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FIN 515 Week 4 Midterm Exam (Answer Key)

FIN 515 Week 4 Midterm Exam (Answer Key)
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FIN 515 Week 4  Business Valuation and Stock Valuation - Midterm Exam

 


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) Which of the following statements is CORRECT? (Points : 10)
        In the statement of cash flows, a decrease in accounts receivable is reported as a use of cash.
        Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity.
        In the statement of cash flows, a decrease in accounts payable is reported as a use of cash.
        In the statement of cash flows, depreciation charges are reported as a use of cash.
        In the statement of cash flows, a decrease in inventories is reported as a use of cash.

3. (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? (Points : 10)
        7.57%
        7.95%
        8.35%
        8.76%
        9.20%

4. (TCO B) You want to buy a new sports car three years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the third deposit, three years from now? (Points : 10)
        $11,973
        $12,603
        $13,267
        $13,930
        $14,626

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 $14,000 at a rate of 10.0% and must repay it in five equal installments at the end of each of the next five years. How much interest would you have to pay in the first year? (Points : 10)
        $1,200.33
        $1,263.50
        $1,330.00
        $1,400.00
        $1,470.00

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) 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 to cool off the economy and decrease expectations for inflation, the Federal Reserve tightened the money supply, causing an increase in the risk-free rate, rRF. Investors also became concerned that the Fed's actions would lead to a recession, and that led to an increase in the market risk premium, (rM - rRF). Under these conditions, with other things held constant, which of the following statements is most correct? (Points : 10)
        The required return on all stocks would increase by the same amount.
        The required return on all stocks would increase, but the increase would be greatest for stocks with betas of less than 1.0.
        Stocks' required returns would change, but so would expected returns, and the result would be no change in stocks' prices.
        The prices of all stocks would decline, but the decline would be greatest for high-beta stocks.
        The prices of all stocks would increase, but the increase would be greatest for high-beta stocks.
 

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