Journal Chapter 3

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Required

Before you begin, print out all the pages in this workbook.
Roth Contractors Corporation was incorporated on December 1, 2019.
Required:
Part A
1 Prepare journal entries to record the December transactions shown on page “Transactions Pt. A”. General ledger account numbers and descriptions are not needed.
2 Post the entries to general ledger T-accounts.
Part B
3 Prepare all necessary adjusting entries based on the information shown on the printed “Adj. Entries Pt. B” page. General ledger account numbers and descriptions are not necessary.
4 Post the entries to general ledger T-accounts and calculate balances.
5 Prepare an adjusted trial balance at December 31.
6 Prepare an income statement, statement of changes in equity, and balance sheet. Assume the fiscal year-end is December 31, 2019.
7 Prepare closing entries and a post-closing trial balance at December 31, 2019.

Transactions Pt. A

2019
December Transactions Amount
a. Issued common stock for cash 2,000
b. Paid cash for three month’s rent: December 2019, January and February 2020 2,400
c. Purchased a used truck on credit (recorded as an account payable) 13,000
d. Purchased supplies on credit. These are expected to be used during the month (recorded as expense) 1,600
e. Paid for a one-year truck insurance policy, effective December 1 2,280
f. Billed a customer for work completed to date 6,000
g. Collected cash for work completed to date 4,000
h. Paid the following expenses in cash:
Advertising 700
Interest 700
Telephone 800
Truck operating 600
Wages 5,000
i. Collected part of the amount billed in f above 1,000
j. Billed customers for work completed to date 7,000
k. Signed a contract for work to be performed in January 2020 9000 5,000
l. Paid the following expenses in cash:
Advertising 600
Interest 600
Truck operating 900
Wages 2,000
m. Collected an advance on work to be done in January (the policy of the coproration is to record such advances as revenue at the the time they are received)
2,000
n. Received a bill for electricity used during the month (recorded as utilities expense) 800

Adj. Entries Pt. B

2019
December Adjusting Entries Amount
o. One month of the prepaid insurance has expired. $170
p. The December portion of the rent paid on December 1 has expired. $900
q. Counted supplies and found this amount still on hand (recorded the amount used as an expense) $100
r. The amount collected in transaction m is unearned at December 31. $2,000
s. Three days of wages for December 29, 30, and 31 are unpaid. These will be paid in January.
$2,900
t. One month of depreciation needs to be recorded. Estimated useful life of truck in years is: 361.1111111111 3
u. Income taxes expense to be paid in the next fiscal year. $100

T-accounts

Roth Contractors Corporation
Cash Accounts Payable Repair Revenue Rent Expense
Supplies Expense
Accounts Receivable Wages Payable Advertising Expense
Telephone Expense
Unearned Repair Revenue
Prepaid Insurance
Income Taxes Payable Depreciation Exp. – Truck Truck Operating Expense
Prepaid Rent
Common Stock Insurance Expense
Utilities Expense
Unused Supplies
Interest Expense
Wages Expense
Truck
Acc. Dep’n – Truck Income Taxes Expense

Jnl. Entries

Roth Contractors Corporation
GENERAL JOURNAL
Dec.
2019 Description F Debit Credit
Roth Contractors Corporation
GENERAL JOURNAL
Dec.
2019 Description F Debit Credit
Roth Contractors Corporation
GENERAL JOURNAL
Dec.
2019 Description F Debit Credit

Adj. Trial Bal.

Roth Contractors Corporation
Adjusted Trial Balance
At December 31, 2019
Post-closing Trial Balance
Accounts Balances Closing Entries
Account Title Debit Credit # Debit Credit # Debit Credit
Cash
Accounts Receivable
Prepaid Insurance
Prepaid Rent
Unused Supplies
Truck
Accum. Dep’n. – Truck
Accounts Payable
Wages Payable
Income Taxes Payable
Unearned Revenue
Common Stock
Retained Earnings
Income Summary
Repair Revenue
Advertising Expense
Dep’n. Expense – Truck
Insurance Expense
Interest Expense
Rent Expense
Supplies Expense
Telephone Expense
Truck Operating Expense
Utilities Expense
Wages Expense
Income Taxes Expense

Statements

Roth Contractors Corporation Roth Contractors Corporation
Income Statement Balance Sheet
For the Month Ended Dec. 31, 2019 At December 31, 2019
Revenue Assets
Expenses
Liabilities
Roth Contractors Corporation
Statement of Changes in Equity Stockholders’ Equity
For the Month Ended December 31, 2019
Common stock Retained earnings Total equity
Opening balance
Ending balance

