Question

1. You are considering buying a new car. Price is $23,000 and you will pay down payment of $3000. If you plan to incase the car over a 50 month period at a nominal interest of 12% what would be you monthly payment?

A. $ 613.25

B. $ 510.25

C. $ 480. 65

D. $ 620.50

2. The conflict of interest exists between stockholders and creditors in a corporation because stockholders may

A. Increase the firms investment risk level

B. Decrease the amount of deft outstanding

C. Decrease the risk of a firms investment

D. Increase the firms net worth

Answer 1

Question 1.

Price - 23000$

Downpayment - 3000$

Remaining payment - 20000$

Periods - 50

Interest - 12%

Effective interest - 1% per month

Monthly payment = Principal * effective rate * (1+ effective rate)^ periods / ( (1+ effective rate)^ periods - 1)

= 20000 * 0.01 * ( 1 + 0.01)^50 / ( ( 1 + 0.01)^50 - 1)

= 200 * 1.01^50 / 1.01^50 - 1

= 200 * 1.6446 / 0.6446

= 510.25$

Answer - B.

Question 2.

The creditors, are people who have lent money to a company, thus they would want the company to maintain a stream of stable income to be able to get back the money lent. Whereas, the stockholders working through the management of the company would have interest of the overall performance and advancement of the company. Decreasing the amount of debt outstanding and the risk of the firms investments, are not points of contention between creditors and stock holders, as they dont have negative implications on the creditors. Increasing the firms net worth, doesnt effect creditors.

The stock holders may want to increase the firms investment risk level to get higher returns, this could effect the cash flows of the firm and thus the money being paid back to the creditor.

Answer - A)