Business Finance Exam

1. Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership?

a) Corporations generally find it relatively difficult to raise large amounts of capital.

b) Less of a corporation's income is generally subjected to taxes than would be true if the firm were a partnership.

c) Corporate shareholders escape liability for the firm's debts, but this factor may be offset by the tax disadvantages of the corporate form of organization.

d) Corporate investors are exposed to unlimited liability.

2. You deposited $2,000 seven years ago and haven't touched the account since. Now you have $3,656 in the bank. What was the interest rate?

a) 6%

b) 7%

c) 8%

d) 9%

3. Jane wants to have $200,000 in an account in 20 years. If it earns 11 percent per annum over the accumulation period, how much must she save per year (end of year) to have the $200,000?

a) $25,116

b) $3,115

c) $10,000

d) $3,492

4. Idlewild Bank has granted you a seven year Loan for $50,000. If your seven annual (end of year) payments are $11,660.45, what is the rate of interest Idlewild is charging?

a) 14%

b) 23%

c) 12.6%

d) none of the above

5. Assume you want to pay off your $10,000, 30-month car loan after only the first 12 months of payments. With interest at 12% compounded monthly, how much will you need to pay off the loan in full at the end of the first year?

a) $5,639

b) $6,354

c) $4,361

d) $7,425

6. How much must be invested today to have $1,000 in two years if the interest rate is 5%?

a) $909.09

b) $900.00

c) $907.00

d) $950.00

7. If Susan and Joe set aside $10,000 for college tuition when their daughter is 13, how much will be available when she starts college at 18 if the account in which the money is deposited pays 12 percent compounded monthly?

a) $17,623.42

b) $18,170.00

c) $16,105.10

d) $16,122.26

8. Comet Powder Company has purchased a piece of equipment costing $100,000. It is expected to generate a 10-year stream of benefits amounting to $16,273 per year. Determine the rate of return Comet expects to earn from this equipment.

a) 16.3%

b) 62.7%

c) 10%

d) 20%

9. Columbia Bank & Trust has just given you a $20,000 term loan to pay for a new concrete mixer. The loan requires five equal annual (end of year) payments. If the loan provides the bank with a 12 percent return, what will be your annual payments?

a) $5,547.85

b) $3,148.12

c) $6,000.00

d) $1,666.67

10. Each year a company is required to place money into a bank account to retire its bond's principal at maturity. If the bond's principal is $10 million, and bank interest is estimated at 8%, how much are the annual payments if they are to be made over the last 20 years of the bond's life?

a) $101,853

b) $218,522

c) $462,950

d) $425,387

11. Find the present value of a perpetuity of $1,500 per year, given a 20% opportunity cost.

a) $800

b) $3,000

c) $300

d) $6,000

e) $7,500

12. If a 30-year, $1,000 bond has a 9% coupon and is currently selling for $826, its current yield is:

a) $90

b) 9.0%

c) 10.9%

d) 12.0%

13. If a bond is selling at par value, which of the following would be the same as its coupon rate:

a) Current Yield

b) Yield to Maturity

c) Market Interest Rate

d) Both b & c

e) All of the above

14. Addleson Corp. has a $1,000 par value bond outstanding that was issued for 30 years 5 years ago at a coupon rate of 15%. The yield on similar bonds is now 12%. What is its price?

a) $1,235.27

b) $2,418.58

c) $836.74

d) $1,236.44

15. A bond is available for purchase that has a face value of $10,000, an 8% coupon, payable semiannually, and 20 years of its original 25 years left to maturity. Approximately how much would you pay for the bond if the market return on similar bonds is 10%?

a) $8,184.60

b) $8,296.88

c) $8,283.64

d) $8,174.36

16. A $1,000 par value convertible bond has a conversion price of $25. It is currently selling for $1,200, despite the fact that the bond's coupon rate and the market interest rate are equal. The common stock obtained upon conversion is selling for $27 per share. What is the convertible bond's conversion ratio?

a) 37

b) 40

c) 48

d) 200

17. When interest rates decrease, what happens to the bond prices of seasoned issues (assume the coupon rate is fixed)?

a) the bond prices decrease

b) the bond prices increase

c) the bond prices are unaffected

d) the bonds will be retired and re-issued at higher coupon rates

18. Which of the following best represent the capital gains yield on a stock held for one year?

a) (P₁ - P₀)/P₁

b) (P₁ - P₀)/P₀

c) D₁/P₀ + (P₁ - P₀)/P₁

d) D₁/P₀ + (P₁ - P₀)/P₀

e) D₁/P₁

19. The constant growth model, or Gordon model, is formulated as follows:

P₀ = D₀(1+g)/(k - g)

The model can be recast to focus on the expected return implied by the constant growth assumption, as follows:

a) g = [P₀(k-g)/D₀] - 1

b) D₁ = P₀(k - g)

c) k_e = D₁/(P₀ - g)

d) k_e = [D₀(1+g)/P₀]+ g

20. Common stockholders:

a) have a residual claim on both income and assets

b) are last in line in the event of bankruptcy

c) havea higher claim on assets than preferred stockholders

d) both a & b

e) all of the above

21. The price of a share of stock today is $25.00. If the return on the share is estimated at 18% and the stock generally pays a dividend of $1 per year, what is its projected selling price in one year?

a) $22.30

b) $30.00

c) $28.50

d) $29.50

22. What is the rate of return on a preferred stock that has a par value of $50, a market price of $46.50, and a dividend of $4.10?

a) 8.20%

b) 11.34%

c) 8.82%

d) 12.20%

23. George Franks can buy shares of Ace Rocket Launcher EARL) for $45.00. George expects dividends to be $3.00 in one year and $5.00 in two years, and he expects to sell the stock for $58.00 in two years. Should George buy any shares of ARL? George feels that 18 percent is the appropriate required rate of return.

24. The Rich Company has a dividend growth rate of 14 percent, a current share price of $56.00, and a current dividend of $1.50. What is the required rate of return for Rich Company shares?

25. Because of a lucky breakthrough, Philadelphia Pharmaceutical's current dividend per share of $2.00 is expected to grow at a very high 32 percent per year for the next three years and then to grow at a more normal 6 percent per year. What is the value of a Philadelphia share if the investors' expected return is 20 percent?