Copyright

Copyright © 2018 David Annand
Published by David Annand
Box 308, Rochester AB T0G 1Z0
ISBN: 978-0-9953266-6-8
Library and Archives Canada Cataloguing in Publication
Annand, David, 1954–
This case is licensed under a Creative Commons License, Attribution–Non-commercial–Share Alike 4.0 USA see www.creativecommons.org. This material may be reproduced for non-commercial purposes and changes may be used by others provided that credit is given to the author.
To obtain permission for uses beyond those outlined in the Creative Commons license, such as personalized assignments for students, please contact David Annand at [email protected].
Latest version available at https://open.bccampus.ca/find-open-textbooks/
Please forward suggested changes to [email protected].
First US Edition
July 31, 2018
 
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Chapter Work Statistics

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45. An auditor for Health Maintenance Services of Georgia reports 40% of policyholders 55 years or older submit a claim during the year. Fifteen policyholders are randomly selected for company records. a. How many of the policyholders would you expect to have filed a claim within the last year? b. What is the probability that 10 of the selected policyholders submitted a claim last year? c. What is the probability that 10 or more of the selected policyholders submitted a claim last year? d. What is the probability that more than 10 of the selected policyholders submitted a claim last year?

71. Refer to the Baseball 2016 data. Compute the mean number of home runs per game. To do this, first find the mean number of home runs per team for 2016. Next, divide this value by 162 (a season comprises 162 games). Then multiply by 2 because there are two teams in each game. Use the Poisson distribution to estimate the number of home runs that will be hit in a game. Find the probability that: a. There are no home runs in a game. b. There are two home runs in a game. c. There are at least four home runs in a game.

53. Management at Gordon Electronics is considering adopting a bonus system to increase production. One suggestion is to pay a bonus on the highest 5% of production based on past experience. Past records indicate weekly production follows the normal distribution. The mean of this distribution is 4,000 units per week and the standard deviation is 60 units per week. If the bonus is paid on the upper 5% of production, the bonus will be paid on how many units or more?

55. Best Electronics Inc. offers a “no hassle” returns policy. The daily number of customers returning items follows the normal distribution. The mean number of customers returning items is 10.3 per day and the standard deviation is 2.25 per day .a. For any day, what is the probability that eight or fewer customers returned items?  b. For any day, what is the probability that the number of customers returning items is between 12 and 14? c. Is there any chance of a day with no customer returns?

76. Refer to the Lincolnville School District bus data a. Refer to the maintenance cost variable. The mean maintenance cost for last year is $4,552 with a standard deviation of $2332. Estimate the number of buses with a maintenance cost of more than $6,000. Compare that with the actual number. Create a frequency distribution of maintenance cost. Is the distribution normally distributed. Refer to the variable on the number of miles driven since the last maintenance. The mean is 11,121 and the standard deviation is 617 miles. Estimate the number of buses traveling more than 11,500 miles since the last maintenance. Compare that number with the actual value. Create a frequency distribution of miles since maintenance cost. Is the distribution normally distributed?

A. Century National Bank Refer to the Century National Bank data. Is it reasonable that the distribution of checking account balances approximates a normal probability distribution? Determine the mean and the standard deviation for the sample of 60 customers. Compare the actual distribution with the theoretical distribution. Cite some specific examples and comment on your findings. Divide the account balances into three groups, of about 20 each, with the smallest third of the balances in the first group, the middle third in the second group, and those with the largest balances in the third group. Next, develop a table that shows the number in each of the categories of the account balances by branch. Does it ap-pear that account balances are related to the branch? Cite some examples and comment on your findings.

 
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Tax Problems – Questin And Answer ,.,. Ch 19 26774

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30. LO.1, 4 At the start of the current year, Blue Corporation (a calendar year taxpayer) has accumulated E & P of $100,000. Blue’s current E & P is $60,000, and at the end of the year, it distributes $200,000 ($100,000 each) to its equal shareholders, Pam and Jon.
Pam’s stock basis is $11,000; Jon’s stock basis is $26,000. How is the distribution treated for tax purposes?

