Question $1$

How is taxation different in the corporate and proprietorship forms of business? Explain double taxation.

Question $2$

What is leverage and how does it work? What is the main concern about using it$?$

Question $3$

Sweet Tooth Cookies, Inc. has the following ratios

ROE $=15\%$

T$/$A turnover $=1\mathrm{.}2$

ROS $=10\%$

What percentage of its assets are financed by equity? $($Hint: Substitute into the Extended DuPont Equation.$)$

Question $4$

A financial plan has to be either a prediction about the future or a statement of goals; it can't be both. Explain this statement and comment on its validity.

Question $5$

Nu$-$Mode Fashions Inc. manufactures quality women$$s wear, and needs to borrow money to get through a brief cash shortage. Unfortunately, sales are down, and lenders consider the firm risky. The CFO has asked you to estimate the interest rate Nu$-$Mode should expect to pay on a one year loan. She$$s told you to assume a $3\%$ default risk premium even though the loan is relatively short, and to assume the liquidity and maturity risk premiums are each $(1)/(2)\%.$ Inflation is expected to be $4\%$ over the next twelve months. Economists believe the pure interest rate is currently about $3(1)/(2)\%.$

Question $6$

How much is a guaranteed promise of $$15,750$ to be received in $12$ years$$ worth today if interest is $14\%?$

Question $7$

A bond that pays $10\%$ interest compounded annually on a $$1,000$ face value will mature in $20$ years. The interest rate is now $12\%.$ What should the bond$$s market price be$?$

Question $8$

Blackstone Corporation's $$7$ preferred was issued five years ago. The risk$-$appropriate interest rate for the issue is currently $11\%.$ What is this preferred stock selling for today?

Question $9$

Conestoga Ltd$.$ has the following estimated probability distribution of returns.

Return Probability

$4\%\mathrm{.}20$

$12\%\mathrm{.}50$

$14\%\mathrm{.}30$

Calculate Conestoga$$s expected return, the variance and standard deviation of its expected return and the return$$s coefficient of variation.

Question $10$

Gander, Inc. is considering two projects with the following cash flows.

Year Project X Project Y

$0($$$100,000)($$$100,000)$

$140,00050,000$

$240\mathrm{.}0000$

$340,0000$

$440,0000$

$540,000250,000$

Gander uses the payback period method of capital budgeting and accepts only projects with payback periods of $3$ years or less.

a$.$ If the projects are presented as standalone opportunities which one$($s$)$ would

Gander accept? If they were mutually exclusive and Gander disregarded its

three year rule, which project would be chosen?

b$.$ Is there a flaw in the thinking behind the correct answers to part a$?$