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Questions and Answers of
Corporate Finance
What are the main differences between fixed and variable annuities? Which type is more appropriate for someone who is 60 years old and close to retirement?
At what age would you like to retire? Describe the type of lifestyle you envision—where you want to live, whether you want to work part-time, and so on. Discuss the steps you think you should take
1. Discuss and contrast the features of the retirement plans offered by Analytical Solutions and Precision Manufacturing.2. Which plan do you think is more desirable? Consider the features,
1. After taking into account the income that Sophia will receive from Social Security and her company sponsored pension plan, the financial planner has estimated that her investment assets will need
Discuss the importance and goals of estate planning. Explain why estates often break up. Distinguish between the probate estate and the gross estate.
Briefly describe the steps involved in the estate planning process.
What is a will? Why is it important? Describe the consequences of dying intestate.
Describe the basic clauses normally included in a will and the requirements regarding who may make a valid will.
How can changes in the provisions of a will be made legally? In what four ways can a will be revoked?
Explain these terms:(a) Intestacy(b) Testator(c) Codicil(d) Letter of last instructions.
What is meant by the probate process? Who is an executor, and what is the executor’s role in estate settlement?
Describe briefly the importance of these documents in estate planning:(a) Power of attorney(b) Living will(c) Durable power of attorney for health care(d) Ethical will.
Define and differentiate between joint tenancy and tenancy by the entirety. Discuss the advantages and disadvantages of joint ownership. How does tenancy in common differ from joint tenancy?
What is the right of survivorship? What is community property, and how does it differ from joint tenancy with regard to the right of survivorship?
Describe the basic trust arrangement, and discuss typical reasons for establishing trusts. What essential qualities should a trustee possess?
What is a living (inter vivos) trust? Distinguish between a revocable living trust and an irrevocable living trust.
Explain each of these terms:(a) Grantor(b) Trustee(c) Beneficiary(d) Pour-over will(e) Testamentary trust(f) Irrevocable life insurance trust.
What is a gift, and when is a gift made? Describe the following terms as they relate to federal gift taxes:(a) Annual exclusion(b) Gift splitting(c) Charitable deduction(d) Marital deduction.
Discuss the reasons estate planners cite for making lifetime gifts. How can gift giving be used to reduce estate shrinkage?
Explain the general nature of the federal estate tax. How does the unified tax credit affect the amount of estate tax owed? What is the portability concept?
The two basic techniques of estate planning are(1) Dividing your estate and (2) Deferring income to minimize taxes.Describe and discuss each of these techniques.
Explain the general procedure used to calculate the federal estate tax due.
Generate a list of estate planning objectives that apply to your personal family situation. Be sure to consider the size of your potential estate as well as people planning and asset planning.
David and Cheryl Allen are in their mid-30s and have two children, ages 8 and 5. They have combined annual income of $95,000 and own a house in joint tenancy with a market value of $310,000, on which
State the topics you would cover in your ethical will. Would you consider recording it digitally?
George Reed, 48 and a widower, and Debbie Moore, 44 and previously divorced, were married five years ago. There are children from their prior marriages, two children for George and one child for
Use Worksheet 15.2. When Russell Hypes died unmarried in 2012, he left an estate valued at $7,850,000. His trust directed distribution as follows: $20,000 to the local hospital, $160,000 to his alma
Summarize important legislation affecting estate taxes, and briefly describe the impact on estate planning. Explain why getting rid of the estate tax doesn’t eliminate the need for estate planning.
Your best friend has asked you to be executor of his estate. What qualifications do you need, and would you accept the responsibility?
1. Does Latafat really need a will? Explain why or why not. What would happen to his estate if he were to die without a will?2. Explain to Latafat the common features that need to be incorporated
1. Compute the value of Robert’s probate estate.2. Compute the value of Robert’s gross estate.3. Determine the total allowable deductions.4. Calculate the estate tax base; taking into account the
1. Which of the following is true about finance?a. Finance is the study of how and under what terms savings (money) are allocated between lenders and borrowers.b. Finance is different from economics
You are examining the economy of a very small, completely isolated island nation. There are only three people on this island: Fred, Robinson, and Friday. Fred owns a house valued at $1,000 and owes
Describe why financial and market intermediaries exist in our financial system.
