QUESTION 21

Hutchinson Corporation has zero debt it is financed only with common equity. Its total assets are $410,000. The new CFO wants to employ enough debt to bring the debt/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?

	a.	$155,800
	b.	$189,851
	c.	$172,200
	d.	$164,000
	e.	$180,810

QUESTION 22

Amram Company's current ratio is 1.9. Considered alone, which of the following actions would reduce the company's current ratio?

	a.	Use cash to reduce accounts payable.
	b.	Use cash to reduce accruals.
	c.	Borrow using short-term notes payable and use the proceeds to reduce long-term debt.
	d.	Use cash to reduce short-term notes payable.
	e.	Borrow using short-term notes payable and use the proceeds to reduce accruals.

QUESTION 23

Which of the following statements is CORRECT?

	a.	Corporations of all types are subject to the corporate income tax.
	b.	It is generally easier to transfer one's ownership interest in a partnership than in a corporation.
	c.	One of the advantages of the corporate form of organization is that it avoids double taxation.
	d.	One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.
	e.	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."

QUESTION 24

Which of the following statements is CORRECT?

	a.	Subordinated debt has less default risk than senior debt.
	b.	A debenture is a secured bond that is backed by some or all of the firm's fixed assets.
	c.	Convertible bonds have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains.
	d.	Junior debt is debt that has been more recently issued, and in bankruptcy it is paid off after senior debt because the senior debt was issued first.
	e.	Junk bonds typically provide a lower yield to maturity than investment-grade bonds.

QUESTION 25

Which of the following statements is CORRECT?

	a.	A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.
	b.	The retained earnings account as shown on the balance sheet shows the amount of cash that is available for paying dividends.
	c.	Since depreciation is a source of funds, the more depreciation a company has, the larger its retained earnings will be, other things held constant.
	d.	If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative.
	e.	Common equity includes common stock and retained earnings, less accumulated depreciation.

QUESTION 26

Which of the following statements is NOT CORRECT?

	a.	All else equal, bonds with larger coupons have greater interest rate (price) risk than bonds with smaller coupons.
	b.	If a bond is selling at a premium, its current yield will be greater than its yield to maturity.
	c.	All else equal, bonds with longer maturities have more interest rate (price) risk than bonds with shorter maturities.
	d.	If a bond is selling at a discount to par, its current yield will be less than its yield to maturity.
	e.	If a bond is selling at its par value, its current yield equals its yield to maturity.

QUESTION 27

Which of the following statements is NOT CORRECT?

	a.	A company's bond rating is affected by its financial ratios and provisions in its indenture.
	b.	The expected return on a corporate bond must be less than its promised return if the probability of default is greater than zero.
	c.	Under Chapter 11 of the Bankruptcy Act, the assets of a firm that declares bankruptcy must be liquidated, and the sale proceeds must be used to pay off its debt according to the seniority of the debt as spelled out in the Act.
	d.	All else equal, senior debt has less default risk than subordinated debt.
	e.	All else equal, secured debt is less risky than unsecured debt.

QUESTION 28

Orwell Building Supplies' last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (r _s) is 12%. What is the best estimate of the current stock price?

	a.	$45.92
	b.	$41.58
	c.	$44.80
	d.	$43.71
	e.	$42.64

QUESTION 29

Which of the following is a primary market transaction?

	a.	You sell 200 shares of Johnson & Johnson stock on the NYSE through your broker.
	b.	One financial institution buys 200,000 shares of Johnson & Johnson stock from another institution. An investment banker arranges the transaction.
	c.	You invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of Johnson & Johnson shares on the NYSE.
	d.	You buy 200 shares of Johnson & Johnson stock from your younger brother. You just give him cash and he gives you the stock&34;the trade is not made through a broker.
	e.	Johnson & Johnson issues 2,000,000 shares of new stock and sells them to the public through an investment banker.

QUESTION 30

JG Asset Services is recommending that you invest $1,500 in a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

	a.	$2,062.34
	b.	$1,870.61
	c.	$1,781.53
	d.	$2,165.46
	e.	$1,964.14