31. LO.1, 2 Cardinal Corporation, a calendar year taxpayer, receives dividend income of $250,000 from a corporation in which it holds a 10% interest. Cardinal also receives interest income of $35,000 from municipal bonds. (The municipality used the proceeds from the bond issue to construct a library.) Cardinal borrowed funds to purchase the municipal bonds and pays $20,000 of interest on the loan. Excluding these items, Cardinal’s taxable income is $500,000.
a. What is Cardinal Corporation’s taxable income after these items are taken into account?
b. What is Cardinal Corporation’s accumulated E & P at the start of next year if its beginning balance this year is $150,000?

32. LO.1, 2, 3 On September 30, Silver Corporation, a calendar year taxpayer, sold a parcel of land (basis of $400,000) for a $1 million note. The note is payable in five installments, with the first payment due next year. Because Silver did not elect out of the installment method, none of the $600,000 gain is taxed this year.
Silver Corporation had a $300,000 deficit in accumulated E & P at the beginning of the year. Before considering the effect of the land sale, Silver had a deficit in current
E & P of $50,000.
Sam, the sole shareholder of Silver, has a basis of $200,000 in his stock. If Silver distributes $900,000 to Sam on December 31, how much income must he report for tax purposes?

33. LO.2 Sparrow Corporation (a calendar year, accrual basis taxpayer) had the following transactions in 2013, its second year of operation.
Taxable income $330,000
Federal income tax liability paid 112,000
Tax-exempt interest income 5,000
Meals and entertainment expenses (total) 3,000
Premiums paid on key employee life insurance 3,500
Increase in cash surrender value attributable to life insurance premiums 700
Proceeds from key employee life insurance policy 130,000
Cash surrender value of life insurance policy at distribution 20,000
Excess of capital losses over capital gains 13,000
MACRS deduction 26,000
Straight-line depreciation using ADS lives 16,000
Section 179 expense elected during 2012 100,000
Dividends received from domestic corporations (less than 20% owned) 25,000
Sparrow uses the LIFO inventory method, and its LIFO recapture amount increased by $10,000 during 2013. In addition, Sparrow sold property on installment during 2012.
The property was sold for $40,000 and had an adjusted basis at sale of $32,000. During 2013, Sparrow received a $15,000 payment on the installment sale. Finally, assume that no additional first-year depreciation was claimed. Compute Sparrow’s current E & P.

34. LO.1, 2 In each of the following independent situations, indicate the effect on taxable income and E & P, stating the amount of any increase (or decrease) in each as a result of the transaction. Assume that E & P has already been increased by taxable income.
Transaction
Taxable Income
Increase (Decrease)
E & P Increase (Decrease)
a. Realized gain of $80,000 on involuntary conversion of building ($10,000 of gain is recognized). _____________ _____________
b. Mining exploration costs incurred on May 1 of current year; $24,000 is deductible from current-year taxable income. _____________ _____________
c. Sale of equipment to unrelated third party for $240,000; basis is $120,000 (no election out of installment method; no payments are received in current year). _____________ _____________
d. Dividends of $20,000 received from 5% owned corporation, together with dividends received deduction (assume that taxable income limit does not apply). _____________ _____________
e. Domestic production activities deduction of $45,000 claimed in current year. _____________ _____________
f. Section 179 expense deduction of $100,000 in current year. _____________ _____________
g. Impact of current-year § 179 expense deduction in succeeding year. _____________ _____________
h. MACRS depreciation of $80,000. ADS depreciation would have been $90,000. _____________ _____________
i. Federal income taxes of $80,000 paid in current year. _____________ _____________

35. LO.1, 3 Black Corporation and Tom each own 50% of Tan Corporation’s common stock. On January 1, Tan has a deficit in accumulated E & P of $200,000. Its current E & P is $90,000. During the year, Tan makes cash distributions of $40,000 each to Black and Tom.
a. How are the two shareholders taxed on the distribution?
b. What is Tan Corporation’s accumulated E & P at the end of the year?

36. LO.1, 3 Complete the following schedule for each case. Unless otherwise indicated, assume that the shareholders have ample basis in the stock investment.
Accumulated
E & P Beginning of Year Current E & P Cash
Distributions (All on Last
Day of Year)
Dividend
Income
Return of
Capital
a. ($200,000) $ 70,000 $130,000 $________ $________
b. 150,000 (120,000) 210,000 ________ ________
c. 90,000 70,000 150,000 ________ ________
d. 120,000 (60,000) 130,000 ________ ________
e. Same as (d), except that the distribution of $130,000 is made on June 30 and the corporation uses the calendar year for tax purposes. ________ ________

37. LO.1, 3 Larry, the sole shareholder of Brown Corporation, sold his Brown stock to Ed on July 30 for $270,000. Larry’s basis in the stock was $200,000 at the beginning of the year. Brown had accumulated E & P of $120,000 on January 1 and has current E & P of $240,000. During the year, Brown made the following distributions: $450,000 of cash to
Larry on July 1 and $150,000 of cash to Ed on December 30. How will Larry and Ed be taxed on the distributions? How much gain will Larry recognize on the sale of his stock to Ed?

