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Finance Quiz

Finance Quiz

Finance Quiz

Question 1.

1. (TCO A) Which of the following statements is correct? (Points : 10)

A) It is generally more expensive to form a proprietorship than a corporation, because with a proprietorship, extensive legal documents are required.

B)Corporations face fewer regulations than sole proprietorships.

C) One disadvantage of operating a business as a sole proprietorship is that the firm is subject to double taxation, at both the firm and the owner levels.

D)One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership.

E)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.

Question 2.

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)

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? (Points : 10)

A. $155,800

B. $164,000

C. $172,200

D. $180,810

E. $189,851

Question 4.

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)

A. $2,245.08

B. $2,363.24

C. $2,481.41

D. $2,605.48

E. $2,735.75

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 $14,000 at a rate of 10.0% and must repay it in five equal installments at the end of each of the next 5 years. How much interest would you have to pay in the first year? (Points : 10)

A. $1,200.33

B. $1,263.50

C. $1,330.00

D. $1,400.00

E. $1,470.00

Question 7.

7. (TCO D) Which of the following statements is correct? (Points : 10)

A. If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.

B. 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.

C. 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.

D. If a coupon bond is selling at par, its current yield equals its yield to maturity.

E. 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.

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? (Points : 10)

A. 7.39%

B. 7.76%

C. 8.15%

D. 8.56%

E. 8.98%

Question 9.

9. (TCO C) Niendorf Corporation’s 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for 5-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) × 0.1%, where t = number of years to maturity. Which is the liquidity premium (LP) on Niendorf’s bonds? (Points : 10)

A. 0.49%

B. 0.55%

C. 0.61%

D. 0.68%

E. 0.75%

Question 10.

10. (TCO C) Which of the following statements is correct? (Points : 10)

A. The slope of the SML is determined by the value of beta.

B. The SML shows the relationship between companies’ required returns and their diversifiable risks. The slope and intercept of this line cannot be influenced by a firm’s managers, but the position of the company on the line can be influenced by its managers.

C. Suppose you plotted the returns of a given stock against those of the market and you found that the slope of the regression line was negative. The CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming investors expect the observed relationship to continue on into the future.

D. If investors become less risk averse, the slope of the SML will increase.

E. If a company increases its use of debt, this is likely to cause the slope of its SML to increase, indicating a higher required return on the stock.


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