Question

1. When a corporation buys back its own stock the stock is then called:

a.Bond stock

b. Treasury stock

c.Preferred stock

2. Which type of business would have a Retained Earnings account in the Shareholder’s Equity

section?

a.Sole proprietorship

b. Partnership

c.Corporation

3. The interest tax shield allows a corporation to deduct interest expense from its Earnings Before

Interest and Tax before the tax amount is calculated on Earnings Before Tax, giving the

corporation a tax deduction for its interest expense.

a.True

b. False

4. When an investor receives the same dollar amount at the same time period for multiple periods,

these payments are called a(n):

a.Annuity

b. Bankruptcy

c.Partnership

d. Default

5. A bond that has a poor rating from a rating agency, such as below investment grade from the

Standard and Poor agency, is called a:

a.Premium bond

b. Municipal bond

c.Junk bond

6. If a corporation goes out of business and liquidates its assets, which of the following parties gets

paid off last provided there is still cash left?

a.Government tax authority

b. Bondholders

c.Common stockholders

d. Preferred stockholders

7. Financial leverage means that the corporation is using _______________ to finance some of its

assets.

a.Foreign currency

b. Equity

c.No money

d. Debt

8. The owners of a corporation are the:

a.Stockholders

b. Bondholders

c.Clients

d. All of the above answers is correct.

9. If a corporation declares dividends, preferred stockholders must receive them before:

a.Bondholders are paid interest

b. The government is paid taxes

c.Common stockholders are paid dividends

10. An example of an annuity is which of the following:

a.Receiving a commission payment that changes each pay period

b. Receiving the same interest payment on a bond each year for ten years

c.Receiving a one-time-only payment from selling a truck

11. A measure of the cost of raising equity capital from the firm's shareholders and the cost of

borrowing from the firm's creditors is the:

a.Weighted Average Cost of Capital (WACC)

b. Profit margin

c.Return on assets

12. The ways common stockholders invest to get a return on their investment include:

a.Dividends

b. Stock price increasing after it’s purchased

c.Coupon payments

d. Answers A and B above

13. Capital investment involves putting money into projects that have a timeframe of:

a.Less than one year

b. Longer than one year

c.Ten years only

14. Hayward-Lodge Corporation issued a bond with a par amount of $1,300,000 and a coupon rate

of 3% per annum paid annually to finance the building of its new headquarters building.

Investors weren’t satisfied with the coupon rate and bought the bonds at a discount making the

proceeds from the bond sale $1,010,000. When the bond matures in 20 years, how much

principal will the Hayward-Lodge Corporation have to pay investors? (No principal payments will

be made before maturity.)

a.$500,000.

b. $1,300,000

c.$2,000,000

15. If a bond has a high risk of default by the issuer, the yield offered to investors in the bond should

be:

a.Low.

b. High.

c.Zero

Answer 1

1. Option b is correct option Treasury Stock is the account where corporations buy back their own stock

2. Option c is correct . Corporations keep retained earnings in shareholder equity account.

3. True. Interest payment provides tax shield to companies.

4. Option a is correct. Annuity pays same amount over a period of time at regular intervals

5. Option c is correct. Junk bonds are lowest rated bonds and have highest risk of default

6. Option c is correct. Stock holders are paid after debt holders and preferred stock holders are paid off. They have residual claim.

7. Option d is correct option . Debt increases leverage in a firm.

8. Option a is correct option. Stockholders are owners of company.