38. LO.4 In November of the current year, Emerald Corporation declared a dividend of $2 per share (the shareholder record date is December 15). Assume that Emerald has sufficient current E & P to cover the dividend payment. If Judy purchases 500 shares of Emerald stock on December 5 and sells the stock on December 25, how is she taxed on the $1,000 dividend?

39. LO.1, 5 Heather, an individual, owns all of the outstanding stock in Silver Corporation.
Heather purchased her stock in Silver nine years ago, and her basis is $56,000. At the beginning of this year, the corporation has $76,000 of accumulated E & P and no current E & P (before considering the effect of the distributions as noted below). What are the tax consequences to Heather (amount and type of income and basis in property received) and Silver Corporation (gain or loss and effect on E & P) in each of the following situations?
a. Silver distributes land to Heather. The land was held as an investment and has a fair market value of $54,000 and an adjusted basis of $42,000.
b. Assume that Silver Corporation has no current or accumulated E & P prior to the distribution. How would your answer to (a) change?
c. Assume that the land distributed in (a) is subject to a $46,000 mortgage (which Heather assumes). How would your answer change?
d. Assume that the land has a fair market value of $54,000 and an adjusted basis of $62,000 on the date of the distribution. How would your answer to (a) change?
e. Instead of distributing land in (a), assume that Silver decides to distribute equipment used in its business. The equipment has a $14,000 market value, a $1,200 adjusted basis for income tax purposes, and a $5,200 adjusted basis for E & P purposes. When the equipment was purchased four years ago, its original fair market value was $18,000.

40. LO.1, 5 Lime Corporation, with E & P of $500,000, distributes land (worth $300,000, adjusted basis of $350,000) to Harry, its sole shareholder. The land is subject to a liability of $120,000, which Harry assumes. What are the tax consequences to Lime and to Harry?

41. LO.1, 3 At the beginning of the year, Penguin Corporation (a calendar year taxpayer) has accumulated E & P of $55,000. During the year, Penguin incurs a $36,000 loss from operations that accrues ratably. On October 1, Penguin distributes $40,000 in cash to Holly, its sole shareholder. How is Holly taxed on the distribution?

 
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Finc 330 Midterm

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1) Managerial finance

A) involves tasks such as budgeting, financial forecasting, cash management, and funds procurement.

B) involves the design and delivery of advice and financial products.

C) recognizes funds on an accrual basis.

D) devotes the majority of its attention to the collection and presentation of financial data.

 

 

2) High cash flow is generally associated with a higher share price whereas higher risk tends to result in a lower share price.

A) True

B) False

 

 

3) When considering each financial decision alternative or possible action in terms of its impact on the share price of the firm’s stock, financial managers should accept only those actions that are expected to increase the firm’s profitability.

A) True

B) False

 

 

4) The wealth of corporate owners is measured by the share price of the stock.

A) True

B) False

 

 

5) The profit maximization goal ignores the timing of returns, does not directly consider cash flows, and ignores risk.

A) True

B) False

 

 

6 Stockholders expect to earn higher rates of return on investments of lower risk and lower rates of return on investments of higher risk.

A) True

B) False

 

 

7) The primary goal of the financial manager is

A) minimizing risk.

B) maximizing profit.

C) maximizing wealth.

D) minimizing return.

 

 

8) Profit maximization as a goal is not ideal because it does NOT directly consider

A) risk and cash flow.

B) cash flow and stock price.

C) risk and EPS.

D) EPS and stock price.

 

 

9) An effective ethics program can

A) weakened corporate value.

B) had no effect on a corporation’s value

C) enhance a corporation’s value.

D) be thought of as unimportant to corporate owners.

 

 

10) Johnson, Inc. has just ended the calendar year making a sale in the amount of $10,000 of merchandise purchased during the year at a total cost of $7,000. Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. The net profit and cash flow from this sale for the year are

A) $3,000 and $10,000, respectively.

B) $3,000 and -$7,000, respectively.

