Q: A firm’s net worth can be calculated using which of the following equations?

$$\text{Net Worth} = \text{Assets} - \text{Liabilities}$$

Question 1

Which of the following best describes the principal-agent problem in corporate governance?

Accepted Answer

A conflict that arises when managers pursue their own interests rather than those of the shareholders.

Question 2

Which of the following is NOT a characteristic of a corporation?

Accepted Answer

Owners are personally liable for all debts.

Question 3

Suppose a firm issues a bond with a face value of $$1,000, a coupon payment of 50 $$per year, and a maturity of 10 years. If the market interest rate rises, what will happen to the price of the bond?

Accepted Answer

The price of the bond will decrease.

Question 4

Which of the following is an example of an implicit cost?

Accepted Answer

The opportunity cost of the owner's time.

Question 5

A firm’s net worth can be calculated using which of the following equations?

Accepted Answer

$$	ext{Net Worth} = 	ext{Assets} - 	ext{Liabilities}$$

Question 6

Which of the following best explains why stocks are generally riskier than bonds?

Accepted Answer

Bondholders are paid before shareholders in case of bankruptcy.

Question 7

If a firm’s income statement shows revenues of $$500,000, operating expenses of 300$$,000, and taxes paid of $50,000, what is its accounting profit?

Accepted Answer

$$500,000 - 300,000 - 50,000 = 150,000$$

Question 8

Which of the following is a method of direct finance for a firm?

Accepted Answer

Issuing bonds to investors.

Question 9

What is the present value of $1,000 to be received in 2 years if the interest rate is 5% per year?

Accepted Answer

$$PV = \frac{1000}{(1+0.05)^2} = 907.03$$

Question 10

Which of the following is a reason why fewer young people are starting businesses today, according to the study materials?

Accepted Answer

Increase in regulations and licensing requirements.

Question 11

A mutual fund differs from an exchange-traded fund (ETF) in that:

Accepted Answer

Mutual funds can only be sold back to the management company, while ETFs can be traded directly between investors.

Question 12

If a stock pays a constant dividend of $4 per year and the required rate of return is 8%, what is the price of the stock according to the present value formula for a perpetuity?

Accepted Answer

$$P = \frac{4}{0.08} = 50$$

Question 13

Which of the following is a potential conflict of interest for credit-rating agencies?

Accepted Answer

They are paid by the firms and governments whose bonds they rate.

Question 14

Which regulation requires CEOs to personally certify the accuracy of financial statements?

Accepted Answer

The Sarbanes-Oxley Act

Question 15

If a firm’s assets are $$2,000,000 and its liabilities are 1$$,500,000, what is its net worth?

Accepted Answer

$$2,000,000 - 1,500,000 = 500,000$$

Question 16

Which of the following best describes the difference between accounting profit and economic profit?

Accepted Answer

Economic profit includes both explicit and implicit costs, while accounting profit includes only explicit costs.

Question 17

A firm is considering two investment projects. Project A requires an initial investment of $$10,000 and will return 12$$,000 in one year. Project B requires an initial investment of $$10,000 and will return 13$$,000 in two years. If the interest rate is 10%, which project has the higher present value?

Accepted Answer

Project A: $$PV = \frac{12,000}{(1+0.10)^1} = 10,909.09$$; Project B: $$PV = \frac{13,000}{(1+0.10)^2} = 10,743.80. $$Project A has the higher present value.

Question 18

Which of the following is NOT a way that firms typically raise funds?

Accepted Answer

Issuing government bonds.

Question 19

Why do stock prices tend to move together during recessions and expansions?

Accepted Answer

Changes in economic conditions affect the expected profitability of many firms at once.

Firms, the Stock Market, and Corporate Governance: Study Notes

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