Finance: advantages of an LLC, market interest, compute IRR,

Question 1. The primary advantages of a limited liability company are the:
a. corporation taxation and the avoidance of any financial loss.
b. ease of trading the shares of stock in the firm and the personal taxation of the net profits.
c. limited liabilities for the limited partners and the control of management by the general partners.
d. limited liabilities and the double taxation.
e. limits on the liabilities assumed by the owners and the means of taxation.

Question 2. A company has an outstanding loan that calls for equal annual payments of $14,903 over the 10-year life of the loan. The original loan amount was $100,000 at an APR of 8%. How much of the fourth payment is principal?
a. $6,851.34
b. $8,695.79
c. $6,447.76
d. $8,051.66
e. $6,207.21

Question 3. An unexpected increase in market interest rates will cause:
a. bond prices to decrease and the current yield to increase.
b. bond prices to increase and the current yield to decrease.
c. both bond prices and yields to maturity to increase.
d. an increase in coupon rates on new bonds but no change in bond prices.
e. both bond prices and current yields to decrease.

Question 4. You are considering an investment for which you require a 14 percent rate of return. The investment will cost $85,000 and produce cash inflows of $20,000 a year for 5 years. Should you accept this project based on its internal rate of return? Why or why not?
a. yes; because the IRR is 5.67% is less than the required rate of return 14%.
b. yes; because the IRR is 14.12% is higher than the required rate of return 14%.
c. cannot decide; because there are many IRRs.
d. no; because the IRR is 5.67% is less than the required rate of return 14%.
e. no; because the IRR is 14.12% is higher than the required rate of return 14%.

Question 5. Portfolio is invested 40% in stock E, 30% in stock F, and 30% in stock G. Assuming that the returns are normally distributed, what is the 95% probability range of returns for any given year?

State of Probability of Rate of Return if State Occurs

Economy State of Economy Stock E Stock F Stock G

Boom 10% 5% 16% 23%

Normal 70% 8% 9% 11%

Recession 20% 15% -3% -25%

a. -2.76% to 17.42%
b. 2.29% to 12.37%
c. -1.69% to 8.34%
d. 4.12% to 15.18%
e. -3.68% to 13.89%

Question 6. A firm is an all-equity firm with a current cost of equity 18%. The estimated earnings before interest and taxes is $180,000 annually forever. Currently, the firm has no debt but is in the process of borrowing $400,000 at 8% interest. The tax rate is 34%. What is the value of the unlevered firm?
a. $723,150
b. $660,000
c. $640,350
d. $748,000
e. $619,000

Question 7. Which of the following statements is true?
a. The ABC Co. declared a dividend to holders of record on Friday, October 12, which is payable on Friday, October 26. Gilbert purchased 100 shares of ABC Co. stock on Tuesday, October 9. Gilbert is entitled to 25% of the October 26 dividend on the 100 shares.
b. If Tuesday, May 11, is the ex-dividend date on ADL, Inc., stock, then Thursday, May 13 is the record date.
c. XYZ declared a dividend of $0.80 a share. The ex-dividend date is tomorrow. All else constant, you would expect the opening price tomorrow morning to be higher by an amount approximately equal to the after-tax value of the dividend.
d. Winsome and Losesome declared a dividend to shareholders of record on Monday, February 10, which is payable on Wednesday, February 25. Julie knows that once her dividend check is mailed that it takes two business days for the check to arrive in her mailbox. Julie should expect to receive her dividend check on February 12.

Question 8. Kramerica Industries currently has an inventory turnover 15, a receivables turnover 18, and a payables turnover 20. How many days are in the cash cycle?
a. 26 days
b. 8 days
c. 64 days
d. 35 days
e. 71 days

Question 9. The spot rate between Japan and the U.S. is ¥105.23 = $1, while the 1-year forward rate is ¥104.66 = $1. A 1-year risk-free security in Japan. is yielding 3.9%. What is the rate of return on a 1-year risk-free security in the U.S. assuming that interest rate parity exists?
a. 4.15%
b. 1.88%
c. 5.08%
d. 4.46%
e. 5.31%

Question 10. Which one of the following actions best matches the primary goal of financial management?
a. increasing the stock price by improving the efficiency of operations
b. increasing the company size by acquiring another firm in a different industry
c. decreasing the fixed costs while increasing the variable costs per unit sold
d. decreasing the liquidity of the firm while increasing the long-term debt
e. increasing the net working capital while maintaining the same level of sales