1. The nominal interest rate is equal to the real risk-free rate, plus an inflat

Question

1. The nominal interest rate is equal to the real risk-free rate, plus an inflation premium, plus a default risk premium, plus a liquidity premium, plus a maturity risk premium.

2. A company decides to pay out all it's income in dividends rather than retaining it for future investment. By passing its income to the shareholders in this manner, the company can avoid paying corporate income taxes.

3. A firm with a Current Ratio of 2.0 is twice as profitable as a firm with a Current Ratio of 1.0.

4. At any positive rate of return (r), the present value (PV) of a lump sum will be lower than its future value (FV).

5. Which of the following is the best measure of the wealth of a firm's stockholders?

6. Consider the following firms:

7. A company has the following income statement. What is its net operating profit after taxes (NOPAT)?

Sales $1,000
Costs 700
Depreciation 100
EBIT $ 200
Interest expense 50
EBT $ 150
Taxes (40%) 60
Net income $ 90

8. Carter Corporation has some money to invest, and its treasurer is choosing between City of Chicago municipal bonds and U.S. Treasury bonds. Both have the same maturity, and they are equally risky and liquid. If Treasury bonds yield 6 percent, and Carter's marginal income tax rate is 40 percent, what yield on the Chicago municipal bonds would make Carter's treasurer indifferent between the two?

5.25%

6.00%

Question 9

If a firm's current ratio is less than 1.0, it indicates that:

The firm had negative net income for the year

The firm will be unable to pay its shortterm loans which come due this year

Current Assets are less than Current Liabilities

The firm is insolvent

Question 10

In November 2011 you bought 100 shares of Microsoft stock for $35.375 a share. In November 2013 you sold your stock for $92.5625 a share. What was your average annual rate of return on your Microsoft investment? (disregard dividends and commissions)

262%

62%

585%

1.6%

Explanation / Answer

1. True

2. False, company has to pay dividend paypout tax

3. False, current ratio = current asset/current liability

4. True

5. The price of the firm's stock on the open market,

Themain goal is to maximize the wealth of the firm's owners, (the stockholders). The simplest and best measures of stockholder wealth is the firms share price.

6. The manager of Firm A is doing a better job than B

7. NOPAT = EBIT*(1-tax rate)

NOPAT = 200*(1-.4) = $120

8).

6*(1-.4) = 3.6%

9). Current Assets are less than Current Liabilities

10). let avg annual profit = r

92.5625 = 35.375*(1+R)^2

on solving for R

R = 62%

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