C) $7,000 and -$3,000, respectively.

D) $3,000 and $7,000, respectively.

 

 

11) Marginal analysis states that financial decisions should be made and actions taken only when

A) demand equals supply.

B) benefits equal costs.

C) added benefits exceed added costs.

D) added benefits are greater than zero.

 

 

12) One way often used to insure that management decisions are in the best interest of the stockholders is to

A) threaten to fire managers who are seen as not performing adequately.

B) remove management’s perquisites.

C) tie management compensation to the performance of the company’s common stock price.

D) tie management compensation to the level of earnings per share.

 

 

13) The Sarbanes-Oxley Act of 2002 was passed in response to

A) insider trading activities.

B) false disclosures in financial reporting.

C) the decline in technology stocks.

D) all of the above

 

 

14) The key participants in financial transactions are individuals, businesses, and governments. Individuals are net ________ of funds, and businesses are net ________ of funds.

A) demanders; suppliers

B) users; providers

C) suppliers; demanders

D) purchasers; sellers

 

 

15) An efficient market is a market that allocates funds to their most productive use as a result of competition among wealth-maximizing investors.

A) True

B) False

 

 

16) The primary risk of mortgage-backed securities is

A) that the prices of housing will go down.

B) that the prices of housing will increase.

C) that the government will not be able to meet the guarantees on the cash flows.

D) that homeowners may not be able to, or choose not to, repay their loans.

 

 

17) The marginal tax rate represents the rate at which additional income is taxed.

A) True

B) False

 

 

18) Retained earnings represent the cumulative total of all earnings retained and reinvested in the firm since its inception.

A) True

B) False

 

 

19) The stockholder’s annual report must include

A) a statement of cash flows.

B) an income statement.

C) a balance sheet.

D) a statement of retained earnings.

E) all of the above.

 

 

20) Gross profits are defined as

A) operating profits minus depreciation.

B) operating profits minus cost of goods sold.

C) sales revenue minus operating expenses.

D) sales revenue minus cost of goods sold.

 

 

21) A firm had the following accounts and financial data for 2005.

 

 

The firm’s earnings available to common shareholders for 2005 were

A) -$224.25

B) $195.40

C) $302.40

D) $516.60

 

 

22) A firm had the following accounts and financial data for 2005.

 

 

The firm’s net profit after taxes for 2005 was ________.

A) -$206.40

B) $213.80

C) $320.40

D) $206.25

 

 

23) The firm’s creditors are primarily interested in the short-term liquidity of the company and its ability to make interest and principal payments.

A) True

B) False

 

 

24) Ratio analysis merely directs the analyst to potential areas of concern; it does not provide conclusive evidence as to the existence of a problem.

A) True

B) False

 

 

25) In ratio analysis, the financial statements being used for comparison should be dated at the same point in time during the year. If not, the effect of seasonality may produce erroneous conclusions and decisions.

A) True

B) False

 

 

26) ________ analysis involves the comparison of different firms’ financial ratios at the same point in time.

A) Time-series

B) Cross-sectional

C) Marginal

D) Quantitative

 

 

27) The primary concern of creditors when assessing the strength of a firm is the firm’s

A) profitability.

B) leverage.

C) short-term liquidity.

D) share price

 

 

28) The analyst should be careful when conducting ratio analysis to ensure that

A) the overall performance of the firm is not judged on a single ratio.

B) the dates of the financial statements being compared are the same.

C) audited statements are used.

D) the same accounting procedures were used.

E) all of the above.

 

 

29) The current ratio provides a better measure of overall liquidity only when a firm’s inventory cannot easily be converted into cash. If inventory is liquid, the quick ratio is a preferred measure of overall liquidity.

A) True

B) False

 

 

30) The ________ measures the percentage of each sales dollar remaining after ALL expenses, including taxes, have been deducted.

A) net profit margin

B) operating profit margin

C) gross profit margin

D) earnings available to common shareholders

 

 

Table 3.2

 

Dana Dairy Products Key Ratios

 

Income Statement

Dana Dairy Products

For the Year Ended December 31, 2010

 

Balance Sheet

Dana Dairy Products

December 31, 2010

 

31) The current ratio for Dana Dairy Products in 2005 was ________. (See Table 3.2)

A) 1.58

B) 0.63

C) 1.10

D) 0.91

 

 

32) Since 2009, the liquidity of Dana Dairy Products ________. (See Table 3.2)

A) has deteriorated

B) remained the same

C) has improved

D) cannot be determined

 

 

33) The inventory turnover for Dana Dairy Products in 2010 was ________. (See Table 3.2)

A) 43

B) 5

C) 20

D) 25

 

 

34) The average collection period for Dana Dairy Products in 2010 was (See Table 3.2)

A) 32.5 days.