Describe the causes of a “credit crunch.”
List the four major financial sectors in the financial system and discuss how they relate to one another.
Explain how banks, pension funds, insurance firms, and mutual funds work in the financial system.
What are secondary market transactions? How do secondary markets facilitate the primary markets?
Multiple Choices1. Which of the following businesses is the least likely to be operated as a partnership?a. Accounting firmsb. Doctors’ officesc. Lawyers’ officesd. Steel foundry2. Which of the
State the main differences and similarities between sole proprietorships and partnerships.
Janice borrowed $100,000 from friends and family to start her company (a sole proprietorship). Business has been poor recently, and Janice has decided to cease operations and liquidate the firm. She
Suppose Janice obtains only $93,000 when she sells all the assets of the firm described in Practice Problem 18. How much money would the debt holders receive if the business were a corporation? If it
List the four areas of conflict of interest between shareholders and managers.
Describe the compensation structure of top Canadian executives.
What is the objective behind the stock option plan of executives? In reality, does it achieve this objective?
List the basic areas of capital budgeting.
List the basic areas of financial management.
List the basic questions related to corporate financing.
As the CFO of your company, it falls to you to make the final decision on large expenditures. Recently, your controller has proposed purchasing a new computer system at a cost of $50,000. He believes
List and define the four major forms of business organization.
Summarize the main characteristics of corporations.
State the statutory responsibilities of directors that are described in the Canada Business Corporations Act.
When you hired Dan to manage your business, you agreed to pay him a bonus of 10 percent of profits at the end of each year. The company now has a choice between two projects. Project A will generate
List the major jobs available in the financial industry.
Summarize the main responsibilities of the finance function (including CFO, treasurer, and controller) in a non-financial company.
1. Which of the following statements about an efficient market is false?a. It reflects all relevant and available information.b. Prices will reflect such information as firm financial strength and
1. Proponents of the efficient market hypothesis think technical analysts:a. Should focus on relative strengthb. Should focus on resistance levelsc. Should focus on support levelsd. Are wasting their
Identify the types of inefficiency (allocational, operational, or informational) described below:a. The Lower Red River stock market is characterized by very high transaction costs and, due to
Explain whether each of the following is an example of informational efficiency.a. Every time my broker tells me to buy, the stock price subsequently goes down. Every time my broker tells me to sell,
Describe two common tests for the weak form and for the semi-strong form of the EMH.
State the main assumptions required for the existence of efficient markets.
Elvira, the CEO of AT Pharmaceutical Ltd., has hired Dome Financial Inc. to advise her on issuing new stock. Her company will need to issue more stock soon to finance the development of a new
On Monday, the stock of the Wicker Company was trading at $25. The CEO was satisfied with this price as it reflected the prospects of the firm (future dividend growth and required rate of return).
State four important implications of the EMH for investors and two implications for corporate officers.
The manager of Quest Adventures Ltd. is puzzled. Analysts are saying that the future prospects for his company are poor because the stock price has dropped 5 percent.a. Explain to the manager the
On the morning of March 15, Decker Marketing Inc. announced that it will pay its first dividend of $5 this year. The ex-dividend date will be July 3.a. If the announcement is a complete surprise to
On Monday evening, Codina Model Steam Engine Company announced that it would be restating its financial statements for the past five years, and its CFO was arrested for fraud. Interpret the
A news story about United Airline’s decision to seek protection from creditors was originally published December 10, 2002 by the Chicago Tribune. The story was re-circulated by a Florida news
Parker Investments Inc. has just completed an investigation of strong form efficiency in the Canadian stock market and has concluded that its evidence is statistically significant but not
Which type of analyst, buy side or sell side, is more likely to “sell” their recommendation to the public?
Summarize the empirical conclusions regarding the three forms of the EMH.
Assume that the information system is so advanced that the market, as confirmed by numerous unbiased studies, is efficient. Investment firms therefore decide to retire all portfolio managers and
Would you expect investors to be more overconfident during a boom or a recession? Why?
