Tutorial Questions Week 1: The Corporation; Financial Decision Making
Chapter 1 Problems 1, 2, 9, 15,
Chapter 3 Problems 4, 12, 16
What is the most important difference between a corporation and all other organization forms?
What does the phrase limited liability mean in a corporate context?
Corporate managers work for the owners of the corporation. Consequently, they should make decisions that are in the interests of the owners, rather than their own. What strategies are available to shareholders to help ensure that managers are motivated to act this way?
1-15. If you wanted to buy Yahoo!, what price would you pay? How much would you receive if you wanted to sell Yahoo!?
Suppose your employer offers you a choice between a $5000 bonus and 100 shares of the company stock. Whichever one you choose will be awarded today. The stock is currently trading for $63 per share.
a. Suppose that if you receive the stock bonus, you are free to trade it. Which form of the bonus should you choose? What is its value?
b. Suppose that if you receive the stock bonus, you are required to hold it for at least one year. What can you say about the value of the stock bonus now? What will your decision depend on?
3-12. Suppose Bank One offers a risk-free interest rate of 5.5% on both savings and loans, and Bank Enn offers a risk-free interest rate of 6% on both savings and loans.
a. What arbitrage opportunity is available?
b. Which bank would experience a surge in the demand for loans? Which bank would receive a surge in deposits?
c. What would you expect to happen to the interest rates the two banks are offering?
3-16. An Exchange-Traded Fund (ETF) is a security that represents a portfolio of individual stocks. Consider an ETF for which each share represents a portfolio of two shares of Hewlett-Packard (HPQ), one share of Sears (SHLD), and three shares of General Electric (GE). Suppose the current stock...
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