QUESTION 1

The goal of all corporations is shareholder wealth maximization, according to the text.

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True

False

QUESTION 2

Short-term capital gains are sometimes taxed at a lower rate because the holding period is shorter than when the asset is held long-term AND the returns on short-term investments are usually lower than on long-term ones.

True

False

QUESTION 3

Jones Brothers Farm Equipment owes $48,329 in tax on a taxable income of $549,600. The company has determined that it will owe $56,211 in tax if its taxable income rises to $575,000. What is the marginal tax rate at this level of income?

A. 29.08 percent

B. 30.00 percent

C. 30.67 percent

D. 31.03 percent

E. 32.00 percent

F. none of the above

QUESTION 4

Use the following tax table to answer the next three questions

Taxable Income Tax Rate

$ 0 – $ 50,000 15%

50,000 – 75,000 25

75,000 – 100,000 34

100,000 – 335,000 39

335,000 – 10,000,000 34

Bait and Tackle has taxable income of $411,562. How much does it owe in taxes?

A. $128,603.33

B. $134,611.27

C. $138,542.79

D. $139,931.08

E. $141,354.82

QUESTION 5

What is Bait and Tackle’s average tax rate?

——————

QUESTION 6

Based on the table in the question above (in question #4), what would be the marginal tax rate on income over $50,000,000?

QUESTION 7

Donovan, Inc. owes a total of $17,129 in taxes for this year. The taxable income is $68,556. If Donovan earns $100 more in income, it will owe an aIDitional $35 in taxes. What is Donovan’s average tax rate on income of $68,656?

A. 15 percent

B. 21 percent

C. 25 percent

D. 34 percent

E. 35 percent

F. none of the above

QUESTION 8

Medical Devices Corporation, a supplier of precision medical devices, is 100 percent equity financed and promised to pay its shareholders a year-end dividend of $2.50. If the company is in the 35% tax bracket and will make $3.56 excluding tax, will be it be able to honor its promise as given?

A. Yes it will

B. No it can’t

C. Not enough information is provided to answer the question

D. None of the above

QUESTION 9

Two not-for-profit hospitals with the same income and expenses would report different cash flows (net income + depreciation) if they have different depreciation expenses.

True

False

QUESTION 10

An asset used in a 3-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $5.4 million and will be sold at the end of the project for whatever price buyers are willing to pay. What is the book value of the asset when it’s sold at the end of the project?

MACRS Table

Property Classes

Year 3-year 5-year 7-year

1 33.33% 20.00% 14.29%

2 44.45 32.00 24.49

3 14.81 19.20 17.49

4 7.41 11.52 12.49

5 11.52 8.93

6 5.76 8.92

7 8.93

8 4.46

A. $1,075,680

B. $780,000

C. $904,320

D.$1,555,200

E.$1,187,560

QUESTION 11

Paul is the owner of Paul’s Cabinets, which is a sole proprietorship. The firm cannot pay its bills because a large customer defaulted on payment. Which one of the following statements is correct given this situation?

A. The creditors of Paul’s Cabinets can only collect payment if Paul’s Cabinets receives payment from its customer.

B. The only course of action the creditors of Paul’s Cabinets has is to sell the assets of Paul’s Cabinets.

C. The creditors of Paul’s Cabinets can assume the assets of Paul’s Cabinets but only in an amount that exceeds Paul’s investment in the firm.

D. Paul is personally liable for the entire debt of Paul’s Cabinets.

E. Paul is personally liable for the firm’s debts but only to the extent of his investment in Paul’s Cabinets.

QUESTION 12

The owners of a corporation enjoys the privilege unlimited liability.

True

False

QUESTION 13

Asymmetric information warfare is an important tool in the battle against adverse selection and moral hazard.

True

False

QUESTION 14

It is impossible for expected value to be similar to actual value over short periods of time, such as one year.

True

False

QUESTION 15

Centre Bank pays 2.5 percent interest, compounded quarterly, on its savings accounts. Country Bank pays 2.5 percent compounded annually on its savings accounts. You want to deposit sufficient funds today so that you will have $1,500 in your account 2 years from today. The amount you must deposit today:

A. is the same regardless of which bank you choose because they both pay interest.

B. is the same regardless of which bank you choose because they both pay simple interest.

C. is the same regardless of which bank you choose because the time period is the same for both banks.

D.will be greater if you invest with Centre Bank.

E. will be greater if you invest with Country Bank.

QUESTION 16

What is the present value of the following cash flow stream at a rate of 8.0%?

Years: 0 1 2 3

| | | | |

CFs: $750 $2,450 $3,175 $4,400

A. $7,917

B. $8,333

C. $8,772

D. $9,233

E. $9,695

QUESTION 17

You have just won the lottery and received $10,000. You deposited your winnings into an account that pays 7.5 percent interest compounded annually. How long will you have to wait until your winnings are worth $15,000? Find answer to the nearest year!

A. 5.44 years

B. 6.00 years

C. 6.83 years

D. 16.19 years

E. 16.46 years

QUESTION 18

Which one of the following statements is correct?

A. The future value of an annuity increases when the interest rate decreases.

B. The present value of an annuity increases when the interest rate increases.

C. The present value of an annuity is unaffected by the number of the annuity payments.

D. The future value of an annuity is unaffected by the amount of each annuity payment.

E. The present value of an annuity increases when the interest rate decreases.

QUESTION 19

Riverside Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan (principal plus interest) must be repaid by the end of the year. Midwest Bank also offers to lend you the $50,000, but it will charge an annual rate of 7.0%, with no interest due until the end of the year. What’s the difference in the rates charged on an annualized basis by Midwest and Riverside?

A. 0.52%

B. 0.44%

C. 0.36%

D. 0.30%

E. 0.24%

QUESTION 20

You want to purchase a used building for a small outpatient clinic which costs $329,000. Your plan is to pay 20 percent down in cash and finance the balance over 25 years at an APR (interest rate) of 6.25 percent. What will be your monthly mortgage payment?

A. $1,736.25

B. $1,833.33

C. $1,908.16

D. $2,221.43

E. $2,406.11

QUESTION 21

You have a chance to buy an annuity that pays $550 at the beginning of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

A. $1,412.84

B. $1,487.20

C. $1,565.48

D. $1,643.75

E. $1,725.94

QUESTION 22

Given the following information, what is the standard deviation of the returns on this stock?

State of Economy Probability Rate of Return

Boom 20% 21%

Normal 70 13

Recession 10 -9

A. 7.38 percent

B. 7.55 percent

C. 7.80 percent

D. 7.91 percent

E. 8.06 percent

QUESTION 23

What is the coefficient of variation in the above problem? Show your answer in space provided below:

Answer: 0.0068

QUESTION 24

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date.

True

False

QUESTION 25

What’s the present value of a 4-year ordinary annuity of $2,250 per year plus an aIDitional $3,000 at the end of Year 4 if the interest rate is 5%?

A. $8,509

B. $8,957

C. $9,428

D. $9,924

E. $10,446.49

QUESTION 26

Sam was injured in an accident, and the insurance company has offered him the choice of $25,000 per year for 15 years, with the first payment being made today (the first day of the year) and all remaining payments continuing to be paid on the 1st day of each year for the rest of the period; or he can take a lump sum (a one-time payment). If a fair return is 7.5%, how large must the lump sum be to leave him as well off financially as with the annuity?

A. $225,367

B. $237,229

C. $249,090

D. $261,545

E. $274,622

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