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devry fin515 midterm exam




Question;FI515 Midterm Week 4;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) 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? (Points: 10);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.;3. (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? (Points: 10);$155,800;$164,000;$172,200;$180,810;$189,851;4. (TCO B) You deposit $1,000 today in a savings account;that pays 3.5% interest, compounded annually. How much will your account be;worth at the end of 25 years? (Points: 10);$2,245.08;$2,363.24;$2,481.41;$2,605.48;$2,735.75;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 $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?(Points: 10);$3,704.02;$3,889.23;$4,083.69;$4,287.87;$4,502.26;7. (TCO D) Which of the following statements is CORRECT?;(Points: 10);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.;8. (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?(Points: 10);6.20%;6.53%;6.87%;7.24%;7.62%;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 investors have recently become more;risk averse, so the market risk premium has increased. Also, assume that the;risk-free rate and expected inflation have not changed. Which of the following;is most likely to occur? (Points: 10);The required rate of;return for an average stock will increase by an amount equal to the increase in;the market risk premium.;The required rate of;return will decline for stocks whose betas are less than 1.0.;The required rate of;return on the market, rM, will not change as a result of these changes.;The required rate of;return for each individual stock in the market will increase by an amount equal;to the increase in the market risk premium.;The required rate of;return on a riskless bond will decline.


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