4. New Business is just being formed by 10 investors, each of whom will own 10% of the business. The firm is expected to earn $1,000,000 before taxes each year. The corporate tax rate is 35% and the personal tax rate for the firm's investors is 38%. The firm does not need to retain any earnings, so all of its after-tax income will be paid out as dividends to its investors. The investors will have to pay personal taxes on whatever they receive. How much additional spendable income will each investor have if the business is organized as a partnership rather than as a corporation?
a. $20,015
b. $20,424
c. $20,841
d. $21,266
e. $21,700
5. You have the following data on three stocks shown below. You decide to use the data on these stocks to form an index, and you want to find the average earned rate of return for 2008 on your index. If you follow the averaging procedure used to calculate the S&P 500 Index return, what would your index's rate of return be? Hints: Rates of return are based on beginning-of-year prices, and the S&P Index is weighted by market values of the companies in the index.

Shares

Beginning
Ending
Outstanding
Stock
Dividend
Price
Price
(millions)

A
$1.50
$30.00
$32.00
5.00
B
$2.00
$28.50
$27.00
4.50
C
$0.75
$20.00
$24.00
20.00
a. 16.07%
b. 16.92%
c. 17.76%
d. 18.65%
e. 19.59%
11. Bauer Software's current balance sheet shows total common equity of $5,125,000. The company has 530,000 shares of stock outstanding, and they sell at a price of $27.50 per share. By how much do the firm's market and book values per share differ?
a. $1 7.83
b. $18.72
c. $19.66
d. $20.64
e. $21 .67
12. Which of the following factors could explain why Michigan Energy's cash balance increased even though it had a negative cash flow last year?
a. The company sold a new issue of bonds.
b. The company made a large investment in new plant and equipment.
c. The company paid a large dividend.
d. The company had high depreciation expenses.
e. The company repurchased 20% of its common stock.
13. Beranek Corp has $720,000 of assets, and it uses no debt--it is financed only with common equity. The new CFO wants to employ enough debt to raise the debt/assets ratio to 40%, using the proceeds from borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?
a. $273,600
b. $288,000
c. $302,400
d. $317,520
e. $333,396
14. Ajax Corp's sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm's times-interest-earned (TIE) ratio?
a. 4.72
b. 4.97
c. 5.23
d. 5.51
e. 5.80
15. Zero Corp's total common equity at the end of last year was $405,000 and its net income was $70,000. What was its ROE?
a. 14.82%
b. 15.60%
c. 16.42%
d. 17.28%
e. 18.15%
16. Ryngard Corp's sales last year were $38,000, and its total assets were $16,000. What was its total assets turnover ratio (TATO)?
a. 2.04
b. 2.14
c. 2.26
d. 2.38
e. 2.49
17. Hoagland Corp's stock price at the end of last year was $33.50, and its book value per share was $25.00. What was its market/book ratio?
a. 1.34
b. 1.41
c. 1.48
d. 1.55
e. 1.63
18. Sue now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?
a. $205.83
b. $216.67
c. $228.07
d. $240.08
e. $252.08
19. Suppose a State of California bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?
a. $651.60
b. $684.18
c. $718.39
d. $754.31
e. $792.02
20. Suppose the U.S. Treasury offers to sell you a bond for $747.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price?
a. 4.37%
b. 4.86%
c. 5.40%
d. 6.00%
e. 6.60%
21. Ten years ago, Lucas Inc. earned $0.50 per share. Its