Question 1. (TCO A) Which of the following statements is CORRECT?

a. One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.

b. It is generally easier to transfer one’s ownership interest in a partnership than in a corporation.

c. One of the advantages of the corporate form of organization is that it avoids double taxation.

d. One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., “one person, one vote.”

e. Corporations of all types are subject to the corporate income tax.

Question 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?

a. The company’s operating income declined.

b. The company’s expenditures on fixed assets declined.

c. The company’s cost of goods sold increased.

d. The company’s depreciation and amortization expenses declined.

e. The company’s interest expense increased.

Question 3.3. (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 to 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?

a. $155,800

b. $164,000

c. $172,200

d. $180,810

e. $189,851

Calculation:

See in attachment

Question 4.4. (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?

a. $585.43

b. $614.70

c. $645.44

d. $677.71

e. $711.59

Calculation:

See in attachment

Question 5.5. (TCO B) You sold a car and accepted a note with the following cash flow stream as your payment. Which 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)

a. $5,987

b. $6,286

c. $6,600

d. $6,930

e. $7,277

Question 6.6. (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 4 years. How large would your payments be?

b. $3,889.23

c. $4,083.69

d. $4,287.87

e. $4,502.26

Calculation:

See in attachment

Question 7.7. (TCO D) A 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is correct?

a. The bond’s coupon rate exceeds its current yield.

b. The bond’s current yield exceeds its yield to maturity.

c. The bond’s yield to maturity is greater than its coupon rate.

d. The bond’s current yield is equal to its coupon rate.

e. If the yield to maturity stays constant until the bond matures, the bond’s price will remain at $850.

Question 8.8. (TCO D) Garvin Enterprises’ bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000. Which is their current yield?

a. 7.39%

b. 7.76%

c. 8.15%

d. 8.56%

e. 8.98%

Calculation:

The *current yield* is the xxxxxxx divided by the xxxxxxxxxxx the bond

Annual Coupon = 85$

Current xxxxxx price = xxxx

Current yield = 8xxx = 0.xxxx or 7.xx%

See in attachment

Question 9.9. (TCO C) Keys Corporation’s 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for 5-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) × 0.1%, where t = number of years to maturity. Which is the default risk premium (DRP) on Keys’ bonds?

a. 0.99%

b. 1.10%

c. 1.21%

d. 1.33%

e. 1.46%

Calculation

See in attachment

Question 10.10. (TCO C) Assume that the risk-free rate remains constant but the market risk premium declines. Which of the following is most likely to occur?

a. The required return on a stock with beta = 1.0 will not change.

b. The required return on a stock with beta > 1.0 will increase.

c. The return on the market will remain constant.

d. The return on the market will increase.

e. The required return on a stock with beta < 1.0 will decline.