HW 1 - week 1 homework PDF

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week 1 homework...

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Session 1 1. What is the primary disadvantage of the corporate form of organisation? Name at least two of the advantages of corporate organisation. The primary disadvantage of the corporate form is the double taxation to shareholders of distributed earnings and dividends. The advantages of corporate organisation are limited liability for its shareholders, a perpetual existence and ease of transferring ownership interests. 2. Who owns a corporation? Describe the process whereby the owners control the firm’s management. What is the main reason that an agency relationship exists in the corporate form of organisation? In this context, what kinds of problems can arise? In the corporate form of ownership, the shareholders are the owners of the firm. The shareholder selects the directors of the corporation, who in turn appoint the firm’s management. This separation of ownership from control in the corporate form of organization is what causes agency problems to exist. Management may act in its own or someone else’s best interests, rather than those of the shareholders. If such events occur, they may contradict the goal of maximizing the share price of the equity of the firm. 3. You just won $150,000 in the state lottery. Lottery rules do not allow a lumpsum payment. Instead, the lottery will pay you $5,000 per year for the next 10 years, followed by payments of $10,000 per year for the next ten years. How much are your winnings actually worth? The appropriate interest rate is 8% per year. CF0 = 0 CO1 = 5000

F01 = 10

CO2= 10,000

F02 = 10

I=8 CPT NPV = 64,631.0671 4. Say you own an asset that had a total return last year of 15%. If the inflation rate last year was 2.5%, what was your real return?

= (1 + 0.15/ 1+ 0.025) - 1 = 12.195%...