Instructions:
● Write your NAME, SURNAME and LIBRARY CARD NUMBER on the coloured MCQ form.
● Use PENCIL+ ERASER.
● There are 10 Multiple Choice Questions worth 4 marks each.
● Choose only one answer for each question on the MCQ form. Two or more boxes ticked, or illegible answers, are considered as incorrect answers.
● There are no marks deducted for an incorrect answer.
1. Which of the following statements is most correct?
a. An advantage to incorporation is that it allows for less regulation of the business.
b. Unlike a partnership, a disadvantage of a corporation is that has limited liability.
c. An advantage of a corporation is that it is subject to double taxation.
d. Corporations face more regulations when compared to partnerships. [4 marks]
2. The Principal-Agent Problem arises:
a. because managers have little incentive to work in the interest of shareholders when this means working against their own self-interest.
b. because of the separation of ownership and control in a corporation.
c. Both A and B
d. None of the above. [4 marks]
3. Which of the following is NOT an advantage of a sole proprietorship?
a. Limited liability
b. Ease of setup
c. Single taxation
d. No separation of ownership and control [4 marks]
4. Which of the following statements is FALSE?
a. The process of moving a value or cash flow forward in time is known as compounding.
b. It is only possible to compare or combine values at the same point in time.
c. A dollar in the future is worth more than a dollar today.
d. The effect of earning interest on interest is known as compound interest. [4 marks]
5. The effective annual rate (EAR) for a loan with a stated APR of 8% compounded monthly is closest to:
a. 8.30%
b. 8.00%
c. 8.66%
d. 7.72% [4 marks]
6. Dagny Taggart has just purchased a home and taken out a £400,000 mortgage. The mortgage has a 30-year term with monthly payments and has an APR of 5.4%. Dagny's monthly payments are closest to:
a. £2246
b. £1110
c. £1800
d. £2268 [4 marks]
7. Which of the following statements is TRUE?
a. If a bond's yield to maturity is less than its coupon rate, the bond trades at a premium.
b. If a bond's yield to maturity exceeds its coupon rate, the bond trades at a premium.
c. Prices of bonds with lower durations are more sensitive to interest rate changes.
d. Bonds with higher coupon rates are more sensitive to interest rate changes. [4 marks]
8. Which one of the following statements is correct?
a. From a legal perspective, preferred stock is a form of corporate equity.
b. All classes of stock must have equal voting rights per share.
c. Common shareholderselect the corporate directors while the preferred shareholders vote on mergers and acquisitions.
d. Shareholders prefer noncumulative dividends over cumulative dividends. [4 marks]
9. If the financial markets are semi-strong form. efficient, then:
a. only the most talented analysts can determine the true value of a security.
b. only individuals with private information have a marketplace advantage.
c. technical analysis provides the best tool to use to gain a marketplace advantage.
d. noone individual has an advantage in the marketplace. [4 marks]
10. Which one of the following statements is correct?
a. All secondary markets are dealer markets.
b. All secondary markets are broker markets.
c. All stock trades between existing shareholders are secondary market transactions.
d. All stock transactions are secondary market transactions. [4 marks] TOTAL: 40 marks
Section B
ANSWER ALL QUESTIONS
1. Joe just inherited the family business, and having no desire to run the family business, he has decided to sell it to an entrepreneur. In exchange for the family business, Joe has been offered an immediate payment of £100,000. Joe will also receive payments of £50,000 in one year, £50,000 in two years, and £75,000 in three years. The current market rate of interest for Joe is 6%. In terms of present value, how much will Joe receive for selling the family business? [10 marks]
2. The Basic Point Company has a bond outstanding with a face value of £1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Basic Point bond is 8.8%, then at what price should this bond trade for? [20 marks]
3. Discuss the strategies available to shareholders to help ensure that managers are motivated to act in the interest of the shareholders rather than their own interest? [20 marks]
4. Briefly explain the term limited liability. [10 marks] TOTAL: 60 marks