Question

1. Assume there are 5 seats to vote in the board of directors. There are only three shareholders: Arnold (100 shares), Beth (40 shares), and Charles (60 shares). With cumulative voting Charles can elect at least _________.

Select one:

a. zero directors

b. one director

c. two directors    

d. three directors   

2If a savings account pays an annual interest of 2% compounded quarterly, then the quarterly interest rate should be less than 0.5%.

Select one:

True

False

3.If a company is liquidated, preferred shareholders have a first claim on the company assets than subordinate debt holders.

Select one:

True

False

4Assume you invest $20,000 with expected cash flows of $10,500 and $11,025 in periods one and two respectively. If the discount rate is 5% then the net present value of your investment is $1,525.

Select one:

True

False

5.An example of indirect finance is when companies issue bonds instead of getting loans from commercial banks.

Select one:

True

False

Answer 1

1. Arnold has 100 shares = 50% voting rights (100/200)

Beth has 40 shares = 20% voting rights (40/200)

Charles has 60 shares = 30% voting rights (60/200)

Since there are 5 seats for board of directors, with cumulative voting Charles can elect at least ONE director(b). (30% of 5seats = 1.5)

2. FALSE. Since, it is compounded quarterly the the effective rate would be exactly 0.5% i.e (Rate /4)

3. FALSE. Subordinate debts are debts that fall after Senior debts. However, subordinated debt does have priority over preferred and common equity.

4. FALSE.

year 0 = $ -20000 x 1

year 1 = $ 10500 x 0.9523 (PV factor)

year 2 = $ 11025 x 0.9070 (PV factor)

NPV = - 20000 + 9999.15 + 9999.675 = -1.175

5. FALSE. Indirect finance is a type of finance where company raises money from getting loans throught banks and Direct finance is where company is issuing bonds which is from financial markets to raise money.