general business data bank
True/False 

Indicate whether the statement is true or falsewith A for true and B for false. 

____ 
1. 
Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not 

deductible. This treatment, other things held constant, tends to encourage the use of debt financing by 

corporations. 

____ 
2. 
According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the 

risks of individual stocks held in isolation. Thus, the relevant risk of a stock is the stock's contribution to the 

riskiness of a welldiversified portfolio. 

____ 
3. 
The major advantage of a regular partnership or a corporation as a form of business organization is the fact 

that both offer their owners limited liability, whereas proprietorships do not. 

____ 
4. 
Midway through the life of an amortized loan, the percentage of the payment that represents interest is equal 

to the percentage that represents principal repayment. This is true regardless of the original life of the loan. 

____ 
5. 
The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how 

effectively a firm is managing its assets. 
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____ 6. You recently sold to your brother 200 shares of Disney stock, and the transfer was made through a broker, and the trade occurred on the NYSE. This is an example of:
a. A futures market transaction.
b. A primary market transaction.
c. A secondary market transaction.
d. A money market transaction.
e. An overthecounter market transaction.
____ 7. Ten years ago, Levin Inc. earned $0.50 per share. Its earnings this year were $2.20. What was the growth rate in Levin's earnings per share (EPS) over the 10year period?
a. 15.17%
b. 15.97%
c. 16.77%
d. 17.61%
e. 18.49%
____ 8. Amram Company's current ratio is 1.9. Considered alone, which of the following actions would reduce the company's current ratio?
a. Borrow using shortterm notes payable and use the proceeds to reduce accruals.
b. Borrow using shortterm notes payable and use the proceeds to reduce longterm debt.
c. Use cash to reduce accruals.
d. Use cash to reduce shortterm notes payable.
e. Use cash to reduce accounts payable.
____ 9. Northwest Lumber had a profit margin of 5.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE?
a. 12.79%
b. 
13.47% 
c. 
14.18% 
d. 
14.88% 
e. 
15.63% 
____ 
10. Ripken Iron Works believes the following probability distribution exists for its stock. What is the coefficient 

of variation on the company's stock? 

State of the 
Probability of 
Stock's 

Economy 
State Occurring 
Expected Return 

Boom 
0.25 
25% 

Normal 
0.50 
15% 

Recession 
0.25 
5% 

a. 
0.4360 

b. 
0.4714 

c. 
0.5068 

d. 
0.5448 

e. 
0.5856 

____ 
11. You have the following data on three stocks: 

Stock 
Standard Deviation 
Beta 

A 
0.15 
0.79 

B 
0.25 
0.61 

C 
0.20 
1.29 
As a risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a welldiversified portfolio.
a. A; A.
b. A; B.
c. B; C.
d. C; A.
e. C; B.
____ 12. Ewert Enterprises' stock currently sells for $30.50 per share. The stock's dividend is projected to increase at a constant rate of 4.50% per year. The required rate of return on the stock, r_{s}, is 10.00%. What is Ewert's expected price 3 years from today?
a. $31.61
b. $32.43
c. $33.26
d. $34.11
e. $34.81
____ 13. You were hired as a consultant to Kroncke Company, whose target capital structure is 40% debt, 10% preferred, and 50% common equity. The aftertax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 13.25%. The firm will not be issuing any new stock. What is its WACC?
a. 9.48%
b. 9.78%
c. 10.07%
d. 10.37%
e. 10.68%
____ 14. To help finance a major expansion, Delano Development Company sold a noncallable bond several years ago that now has 15 years to maturity. This bond has a 10.25% annual coupon, paid semiannually, it sells at a price of $1,025, and it has a par value of $1,000. If Delano's tax rate is 40%, what component cost of debt should be used in the WACC calculation?
a. 5.11%
b. 5.37%
c. 5.66%
d. 5.96%
e. 6.25%
____ 15. Thompson Stores is considering a project that has the following cash flow data. What is the project's IRR, NPV and Payback if the WACC is 10%? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected.
Year: 
0 
1 
2 
3 
4 
5 
Cash flows: 
$1,000 
$300 
$295 
$290 
$285 
$270 
a. IRR  11.16%, NPV = 96.72, Payback = 3.4 years
b. IRR= 13.78%, NPV = 125.232, Payback = 3.4 years
c. IRR= 13.78%, NPV = 96.72, Payback = 3.4 years
d. IRR = 12.45%, NPV = 96.72, Payback 4.1 years
e. IRR = 12.45%, NPV = 125.232, Payback = 4.1 years

Rating:
5/
Solution: general business data bank