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.

b. It is generally easier to transfer one’s ownership
interest in a partnership than in a

corporation.

c. One of the advantages of the corporate form of
organization is that it avoids double

taxation.

d. One of the advantages of a corporation from a social
standpoint is that every

stockholder has equal voting rights, i.e., “one person, one
vote.”

e. Corporations of all types are subject to the corporate
and personal income tax.

2. Which of the following statements is CORRECT?

a. The cash flows for an ordinary (or deferred) annuity all
occur at the beginning of the

periods.

b. If a series of unequal cash flows occurs at regular
intervals, such as once a year, then

the series is by definition an annuity.

c. The cash flows for an annuity due must all occur at the
ends of the periods.

d. The cash flows for an annuity must all be equal, and they
must occur at regular

intervals, such as once a year or once a month.

e. If some cash flows occur at the beginning of the periods
while others occur at the

ends, then we have what the textbook defines as a ‘variable’
annuity.

3. Which of the following statements is most CORRECT?

a. The four most important financial statements provided in
the annual report are the

balance sheet, income statement, cash budget, and the
statement of stockholders’

equity.

b. The balance sheet gives us a picture of the firm’s
financial position at a point in

time.

c. The income statement gives us a picture of the firm’s
financial position at a point in

time.

d. The statement of cash flows tells us how much cash the
firm has in the form of

currency and demand deposits.

e. The statement of cash needs tells us how much cash the
firm will require during

some future period, generally a year or two.

4. The term “additional funds needed (AFN)” is generally
defined as follows:

a. Funds that are obtained automatically from routine
business transactions.

b. Funds that a firm must raise externally from
non-spontaneous sources, i.e., by

borrowing or by selling new stock or bonds to support
operations.

c. The amount of assets required per dollar of sales.

d. The amount of internally generated cash in a given year
minus the amount of cash

needed to acquire the new assets needed to support growth.

e. A forecasting approach in which the forecasted percentage
of sales for each balance

sheet account is held constant.

5. Spontaneous funds are generally defined as follows:

a. Assets required per dollar of sales.

2

b. A forecasting approach in which the forecasted percentage
of sales for each item is

held constant.

c. Funds that a firm must raise externally through
short-term or long-term borrowing

and/or by selling new common or preferred stock.

d. Funds that arise out of normal business operations from
its suppliers, employees,

and the government, and they include immediate increases in
accounts payable,

accrued wages, and accrued taxes.

e. The amount of cash raised in a given year minus the
amount of cash needed to

finance the additional capital expenditures and working
capital needed to support

the firm’s growth.

6. If markets are in equilibrium, which of the following
conditions will exist?

a. Each stock’s expected return should exceed its realized
return as seen by the

marginal investor.

b. Each stock’s expected return should equal its required
return as seen by the

marginal investor.

c. All stocks should have the same expected return as seen
by the marginal investor.

d. The expected and required returns on stocks and bonds
should be equal.

e. All stocks should have the same realized return during
the coming year.

**Part B: Simple problems (8 points
each, 32 in total)**

7.**(8
points)**To complete your last year in business
school and them go through law

school, you will need $10,000 per year for 4 years, starting
next year (that is, you will

need to withdraw the first $10,000 one year from today).
Your rich uncle offers to put

you through school, and he will deposit in a bank paying 7%
interest a sum of money

that is sufficient to provide the 4 payments of $10,000
each. His deposit will be made

today (time “0”).

a. How large must the deposit be?

b. How much will be in the account immediately after you
make the first

withdrawal? After the last withdrawal?

8.**(8
points)**Alexandra Video Product’s sales are
expected to increase by 20% from $5

million in 2010 to $6 million in 2011. Its assets totaled $3
million at the end of 2010.

Alexandra is already at full capacity, so its assets must
grow at the same rate as

projected sales. At the end of 2010, current liabilities
were $1 million, consisting of

$250,000 of accounts payable, $500,000 of notes payable, and
$250,000 of accruals.

The after tax profit margin is forecasted to be 5%, and the
forecasted payout ratio is

70%.Use the EFN equation to forecast Alexandra's additional
funds needed for the

coming year.

9.**(8
points)**Jackson Corporation’s bonds will mature
in 10 years. The bonds have a face

value of $1,000, and an 8% coupon rate, paid semi-annually.
The price of the bond is

$1,100. The bonds are callable in 5 years at a call premium
of 5%.

a. What is their nominal yield to maturity (YTM)?

b. What is their nominal yield to call (YTC)?

10.**(8
points)**You buy a share of MIT Corporation
stock for $21.40, which pays a dividend

of $1.05/share. You expect it to pay dividends of $1.1070,
$1.1449, and 1.2250 in Year

1, 2 and 3 respectively, and you expect to sell it at a
price of $26.22 at the end of the

year 3.

a. Calculate the growth rate in dividends for the last year.

b. Assuming that the calculated growth rate is expected to
continue, what is the

expected dividend yield for the same year?

c. What is this stock’s expected total rate of return at t =
3?

**C. Problem solving (13 points
each, 39 in total)**

10.**(13
points**) The most recent financial statements
for Maritin, Inc. are shown below:

Income Statement Balance sheet

Sales $19,200 Assets $93,000 Debt $20,400

Cost $15,550 Equity $72,600

Taxable income $3,650 Total $93,000 Total $93,000

Taxes (34%) $1,241

Net income $2,409

Assets and costs are changing*proportionally*to sales. Debt and common equity do not

change. A dividend of $963.60 was paid and Maritin wishes to
maintain a constant

dividend payout ratio of 0.40. Next year’s sales are
projected to be $23,040. What external

financing is needed? (Note: construct the pro-forma balance
sheet to find EFN).

11.**(13
points)**A company currently pays a dividend of
$2 per share, that is, D0
= $2. It is

estimated that the company’s dividend will grow at a rate of
20% per year for the next 2

years, then at a constant rate of 7% thereafter. The
company’s stock has a beta of 1.2,

the risk-free rate is 7.5%, and the market return is 11.5%.
What is your estimate of the

stock’s current price? What is the stock price in one year
if it appreciates with the same

rate as dividends?

12.
**(13 points)**Consider the possible rates of return
that you might obtain over the next

year under each state of the economy. You can invest in
stock*U*and stock*V*.

State of Probability of Stock A Return Stock B Return

Economy State Occurring if State Occurs (%) if State Occurs
(%)

Recession 0.20 7.0% -5.0%

Normal 0.50 7.0 10.0

Bull 0.30 7.0 25.0

a.
Determine the expected return,
variance, and the standard deviation for stock*A*

and*B*.

b.
Determine the covariance and
correlation between the returns of stock*A*and

stock*B*.

c.
Determine the expected return and
standard deviation of an equally weighted

portfolio of stock*A*and stock*B*.

7

**Part D: Essay question (10 points
in total)**

List the three forms of market efficiency according to the
EMH and give examples for each

of them.

Extract from an excellent student’s answer:

9

**Part D: Bonus questions (2 points
each, 4 in total)**

1. Which of the following classes use case-based learning
approach?

a. Corporate finance 1 and 2

b. Political Anthropology

c. Introduction to Music

d. Beginning Drawing

2. Who is the current chair of the Business Department?

a. Lucia Miree

b. Donald Brady

c. Steve Sullivan

d. Cy Reed