The Apex Company has just hired Mr. Smith, who is age 25 and is expected to retire at age 60. Mr. Smith’s current salary is $30,000 per year

| March 14, 2016

1. The Apex Company has just hired Mr. Smith, who is age 25 and is expected to retire at age 60. Mr. Smith’s current salary is $30,000 per year, but his wages are expected to increase by 5 percent annually over the next 35 years. Apex has a defined benefit pension plan in which workers receive 2 percent of their final year’s wages for each year of employment. Assume a world of certainty. Further, assume that all payments occur at year-end. What is Mr. Smith’s expected annual retirement benefit, rounded to the nearest thousands of dollars?

a. $ 35,000

b. $ 57,000

c. $ 89,000

d. $116,000

e. $132,000

2. Midwest Investment Consultants (MIC) operates several stock investment portfolios that are used by firms for investment of pension plan assets. Last year, one portfolio had a realized return of 12.6 percent and a beta coefficient of 1.15. The average T-bond rate was 7 percent and the realized rate of return on the S&P 500 was 12 percent. What was the portfolio’s alpha?

a. -0.75%

b. -0.15%

c. 0%

d. 0.15%

e. 0.75%

3. The Ritz Company has a 40-year-old employee that will retire at age 60 and live to age 75. The firm has promised a retirement income of $20,000 at the end of each year following retirement until death. The firm’s pension fund is expected to earn 7 percent annually on its assets and the firm uses 7% to discount pension benefits. What is Ritz’s annual pension contribution to the nearest dollar for this employee? (Assume certainty and end-of-year cash flows.)

a. $2,756

b. $3,642

c. $4,443

d. $4,967

e. $5,491

4. Which of the following statements about municipal bond financing is most correct?

a. In contrast to corporate bonds, municipal bond issues are not required to be registered with the Securities and Exchange Commission.

b. Whereas the vast majority of Treasury and corporate bonds are held by institutions, no municipal bonds are held by individual investors.

c. The primary attraction of municipal bonds to individual investors is their high before-tax yields.

d. Municipal bonds usually pay higher coupon rates than corporate bonds with similar ratings.

e. Municipal bonds are risk-free.

5. Which of the following statements about a not-for-profit firm’s ownership is most correct?

a. Not-for-profit firms are governed by a board of trustees whose members are elected by the community at large.

b. The residual earnings (profits) of not-for-profit firms can be distributed to the firm’s top managers.

c. Not-for-profit firms are exempt from federal taxes, but they must pay state and local taxes, including property taxes.

d. Upon liquidation of a not-for-profit firm, the proceeds from the sale of its assets are distributed, on a pro rata basis, to the firm’s employees.

e. None of the profits are used for private inurement.

6. Which of the following statements about a not-for-profit firm’s cost of capital estimate is most correct?

a. Since a not-for-profit firm has no shareholders, its WACC estimate does not include a cost of equity (fund capital) estimate.

b. The capital structure weights for a not-for-profit firm are set at 50/50, because such firms can raise $1 of debt financing for each dollar of retained earnings.

c. The cost of tax-exempt debt issued by not-for-profit firms is increased (“grossed up”) by 1 – T in the WACC estimate to reflect the fact that such firms do not pay taxes.

d. Equity (fund) capital has a cost that is roughly equivalent to the cost of retained earnings to similar investor-owned companies.

e. Not-for-profit firms have a zero cost of capital.

7. Which of the following statements about a not-for-profit firm’s fund capital is most correct?

a. Fund capital is equivalent to equity capital in investor-owned firms.

b. The sole source of fund capital is the excess of revenues over expenses.

c. Fund capital has a zero opportunity cost.

d. Fund capital can only come from donations.

e. Fund capital does not change over time.

8. Which of the following statements about a not-for-profit firm’s sources of capital is most correct?

a. Since not-for-profit firms are tax exempt, there is no tax advantage to debt capital.

b. Fund capital is obtained by retaining earnings–if all earnings are paid out as dividends, no fund capital is created.

c. Preferred stock is never used by not-for-profit firms.

d. Not-for-profit firms are not allowed to raise capital by borrowing.

e. Not-for-profit firms usually have high dividend payouts.

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