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

Student Answer: 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. Instructor Explanation: Chapter 1
Explanation: Ch 1: d is correct, all others are incorrect

a: incorporating provides owners limited liability

b: sole proprietorship has less regulation than corporation

c: In limited partnerships certain partners can be designated general partners and others limited partners with differences in control and liability

d. sole proprietorships and partnerships are taxed just once at owner level (pass-through of income to owners) whereas corporation earnings can be double or triple taxed depending on individual or corporate ownership of stock

e. S-corps can elect to be taxed as proprietorship or partnership

Points Received: 10 of 10 Comments:

2. Question : (TCO G) Aubey Aircraft recently announced that its net income increased sharply from the previous year, yet its net cash flow from operations declined. Which of the following could explain this performance?

Student Answer: The company’s operating income declined. The company’s expenditures on fixed assets declined. The company’s cost of goods sold increased. The company’s depreciation and amortization expenses declined. The company’s interest expense increased. Instructor Explanation: Chapter 2
Ch 2: d is true all others are false

a. False: would not contribute to increase in operating income

b. False- this impacts cash flows from investments vs. operations

c. False: would decrease operating income

d. True: a decrease in non-cash charges would increase earnings, increase tax liability and decrease cash flows

e: False- increase in interest charges would decrease net income and cash flows

Points Received: 10 of 10 Comments:

3. Question : (TCO G) Beranek Corp. has $410,000 of assets, and it uses no debt—it is financed only with common equity. The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?

Student Answer: $155,800 $164,000 $172,200 $180,810 $189,851 Instructor Explanation: b: 40%*410k=$164.

Points Received: 10 of 10 Comments:

4. Question : (TCO B) Suppose a State of New York bond will pay $1,000 10 years from now. If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today?

Student Answer: $585.43 $614.70 $645.44 $677.71 $711.59 Instructor Explanation: Chapter 4
Using Excel or a calculator, your inputs and outputs are as follows:

fv 1000 n 10 r 0.055 pmt 0 beg/end 0 pv ($585.43)

You can also use the financial tables to solve this problem.

Points Received: 10 of 10 Comments:

5. Question : (TCO B) At a rate of 6.5%, what is the future value of the following cash flow stream?
Years: 0 1 2 3 4 |--------|-----------|----------|---------|
CFs: $0 $75 $225 $0 $300

Student Answer: $526.01 $553.69 $582.83 $613.51 $645.80 Instructor Explanation: Chapter 4
FV of $75= $90.60

FV of $225= $255.20

$300 is not compounded.

Total FV= $90.6 + $255.2 + $300= $645.8

Points Received: 10 of 10 Comments:

6. Question : (TCO B) Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in four equal installments at the end of each of the next four years. How large would your payments be?

Student Answer: $3,704.02 $3,889.23 $4,083.69 $4,287.87 $4,502.26 Instructor Explanation:
Using Excel or a calculator, your inputs and outputs are as follows:

pv 12000 r 0.09 fv 0 beg/end 0 n 4 pmt ($3,704.02)

Points Received: 10 of 10 Comments:

7. Question : (TCO D) A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?

Student Answer: The bond’s current yield is less than 8%. If the yield to maturity remains at 8%, then the bond’s price will decline over the next year. The bond’s coupon rate is less than 8%. If the yield to maturity increases, then the bond’s price will increase. If the yield to maturity remains at 8%, then the bond’s price will remain constant over the next year. Instructor Explanation:
Explanation:

If bond trades at premium, then YTM is less than coupon rate. If YTM is 8%, then coupon rate is less than 8% a: Don't know split between current yield and capital gain yield. b: True: as nears maturity, price will go to $1,000 - it will decline. c: Don't know split between current yield and capital gain yield. d: False: If YTM increases, bond price will fall e: False: as nears maturity- price will go to $1,000- it will decline

Points Received: 10 of 10 Comments:

8. Question : (TCO D) Ezzell Enterprises’ noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity?

Student Answer: 6.20% 6.53% 6.87% 7.24% 7.62% Instructor Explanation:
Explanation:

Our inputs and outputs are as follows:

FV 1000 N 15 PMT 95 PV -1165 beg/end 0 R 7.62%

Points Received: 10 of 10 Comments:

9. Question : (TCO C) 5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on five-year bonds is 0.4%. What is the real risk-free rate, r*?

Student Answer: 2.59% 2.88% 3.20% 3.52% 3.87% Instructor Explanation: real risk free rate =.055-.019-.004=0.032

Points Received: 10 of 10 Comments:

10. Question : (TCO C) Assume that to cool off the economy and decrease expectations for inflation, the Federal Reserve tightened the money supply, causing an increase in the risk-free rate, rRF. Investors also became concerned that the Fed's actions would lead to a recession, and that led to an increase in the market risk premium, (rM - rRF). Under these conditions, with other things held constant, which of the following statements is most correct?

Student Answer: The required return on all stocks would increase by the same amount. The required return on all stocks would increase, but the increase would be greatest for stocks with betas of less than 1.0. Stocks' required returns would change, but so would expected returns, and the result would be no change in stocks' prices. The prices of all stocks would decline, but the decline would be greatest for high-beta stocks. The prices of all stocks would increase, but the increase would be greatest for high-beta stocks. Instructor Explanation: a: False- depends on individual stock beta

b: False- larger beta- greater the increase

c: False- not likely in equilibrium

d: True- higher discount rates- lower prices

e: False: Price and rates inversely related

Points Received: 10 of 10 Comments: