1. One year ago, John Doe bought 10,000 shares of Galaxy Entertainment Company at $50 per share. His purchase represents 20 percent ownership in the firm. Today s market value per share is $60. If Galaxy Entertainment is bankrupt and owes $200,000 more in debts than the firm can pay after liquidating all of its assets, what is the maximum loss per share John Doe will incur on this investment?

$0 a share

$20 a share

$55 a share, computed as ($50 + 60)/2

$50 a share

$4 share, computed as (20% $200,000)/10,000 shares

2. Merrimack, Inc., is considering an investment project that generates a cash flow of $1,900,000 next year if the economy is favorable but generates only $900,000 if the economy is unfavorable. The probability of favorable economy is 60% and of unfavorable economy is 40%. The project will last only one year and be closed after that. The cost of investment is $1,500,000 and Merrimack plans to finance the project with $400,000 of equity and $1,100,000 of debt. Assuming the discount rates of both equity and debt are 0%. What is the expected cash flow to Merrimack s shareholders if the company invests in the project?

		$400,000
		$480,000
		$800,000
		$0
		$1,020,000

3. Merrimack Inc., had a current share price of $50, and the firm had 1,000,000 shares of stock outstanding. The company is considering an investment project that requires an immediate $15,000,000 investment but will produce a single cash flow of $20,000,000 after 2 years then close. If Merrimack invests in the project, what would the new share price be? Merrimack's cost of capital is 10%. (Hint: consider how the project NPV affects the stock price)

		$35
		$42.75
		$48.25
		$51.53
		$55

4. Which of the following statements regarding agency problems and costs are correct?

I. An agency problem exists when there is a conflict of interest between the stockholders and the management of a firm.

II. An agency problem exists when there is a conflict of interest between a principal and an agent.

III. An agency cost occurs when firm management avoids risky projects that would favorably affect the stock price because the managers are worried about keeping their jobs.

IV. An agency cost occurs when management chooses an action that benefits the shareholders but reduces management compensation.

		I and II only
		II and III only
		I, III, and IV only
		I, II, and III only
		II, III, and IV only

5. Which one of the following is least apt to encourage managers to act in the best interest of shareholders?

		Shareholder election of the board of directors, who in turn select managers
		Threat of a takeover by another firm
		Linking manager compensation to share value
		Compensating managers with fixed salaries
		Compensating managers with stock options