Most Successful Speculation Ever PRINT THIS PAGE RESIZE TEXT by Addison Wiggin – May 2, 2011 "Bleeding America to the point of bankruptcy": Bin Laden dead, but the world's most successful leveraged bet lives on Dollar's bin Laden bounce doesn't last long… Abe Cofnas on the next big event to move currency markets "There are no investments anymore"… Doug Casey on how we're all being forced into speculation Mad grab for local tax revenue sparks revival of the "granny flat" "Wow, can I do that too?" readers react to a drug-and-bank corruption thread The man who executed the most brilliant leveraged bet in history is dead. "We, alongside the mujahedeen," Osama bin Laden was reported to have said in a speech delivered a few days before the 2004 presidential election, "bled Russia for 10 years until it went bankrupt and was forced to withdraw in defeat… "So we are continuing this policy in bleeding America to the point of bankruptcy." Al-Qaida pulled off the Sept. 11 attacks for somewhere in the vicinity of $500,000, according to the final report of the 9/11 Commission. By the end of fiscal 2011, the U.S. government will have spent $1.26 trillion fighting the wars in Afghanistan and Iraq, according to the Center for Defense Information. A total equal to nearly 9% of the national debt. "Every dollar of al-Qaida defeated a million dollars, by the permission of Allah, besides the loss of a huge number of jobs," bin Laden added in his 2004 speech. We don't know if Allah really gave his permission or not. But he certainly had plenty of help from eager participants across the West. Based on the figures above, bin Laden pulled off a 2,514,000:1 return. And that's just versus U.S. interests. When you figure in costs beyond direct war, the number is incalculable. Throw in the post-9/11 homeland security bureaucracy, for example, or the covert wars in Yemen and Somalia, future health care costs for wounded veterans, interest on the portion of the national debt that can be attributed to these costs… Makes you wonder why those students from George Washington University were cheering in front of the White House: Land of the (somewhat less) Free: Party now, pay later… Nor does it mean that just because the bad guy's dead the spending stops, the troops come home and the TSA is disbanded. Far from it. This morning, the State Department warned of "enhanced potential for anti-American violence" worldwide. Security's been beefed up at the New York airports. And so… bin Laden's leveraged gains keep piling ever higher.
Chapter 1 The Corporation 1.1 The Four Types of Firms 1) A sole proprietorship is owned by: A) One person B) Two of more persons C) Shareholders D) Bankers Answer: A Diff: 1 Skill: Definition 2) Which of the following organization forms for a business does not avoid double taxation? A) Limited Partnership B) ʺCʺ Corporation C) ʺSʺ Corporation D) Limited Liability Company Answer: B Diff: 1 Skill: Conceptual 3) Which of the following organization forms has the most revenue? A) ʺSʺ Corporation B) Limited Partnership C) ʺCʺ Corporation D) Limited Liability Company Answer: C Diff: 1 Skill: Conceptual 4) Which of the following organization forms accounts for the greatest number of firms? A) ʺSʺ Corporation B) Limited Partnership C) Sole Proprietorship D) ʺCʺ Corporation Answer: C Diff: 1 Skill: Conceptual 2 Berk/DeMarzo · Corporate Finance 5) Which of the following is NOT an advantage of a sole proprietorship? A) Single taxation B) Ease of setup C) Limited liability D) No separation of ownership and control Answer: C Diff: 2 Skill: Conceptual 6) Which of the following statements regarding limited partnerships is true? A) There is no limit on a limited partnerʹs liability. B) A limited partnerʹs liability is limited by the amount of their investment. C) A limited partner is not liable until all the assets of the general partners have been exhausted. D) A general partnerʹs liability is limited by the amount of their investment. Answer: B Diff: 2 Skill: Conceptual 7) Which of the following is / are an advantage of incorporation? A) Access to capital markets B) Limited liability C) Unlimited life D) All of the above Answer: D Diff: 2 Skill: Conceptual 8) Which of the following statements is most correct? A) An advantage to incorporation is that it allows for less regulation of the business. B) An advantage of a corporation is that it is subject to double taxation. C) Unlike a partnership, a disadvantage of a corporation is that has limited liability. D) Corporations