Which of the following could explain why a business might choose to operate as a partnership rather than as a corporation? Answer Partnerships generally find it easier to raise large amounts of capital. Partnerships are exposed to unlimited liability. Less of a partnership’s income is generally subject to federal taxes. None of these are a valid reason why a business would choose to be structured as a partnership. Sue currently has $10,000. To the nearest dollar, how much would she have after 1 year if she invested the money at 12% with monthly compounding? You were hired as a consultant to Tarlo Company, whose target capital structure is 60% debt and 40% common equity. The after-tax cost of debt is 5.0% and the cost of retained earnings is 12.0%. The firm will not be issuing any new stock. What is its WACC? If the Treasury yield curve is downward sloping, how should the yield to maturity on a 1-year corporate bond compare to that on a 15-year corporate? Answer The yield on a 15-year bond would have to be higher than that on a 1-year. The yield on a 15-year bond would be less than that on a 1-year. It is impossible to tell without knowing the coupon rates of the bonds. The yields on the two securities should be equal for the same corporation. Considered alone, which of the following would decrease a company’s current ratio? Answer An increase in net fixed assets. A decrease in accrued liabilities. A decrease in inventories. An increase in long-term, notes payable. How much would $1,000 due (i.e, paid) in 10 years be worth today if the (annualized) discount rate were 8.5%? Dutton Inc.'s stock has a 40% of producing a 15% return, a 25% chance of producing a 10% return, and a 15% chance of producing a -20% return. What is the firm's expected rate of return? If its yield to maturity increased by 1%, which of the following bonds would have the largest percentage decrease in value? Answer A 30-year bond with an 5% coupon. A 1-year bond with an 5% coupon. A 10-year bond with an 5% coupon. A 30-year zero coupon bond.
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