 3

facebook is very profitable
they might need to start rethinking things
losing young customers

Question 4

why is it a problem that facebook is losing young customers

Answer 4

facebook’s revenue is ad driven and losing users decreases revenue

Question 5

what percentage of economists think we will go into a recession?

Answer 5

25%

Question 6

what impact does a recession have on investors?

Answer 6

investors tend not to do well

Question 7

what impact does recession have on consumers and employees?

Answer 7

layoffs and lower wages take place due to lower company revenues

Question 8

what impact does a recession have on companies?

Answer 8

cut spending and costs

laying off employees

Question 9

Albert Einstein compound interest quote

Answer 9

compound interest is the eighth wonder of the world. he who understands it, earns it. he who doesn’t, pays it.

Question 10

the agency problem

Answer 10

when a manager’s interests don’t align with the owner’s interests
put in the right incentives to ensure that management will do the right things

Question 11

advantages of a sole proprietorship

Answer 11

you run company and make own decisions
taxed once as personal income
you keep all profits
easy to start

Question 12

disadvantages of sole proprietorship

Answer 12

all liability on you and based on everything you own
lasts as long as you live
difficult to sell ownership

Question 13

partnership advantages

Answer 13

shared liability
more access to capital
relatively easy to start
income taxed once as personal income

Question 14

partnership disadvantages

Answer 14

not as easy to raise capital

unlimited liability

Question 15

corporation advantages

Answer 15

life of company is indefinite
easily raise capital
liability lies on corporation not person
transfer of ownership is easy
limited liability

Question 16

corporation disadvantages

Answer 16

double taxed
not easy to start a corporation
separation from ownership and management (agency problem)

Question 17

liquidity

Answer 17

access to cash and how quickly assets can be converted to cash at or close to its value

Question 18

market value

Answer 18

how much the market values it

what you would be able to sell it at

Question 19

book value

Answer 19

accounting value

amount the asset was purchased for

Question 20

common sizing

Answer 20

balance sheet - all accounts divided by total assets

income statement - all accounts divided by total sales

Question 21

EARs

Answer 21

effective annual rate - it’s the true or actual interest rate that you pay