1. FI515 Week 4 Midterm Exam
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1. (TCO A) Which of the following statements is CORRECT? (Points : 10)
2. (TCO G) A security analyst obtained the following information from Prestopino
Products’ financial statements:
• Retained earnings at the end of 2009 were $700,000, but retained earnings at
the end of 2010 had declined to $320,000.
• The company does not pay dividends.
• The company’s depreciation expense is its only non-cash expense; it has no
amortization charges.
• The company has no non-cash revenues.
• The company’s net cash flow (NCF) for 2010 was $150,000.
3. (TCO G) Beranek Corp. has $410,000 of assets, and it uses no debt—it is
financed only with common equity. The new CFO wants to employ enough debt
to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to
buy back common stock at its book value. How much must the firm borrow to
achieve the target debt ratio? (Points : 10)
4. (TCO B) You deposit $1,000 today in a savings account that pays 3.5%
interest, compounded annually. How much will your account be worth at the end
of 25 years? (Points : 10)
5. (TCO B) You sold a car and accepted a note with the following cash flow
stream as your payment. What was the effective price you received for the car
assuming an interest rate of 6.0%?
Years: 0 1 2 3 4
6. (TCO B) Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in
four equal installments at the end of each of the next four years. How large would
your payments be?(Points : 10)
7. (TCO D) Which of the following statements is CORRECT? (Points : 10)
8. (TCO D) Ezzell Enterprises’ noncallable bonds currently sell for $1,165. They
have a 15-year maturity, an annual coupon of $95, and a par value of $1,000.
Whatistheiryieldtomaturity?(Points : 10)
9. (TCO C) Niendorf Corporation's five-year bonds yield 6.75%, and five-year T-
bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for
five-year bonds is %, the default risk premium for Niendorf's bonds is % versus

2. zero for T-bonds, and the maturity risk premium for all bonds is found with the
formula MRP = (t - 1) x 0.1%, where of years to maturity. What is the liquidity
premium (LP) on Niendorf's bonds?(Points : 10)
10. (TCO C) 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)