Week 4 : Business Valuation and Stock Valuation - Exam

Exam

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

One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability. It is generally easier to transfer ones ownership interest in a partnership than in a corporation. One of the advantages of the corporate form of organization is that it avoids double taxation. 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. Corporations of all types are subject to the corporate income tax.
2. (TCO G) Smith & Constantine Inc. recently announced that their net income increased sharply from

the previous year, yet their net cash flow from operations declined. Which of the following could explain this performance? (Points : 10) The companys operating income declined. The companys expenditures on fixed assets declined. The companys cost of goods sold increased. The companys depreciation and amortization expenses declined. The companys interest expense increased.
3. (TCO G) Lucky 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 Lucky Corp. 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) Suppose a state of Delaware 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) Your father paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the

end of each of the next five years, then an additional lump sum payment of $10,000 at the end of the fifth year. What is the expected rate of return on this investment? (Points : 10) 6.77% 7.13% 7.50% 7.88% 8.27%

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 bonds coupon rate exceeds its current yield. The bonds current yield exceeds its yield to maturity. The bonds yield to maturity is greater than its coupon rate. The bonds current yield is equal to its coupon rate. If the yield to maturity stays constant until the bond matures, the bonds 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) 5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on five-year bonds is 0.4%. What is the real risk-free rate, r*? (Points : 10)

2.59% 2.88% 3.20% 3.52% 3.87%

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.