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1- Limited partnerships are not as prevalent as corporations because
1. limited partners can lose up to three times the amount they invested in the partnership if the business goes bankrupt.
2. limited partnerships have the disadvantage of double taxation.
3. the general partner has no liability, making it difficult for the partnership to borrow money.
4. it is easier to transfer ownership by selling common stock than it is to sell partnership.
2- Capital budgeting is concerned with
1. whether a company’s assets should be financed with debt or equity.
2. managing a firms cash budgeting procedures.
3. what long-term investments a firm should undertake.
4. planning sales of a corporation’s equity capital.
3 – Which of the following forms of organizations have earnings that are taxed twice, once as business income and once as personal income as the earnings are distributed to the owners in the form of dividends?
2. general partnerships
3. limited partnerships
4. both A and C
4- The true owners of the corporation are the
1. holders of debt issues of the firm.
2. preferred stockholders.
3. board of directors of the firm.
4. common stockholders.
5-All of the following business organizations provide limited liability to their owners except:
1. general partnership.
2. S-type corporation.
4. limited liability company.
6- A corporate manager decides to build a new store on a lot owned by the corporation that could be sold to a local developer for $250,000. The lot was purchased for $50,000 twenty years ago. When determining the value of the new store project,
1. the cost of the lot is zero since the corporation already owns it.
2. the opportunity cost of the lot is $250,000 and should be included in calculating the value of the project.
3. the cost of the lot for valuation purposes is $50,000 because land does not depreciate.
4. the incremental cash flow should be the $50,000 original cost less accumulated amortization.
7- Investors are generally risk averse. Therefore, a typical investor
1. will not be induced to take on any risk.
2. will only take on the least risk possible.
3. will only take on additional risk if he expects to be compensated in the form of additional return.
4. will only accept a zero return if the risk is zero.
8- Determining the best way to raise money to fund a firm’s long-term investments is called
1. the capital budgeting decision.
2. the portfolio decision.
3. the money flow processing decision.
4. the capital structure decision.
9- All of the following statements about agency problems are true except:
1. Agency problems interfere with the goal of maximizing shareholder value.
2. Agency costs are paid by the managers who do not act in the shareholders’ best interest.
3. Agency problems result from the separation of management and the ownership of a firm.
4. The root cause of agency problems is conflicts of interest.
10- Working capital management is concerned with
1. how a firm can best manage its cash flows as they arise in its day-to-day operations.
2. how a firm should raise money to fund its investments.
3. what long-term investments a firm should undertake.
4. managing a firms capital stock.
11-The PDQ Company’s common stock is expected to pay a $2.00 dividend in the coming year. If investors require a 17% return and the growth rate in dividends is expected to be 8%, what will the market price of the stock be?
12-Baseheart, Inc. expects its current annual $2.50 per share common stock dividend to remain the same for the foreseeable future. Therefore, the value of the stock to an investor with a required return of 12% is:
13-When the intrinsic value of an asset exceeds the market value
1. the asset is undervalued to the investor.
2. the asset is overvalued to the investor.
3. market value and intrinsic value are always the same; therefore, this could not happen.
4. liquidation value must be higher than book value.
14- A $1,000 par value 14-year bond with a 10 percent coupon rate recently sold for $965. The yield to maturity is
15- Keyes Corporation preferred stock pays an annual dividend of $7 per share. Which of the following statements is true for an investor with a required return of 9%?
1. The value of the preferred stock is $7 because the dividend is fixed at $7 each year .
2. The value of the preferred stock is $63.00 per share.
3. The value of the preferred stock is $77.78 per share.
4. The value of the preferred stock is $6.30 per share because of the 9% required return.
16- Which of the following is true of a zero coupon bond?
1. The bond makes no coupon payments.
2. The bond sells at a premium prior to maturity.
3. The bond has a zero par value.
4. The bond has no value until the year it matures because there are no positive cash flows until then.
17- You are considering the purchase of a share of Edie’s common stock. You expect to sell it at the end of 1 year for $32.00. You will also receive a dividend of $2.50 at the end of the year. Edie just paid a dividend of $2.25. If your required return on this stock is 12%, what is the most you would be willing to pay for it now?
18- What is the yield to maturity of a corporate bond with 13 years to maturity, a coupon rate of 8% per year, a $1,000 par value, and a current market price of $1,250? Assume semi-annual coupon payments.
19- The yield to maturity on long-term bonds
1. is equal to the current yield if the bond is selling for face value.
2. is equal to the coupon rate on the bond.
3. is equal to the net present value of the bond’s future cash flows.
4. is set by the indenture agreement and will not change over the life of the bond.
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