Question Type:

# Of Questions:

Multiple Choice

# Correct:

10

10

Grade Details - All Questions

Question 1. Question :
Student Answer:

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

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 and the owner levels.
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.

Instructor Explanation:

See Chapter 1.
Choice d is correct; all others are incorrect.
a. False (corporate formation is more complex and expensive, in
general, than are partnerships)
b. False (corporations are regulated at the state level and thus are
more regulated than sole proprietorships)
c: False (sole proprietors are taxed once at the owner level)
d: True (the corporate form provides owners limited liability)
e: False (under partnership law, each partner is liable for the
business debts)

Points Received:

10 of 10

Comments:

Question 2. Question :

Student Answer:

(TCO G) Aubey Aircraft recently announced that its net income

increased sharply from the previous year, yet its net cash flow
from operations declined. Which of the following could explain this
performance?
The companys operating income declined.

The companys expenditures on fixed assets declined.

The companys cost of goods sold increased.
The companys depreciation and amortization expenses
declined.
The companys interest expense increased.
Instructor Explanation: See Chapter 2.

Choice d is true; all others are false.

a: False (would not contribute to increase in operating income)
b: False (this impacts cash flow from investments versus operations)
c: False (would decrease operating income)
d: True (a decrease in noncash charges would increase earnings,
increase tax liability, and decrease cash flows)
e: False (increase in interest charges would decrease net income and
cash flows)

Points Received:

10 of 10

Comments:

Question 3. Question :

Student Answer:

(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 an ROE of
13.5%. How much net income must be expected to warrant
starting the business?
$52,230
$54,979
$57,873
$60,919
$64,125

Instructor Explanation: $475,000 13.5% = $64,125

Points Received:
Comments:

10 of 10

Question 4. Question :

(TCO B) You want to buy a new sports car 3 years from now, and
you plan to save $4,200 per year, beginning 1 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, 3 years from now?

Student Answer:

$11,973
$12,603
$13,267
$13,930
$14,626

Instructor
Explanation:

Using Excel or a calculator, your inputs and outputs are as follows.

pv
pmt
n
r
beg/end
fv

Points Received:

0
-4,200
3
0.052
0
$13,266.56

10 of 10

Comments:

Question 5. Question :

Student Answer:

(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 5 years,
then an additional lump sum payment of $10,000 at the end of the
fifth year. Which is the expected rate of return on this investment?
6.77%
7.13%
7.50%
7.88%
8.27%

Instructor
Explanation:

Points Received:

See Chapter 4. This is the definition of a $10,000 bond yielding 7.5%. No

calculation is needed.

10 of 10

Comments:

Question 6. Question :

Student
Answer:

(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 4 years. How large would your payments be?
$3,704.02
$3,889.23
$4,083.69
$4,287.87
$4,502.26

Instructor
Explanation:

Using Excel or a calculator, your inputs and outputs are as

follows.
pv
r
fv
beg/end
n
pmt

Points Received:

12,000
0.09
0
0
4
($3,704.02)

10 of 10

Comments:

Question 7. Question :
Student
Answer:

(TCO D) Which of the following statements is correct?

If a bond is selling at a discount, the yield to call is a better measure of

return than the yield to maturity.
On an expected yield basis, the expected capital gains yield will always be
positive, because an investor would not purchase a bond with an expected
capital loss.
On an expected yield basis, the expected current yield will always be
positive, because an investor would not purchase a bond that is not expected
to pay any cash coupon interest.
If a coupon bond is selling at par, its current yield equals its yield to
maturity.
The current yield on Bond A exceeds the current yield on Bond B;
therefore, Bond A must have a higher yield to maturity than Bond B.

Instructor
Explanati
on:

a: False (yield to call only relevant if callable bond, discount/premium related to

expected yield to maturity which is yield to call for callable bond, and the
coupon rate)
b: False (YTM is sum of current and capital gain yield)
c: False (YTM is sum of current and capital gain yield; investor may not want
current incomemay only want capital gain)
d. True (the two yields are in equilibrium when par value = price)
e: False (YTM is sum of current and capital gain yielddepends on capital gain
yield)

Points Received:

10 of 10

Comments:

Question 8. Question :

(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. Which is their yield to maturity?

Student Answer:

6.20%
6.53%
6.87%
7.24%
7.62%

Instructor
Explanation:

Our inputs and outputs are as follows.

FV
N
PMT
PV
beg/end
R

Points Received:

1,000
15
95
-1,165
0
7.62%

10 of 10

Comments:

Question 9. Question :

(TCO C) Five-year Treasury bonds yield 5.5%. The inflation

premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5year bonds is 0.4%. Which is the real risk-free rate, r*?

Student Answer:

2.59%
2.88%
3.20%
3.52%
3.87%

Instructor
Explanation:

Real risk-free rate = 0.055 - 0.019 - 0.004 = 0.032

Points Received:

10 of 10

Comments:

Question 10. Question :

(TCO C) Which of the following statements is correct?

Student Answer:

The slope of the SML is determined by the value of beta.

The SML shows the relationship between companies'
required returns and their diversifiable risks. The slope and
intercept of this line cannot be influenced by a firm's managers,
but the position of the company on the line can be influenced by
its managers.
Suppose you plotted the returns of a given stock against
those of the market and you found that the slope of the regression
line was negative. The CAPM would indicate that the required
rate of return on the stock should be less than the risk-free rate
for a well-diversified investor, assuming investors expect the
observed relationship to continue on into the future.
If investors become less risk averse, the slope of the SML
will increase.
If a company increases its use of debt, this is likely to cause
the slope of its SML to increase, indicating a higher required
return on the stock.

Instructor Explanation:

a: False (the slope of SML reflects the degree of risk aversion in the
economy, beta is horizontal axis and required return of stock is
vertical axis)
b: False (managers can influence capital structure which impacts a
firms beta)
c: True

d: False (less risk averse would result in less steep slope)

e: Depends on level of debt and investor risk aversion

Points Received:
Comments:

10 of 10