Question 1.1. Suppose a U.S. treasury bond will pay $2,500 five years from now. If the going interest rate on 5-year treasury bonds is 4.25%, how much is the bond worth today?
- $1,928.78
- $2,030.30
- $2,131.81
- $2,238.40
Question 2.2. Suppose a State of New York bond will pay $1,000 ten years from now. If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today?
- $585.43
- $614.70
- $645.44
- $677.71
Question 3.3. Which of the following statements is CORRECT?
- It is generally more expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required.
- Corporations face fewer regulations than sole proprietorships.
- One disadvantage of operating a business as a sole proprietorship is that the firm is subject to double taxation, at both the firm level and the owner level.
- 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.
Question 4.4. A $150,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?
- The annual payments would be larger if the interest rate were lower.
- If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan.
- The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were lower.
- The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.
Question 5.5. 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? (Points : 4)
- Corporations generally find it relatively difficult to raise large amounts of capital.
- Less of a corporation's income is generally subjected to taxes than would be true if the firm were a partnership.
- 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.
- Corporate investors are exposed to unlimited liability.
Question 6.6. Pace Corp.'s assets are $625,000, and its total debt outstanding is $185,000. The new CFO wants to employ a debt ratio of 55%. How much debt must the company add or subtract to achieve the target debt ratio?
- $158,750
- $166,688
- $175,022
- $183,773
Question 7.7. Branch Corp.'s total assets at the end of last year were $315,000 and its net income after taxes was $22,750. What was its return on total assets?