NYU Stern School of Business
Corporate Finance
B40.2302.11, .12
Fall 2001
Midterm Solutions
Note to Wednesday section: Please do not discuss this exam with members of the
Thursday section.
(Doing so would only move the curve against you!)
The questions are equalweighted unless otherwise indicated.
(In multipart questions,
each ““ is the equivalent of one full question.)
1) What is the main dis
advantage to organizing as a corporation (in the United States)?
(one sentence)
Double taxation of dividend income.
2) Write down (but do not “solve” for the actual numerical answer) the expression for the
following:

The present value of a cash flow stream that gives $110,000 one year from now
and $40,000 five years from now, given an annuallycompounded discount rate of
10% (one equation)
PV = 110,000/1.10 + 40,000/(1.10)^5

The present value of a cash flow stream that gives $50,000 six months from now,
given an annuallycompunded discount rate of 10% (one equation)
PV = 50,000/(1.10)^0.5
3) Explain intuitively why “maximization of shareholder wealth” is an uncontroversial
corporate goal, even for shareholders that have different preferred “time patterns” for
consumption. Hint: think ants and grasshoppers. (No more than four sentences.)
Investors can achieve their preferred pattern of consumption over time by borrowing
against their current wealth (e.g. the grasshopper in our example) or lending their
current wealth (e.g. the ant in our example). Therefore, whatever their preferences for
consumption across time, they will all agree on that the corporation should maximize
current wealth.
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