face more regulations when compared to partnerships. Answer: D Diff: 2 Skill: Conceptual Chapter 1 The Corporation 3 9) A limited liability company is essentially A) a limited partnership without limited partners. B) a limited partnership without a general partner. C) just another name for a limited partnership. D) just another name for a corporation. Answer: B Diff: 1 Skill: Conceptual 10) The distinguishing feature of a corporation is that A) their is no legal difference between the corporation and its owners. B) it is a legally defined, artificial being, separate from its owners. C) it spreads liability for its corporate obligations to all shareholders. D) provides limited liability only to small shareholders. Answer: B Diff: 2 Skill: Conceptual 11) Which of the following are subject to double taxation? A) Corporation B) Partnership C) Sole proprietorship D) A and B Answer: A Diff: 1 Skill: Conceptual 12) You own 100 shares of a ʺCʺ Corporation. The corporation earns $5.00 per share before taxes. Once the corporation has paid any corporate taxes that are due, it will distribute the rest of its earnings to its shareholders in the form of a dividend. If the corporate tax rate is 40% and your personal tax rate on (both dividend and non-dividend) income is 30%, then how much money is left for you after all taxes have been paid? A) $210 B) $300 C) $350 D) $500 Answer: A Explanation: A) EPS × number of shares × (1 - Corporate Tax Rate) × (1 - Individual Tax Rate) $5.00 per share × 100 shares × (1 - .40) x (1 - .30) = $210 Diff: 2 Skill: Analytical 4 Berk/DeMarzo · Corporate Finance 13) You own 100 shares of a Sub Chapter ʺSʺ Corporation. The corporation earns $5.00 per share before taxes. Once the corporation has paid any corporate taxes that are due, it will distribute the rest of its earnings to its shareholders in the form of a dividend. If the corporate tax rate is 40% and your personal tax rate on (both dividend and non-dividend) income is 30%, then how much money is left for you after all taxes have been paid? A) $210 B) $300 C) $350 D) $500 Answer: C Explanation: C) EPS × number of shares × (1 - Individual Tax Rate) $5.00 per share × 100 shares × (1 - .30) = $350 Diff: 2 Skill: Analytical 14) You are a shareholder in a ʺCʺ corporation. This corporation earns $4 per share before taxes. After it has paid taxes, it will distribute the remainder of its earnings to you as a dividend. The dividend is income to you, so you will then pay taxes on these earnings. The corporate tax rate is 35% and your tax rate on dividend income is 15%. The effective tax rate on your share of the corporations earnings is closest to: A) 15% B) 35% C) 45% D) 50% Answer: C Explanation: C) Fist the corporation pays taxes. It earned $4 per share, but must pay $4 × .35 = $1.40 to the government in corporate taxes. That leaves $4.00 - $1.40 = $2.60 to distribute to the shareholders. However, the shareholder must pay $2.60 × .15 = $0.39 in income taxes on this amount, leaving only $2.21 to the shareholder after all taxes are paid. The total amount paid in taxes is $1.40 + 0.39 = $1.79. The effective tax rate is then $1.79 ÷ $4 = .4475 or 44.75% which is closest to 45%. Diff: 3 Skill: Analytical 15) Explain the benefits of incorporation. Answer: 1. Limited liability 2. Unlimited life 3. Access to capital markets / availability of outside funding Diff: 2 Skill: Conceptual Chapter 1 The Corporation 5 16) Explain the difference between a sub-chapter ʺSʺ corporation and a sub-chapter ʺCʺ corporation. Answer: ʺCʺ Corporation ʺSʺ Corporation Publicly traded stock Privately traded stock Unlimited shareholders No more than 75 shareholders Double taxation Taxed like a partnership Diff: 2 Skill: Conceptual 1.2 Ownership Versus Control of Corporations 1) In a corporation, the ultimate decisions regarding business matters are made by A) the Board of Directors. B) debt holders. C) shareholders. D) investors. Answer: A Diff: 1 Skill: Conceptual 2) The person charged with running the corporation by instituting the rules and policies set by the board of directors is called A) the Chief Operating Officer. B) the Company President. C) the Chief Executive Officer. D) the Chief Financial Officer. Answer: C Diff: 1 Skill: Definition 3) The Principal-Agent Problem arises A) because managers have little incentive to work in the interest of shareholders when this means working against their own self-interest. B) because of the separation of ownership and control in a corporation. C) Both A and B