IFM11 TB Ch31 Essay

Submitted By ZoeYiZou
Words: 904
Pages: 4

(Difficulty: E = Easy, M = Medium, and T = Tough)

Please see the preface for information on the AACSB letter indicators (F, M, etc.) on the subject lines.



Goals of the firm FM Answer: a Diff: EASY
1. The primary goal of investor-owned firms is shareholder wealth maximization, while the primary goal of not-for-profit firms is typically stated in terms of some mission; for example, to provide health care services to the communities served.

a. True b. False

Cost of capital FM Answer: b Diff: EASY
2. Not-for-profit firms have fund capital in place of equity capital. Since fund capital does not have to provide a return to stockholders, the appropriate cost of fund capital in a cost of capital estimate is zero.

a. True b. False


Tax considerations FM Answer: b Diff: MEDIUM
3. Since not-for-profit firms do not pay taxes, they receive no tax benefits whatsoever from using debt financing.

a. True b. False

Net present social value FM Answer: a Diff: MEDIUM
4. The net present social value model formally recognizes that not-for-profit firms must consider the social value along with the financial value of proposed new projects.

a. True b. False

Multiple Choice: Conceptual


Risk analysis CM Answer: e Diff: MEDIUM
5. Which of the following statements about project risk analysis in not-for-profit firms is incorrect?

a. A project’s corporate beta measures the contribution of the project to the overall corporate risk of the firm. b. A project’s corporate beta is found (at least conceptually) by regressing returns on the project against returns on the market portfolio. c. A project’s corporate beta is defined as (P/F)rPF, where P is the standard deviation of the project’s returns, F is the standard deviation of the firm’s returns, and rPF is the correlation among the two sets of returns. d. In practice, it is usually difficult, if not impossible, to directly measure a project’s corporate risk, so project risk analysis typically focuses on stand-alone risk. e. The market risk of a project is not relevant to not-for-profit firms.

Municipal bonds CM Answer: e Diff: MEDIUM
6. Which of the following statements about municipal bond financing is most correct?

a. Whereas the vast majority of Treasury and corporate bonds are held by institutions, no municipal bonds are held by individual investors. b. The primary attraction of municipal bonds to individual investors is their high before-tax yields. c. Municipal bonds usually pay higher coupon rates than corporate bonds with similar ratings. d. Municipal bonds are risk-free. e. In contrast to corporate bonds, municipal bond issues are not required to be registered with the Securities and Exchange Commission.

Ownership CM Answer: d Diff: MEDIUM
7. Which of the following statements about a not-for-profit firm’s ownership is most correct?

a. The residual earnings (profits) of not-for-profit firms can be distributed to the firm’s top managers. b. Not-for-profit firms are exempt from federal taxes, but they must pay state and local taxes, including property taxes. c. Upon liquidation of a not-for-profit firm, the proceeds from the sale of its assets are distributed, on a pro rata basis, to the firm’s employees. d. None of the profits are used for private inurement. e. Not-for-profit firms are governed by a board of trustees whose members