MIDTERMFIN515/ManagerialFinance

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)

The statement of cash flows reflects cash flows from operations, but it does not reflect
the effects of buying or selling fixed assets.

The statement of cash flows shows where the firms cash is located; indeed, it provides a
listing of all banks and brokerage houses where cash is on deposit.

The statement of cash flows reflects cash flows from continuing operations, but it does
not reflect the effects of changes in working capital.

The statement of cash flows reflects cash flows from operations and from borrowings,
but it does not reflect cash obtained by selling new common stock.

The statement of cash flows shows how much the firms cashthe total of
currency, bank deposits, and short-term liquid securities (or cash equivalents)increased
or decreased during a given year.

3.(TCO G) An investor is considering starting a new business. The company would require
$475,000 of assets, and it would be financed entirely with common stock. The investor will go
forward only if she thinks the firm can provide a 13.5% return on the invested capital, which
means that the firm must have a ROE of 13.5%. How much net income must be expected to
warrant starting the business?(Points:10)

$52,230

$54,979

$57,873

$60,919

$64,125

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)

$2,245.08

$2,363.24

$2,481.41

$2,605.48

$2,735.75

5.(TCO B) At a rate of 6.5%, what is the future value of the following cash flow stream?
Years: 0
1
2
3
4
|--------|-----------|----------|---------|
CFs: $0 $75 $225 $0 $300(Points:10)

$526.01

$553.69

$582.83

$613.51

$645.80

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 four years. How large would your payments be?
(Points:10)

$3,704.02

$3,889.23

$4,083.69

$4,287.87

$4,502.26

7.(TCO D) A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a
premium. Which of the following statements is CORRECT?(Points:10)

The bonds current yield is less than 8%.

If the yield to maturity remains at 8%, then the bonds price will decline over the
next year.

The bonds coupon rate is less than 8%.

If the yield to maturity increases, then the bonds price will increase.

If the yield to maturity remains at 8%, then the bonds price will remain constant over the
next year.

8.(TCO D) The Morrissey Company's bonds mature in seven years, have a par value of $1,000,
and make an annual coupon payment of $70. The market interest rate for the bonds is

8.5%. What is the bond's price?(Points:10)

$923.22

$946.30

$969.96

$994.21

$1,019.06

9.(TCO C) Crockett Corporation's five-year bonds yield 6.85%, and five-year T-bonds yield
4.75%. The real risk-free rate is r* = 2.80%, the default risk premium for Crockett's bonds is DRP
= 0.85% versus zero for T-bonds, the liquidity premium on Crockett's bonds is LP = 1.25%, 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 inflation premium (IP) on five-year bonds?(Points:10)

1.40%

1.55%

1.71%

1.88%

2.06%

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 highbeta stocks.

The prices of all stocks would increase, but the increase would be greatest for high-beta
stocks.