Which of the following statements is CORRECT?
1. Which of the following statements is CORRECT?
A) One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt.
B) Sole proprietorships are subject to more regulations than corporations.
C) In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner.
D) Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones.
E) Corporations of all types are subject to the corporate income tax.
2. Which of the following statements is CORRECT?
A) One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.
B) It is generally easier to transfer one s ownership interest in a partnership than in corporation.
C) One of the advantages of the corporate form of organization is that it avoids double taxation.
D) 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.
E) Corporations of all types are subject to the corporate income tax.
3. Which of the following statements is CORRECT?
A) It is generally more expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required.
B) Corporations face fewer regulations than sole proprietorships.
C) 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.
D) One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership.
E) 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.
4. Cheers Inc. operates as a partnership. Now the partners have decided to convert the business into a regular corporation. Which of the following statements is CORRECT?
A) Assuming Cheers is profitable, less of its income will be subject to federal income taxes.
B) Cheers will now be subject to fewer regulations.
C) Cheers shareholders (the ex partners) will now be exposed to less liability.
D) Cheers investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.
E) Cheers will find it more difficult to raise additional capital.
5. Other things held constant, which of the following actions would increase the amount of cash on a company s balance sheet?
A) The company repurchases common stock.
B) The company pays a dividend.
C) The company issues new common stock.
D) The company gives customers more time to pay their bills.
E) The company purchases a new piece of equipment.
6. Which of the following items is NOT included in current assets?
A) Accounts receivable.
E) Short term, highly liquid, marketable securities.
7. Analysts who follow Howe Industries recently noted that, relative to the previous year, the company s operating net cash flow increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?
A) The company cut its dividend.
B) The company made a large investment in a profitable new plant.
C) The company sold a division and received cash in return.
D) The company issued new common stock.
E) The company issued new long term debt.
8. Hunter Manufacturing Inc. s December 31, 2009 balance sheet showed total common equity of $2,050,000 and 100,000 shares of stock outstanding. During 2010, Hunter had $250,000 of net income, and it paid out $100,000 as dividends. What was the book value per share at 12/31/10, assuming that Hunter neither issued nor retired any common stock during 2010?
9. Considered alone, which of the following would increase a company s current ratio?
A) An increase in net fixed assets.
B) An increase in accrued liabilities.
C) An increase in notes payable.
D) An increase in accounts receivable.
E) An increase in accounts payable.
10. A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?
A) Reduce the company s days sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.
B) Use cash to repurchase some of the company s own stock.
C) Borrow using short term debt and use the proceeds to repay debt that has a maturity of more than one year.
D) Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
E) Use cash to increase inventory holdings.
11. Companies E and P each reported the same earnings per share (EPS), but Company E s stock trades at a higher price. Which of the following statements is CORRECT?
A) Company E probably has fewer growth opportunities.
B) Company E is probably judged by investors to be riskier.
C) Company E must have a higher market to book ratio.
D) Company E must pay a lower dividend.
E) Company E trades at a higher P/E ratio.
12. Which of the following statements is CORRECT?
A) A time line is not meaningful unless all cash flows occur annually.
B) Time lines are not useful for visualizing complex problems prior to doing actual calculations.
C) Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.
D) Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.
E) Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.
13. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?
A) The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.
B) The discount rate increases.
C) The riskiness of the investment s cash flows decreases.
D) The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.
E) The discount rate decreases.
14. Which of the following statements is CORRECT?
A) The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.
B) If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity
C) The cash flows for an annuity due must all occur at the ends of the periods.
D) The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.
E) If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.
15. Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?
A) The periodic rate of interest is 1.5% and the effective rate of interest is 3%.
B) The periodic rate of interest is 6% and the effective rate of interest is greater than 6%.
C) The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.
D) The periodic rate of interest is 3% and the effective rate of interest is 6%.
E) The periodic rate of interest is 6% and the effective rate of interest is also 6%.
16. Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?
A) The company s bonds are downgraded.
B) Market interest rates rise sharply.
C) Market interest rates decline sharply.
D) The company s financial situation deteriorates significantly.
E) Inflation increases significantly.
17. A 10 year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?
A) If the yield to maturity remains constant, the bond s price one year from now will be higher than its current price.
B) The bond is selling below its par value.
C) The bond is selling at a discount.
D) If the yield to maturity remains constant, the bond s price one year from now will be lower than its current price.
E) The bond s current yield is greater than 9%.
18. Tucker Corporation is planning to issue new 20 year bonds. Initially, the plan was to make the bonds non callable. If the bonds were made callable after 5 years at a 5% call premium, how would this affect their required rate of return?
A) Because of the call premium, the required rate of return would decline.
B) There is no reason to expect a change in the required rate of return.
C) The required rate of return would decline because the bond would then be less risky to a bondholder.
D) The required rate of return would increase because the bond would then be more risky to a bondholder.
E) It is impossible to say without more information.
19. Which of the following bonds has the greatest interest rate price risk?
A) A 10 year $100 annuity.
B) A 10 year, $1,000 face value, zero coupon bond.
C) A 10 year, $1,000 face value, 10% coupon bond with annual interest payments.
D) All 10 year bonds have the same price risk since they have the same maturity.
E) A 10 year, $1,000 face value, 10% coupon bond with semiannual interest payments.
20. A highly risk averse investor is considering adding one additional stock to a 3 stock portfolio, to form a 4 stock portfolio. The three stocks currently held all have b = 1.0, and they are perfectly positively correlated with the market. Potential new Stocks A and B both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r = 0.75. However, Stock A s standard deviation of returns is 12% versus 8% for Stock B. Which stock should this investor add to his or her portfolio, or does the choice not matter?
A) Either A or B, i.e., the investor should be indifferent between the two.
B) Stock A.
C) Stock B.
D) Neither A nor B, as neither has a return sufficient to compensate for risk.
E) Add A, since its beta must be lower.