Question

Which one of the following is equivalent to maximizing a firm value? A. Maximizing the amount of dividend B. Maximizing the payoff to chief executive officer C. Maximizing the value of a put option D. Maximizing the value of equity holders E. Maximizing the value of debt holders

Which one of the following financial securities shares a feature of equity holder of a firm?

	A.	Interest rate swap
	B.	Forward
	C.	Futures
	D.	Put options
	E.	Call options

Most firms finance inventories (or short-term assets) with short-term bank loans and fixed assets with long-term financing. Which one of the following concepts describes this financing policy?

	A.	Relative interest rate
	B.	Static Theory of capital structure
	C.	Maturity Hedging
	D.	Maturity mismatch
	E.	Cash reserve

The dividend market is in equilibrium when:

	A.	The total amount of the annual dividends is equal to the net income for the year.
	B.	All clienteles are satisfied.
	C.	Dividends remain constant and no special dividends are declared.
	D.	Half of the firms adopt a low dividend policy and half adopt a high dividend policy.
	E.	All firms adopt a low dividend policy.

Answer 1

1

Among the given option

A is not the answer because by increasing dividend the firm reduces the investment in the firm which decrease the growth rate and therefore the firm value.

B is not the answer because an increase in the payoff of CEO will not help in increasing the firm value in theory. However, in practice it may boost the morale of CEO and he starts working harder but there is no evidence that increasing the compensation increases the firm value

C is not the answer because the increase input option price means the stock price is going to decrease and therefore the firm value is going to decrease

E is not the answer because the increase in debt over an optimal value will decrease the investor confidence and therefore the firm value.

D is the answer. Equity holders are actual owners of the company. So the increase in their value means the increase in firm value

2

Futures and Options both trade on an exchange. Thus, all three of them shares at least one feature of stocks

Hence, the answer is option c,d and e

3

Maturity hedging is the approach of financing short term assets with short term loans and long term assets with long term loans

Hence, the answer is option C  

4

The dividend market is in equilibrium when all clienteles are satisfied.

Hence, the answer is option B