If a firm reports positive net income, its EVA must also be positive
One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free.
One way to increase EVA is to generate the same level of operating income but with less investor-supplied capital.
Actions that increase reported net income will always increase net cash flow.
2. (TCO D) Assume that the current coporate bond yield curve is upward sloping. Under this condition, then we could be sure that... (Points: 10)
Inflation is expected to decline in the future.
The economy is not in a recession
Long-term bonds are a better buy than short-term bonds
Maturity risk premiums could help to explain the yield curve's upward slope
Long-term interest rates are more volatile than short-term rates.
3. (TCO B) Which one of the following is most correct? (Points: 10)
a. An investment which conmpounds interest semiannually, and has a nominal rate of 10 percent will have an effective rate less than 10 percent.
b. The present value of a three-year $100 annuity due is less than the present value of a three-year $100 ordinary annunity.
c. The proportion of the payment of a fully amortized loan which goes toward interest declines over time.
d. Statements a and c are correct.
e. None of the statements above are coorrect.
4. (TCO B) What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 12%, compounded monthly?
5. (TCO B) You are interested in saving money for your first house. Your plan is to make regular deposits into a brokerage account which will earn 14 percent. Your first deposit of $5,000 will be made today (January 1st). You also plan to make four additional deposits at the beginning of each of the next four years. Your plan is to increase your deposits by 10 percent a year. (that is your plan is to deposit $5,500 at t+1, and $6,050 at t+2, etc.) How much money will be in your account after five years? (Points: 10)
6. (TCO A) One drawback of switching from a partnership to the corporate form of organization is the following:
It subjects the firm to additional regulations
It cannot affect the amount of the firm's operating income that goes to taxes
It makes it more difficult for the firm to raise additional capital
It makes the firm's investors subject to greater potential personal liabilities
It makes it more difficult for the firm's investors to transfer their ownership interests.
7. (TCO A) Which of the following statements is correct.
A good goal for a firm's management is maximization of expected EPS.
Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment.
Because most stock ownership is concentrated in the hands of a relatively small segment of society, firms' actions to maximize their stock prices have little benefit to society.
Corporations and partnerships have an advantage over proprietorships because a sole proprietor is exposed to unlimited liablitiy, but the liability of all investors in the other types of businesses is more limited.
The potential exists for agency conflicts between stockholders and managers.
8. (TCO C) Which of the following statements is correct? (Assume that the risk-free rate is a constant)
If the market risk premium increses by 1%, then the required return will increase for stocks that have a beta greater than 1.0.
The effect of a change in the market risk premium depends on the slope of the yield curve.
If the market risk premium increases by 1%, then the required return on all stock will rise by 1%.
If the market risk premium increases by 1%, then the required return will increase by 1%, then the required return will increse by 1% for a stock that has a beta of 1.0.
The effect of a change on the market risk premium depends on the level of the risk-free rate.
9. (TCO C) You read in the Wall Street Journal that 30-day US Treasury Bills are currently yielding 8%. Your brother-in-law, a broker, a broker at Kyoto Securities, has given you the following estimates of current interest rate premiums:
Inflation premium = 5.0%
Liquidity premium = 1.0%
Maturity risk premium = 2.0%
Default risk premium
Based on this data, the real risk-free rate of return is:
10. (TCO C) Your corporation had the following cash flows last year:
Operating income $2,500,000
Interest received 100,000
Interest paid 450,000
Dividends received 200,000
Dividends paid 500,000
Your firms pays taxes at a rate of 40% (federal and state combined) and was profitable last year. Calculate the firm's corporate tax liability for last year.
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