Midterm Exam Business Valuation and Stock Valuation
It is generally more expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required. (b) Corporations face fewer regulations than sole proprietorships. (c) One disadvantage of operating a business as a sole proprietorship is that the firm is subject to double taxation, at both the firm level and the owner level. (d) One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership.
If a regular partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business. (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. On the basis of this information, which of the following statements is CORRECT? (Points : 10) (a) Prestopino had negative net income in 2010. ( b ) Prestopino’s depreciation expense in 2010 was less than $150,000. (c) Prestopino had positive net income in 2010, but its income was less than its 2009 income. (d) Prestopino’s NCF in 2010 must be higher than its NCF in 2009. (e) Prestopino’s cash on the balance sheet at the end of 2010 must be lower than the cash it had on the balance sheet at the end of 2009.
Which of the following is most likely to occur? (Points : 10) (a) The required rate of return for an average stock will increase by an amount equal to the increase in the market risk premium. (b) The required rate of return will decline for stocks whose betas are less than 1. 0. (c) The required rate of return on the market, rM, will not change as a result of these changes. (d) The required rate of return for each individual stock in the market will increase by an amount equal to the increase in the market risk premium. (e) The required rate of return on a riskless bond will decline.