DEVRY FIN515 WEEK 4 EXAM - 70908

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

One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt.
Sole proprietorships are subject to more regulations than corporations.
In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner.
Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones.
Corporations of all types are subject to the corporate income tax.

2. (TCO G) A security analyst obtained the following information from Prestopino Products’ financial statements:

• Retained earnings at the end of 2009 were $700,000, but retained earnings at the end of 2010 had declined to $320,000.
• The company does not pay dividends.
• The company’s depreciation expense is its only non-cash expense; it has no amortization charges.
• The company has no non-cash revenues.
• The company’s net cash flow (NCF) for 2010 was $150,000.

On the basis of this information, which of the following statements is CORRECT? (Points : 10)

Prestopino had negative net income in 2010.
Prestopino’s depreciation expense in 2010 was less than $150,000.
Prestopino had positive net income in 2010, but its income was less than its 2009 income.
Prestopino's NCF in 2010 must be higher than its NCF in 2009.
Prestopino’s cash on the balance sheet at the end of 2010 must be lower than the cash it had on the balance sheet at the end of 2009.

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) 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) Farmers Bank offers to lend you $50,000 at a nominal rate of 5.0%, simple interest, with interest paid quarterly. Merchants Bank offers to lend you the $50,000, but it will charge 6.0%, simple interest, with interest paid at the end of the year. What's the difference in the effective annual rates charged by the two banks? (Points : 10)

1.56%
1.30%
1.09%
0.91%
0.72%

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) Ezzell Enterprises’ noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity? (Points : 10)

6.20%
6.53%
6.87%
7.24%
7.62%

9. (TCO C) Keys Corporation's five-year bonds yield 7.00%, and five-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for five-year bonds is %, the liquidity premium for Keys' bonds is % 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 of years to maturity. What is the default risk premium (DRP) on Keys' bonds? (Points : 10)

0.99%
1.10%
1.21%
1.33%
1.46%

10. (TCO C) Assume that the risk-free rate remains constant, but the market risk premium declines. Which of the following is most likely to occur? (Points : 10)

The required return on a stock with will not change.
The required return on a stock with beta > 1.0 will increase.
The return on "the market" will remain constant.
The return on "the market" will increase.
The required return on a stock with beta < 1.0 will decline. 

 

 

Solution Description

 

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

One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt.
Sole proprietorships are subject to more regulations than corporations.
In any type of partne

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