Keller FIN 515 Quiz 1.doc

(TCO A) Which of the following statements is CORRECT?

Classified - Internal use

Student Answer: 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. Instructor Explanation:Chapter 1

Explanation: Ch 1: d is correct, all others are incorrect

a: incorporating provides owners limited liability

b: sole proprietorship has less regulation than corporation

c: In limited partnerships certain partners can be designated general partners and others limited partners with differences in control and liability

d. sole proprietorships and partnerships are taxed just once at owner level (pass-through of income to owners) whereas corporation earnings can be double or triple taxed depending on individual or corporate ownership of stock

e. S-corps can elect to be taxed as proprietorship or partnership

Points Received: 0 of 10

Comments:

(TCO G) Which of the


following statements is CORRECT?

Student Answer: 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 firm’s 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 firm’s cash—the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)—increased or decreased during a given year. Instructor Explanation:

Ch 2: e is true all others are false

a: False: Statement of cash flows indicates cash flows from operations, investing and financing activities.

b: False: Statement of cash flows does not indicate this information.


c: False: Statement of cash flows reflects changes in working caital or values of current assets and liabilities.

d: False: Statement of Cash Flows reflects all financing activities

e: True: Statement of Cash Flows shows change in total cash position


Comments:

(TCO G) LeCompte Corp. has $312,900 of ass


ets, and it uses only common equity capital (zero debt). I


ts sales for the last year were $620,000, and its net inc


ome after taxes was $24,655. Stockholders recently vote


d in a new management team that has promised to lower co


sts and get the return on equity up to 15%. What profit ma


rgin would LeCompte need in order to achieve the 15% R


OE, holding everything else constant?

Student Answer: 7.57% 7.95% 8.35% 8.76% 9.20% Instructor Explanation:

$312,900*15%=46,935; 46,935/$620,000=7.57%


Comments:

Questi


on :

Student Answer: $2,245.08 $2,363.24 $2,481.41 $2,605.48 $2,735.75 Instructor Explanation:Chapter 4

N 25

I/YR 3.5%

PV $1,000

PMT $0

FV $2,363.24


Comments:

(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 additio


nal lump sum payment of $10,000 at the end of the fifth yea


r. What is the expected rate of return on this investment


?

Student Answer: 6.77% 7.13% 7.50% 7.88% 8.27% Instructor Explanation:Chapter 4 This is the definition of a $10,000 bond yielding 7.5%. No calculation is needed.


Comments:

6.

Question :(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?

Student Answer: 1.56% 1.30% 1.09% 0.91% 0.72% Instructor Explanation:Chapter 4

Answer;

Ch 4: Reference formula 4-14 on pp 155

EAR=Eff%=(1+Inom/M)^M -1

=((1+.05/4)^4)-1

0.050945

Difference in Rates of Two Banks: .06-.050945=.009055 or .9055%


Comments:


7.

Question :(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?

Student Answer: The bond’s current yield is less than 8%. If the yield to maturity remains at 8%, then

the bond’s price will decline over the next year. The bond’s coupon rate is less than 8%. If the

yield to maturity increases, then the bond’s price will increase. If the yield to maturity remains at 8%, then the bond’s price will remain constant over the next year. Instructor Explanation:

Explanation:

If bond trades at premium, then YTM is less than coupon rate. If YTM is 8%, then coupon rate is less than 8%

a: Don't know split between current yield and capital gain yield.

b: True: as nears maturity, price will go to $1,000 - it will decline.

c: Don't know split between current yield and capital gain yield.

d: False: If YTM increases, bond price will fall

e: False: as nears maturity- price will go to $1,000- it will decline


Comments:

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?


Explanation:

Our inputs and outputs are as follows:

FV1000

N15

PMT95

PV-1165

beg/end0

R7.62%


Comments:

9.



Corp Tbond

rf* 2.75% 2.75%

DRP 1.20% 0.00%

MRP 0.40% 0.40%

IP 1.65% 1.65%

LP 0.75% 0.00%

6.75% 4.80%


Comments:


(TCO C) Other things held constant, if the expected infl


ation rate decreases and investors also become more ri


sk averse, the Security Market Line would be affected as


follows:

Student Answer: The y-axis intercept would decline, and the slope would increase. The x-axis

intercept would decline, and the slope would increase. The y-axis intercept would increase, and the

slope would decline. The SML would be affected only if betas changed. Both the y-axis intercept and the slope would increase, leading to higher required returns. Instructor Explanation:Chapter 6

a: True- required return of stock would decrease, and slope increases with increased risk aversion

b: false- see a

c,d,e: false: y axis intercept, value of beta not impacted


Comments:

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Keller FIN 515 Quiz 1.doc