D) None of the above Answer: C Diff: 1 Skill: Conceptual 6 Berk/DeMarzo · Corporate Finance 4) If shareholders are unhappy with a CEOʹs performance, they are most likely to A) buy more shares in an effort to gain control of the firm. B) file a shareholder resolution. C) replace the CEO through a grassroots shareholder uprising. D) sell their shares. Answer: D Diff: 2 Skill: Conceptual 5) A ________, is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO. A) shareholder proposal B) leveraged buyout C) shareholder action D) hostile takeover Answer: D Diff: 2 Skill: Definition 6) Which of the following statements is false? A) In bankruptcy, management is given the opportunity to reorganize the firm and renegotiate with debt holders. B) Because a corporation is a separate legal entity, when it fails to repay its debts, the people who lent to the firm, the debt holders are entitled to seize the assets of the corporation in compensation for the default. C) As long as the corporation can satisfy the claims of the debt holders, ownership remains in the hands of the equity holders. D) If the corporation fails to satisfy debt holdersʹ claims, debt holders may lose control of the firm. Answer: D Explanation: D) If the corporation fails to satisfy debt holdersʹ claims, debt holders may take control of the firm. Diff: 2 Skill: Conceptual 7) What strategies are available to shareholders to help ensure that managers are motivated to act in the interest of the shareholders rather than their own interest? Answer: 1. The threat of a hostile takeover 2. Shareholder initiatives 3. Performance based compensation Diff: 3 Skill: Conceptual Chapter 1 The Corporation 7 1.3 The Stock Market Use the table for the question(s) below. Consider the following two quotes for XYZ stock: November 11th November 18th Ask: 25.25 Ask: 26.00 Bid: 25.20 Bid: 25.93 1) How much would you have to pay to purchase 100 shares of XYZ stock on November 18th? A) $2520 B) $2525 C) $2593 D) $2600 Answer: D Explanation: D) 100 shares × $26.00 (ask price) = $2600 Diff: 1 Skill: Analytical 2) How much would you receive if you sold 200 shares of XYZ stock on November 11th? A) $5050 B) $5040 C) $5186 D) $5200 Answer: B Explanation: B) 200 shares × $25.20 (bid price) = $5040 Diff: 1 Skill: Analytical 3) The largest stock market in the world is A) the London Stock Exchange. B) NASDAQ. C) the American Stock Exchange. D) the New York Stock Exchange. Answer: D Diff: 1 Skill: Definition 8 Berk/DeMarzo · Corporate Finance 4) An investment is said to be liquid if the investment A) has large day to day fluctuations in price. B) has a large bid-ask spread. C) can easily be converted into cash. D) is traded on a stock exchange. Answer: C Diff: 2 Skill: Definition 5) What type of company trades on an organized stock exchange? A) a limited liability company. B) a private company. C) an ʺSʺ corporation. D) a public company. Answer: D Diff: 1 Skill: Definition 6) Which of the following statements is false? A) On Nasdaq, stocks can and do have multiple market makers who compete with each other. Each market maker must post bid and ask prices in the Nasdaq network where they can be viewed by all participants. B) Bid prices exceed ask prices. C) Because customers always buy at the ask and sell at the bid, the bid-ask spread is a transaction cost investors have to pay in order to trade. D) On the floor of the NYSE, market makers (known on the NYSE as specialists) match buyers and sellers. Answer: B Explanation: B) Ask prices exceed bid prices. Diff: 2 Skill: Conceptual Chapter 1 The Corporation 9 Use the table for the question(s) below. Consider the following two quotes for XYZ stock: November 11th November 18th Ask: 25.25 Ask: 26.00 Bid: 25.20 Bid: 25.93 7) What are your net proceeds if you purchased 2500 shares of XYZ stock on November 11th and then sold them a week later on November 18th? Answer: sell at bid price 11/18 = 2500 × $25.93 = $64,825 now subtract the price paid for the shares buy at ask price 11/11 = 2500 × $25.25 = $63,125 so net proceeds = 64,825 - 63,125 = $1700 Diff: 2 Skill: Analytical 8) Explain the main differences between the NYSE and NASDAQ stock markets. Answer: Key points: NYSE has physical location—NASDAQ is an electronic market. NYSE has one specialist in each stock and his role is to match buyers and sellers. NASDAQ has multiple market makers (dealers) in each stock who stand ready to trade on their own accounts. Diff: 2 Skill: Conceptual
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