Qu Question :

est
ion
1.

Student Answer:

It is generally more expensive to form a proprietorship than a corporation, because

with a proprietorship, extensive legal documents are required.

than sole proprietorships.

Corporations face fewer regulations

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:
Comments:

Question :

Qu
est
ion
2.

10 of 10

Student Answer:

Prestopino had negative net income in 2010.

in 2010 was less than $150,000.

Prestopinos depreciation expense

Prestopino had positive net income in 2010, but its income was less

than its 2009 income.

Prestopino's NCF in 2010 must be higher than its NCF in 2009.
Prestopinos cash on the balance sheet at the end of 2010 must be lower than the cash it had on the
balance sheet at the end of 2009. Instructor Explanation:See Chapter 2.
Choice a is true; all others are false.
a: True (as the company pays no dividends, the decrease in retained earnings is from negative earnings
or losses)
b: Does not explain change in retained earnings value
c: Does not explain change in retained earnings value
d: Cash flow does not relate to retained earnings.
e: Cash flow does not relate to retained earnings.
Points Received:

10 of 10

Comments:

Question :
Qu
est
ion
3.

7.57%
15% = $46,935
$46,935 $620,000 = 7.57%
Student Answer:

Points Received:
Comments:

7.95%

10 of 10

8.35%

8.76%

9.20% Instructor Explanation:$312,900

Question
4.

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

$11,973

Student Answer:

$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

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

Points Received:

10 of 10

Comments:

Qu
est
ion
5.

Question :

$526.01
Explanation:See Chapter 4.
Student Answer:

$553.69

FV of $75 = $90.60
FV of $225 = $255.20
$300 is not compounded.
Total FV = $90.6 + $255.2 + $300 = $645.8

Points Received:
Comments:

Qu Question :
est
ion
6.

10 of 10

$582.83

$613.51

$645.80 Instructor

Student Answer:

$1,200.33

$1,263.50

$1,330.00

$1,400.00

$1,470.00 Instructor

Explanation:See Chapter 4.

$14,000 10%, or $1,400

Points Received:

10 of 10

Comments:

Question
Question :

YTM is 8%, and it currently trades at a premium. Which of the

following statements is correct?

Student Answer:

The bonds current yield is less than 8%.

then the bonds price will decline over the next year.

If the yield to maturity remains at 8%,

The bonds coupon rate is less than 8%.

If

the yield to maturity increases, then the bonds price will increase.
If the yield to maturity remains at
8%, then the bonds price will remain constant over the next year. Instructor 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 $1,000it 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 $1,000it will
decline)
Points Received:
Comments:

10 of 10

Question
8.

(TCO
D)
Ezzell
Enterpri
ses
noncall
able
bonds
currentl
y 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
?

6.20%
and outputs are as follows.
Student Answer:

FV
N
PMT
PV
beg/end

1,000
15
95
-1,165
0

6.53%

6.87%

7.24%

7.62% Instructor Explanation:Our inputs

7.62%

Points Received:
Comments:

Question 9.

10 of 10

Student Answer:

0.49%
Corp

rf*
DRP
MRP
IP
LP

0.55%

0.68%

0.75% Instructor Explanation:

T-bond
2.75%
1.20%
0.40%
1.65%
0.75%
6.75%

Points Received:

0.61%

2.75%
0.00%
0.40%
1.65%
0.00%
4.80%
10 of 10

Comments:

Question :
Qu
est
ion
10.

The required return on all stocks would increase by the same amount.
The
required return on all stocks would increase, but the increase would be greatest for stocks with betas of
Student Answer:

less than 1.0.

Stocks' required returns would change, but so would expected returns, and the result

would be no change in stocks' prices.

The prices of all stocks would decline, but the decline would

be greatest for high-beta stocks.

The prices of all stocks would increase, but the increase would be
greatest for high-beta stocks. Instructor Explanation:a: False (depends on individual stock beta)
b: False (larger beta, greater the increase)
c: False (not likely in equilibrium)
d: True (higher discount rates, lower prices)

e: False (price and rates inversely related)

Points Received:
Comments:

10 of 10