# Sunday Questions

Which of the following statements is correct? (Points : 10)

The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets.

The statement of cash flows shows where the firm’s cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit.

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Order Paper NowThe statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital.

The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock.

The statement of cash flows shows how much the firm’s cash—the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)—increased or decreased during a given year.

An investor is considering starting a new business. The company would require $475,000 of assets, and it would be financed entirely with common stock. The investor will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5%. How much net income must be expected to warrant starting the business? (Points : 10)

$52,230

$54,979

$57,873

$60,919

$64,125

You want to buy a new sports car 3 years from now, and you plan to save $4,200 per year, beginning 1 year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the third deposit, 3 years from now? (Points : 10)

$11,973

$12,603

$13,267

$13,930

$14,626

Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in five equal installments at the end of each of the next 5 years. How much interest would you have to pay in the first year? (Points : 10)

$1,200.33

$1,263.50

$1,330.00

$1,400.00

$1,470.00

Which of the following statements is correct? (Points : 10)

If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.

On an expected yield basis, the expected capital gains yield will always be positive, because an investor would not purchase a bond with an expected capital loss.

On an expected yield basis, the expected current yield will always be positive, because an investor would not purchase a bond that is not expected to pay any cash coupon interest.

If a coupon bond is selling at par, its current yield equals its yield to maturity.

The current yield on Bond A exceeds the current yield on Bond B; therefore, Bond A must have a higher yield to maturity than Bond B.

The Morrissey Company’s bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70. The market interest rate for the bonds is 8.5%. Which is the bond’s price? (Points : 10)

$923.22

$946.30

$969.96

$994.21

$1,019.06

Crockett Corporation’s 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%. The real risk-free rate is r* = 2.80%, the default risk premium for Crockett’s bonds is DRP = 0.85% versus zero for T-bonds, the liquidity premium on Crockett’s bonds is LP = 1.25%, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) × 0.1%, where t = number of years to maturity. Which is the inflation premium (IP) on 5-year bonds? (Points : 10)

1.40%

1.55%

1.71%

1.88%

2.06%

Assume that investors have recently become more risk averse, so the market risk premium has increased. Also, assume that the risk-free rate and expected inflation have not changed. Which of the following is most likely to occur? (Points : 10)

The required rate of return for an average stock will increase by an amount equal to the increase in the market risk premium.

The required rate of return will decline for stocks whose betas are less than 1.0.

The required rate of return on the market, rM, will not change as a result of these changes.

The required rate of return for each individual stock in the market will increase by an amount equal to the increase in the market risk premium.

The required rate of return on a riskless bond will decline.

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