HW PreMidterm

Question 1

Which of the following statements about the corporate form of business organization is true?

A. The corporate form is preferred over the sole proprietorship because a corporation is easier to form and faces less regulation.

B. The corporate form has the advantage of unlimited liability.

C. The corporate form has the disadvantage of double taxation relative to a sole proprietorship.

D. Sole proprietorships are the most common form of business organization because liability is limited to the amount invested in the business by the sole proprietor

Answer 1

C. The corporate form has the disadvantage of double taxation relative to a sole proprietorship.

Question 2

In order to reduce agency problems, managers may be provided compensation that includes:

A. a bonus based on the level of profit achieved during the year.

B. incentive pay for achieving higher sales than last year.

C. an option to buy the company’s stock.

D. a fixed salary so managers’ pay is not at risk, allowing managers to focus on the company’s business.

Answer 2

C. an option to buy the company’s stock.

Question 3

The goal of the firm should be:

A. maximization of shareholder wealth.

B. maximization of sales.

C. maximization of profits (net income per share).

D. maximization of market share.

Answer 3

A. maximization of shareholder wealth.

Question 4

Which of the following statements are true regarding “Agency Problem”?

A. all of these

B. The agency problem may interfere with the implementation of maximizing shareholder wealth.

C. Managers might attempt to benefit themselves in terms of salary and perquisites at the expense of shareholders.

D. The agency problem results from the separation of management and the ownership of the firm.

Answer 4

A. all of these

Question 5

The corporation is a legal entity separate from it owners; thus it is possible for the corporation to continue even upon the death of one or more shareholders.

A. True

B. False

Answer 5

A. True

Question 6

Capital structure decisions include all of the following EXCEPT:

A. Deciding how to pay for long term projects.

B. Deciding the total amount of debt the firm should take on.

C. Deciding the mix of debt and equity for the firm.

D. Deciding what assets to purchase.

Answer 6

D. Deciding what assets to purchase.

Question 7

Short-term assets and short-term liabilities are referred to as the firm’s:

A. working capital.

B. financing mix.

C. capital structure.

D. capital budget.

E. cash flow.

Answer 7

A. working capital.

Question 8

Any situation where a potential conflict can arise between the firm’s owners and its managers is referred to as a(n):

A. personnel conflict.

B. agency problem.

C. organizational problem.

D. compensation issue.

E. control issue.

Answer 8

B. Agency Problem

Question 9

Anyone other than the firm’s stockholders or creditors that might have a claim on the cash flows of a firm is called a:

A. liaison.

B. stakeholder.

C. provisional partner.

D. residual owner.

E. shareholder.

Answer 9

B. Stakeholder

Question 10

Capital budgeting is the process of:

A. choosing how much cash to keep on hand.

B. planning and managing a firm’s long-term investments.

C. determining how to raise the money required to fund a project

D. deciding the amount of earnings that a firm should retain.

Answer 10

B. planning and managing a firm’s long-term investments.

Question 11

Three advantages of the corporate form of organization are the ease of transfer of ownership, limited liability for the shareholders and an unlimited life for the business entity.

A. True

B. False

Answer 11

A. True

Question 12

You charged $5,000 on your credit card for holiday gifts. Your credit card company charges you 10% annual interest, compounded monthly. If you make the minimum payments of $50 per month, how long will it take (to the nearest month) to pay off your balance?

A. 49 months

B. 119 months

C. 18 months

D. 216 months

Answer 12

D. 216 months

Question 13

You decide to borrow $800,000 to build a new home. The bank charges an interest rate of 6% compounded monthly. If you pay back the loan over 30 years, what will your monthly payments be (rounded to the nearest dollar)?

A. $4,389

B. $3,179

C. $4,796

D. $2,164

Answer 13

C. $4,796

Question 14

$1,000 is expected to be received 10 years from now. The present value of this $1,000 future cash flow is:

A. always greater than $1,000.

B. lower if the discount rate goes down.

C. less than $1,000 if interest rates are positive.

D. greater if the interest rate goes up.

Answer 14

C. less than $1,000 if interest rates are positive.

Question 15

At what rate must $750 be compounded annually for it to grow to $2,000 in 15 years?

A. 9.08 percent

B. 6.76 percent

C. 14.87 percent

D. 16.91 percent

Answer 15

B. 6.76 percent

Question 16

If you invest $500 every six months at 8 percent compounded semi-annually, how much would you accumulate at the end of 15 years?

A. $14,912

B. $28,042

C. $15,372

D. $23,791

Answer 16

B. $28,042

Question 17

You have just purchased a share of preferred stock for $50.00. The preferred stock pays an annual dividend of $5.00 per share forever. What is the rate of return on your investment?

A. 0.220

B. 0.110

C. 0.10

D. 0.055

Answer 17

C. 0.10

Question 18

What is the present value of 11 years of $45,000 payments if the first payment is to be received today? Assume a discount rate of 12% compounded annually and round to the nearest $10.

A. $1,013,850

B. $299,260

C. $495,690

D. $54,450

Answer 18

B. $299,260

Question 19

If Al deposits $1,000 into a bank account today that pays 7.5% interest compounded quarterly, what will the account balance be in five years?

A. 1,469

B. 1,450

C. 1,400

D. 1,486

Answer 19

B. 1,450

Question 20

You just graduated and landed your first job in your new career. You remember that your favorite finance professor told you to begin the painless job of saving for retirement as soon as possible, so you decided to put away $3,600 at the end of each year in a Roth IRA. Your expected annual rate of return on the IRA is 7.5%. How much will you accumulate at retirement after 40 years of investing?

