Question (TCO A) Which of the following statements is CORRECT?

(TCO A) Which of the following statements is CORRECT?

One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt.

Sole proprietorships are subject to more regulations than corporations.

In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner.

Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones.

Corporations of all types are subject to the corporate income tax.

Question 2. Question :

(TCO G) A security analyst obtained the following information from Prestopino Products’ financial statements:

• Retained earnings at the end of 2009 were $700,000, but retained earnings at the end of 2010 had declined to $320,000.

• The company does not pay dividends.

• The company’s depreciation expense is its only non-cash expense; it has no amortization charges.

• The company has no non-cash revenues.

• The company’s net cash flow (NCF) for 2010 was $150,000.

On the basis of this information, which of the following statements is CORRECT?

Prestopino had negative net income in 2010.

Prestopino’s depreciation expense in 2010 was less than $150,000.

Prestopino had positive net income in 2010, but its income was less than its 2009 income.

Prestopino’s NCF in 2010 must be higher than its NCF in 2009.

Prestopino’s cash on the balance sheet at the end of 2010 must be lower than the cash it had on the balance sheet at the end of 2009.

Instructor Explanation:

Ch 2: a is true all others are false

a. True: As the company pays no dividends, the decrease in retained earnings is from negative earnings or losses.

b: Does not explain change in retained earnings value.

c: Does not explain change in retained earnings value.

d. Cash flow does not relate to retained earnings

d. Cash flow does not relate to retained earnings

Question 3. Question :

(TCO G) An investor is considering starting a new business. The company would require $475,000 of assets, and it would be financed entirely with common stock. The investor will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have a ROE of 13.5%. How much net income must be expected to warrant starting the business?

$52,230

$54,979

$57,873

$60,919

$64,125

Question 4. Question :

(TCO B) You want to buy a new sports car three years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the third deposit, three years from now?

$11,973

$12,603

$13,267

$13,930

$14,626

Question 5. Question :

(TCO B) You sold a car and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 6.0%?

Years: 0 1 2 3 4

|———–|————–|————–|————–|

CFs: $0 $1,000 $2,000 $2,000 $2,000

$5,987

$6,286

$6,600

$6,930

$7,277

Question 6. Question :

(TCO B) Farmers Bank offers to lend you $50,000 at a nominal rate of 5.0%, simple interest, with interest paid quarterly. Merchants Bank offers to lend you the $50,000, but it will charge 6.0%, simple interest, with interest paid at the end of the year. What’s the difference in the effective annual rates charged by the two banks?

1.56%

1.30%

1.09%

0.91%

0.72%

Question 7. Question :

(TCO D) Which of the following statements is CORRECT?

If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.

On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.

On an expected yield basis, the expected current yield will always be positive because an investor would not purchase a bond that is not expected to pay any cash coupon interest.

If a coupon bond is selling at par, its current yield equals its yield to maturity.

The current yield on Bond A exceeds the current yield on Bond B; therefore, Bond A must have a higher yield to maturity than Bond B.

Instructor Explanation:

Explanation:

a: Yield to call only relevant if callable bond, discount / premium related to expected yield to maturity which is yield to call for callable bond, and the coupon rate.

b: False, YTM is sum of current and capital gain yield

c: False, YTM is sum of current and capital gain yield; investor may not want current income- may only want capital gain.

d. True- the two yields are in equilibrium when par value = price

b: False, YTM is sum of current and capital gain yield- depends on capital gain yield.

Question 8. Question :

(TCO D) Garvin Enterprises’ bonds currently sell for $1,150. They have a six-year maturity, an annual coupon of $85, and a par value of $1,000. What is their current yield?

7.39%

7.76%

8.15%

8.56%

8.98%

Question 9. Question :

(TCO C) Keys Corporation’s five-year bonds yield 7.00%, and five-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for five-year bonds is IP = 1.75%, the liquidity premium for Keys’ bonds is LP = 0.75% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) x 0.1%, where t = number of years to maturity. What is the default risk premium (DRP) on Keys’ bonds?

0.99%

1.10%

1.21%

1.33%

1.46%

Question 10. Question :

(TCO C) Which of the following statements is CORRECT?

The slope of the SML is determined by the value of beta.

The SML shows the relationship between companies’ required returns and their diversifiable risks. The slope and intercept of this line cannot be influenced by a firm’s managers, but the position of the company on the line can be influenced by its managers.

Suppose you plotted the returns of a given stock against those of the market, and you found that the slope of the regression line was negative. The CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well diversified investor, assuming investors expect the observed relationship to continue on into the future.

If investors become less risk averse, the slope of the Security Market Line will increase.

If a company increases its use of debt, this is likely to cause the slope of its SML to increase, indicating a higher required r

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