Which Of The Following Statements Is Correct? 470327

Which Of The Following Statements Is Correct Po

Question 1. 1. (TCO A) Which of the following statements is correct? (Points : 10) A) It is generally more expensive to form a proprietorship than a corporation, because with a proprietorship, extensive legal documents are required. B)Corporations face fewer regulations than sole proprietorships. C) 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. D)One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership. E)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 2. 2. (TCO G) Aubey Aircraft recently announced that its net income increased sharply from the previous year, yet its net cash flow from operations declined. Which of the following could explain this performance? (Points : 10) A) The company’s operating income declined. B)The company’s expenditures on fixed assets declined. C)The company’s cost of goods sold increased. D)The company’s depreciation and amortization expenses declined. E)The company’s interest expense increased.

Question 3. 3. (TCO G) Beranek Corp. has $410,000 of assets, and it uses no debt—it is financed only with common equity. The new CFO wants to employ enough debt to bring the debt to assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio? (Points : 10) A. $155,800 B. $164,000 C. $172,200 D. $180,810 E. $189,851

Question 4. 4. (TCO B) You deposit $1,000 today in a savings account that pays 3.5% interest, compounded annually. How much will your account be worth at the end of 25 years? (Points : 10) A. $2,245.08 B. $2,363.24 C. $2,481.41 D. $2,605.48 E. $2,735.75

Question 5. 5. (TCO B) You sold a car and accepted a note with the following cash flow stream as your payment. Which was the effective price you received for the car, assuming an interest rate of 6.0%? Years: |-----------|--------------|--------------|--------------| CFs: $0 $1,000 $2,000 $2,000 $2,000 (Points : 10) A. $5,987 B. $6,286 C. $6,600 D. $6,930 E. $7,277

Question 6. 6. (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 5 years. How much interest would you have to pay in the first year? (Points : 10) A. $1,200.33 B. $1,263.50 C. $1,330.00 D. $1,400.00 E. $1,470.00

Question 7. 7. (TCO D) Which of the following statements is correct? (Points : 10) A. If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity. B. On an expected yield basis, the expected capital gains yield will always be positive, because an investor would not purchase a bond with an expected capital loss. C. On an expected yield basis, the expected current yield will always be positive, because an investor would not purchase a bond that is not expected to pay any cash coupon interest. D. If a coupon bond is selling at par, its current yield equals its yield to maturity. E. The current yield on Bond A exceeds the current yield on Bond B; therefore, Bond A must have a higher yield to maturity than Bond B.

Question 8. 8. (TCO D) Garvin Enterprises’ bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000. Which is their current yield? (Points : 10) A. 7.39% B. 7.76% C. 8.15% D. 8.56% E. 8.98%

Question 9. 9. (TCO C) Niendorf Corporation's 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r * = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Niendorf's bonds is DRP = 1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = ( t - 1) à— 0.1%, where t = number of years to maturity. Which is the liquidity premium (LP) on Niendorf's bonds? (Points : 10) A. 0.49% B. 0.55% C. 0.61% D. 0.68% E. 0.75%

Question 10. 10. (TCO C) Which of the following statements is correct? (Points : 10) A. The slope of the SML is determined by the value of beta. B. The SML shows the relationship between companies' required returns and their diversifiable risks. The slope and intercept of this line cannot be influenced by a firm's managers, but the position of the company on the line can be influenced by its managers. C. Suppose you plotted the returns of a given stock against those of the market and you found that the slope of the regression line was negative. The CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming investors expect the observed relationship to continue on into the future. D. If investors become less risk averse, the slope of the SML will increase. E. If a company increases its use of debt, this is likely to cause the slope of its SML to increase, indicating a higher required return on the stock.

Paper For Above instruction

The realm of corporate finance encompasses a multitude of fundamental principles and decision-making criteria that influence how firms are structured, financed, and valued. Accurately understanding these concepts is essential for both practitioners and scholars, as they underpin corporate strategies and investment behaviors. This paper aims to analyze and interpret the key statements and scenarios presented in the above questions, examining their validity in the context of financial theory and practice.

