Fi515 Midterm

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

Student Answer: 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.
Instructor Explanation:Explanation: Ch 1: a is correct, all others are incorrect a: True
b: false- corporate shares provide easiest transfer of ownership c: false- the corporate form results in double taxation- earnings are taxed at corporate level and dividends distributed are taxed at ownership level d: corporations may issue classes of stock that differ in voting rights e. S-corps can elect to be taxed as proprietorship or partnership

Points Received:10 of 10
Comments:

2.Question :(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?

Student Answer: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.
Instructor Explanation:Chapter 2
Ch 2: d is true all others are false
a. False: would not contribute to increase in operating income b. False- this impacts cash flows from investments vs. operations c. False: would decrease operating income
d. True: a decrease in non-cash charges would increase earnings, increase tax liability and decrease cash flows e: False- increase in interest charges would decrease net income and cash flows

Points Received:10 of 10
Comments:

3.Question :(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?

Student Answer: 7.57%

7.95%
8.35%
8.76%
9.20%
Instructor Explanation:$312,900*15%=46,935; 46,935/$620,000=7.57%

Points Received:0 of 10
Comments:

4.Question :(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?

Student Answer: $585.43

$614.70
$645.44
$677.71
$711.59
Instructor Explanation:Chapter 4
Using Excel or a calculator, your inputs and outputs are as follows: fv1000
n10
r0.055
pmt0
beg/end0
pv($585.43)
You can also use the financial tables to solve this problem.

Points Received:10 of 10
Comments:

5.Question :(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?

Student Answer:6.77%
7.13%
7.50%

7.88%
8.27%
Instructor Explanation:Chapter 4 This is the definition of a $10,000 bond yielding 7.5%. No calculation is needed.

Points Received:10 of 10
Comments:

6.Question :(TCO B) Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in five equal installments at the end of each of the next five...
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