A. $454,513

B. $947,912

C. $818,123

D. $1,136,283

Answer 20

C. $818,123

Question 21

Last National Bank is offering you a loan at 10%; payments on the loan are to be made monthly. Credit Union is offering you a loan where payments are to be made semi-annually; the rate on the loan is also 10%. Local Bank down the street is also offering a loan at 10% where the payments are made quarterly. Which loan has the lowest effective annual rate?

A. Last National Bank’s loan

B. Credit Union’s loan

C. All of the loans will have the same effective annual rate.

D. Local Bank’s loan

Answer 21

Credit Union

Question 22

The interest rate used to calculate the present value of future cash flows is called the:

A. discount rate.

B. future value factor.

C. compound interest rate.

D. present value factor.

E. current yield rate.

Answer 22

Discount Rate

Question 23

A financially wise individual would prefer a loan based on __________ interest and an
investment earning __________ interest.

A. simple; simple

B. compound; compound

C. compound; simple

D. simple; compound

E. complex; compound

Answer 23

D. simple; compound.

Question 24

Given a rate of return of zero, the future value of a lump sum invested today
will always:

A. decrease as the period of time decreases.

B. decrease as the period of time increases.

C. remain constant, regardless of the period of time.

D. increase as the period of time increases.

E. remain constant or increase as the period of time increases.

Answer 24

C. remain constant, regardless of the period of time.

Question 25

You want to have $100,000 for your daughter’s education 17 years from now. If you can earn 8 percent, compounded quarterly, on your savings, how much do you need to deposit today to reach your goal? A. $26,012.87 B. $24,528.09 C. $23,998.17 D. $27,336.87 E. $33,576.99

Answer 25

A. $26,012.87

Question 26

The present value of an annuity considers which of the following factors? I. the timing of each cash flow II. the amount of each cash flow III. the discount rate IV. the number of cash flows A. II and IV only B. I and II only C. II, III, and IV only D. I, II, III, and IV E. I, II, and IV only

Answer 26

D. I, II, III, and IV

Question 27

The yield to maturity on a bond: A) Can be used as the required rate of return to value the bond. B) Is lower for higher risk bonds. C) Is generally below the coupon rate. D) Is fixed when the bond is issued.

Answer 27

Can be used as the required rate of return to value the bond.

Question 28

Suppose interest rates have been at historically high levels the past two years and the expectation is they will soon drop. A reasonable strategy for bond investors during this time period would be to: A) Invest in short-term bonds to reduce interest rate risk. B) Invest in long-term bonds to lock in a bond position for when interest rates decrease in the future. C) Buy only junk bonds which have higher interest rates. D) Invest only in stocks.

Answer 28

Invest in long-term bonds to lock in a bond position for when interest rates decrease in the future.

Question 29

A corporate bond has a coupon rate of 8%, a yield to maturity of 12%, a face value of $1,000, and a market price of $900. Therefore, the annual coupon payment is: A) $80 B) $81 C) $100 D) $120

Answer 29

$80

Question 30

A 18 year bond issued today by Yeti, Inc. has a coupon rate of 7%, a required return of 6% and a face value of $1000. The bond will be sold 3 years from now when interest rates will be 5%. What is the holding period rate of return over the 3 year period? A) 12.53% B) 6.70% C) 27.91% D) 15.28%

Answer 30

27.91%

Question 31

John owns a corporate bond with a coupon rate of 8% that matures in 10 years. Bill owns a corporate bond with a coupon rate of 12% that matures in 25 years. If interest rates go down, then: A) The value of both bonds will increase. B) The value of Bill's bond will decrease more than the value of John's bond due to the longer time to maturity. C) The value of both bonds will remain the same because they were both purchased in an earlier time period before the interest rate changed. D) The value of John's bond will decrease and the value of Bill's bond will increase.

Answer 31

The value of both bonds will increase.

Question 32

All of the following affect the value of a bond except: A) The recorded value of the firm's assets. B) Investors' required rate of return. C) The coupon rate of interest. D) The maturity date of the bond.

Answer 32

The recorded value of the firm's assets.

Question 33

If the market price of a bond increases, then: A) The coupon rate decreases. B) The yield to maturity decreases. C) The coupon rate increases. D) The yield to maturity increases.

Answer 33

The yield to maturity decreases.

Question 34

What is the value of a bond that matures in 20 years, makes an annual coupon payment of $70, and has a par value of $1,000? Assume a required rate of return of 9%, and round your answer to the nearest $10. A) $910 B) $660 C) $1,000 D) $820

Answer 34

$820

Question 35

What is the value of a bond that matures in 3 years, has an annual coupon payment of $80, and a par value of $1,000? Assume a required rate of return of 8%, and round your answer to the nearest $10. A) $300 B) $1,000 C) $240 D) $800

Answer 35

$1,000

Question 36

If a bond has a Standard & Poor's rating of BB, or below, it is referred to as a ________. A) Convertible bond B) Low yield bond C) Capital bond D) Junk bond

Answer 36

Junk bond

Question 37

A bond will sell at a discount (below par value) if: A) The market value of the bond is less than the present value of the discount rate of the bond. B) Current market interest rates are moving in the same direction as bond values. C) The economy is booming. D) Investors' current required rate of return is above the coupon rate of the bond.

Answer 37

Investors' current required rate of return is above the coupon rate of the bond.

Question 38

If market interest rates rise: A) Short-term bonds will decline in value more than long-term bonds. B) Long-term bonds will decline in value more than short-term bonds. C) Short-term bonds will rise in value more than long-term bonds. D) Long-term bonds will rise in value more than short-term bonds.

Answer 38

Long-term bonds will decline in value more than short-term bonds.