Short Answer and ProblemsFINANCE 634 EXAM 1Fall 2002N OTE W ELL:For problems: You must show enough work to justify your answer in the space providedwith each problem. No credit will be given unless work is shown. Partial credit may begiven ONLY IF your work is clearly labeled. Be sure to read all questions carefully andanswer them completely. Do all work on this test booklet. Points are as marked.Points sum to 100 exclusive of extra credit.Note that later questions tend to carry more points.The penalty for academic dishonesty in this course is an “F” grade for the course and the immediate commencement of due process proceedings for permanent dismissal from The University of Mississippi. There are no lesser penalties and no exceptions.Name: ________________________________Short Answer and ProblemsAnswer either question 1 or 2. DO NOT ANSWER BOTH.1. Name and briefly describe the three major decision types in corporate finance [6]________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________2. List the four trade-offs in the choice to use debt or equity to finance the firm and briefly describe what is meant by each of the four. [6] ____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________Answer either question 3 or 4. DO NOT ANSWER BOTH.3. What is the source of the conflict between stockholders and bondholders? What are some of the ways that bondholders can protect themselves from adverse actions by shareholders? [6] ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________4. Under what conditions would maximizing stock prices be congruent with maximizing societal welfare? [6] _______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________5. You are trying to estimate the dollar debt owed by a manufacturing firm that has three different debt issues on its books. The first is a 1-year 8% bank loan for $ 10 millionthat the firm took on just a week ago. The second is a 5-year term loan for $ 20 million that the firm took on two years ago (there are three years left on the loan). The interest rate on the loan was set at 9% at the time of the borrowing, and payments are annual. Thethird is a 10-year bond issue, with a face value of $ 15 million and a coupon rate of 10% made five years ago (it has five years left). Coupon payments on this bond are semiannual and the next one is due six months from now. Assuming that the rate on the 1-year bank loan reflect the current borrowing rate for the firm, estimate the market value of the debt outstanding at this firm. [6]Answer either question 6 or 7. DO NOT ANSWER BOTH.6. You are comparing an older firm to a younger firm. In which of these two firms isthe book value of fixed assets more likely to deviate from the market value? In which direction? Why? [6]