1. How much would $5,000 due in 25 years be worth today if the discount rate were 5.5%? (Points : 4)$1,067.95$1,124.16$1,183.33$1,311.17Question 2. 2. Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures? (Points : 4)$1,781.53$1,870.61$1,964.14$2,062.34Question 3. 3. Which of the following statements is CORRECT? (Points : 4)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.Question 4. 4. Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.) (Points : 4)The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years.Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant.Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.The outstanding balance declines at a slower rate in the later years of the loanâs life.Question 5. 5. 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? (Points : 4)Assuming Cheers is profitable; less of its income will be subject to federal income taxes.Cheers will now be subject to fewer regulations.Cheersâ shareholders (the ex-partners) will now be exposed to less liability.Cheersâ investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.Question 6. 6. Tucker Electronic System’s current balance sheet shows total common equity of $3,125,000. The company has 125,000 shares of stock outstanding, and they sell at a price of $52.50 per share. By how much do the firm’s market and book values per share differ? (Points : 4)$27.50$28.88$30.32$31.83Question 7. 7. Companies generate income from their “regular” operations and from other sources like interest earned on the securities they hold, which is called non-operating income. Lindley Textiles recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,000 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 40%. How much was Lindley’s operating income, or EBIT? (Points : 4)$3,462$3,644$3,836$4,250Question 8. 8. Which of the following items cannot be found on a firmâs balance sheet under current liabilities?(Points : 4)Accounts payable.Short-term notes payable to the bank.Accrued wages.Cost of goods sold.Question 9. 9. Companies E and P each reported the same earnings per share (EPS), but Company Eâs stock trades at a higher price. Which of the following statements is CORRECT? (Points : 4)Company E probably has fewer growth opportunities.Company E is probably judged by investors to be riskier.Company E must have a higher market-to-book ratio.Company E trades at a higher P/E ratio.Question 10. 10. Which of the following would indicate an improvement in a companyâs financial position, holding other things constant? (Points : 4)The inventory and total assets turnover ratios both decline.The debt ratio increases.The profit margin declines.The current and quick ratios both increase.Question 11. 11. Wachowicz Corporation issued 15-year, non-callable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity? (Points : 4)$1,077.01$1,104.62$1,132.95$1,191.79Question 12. 12. Maxwell Inc.’s stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a -28% return. What is the firm’s expected rate of return? (Points : 4)9.41%9.65%9.90%10.15%Question 13. 13. Which of the following statements is CORRECT? (Points : 4)An investor can eliminate virtually all market risk if he or she holds a very large and well diversified portfolio of stocks.The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio.It is impossible to have a situation where the market risk of a single stock is less than that of a portfolio that includes the stock.An investor can eliminate virtually all diversifiable risk if he or she holds a very large, well-diversified, portfolio of stocks.Question 14. 14. A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT? (Points : 4)If the yield to maturity remains constant, the bondâs price one year from now will be higher than its current price.The bond is selling below its par value.The bond is selling at a discount.If the yield to maturity remains constant, the bondâs price one year from now will be lower than its current price.Question 15. 15. Under normal conditions, which of the following would be most likely to increase the coupon rate required to enable a bond to be issued at par? (Points : 4)Adding additional restrictive covenants that limit management’s actions.Adding a call provision.The rating agencies change the bond’s rating from Baa to Aaa.Making the bond a first mortgage bond rather than a debenture.Question 16. 16. You hold a diversified portfolio consisting of a $5,000 investment in each of 20 different common stocks. The portfolio beta is equal to 1.12. You have decided to sell a lead mining stock (b = 1.00) at $5,000 net and use the proceeds to buy a like amount of a steel company stock (b = 2.00). What is the new beta of the portfolio?(Points : 4)1.11391.17001.23111.2927Question 17. 17. Consider the following information and then calculate the required rate of return for the Scientific Investment Fund, which holds 4 stocks. The marketâs required rate of return is 15.0%, the risk-free rate is 7.0%, and the Fund’s assets are as follows: 30Stock Investment BetaA $ 200,000 1.50B 300,000 -0.50C 500,000 1.25D 1,000,000 0.75(Points : 4)10.67%11.23%11.82%13.10%Question 18. 18. Which is the best measure of risk for an asset held in isolation, and which is the best measure for an asset held in a diversified portfolio? (Points : 4)Variance; correlation coefficient.Standard deviation; correlation coefficient.Beta; variance.Coefficient of variation; beta.Question 19. 19. Which of the following is NOT a potential problem with beta and its estimation? (Points : 4)Sometimes a security or project does not have a past history which can be used as a basis for calculating beta.Sometimes, during a period when the company is undergoing a change such as toward more leverage, or riskier assets, the calculated beta will be drastically different than the âtrueâ or âexpected futureâ beta.The beta of âthe market,â can change over time, sometimes drastically.Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.Question 20. 20. If the returns of two firms are negatively correlated, then one of them must have a negative beta. (Points : 4)TrueFalseQuestion 21. 21. Scanlon Inc.’s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: rRF = 4.10%; RPM = 5.25%; and b = 1.30. Based on the CAPM approach, what is the cost of common from retained earnings? (Points : 4)9.67%9.97%10.28%10.93%Question 22. 22. DeLong Inc. has fixed operating costs of $470,000, variable costs of $2.80 per unit produced, and its products sell for $4.00 per unit. What is the company’s breakeven point, i.e., at what unit sales volume would income equal costs? (Points : 4)391,667411,250431,813453,403Question 23. 23. Which of the following statements is CORRECT? (Points : 4)One defect of the IRR method versus the NPV is that the IRR does not take account of cash flows over a projectâs full life.One defect of the IRR method versus the NPV is that the IRR does not take account of the time value of money.One defect of the IRR method versus the NPV is that the IRR does not take account of the cost of capital.One defect of the IRR method versus the NPV is that the IRR does not take proper account of differences in the sizes of projects.Question 24. 24. Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting? (Points : 4)Long-term debt.Accounts payable.Retained earnings.Common stock.Question 25. 25. The cost of equity raised by retaining earnings can be less than, equal to, or greater than the cost of external equity raised by selling new issues of common stock, depending on tax rates, flotation costs, the attitude of investors, and other factors. (Points : 4)TrueFalse