1. What is the total amount accumulated after five years if someone invests $1,000 today with a simple annual interest rate of 8 percent? How about with a compound annual interest rate of 8
1. Which of the following statements is incorrect?a. An ordinary annuity has payments at the end of each year.b. An annuity due has payments at the beginning of each year.c. A perpetuity is
Franklin is trying to decide whether or not to take a philosophy course next semester. He finds the topic interesting, but being a business student, he wants to measure the cost of taking the course.
David has been awarded a scholarship that will pay $2,500 one year from now. However, he really needs the money today and has decided to take out a loan. If the interest rate is 8 percent, how much
When Jon graduates in three years, he wants to throw a big party, which will cost $800. To have this amount available, how much does he have to invest today if he can earn a compound return of 5
Veda has to choose between two investments that have the same cost today. Both investments will ultimately pay $1,300 but at different times, as shown in the table below. If Veda does not choose one
A firm has just declared that its dividend next year will be $3 per share. That rate of payment will continue for an additional four years, after which the dividends will fall back to their usual $2
After living in a university residence for one year, Mary-Beth decides to rent an apartment for the remaining three years of her degree. She has found a nice location that will cost $450 per month.
A 65-year-old man intends to use his retirement funds to purchase an annuity from a life insurance company. Given the amount of money the man has available to invest, the insurance company is able to
Grace, a retired librarian, would like to donate some money to her alma mater to endow a $5,000 annual scholarship. The first scholarship will be awarded in 5 years. The university will manage the
You have just won $50 million in a lottery and are offered two options: receive $40 million today or receive $5 million per year for the next 10 years. At what interest rate are you indifferent to
Two friends, Abe and Betty, are planning for their retirement. Both are 20 years old and plan on retiring in 30 years with $1 million each. Betty plans on making annual deposits beginning in one year
You are planning on buying your first home and need to borrow $250,000 from the bank. The manager offers you two mortgages: the long option will take 25 years to be paid off, and your annual payments
Bank A pays 7.25 percent interest compounded semi-annually, Bank B pays 7.20 percent compounded quarterly, and Bank C pays 7.15 percent compounded monthly. Which bank pays the highest effective
Jimmie is buying a new car. His bank quotes a rate of 9.5 percent per year for a car loan. Calculate the effective annual rate if the compounding occurs:a. annuallyb. quarterlyc. monthly
If Alysha puts $50,000 in a savings account paying 6 percent per year, determine how much money she will have in total at the end of the first year if interest is compounded:a. annuallyb. monthlyc.
A bank is currently offering a savings account paying an interest rate of 8 percent compounded quarterly. It would like to offer another account, with the same effective annual rate, but compounded
Calculate the effective annual rates for the following:a. 24%, compounded dailyb. 24%, compounded quarterlyc. 24%, compounded every four monthsd. 24%, compounded semi-annuallye. 24%, compounded
Amanda would like to borrow $50,000 to pay one year’s tuition at a private U.S. university. She would like to make quarterly payments and finish repaying the loan in five years. If the bank is
Wilma would like to borrow $150,000 to start her own business. She would like to make monthly payments to repay the loan in five years. If the bank is quoting her a rate of 6 percent compounded
At the age of 10, Felix decided that he wanted to attend a very prestigious (and expensive) university. How much will his parents have to save each year to accumulate $40,000 by the time Felix needs
Jane’s parents save $1,000 per year for 17 years to pay for her university tuition costs. They deposit the money into a Registered Education Savings Plan (RESP) account so that no tax is payable on
Stephen has learned that his great-aunt intends to give him $4,000 each year he is studying at university. Tuition must be paid in advance, so Stephen would like to receive his payments at the
Felix will need $10,000 per year for four years to pay for tuition. How much will Felix’s parents have to invest at the end of each year for the eight years before he begins his studies if their
Roger has his eye on a new car that will cost $20,000. He has $15,000 in his savings account, earning interest at a rate of 0.5 percent per month.a. How long (to the nearest month) will it be before
How many years will it take for an investment to double in value if the rate of return is 9 percent, and compounding occurs?a. annually?b. quarterly?
Céline has just won a lottery. She will receive a payment of $6,000 at the end of each year for nine years. As an alternative, she can choose an immediate payment of $50,000.a. Which alternative
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