B) 11.8 days.

C) 25.3 days.

D) 35.9 days.

 

 

35) If Dana Dairy Products has credit terms which specify that accounts receivable should be paid in 25 days, the average collection period ________ since 2009. (See Table 3.2)

A) has deteriorated

B) remained the same

C) has improved

D) cannot be determined

 

 

36) The debt ratio for Dana Dairy Products in 2010 was ________.(See Table 3.2)

A) 50 percent

B) 11 percent

C) 55 percent

D) 44 percent

 

 

37) Dana Dairy Products’ gross profit margin was inferior to the industry standard. This may have resulted from ________. (See Table 3.2)

A) a high sales price.

B) the high cost of goods sold.

C) excessive selling and administrative expenses.

D) excessive interest expense.

 

 

38) The gross profit margin and net profit margin for Dana Dairy Products in 2010 were ________. (See Table 3.2)

A) 13 percent and 0.9 percent, respectively.

B) 13 percent and 1.5 percent, respectively.

C) 2 percent and 0.9 percent, respectively.

D) 2 percent and 1.5 percent, respectively.

 

 

39) The return on total assets for Dana Dairy Products for 2010 was ________. (See Table 3.2)

A) 0.9 percent

B) 5.5 percent

C) 25 percent

D) 2.5 percent

 

 

40) The return on equity for Dana Dairy Products for 2010 was ________. (See Table 3.2)

A) 0.6 percent

B) 5.6 percent

C) 0.9 percent

D) 50 percent

 

 

41) A corporation

A) must use the same depreciation method for tax and financial reporting purposes.

B) must use different depreciation methods for tax and financial reporting purposes.

C) may use different depreciation methods for tax and financial reporting purposes.

D) must use different (than for tax purposes), but strictly mandated, depreciation methods for financial reporting purposes.

 

 

42) Given the financial manager’s preference for faster receipt of cash flows,

A) a longer depreciable life is preferred to a shorter one.

B) a shorter depreciable life is preferred to a longer one.

C) the manager is not concerned with depreciable lives, because depreciation is a non-cash expense.

D) the manager is not concerned with depreciable lives, because once purchased, depreciation is considered a sunk cost.

 

 

43) A corporation sold a fixed asset for $100,000. This is

A) an investment cash flow and a source of funds.

B) an operating cash flow and a source of funds.

C) an operating cash flow and a use of funds.

D) an investment cash flow and a use of funds.

 

 

44) Pro forma statements are used for

A) cash budgeting.

B) credit analysis.

C) profit planning.

D) leverage analysis.

 

 

45) The future value of $100 received today and deposited at 6 percent for four years is

A) $126.

B) $ 79.

C) $124.

D) $116.

 

 

46) The present value of $100 to be received 10 years from today, assuming an opportunity cost of 9 percent, is

A) $236.

B) $699.

C) $ 42.

D) $ 75.

 

 

47) Bill plans to fund his individual retirement account (IRA) with the maximum contribution of $2,000 at the end of each year for the next 20 years. If Bill can earn 12 percent on his contributions, how much will he have at the end of the twentieth year?

A) $19,292

B) $14,938

C) $40,000

D) $144,104

 

 

48) The risk free rate of interest is equal to the sum of the real rate of interest plus an inflation risk premium.

A) True

B) False

 

 

49) The tax deductibility of interest lowers the cost of debt financing, thereby causing the cost of debt financing to be lower than the cost of equity financing.

A) True

B) False

 

 

50) If expected return is less than required return on an asset, rational investors will

A) buy the asset, which will drive the price up and cause expected return to reach the level of the required return.

B) sell the asset, which will drive the price down and cause the expected return to reach the level of the required return.

C) sell the asset, which will drive the price up and cause the expected return to reach the level of the required return.

D) buy the asset, since price is expected to increase.

 

 

51) Tangshan China Company’s stock is currently selling for $80.00 per share. The expected dividend one year from now is $4.00 and the required return is 13 percent. What is Tangshan’s dividend growth rate assuming that dividends are expected to grow at a constant rate forever?

A) 8%

B) 9%

C) 10%

D) 11%

 

 

 

 

 

 

 
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