Finc534 Chap 1-5 Quiz

Chapter 1:
1. Which of the following statements is CORRECT?
a. One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.
2. Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy? d. Corporations step up their expansion plans and thus increase their demand for capital.
3. Which of the following statements is CORRECT?
d. Both Nasdaq "dealers" and NYSE “specialists” hold inventories of stocks.
4. Which of the following statements is CORRECT? e. The potential exists for agency conflicts between stockholders and managers.
5. Which of the following statements is NOT CORRECT?
b. “Going public” establishes a firm 's true …show more content…

Assuming that sales, operating costs, assets, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure?
a. 3.83%

Chapter 4:
1. A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?
c. The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower.
2. Which of the following statements is CORRECT?
c. To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs. This is, essentially, a trialand- error procedure that is easy with a computer or financial calculator but quite difficult otherwise.
3. Riverside Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly.
The loan (principal plus interest) must be repaid at the end of the year. Midwest Bank also offers to lend you the $50,000, but it will charge an annual rate of 7.0%, with no interest due until the end of the year. How much higher or lower is the effective annual rate charged by
Midwest versus the rate charged by Riverside?

Effective annual rate of Riversade Bank:
Rr = (1 + (0.065/12))^12 = 1.067
Effective annual rate of Midwest Bank:
Rm = (1 + (0.07/1))^1 = 1.07 effective annual