Midterm Solutions - NYU Stern School of Business Corporate...

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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 equal-weighted unless otherwise indicated. (In multi-part 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 annually-compounded 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 annually-compunded 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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