Question

 A. The theoretical financial goal for a corporation is to

 a. Minimize losses for the year

 b. Maximize net income for the year

 c. Maximize shareholder wealth, in other words maximize the price of the company's

 stock

 d. Maximize total assets

 B. Pete, a fellow student in your FIN 3200 class, is starting a restaurant business, and is raising capital for the company, by offering each of you a package of 50 common shares at

 a price of $100.00 each. Is this an example of:

 a. Direct Transfer in the capital formation process

 b. Indirect Transfer using Investment Banks in the capital formation process

 c. Indirect Transfer through financial intermediaries ( commercial banks)

 d. None of the above

 C. With respect to a corporate bond, a call premium is:

 a. a premium bond traders have to pay brokers in order to trade bond

 b. a premium corporate bond issuers must pay investment bankers in order have the

 bond rated

 c. a premium exchanges must pay the issuers in order to get their business

 d. none of the above

 D. It has been discussed in class that 85% + of new start- up companies fail within the first five years. And it has also been discussed that the immediate common denominator of these failures is (independent of strategic reasons) the inability to pay current bills due. Given this, what category of ratios do you think the managers of a start up company in particular (not necessarily larger, established corporations) should pay attention to initially?

 a. Profitability Ratios

 b. Activity Ratios

 c. Debt Ratios

 d. Liquidity Ratios

Answer 1

A.

The theoritical goal of any corporation is to maximize shareholders' wealth or in other words, maximize the price of company's stock. All other goals of the corporation are dependent on this goal. When shareholders' wealth increases, all other goals are achieved.

Hence, correct option is (c)

B.

When Peter raises capital by issuing shares directly to some investors, it is a case of direct transfer in the process of capital formation.

Hence, correct option is (a)

C.

Call premium is the amount in excess of par value of bonds, which is given to the bond holders in case of early redemption of bonds by the company. Hence, none of the options given are correct.

Hence, correct option is (d)

D.

When short term solvency is to be judged, liquidity ratios serve the purpose. Since most of the start up companies fail to pay their current bills, hence managers of such companies must pay attention to the liquidity ratios.

Hence, correct option is (d)

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