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1. (TCO A) Which of the following statements is CORRECT?
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) 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? (Points: 10)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. 3. (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? (Points: 10)$52,230 $54,979 $57,873 $60,919 $64,125 4. (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? (Points: 10)$585.43 $614.70 $645.44 $677.71 $711.59 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%?4|----------- | -------------- | -------------- | --------------|$2,000 (Points: 10)$5,987 $6,286 $6,600 $6,930 $7,277 6. (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? (Points: 10)1.56% 1.30% 1.09% 0.91% 0.72% 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) 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? (Points: 10)0.99% 1.10% 1.21% 1.33% 1.46% 10. (TCO C) Other things held constant, if the expected inflation rate decreases and investors also become more risk averse, the Security Market Line would be affected as follows: (Points: 10)The y-axis intercept would decline, and the slope would increase. The x-axis intercept would decline, and the slope would increase. The y-axis intercept would increase, and the slope would decline. The SML would be affected only if betas changed. Both the y-axis intercept and the slope would increase, leading to higher required returns.
