1.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.
2.Question :(TCO G) Which of the following statements is CORRECT?
Student Answer: The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets.
The statement of cash flows shows where the firm’s cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit.
The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital.
The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock.
The statement of cash flows shows how much the firm’s cash—the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)—increased or decreased during a given year.
3.Question :(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?
Student Answer: 7.57%
4.Question :(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?
Student Answer: $2,245.08
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
Student Answer: $5,987
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
7.Question :(TCO D) Which of the following statements is CORRECT?
Student Answer: 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.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?
Student Answer: 7.39%
9.Question :(TCO C) Crockett Corporation’s five-year bonds yield 6.85%, and five-year T-bonds yield 4.75%. The real risk-free rate is r* = 2.80%, the default risk premium for Crockett’s bonds is DRP = 0.85% versus zero for T-bonds, the liquidity premium on Crockett’s bonds is LP = 1.25%, 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 inflation premium (IP) on five-year bonds?
Student Answer: 1.40%
10.Question :(TCO C) Which of the following statements is CORRECT?