Analysis of Business Structures and Their Implications

The first question explores the differences between sole proprietorships, partnerships, and corporations. Answer E is the correct choice: if a regular partnership faces bankruptcy, each partner’s liability is limited to their investment, contrasting with the unlimited liability often associated with sole proprietorships and general partnerships. Contrary to some misconceptions, forming a corporation is typically more expensive due to legal and regulatory requirements, not less (Mancini & McDonald, 2018). Furthermore, corporations usually face more regulations than sole proprietorships, not fewer, and they are subject to corporate taxes rather than double taxation, which applies primarily to C-corporations (Gordon, 2019).

Cash Flow and Income Statements

The second question examines the divergence between net income and net cash flows. A rise in net income with a decline in cash flow suggests increased non-cash expenses such as depreciation or investments in fixed assets (Brigham & Ehrhardt, 2016). Option D, which states that a decline in depreciation and amortization expenses could explain this performance, is less plausible; typically, increased depreciation would reduce net income but not necessarily cash flow. Instead, an increase in depreciation or amortization expenses reduces taxable income and cash outflows, which is more consistent with the scenario. However, a more precise answer would be improvements in working capital or large capital expenditures affecting cash flow.

Financial Leverage and Capital Structure

The third question deals with leveraging to reach a target debt ratio. With assets valued at $410,000 and an aim for a 40% debt ratio, the firm needs to determine the amount to borrow. Calculations show that borrowing approximately $164,000 would achieve this ratio, making option B the correct answer (Ross, Westerfield, & Jaffe, 2019). The borrowing is used to buy back stock at book value, which reduces equity and increases leverage, aligning with standard corporate financial strategies.

Time Value of Money Applications

Questions four through six emphasize foundational concepts of time value of money, including compound interest, present value, and loan amortization. The future value of $1,000 at 3.5% after 25 years totals approximately $2,363.24, matching option B (Brigham & Ehrhardt, 2016). The calculation of the effective price of the car, considering a 6% interest rate, involves discounting the future cash flows of the note, yielding an approximation of $6,286, making option B the correct choice.

In the case of loan interest, the first-year interest on a $14,000 loan at 10% is calculated to be approximately $1,400, corresponding with option D. These principles exemplify how time value concepts underpin real-world financial decision-making, from saving and investing to loan repayment planning.

Bond Valuation and Yield Measures

The seventh through ninth questions focus on bond valuation metrics and risk premiums. A bond selling at par has its current yield equal to its coupon rate; however, without specific data regarding the bond's interest rate relative to its price, precise calculation is necessary. Garvin Enterprises’ bonds, with an annual coupon of $85 and a current price of $1,150, have a current yield of approximately 7.39% (Gordon, 2019).

For Niendorf Corporation, the yield spread over the risk-free rate indicates credit risk and liquidity premiums. The calculated liquidity premium, considering the differences in yield and the components of the yield spread, is about 0.55% (Fabozzi, 2018). Recognizing these premiums is vital for investors assessing bond risk-return profiles.

Capital Asset Pricing Model and Market Line

The final question addresses the Security Market Line (SML) and its slope's relation to systematic risk, measured by beta. The slope of the SML reflects the market risk premium, and changes in investors’ risk aversion influence this slope (Sharpe, 1964). An increase in leverage could alter the risk profile and thus impact the SML, but the precise effects depend on broader market dynamics and firm-specific factors.

Conclusion

Overall, the questions discussed reflect core concepts in corporate finance, including capital structure decisions, valuation techniques, risk assessment, and investment analysis. A nuanced understanding of these principles enables managers and investors to make informed decisions that align with firm objectives and market conditions.

References

• Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Nelson Education.
• Fabozzi, F. J. (2018). Bond Markets, Analysis and Strategies. Pearson.
• Gordon, R. A. (2019). Financial Management: Theory & Practice. Cengage Learning.
• Mancini, G., & McDonald, F. (2018). Corporate Financial Strategies. McGraw-Hill Education.
• Ross, S. A., Westerfield, R. W., & Jaffe, J. F. (2019). Corporate Finance. McGraw-Hill Education.
• Sharpe, W. F. (1964). Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. Journal of Finance, 19(3), 425–442.