Week 4 : Business Valuation and Stock Valuation - Exam


1. (TCO A) Which of the following statements is CORRECT? (Points : 10)

One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability. It is generally easier to transfer one’s ownership interest in a partnership than in a corporation. One of the advantages of the corporate form of organization is that it avoids double taxation. 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.” Corporations of all types are subject to the corporate income tax.
2. (TCO G) Smith & Constantine Inc. recently announced that their net income increased sharply from

the previous year, yet their net cash flow from operations declined. Which of the following could explain this performance? (Points : 10) The company’s operating income declined. The company’s expenditures on fixed assets declined. The company’s cost of goods sold increased. The company’s depreciation and amortization expenses declined. The company’s interest expense increased.
3. (TCO G) Lucky Corp. has $312,900 of assets, and it uses only common equity capital (zero debt). Its

sales for the last year were $620,000, and its net income after taxes was $24,655. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. What profit margin would Lucky Corp. need in order to achieve the 15% ROE, holding everything else constant? (Points : 10) 7.57% 7.95% 8.35% 8.76% 9.20%
4. (TCO B) Suppose a state of Delaware bond will pay $1,000 10 years from now. If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today? (Points : 10)

$585.43 $614.70 $645.44 $677.71 $711.59
5. (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 additional lump sum payment of $10,000 at the end of the fifth year. What is the expected rate of return on this investment? (Points : 10) 6.77% 7.13% 7.50% 7.88% 8.27%

but the increase would be greatest for stocks with betas of less than 1.5%.000 currently sells for $850. The bond’s yield to maturity is greater than its coupon rate.6. causing an increase in the risk-free rate. and the maturity risk premium (MRP) on five-year bonds is 0. and that led to an increase in the market risk premium.rRF). rRF. with other things held constant. the bond’s price will remain at $850.000 at a rate of 10. Investors also became concerned that the Fed's actions would lead to a recession. The bond’s current yield exceeds its yield to maturity.00 $1. an annual coupon of $85. but the decline would be greatest for high-beta stocks. If the yield to maturity stays constant until the bond matures.52% 3. and a par value of $1.59% 2.000. but so would expected returns. (TCO D) Garvin Enterprises’ bonds currently sell for $1. How much interest would you have to pay in the first year? (Points : 10) $1. The prices of all stocks would increase.9%.4%. . (TCO D) A 15-year bond with a face value of $1. (rM . r*? (Points : 10) 2.56% 8. The prices of all stocks would decline. but the increase would be greatest for high-beta stocks.87% 10.400. Which of the following statements is CORRECT? (Points : 10) The bond’s coupon rate exceeds its current yield. The bond’s current yield is equal to its coupon rate. (TCO C) 5-year Treasury bonds yield 5.98% 9.76% 8.150.330. 8. which of the following statements is most correct? (Points : 10) The required return on all stocks would increase by the same amount.470.0% and must repay it in five equal installments at the end of each of the next five years.33 $1.50 $1.00 7. What is the real risk-free rate.15% 8. the Federal Reserve tightened the money supply.00 $1. Under these conditions. Stocks' required returns would change. They have a six-year maturity.20% 3.263. The inflation premium (IP) is 1.0. (TCO B) Suppose you borrowed $14. and the result would be no change in stocks' prices. What is their current yield? (Points : 10) 7.88% 3.200. (TCO C) Assume that to cool off the economy and decrease expectations for inflation. The required return on all stocks would increase.39% 7.

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