Finance Test 2 CFIN 5, 8 & 9 || A Verified A+ Pass.

A 9 percent coupon bond issued by the State of Pennsylvania sells for $1,000 and thus provides a 9 percent yield to maturity. What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 28 percent tax bracket? correct answers 12.50% Before-tax return(1 - T) = 9% Before-tax return(0.72) = 9% Before-tax return = 9%/0.72 = 12.50%. Which of the following statements is most correct? Other things held constant. correct answers the "liquidity preference theory" would generally lead to an upward sloping yield curve. The two reasons most experts give for the existence of a positive maturity risk premium are (1) because investors are assumed to be risk averse, and (2) because investors prefer to lend long while firms prefer to borrow short. correct answers False Firms with the most profitable investment opportunities are willing and able to pay the most for capital, so they tend to attract it away from less efficient firms or from those whose products are not in demand. correct answers True Assume that a 3-year Treasury note has no maturity premium, and that the real, risk-free rate of interest is 3 percent. If the T-note carries a yield to maturity of 13 percent, and if the expected average inflation rate over the next 2 years is 11 percent, what is the implied expected inflation rate during Year 3? correct answers 8% rRF = r* + IP 13% = 3% + IP IP = 10% Therefore, the average inflation expected over the next 3 years is 10 percent. Using an arithmetic average: 30% = 22% + IP3 IP3 = 8% In 2000, Craig and Kathy Koehler owned a small business which was held as a proprietorship in Kathy's name. They were thinking of incorporating if that would lower their total tax liability. The Koehlers expected the company to earn $100,000 before taxes next year. They planned to take out a salary of $45,000, and to reinvest the rest in the business. Their personal deductions total $10,750 and if they choose not to incorporate they will file a joint return. (1) What is their expected total tax liability as a proprietorship? (2) As a corporation? (3) Should they incorporate? correct answers $19,393.50; $13,887.50; Yes As a sole proprietorship: