Question;FIN 515 Week 4: Business Valuation and Stock Valuation ?;Midterm Exam;1. (TCO A) Which of the following statements is CORRECT?;(Points: 10);It is;generally more expensive to form a proprietorship than a corporation because;with a proprietorship, extensive legal documents are required.;Corporations;face fewer regulations than sole proprietorships.;One;disadvantage of operating a business as a sole proprietorship is that the firm;is subject to double taxation, at both the firm level and the owner level.;One advantage;of forming a corporation is that equity investors are usually exposed to less;liability than in a regular partnership.;If a regular;partnership goes bankrupt, each partner is exposed to liabilities only up to;the amount of his or her investment in the business.;2. (TCO G) Which of the following statements is CORRECT?;(Points: 10);In the;statement of cash flows, a decrease in accounts receivable is reported as a use;of cash.;Dividends do;not show up in the statement of cash flows because dividends are considered to;be a financing activity, not an operating activity.;In the;statement of cash flows, a decrease in accounts payable is reported as a use of;cash.;In the;statement of cash flows, depreciation charges are reported as a use of cash.;In the;statement of cash flows, a decrease in inventories is reported as a use of;cash.;3. (TCO G) LeCompte Corp. has $312,900 of assets, and it;uses only common equity capital (zero debt). Its sales for the last year were;$620,000, and its net income after taxes was $24,655. Stockholders recently;voted in a new management team that has promised to lower costs and get the;return on equity up to 15%. What profit margin would LeCompte need in order to;achieve the 15% ROE, holding everything else constant? (Points: 10);7.57%;7.95%;8.35%;8.76%;9.20%;4. (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? (Points;10);$11,973;$12,603;$13,267;$13,930;$14,626;5. (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 (Points: 10);$5,987;$6,286;$6,600;$6,930;$7,277;6. (TCO B) Suppose you borrowed $14,000 at a rate of 10.0%;and must repay it in five equal installments at the end of each of the next;five years. How much interest would you have to pay in the first year? (Points;10);$1,200.33;$1,263.50;$1,330.00;$1,400.00;$1,470.00;7. (TCO D) A 15-year bond with a face value of $1,000;currently sells for $850. Which of the following statements is CORRECT? (Points;10);The bond?s;coupon rate exceeds its current yield.;The bond?s current yield exceeds its;yield to maturity.;The bond?s;yield to maturity is greater than its coupon rate.;The bond?s;current yield is equal to its coupon rate.;If the yield;to maturity stays constant until the bond matures, the bond?s price will remain;at $850.;8. (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? (Points: 10);7.39%;7.76%;8.15%;8.56%;8.98%;9. (TCO C) Niendorf Corporation's five-year bonds yield;6.75%, and five-year T-bonds yield 4.80%. The real risk-free rate is r* =;2.75%, the inflation premium for five-year bonds is IP = 1.65%, the default;risk premium for Niendorf's bonds is DRP = 1.20% 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 liquidity premium;(LP) on Niendorf's bonds? (Points: 10);0.49%;0.55%;0.61%;0.68%;0.75%;10. (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?;(Points: 10);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.
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