FIN515 Week 4 midterm exam

FIN 515 Week 4 : Business Valuation and Stock Valuation –
Exam
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.