Principles of Corporate Finance, Concise (McGraw-Hill/Irwin Series in Finance, Insurance and Real Estate) 2nd Edition

If you accept the dividend irrelevancy theory, it is possible to maintain a high dividend clientele and still fund future growth. Answer: TRUE Answer: TRUE Answer: TRUE The addition of investment grade baseball trading cards is likely to expand the efficient frontier to a better risk return trade off. Answer: TRUE Answer: TRUE Answer: TRUE Opportunity costs should

If the present value of $1.00 received n years from today at an interest rate of r is 0.3855, then what is the future value of $1.00 invested today at an interest rate of r% for n years? A. $1.3855 B. $2.594 C. $1.70 D. Not enough information to solve the problem Answer: B.FV =

Which of the following statements regarding the net present value rule and the rate of return rule is not true? A. Accept a project if NPV > cost of investment B. Accept a project if NPV is positive C. Accept a project if return on investment exceeds the rate of return on an

Learn and Earn Company is financed entirely by common stock that is priced to offer a 20% expected rate of return. The stock price is $60 and the earnings per share are $12. The company wishes to repurchase 50% of the stock and substitutes an equal value of debt yielding

In calculating the weighted average cost of capital, the values used for D, E and V are: A. book values B. liquidating values C. market values D. none of the above Answer: C. Answer: C. Answer: C. Generally, which of the following is true? (b = beta) A. bD < bA < bE B. bE < bA <

An increase in the stock price results in an increase in the call option price. Answer: TRUE Answer: TRUE Answer: TRUE According to the authors, a reasonable range for the risk premium in the United States is 5% to 8%. Answer: TRUE Answer: TRUE Answer: TRUE The "law of conservation

An investor can create the effect of leverage on his/her account by: I) buying equity of an unlevered firm II) by investing in risk-free debt like T-bills III) by borrowing on his/her own account A. I only B. II only C. III only D. I and III only Answer: D. Answer: D. Answer: D. What is the present value annuity

Financial Calculator Company proposes to invest $12 million in a new calculator making plant. Fixed costs are $3 million a year. A financial calculator costs $10 per unit to manufacture and can be sold for $30 per unit. If the plant lasts for 4 years and the cost of capital is

The risk-free rate is 5%, the market risk premium is 8% and the project's beta is 1.25. Calculate the certainty equivalent cash flow for year-3. A. $228.35 B. $197.25 C. $300 D. None of the above Answer: A.rw = 5 + (1.25 * 8) = 15% CF = 300(1.05)^3/(1.15^3) = 228.35 Answer: A.rw = 5

Short-term financial decisions: I) involve short lived assets II) involve short lived liabilities III) are easily reversed A. I only B. II only C. I, II, and III D. III only Answer: C. Answer: C. Answer: C. The value of a previously purchased machine to be used by a proposed project is an example of: A. Sunk cost B. Opportunity cost C. Fixed

According to Strategy C, a firm would: A. Be in permanent need of short-term borrowing B. Have high current cash holdings C. Use low or no short-term debt and more long-term financing D. None of the above Answer: A. Answer: A. Answer: A. The main advantage of the payback rule is: A. Adjustment for uncertainty of early cash

A project costs $7 million and is expected to produce cash flows if $2 million a year for 10 years. The opportunity cost of capital is 16%. If the firm has to issue stock to undertake the project and issue costs are $0.5 million, what is the project's APV? A. $9.67 million B.

When faced with financial distress; managers of firms acting on behalf of their shareholders' interests will: A. favor issuing large quantity of low quality debt to low quantity of high quality debt B. favor paying high dividends to the shareholders C. delay the onset of bankruptcy as long as they can D. all of

By undertaking the analysis in real terms, the financial manager avoids having to forecast inflation. Answer: FALSE Answer: FALSE Answer: FALSE Treasury bonds do not have default risk, but are subject to inflation risk. Answer: TRUE Answer: TRUE Answer: TRUE For an European option: Value of put = (Value of

In order to calculate the tax shield effect of interest payment for a corporation, always use the: I) average corporate tax rate II) marginal corporate tax rate III) state mandated tax rate A. I only B. II only C. III only D. I and III only Answer: B. Answer: B. Answer: B. Inclusion of restrictions in the bond contract leads

A firm in Australia earns a pretax profit of $A10 per share. It pays a corporate tax of $3 per share (30% tax rate) in taxes. The firm pays the remaining $A7 in dividends to a shareholder in 40% tax bracket. What is the amount of tax paid by the

You are given a job to make a decision on project X, which is composed of three independent projects A, B, and C which have NPVs of + $70, -$40 and + $100, respectively. How would you go about making the decision about whether to accept or reject the project? A.

If the NPV of project A is + $120, and that of project B is -$40 and that of project C is + $40, what is the NPV of the combined project? A. +$100 B. -$40 C. +$70 D. +$120 Answer: D.NPV(A + B + C) = 120 + 40 - 40 = 120 Answer: D.NPV(A

Volatility of a bond is given by: I) Duration/ (1 + yield) II) Slope of the curve relating the bond price to the interest rate III) Yield to maturity A. I only B. II only C. III only D. I and II only Answer: D. Answer: D. Answer: D. Generally, postaudits for projects are conducted: I) to identify problems that need

You would like to have enough money saved to receive $100,000 per year perpetuity after retirement so that you and your family can lead a good life. How much would you need to save in your retirement fund to achieve this goal (assume that the perpetuity payments start one year

The WACC formula does not change when preferred stock is included. Answer: FALSE Answer: FALSE Answer: FALSE The smaller the time periods used in the binomial model the closer it will come to approximating the Black-Scholes model price. Answer: TRUE Answer: TRUE Answer: TRUE The risk that cannot be eliminated by diversification is called market risk.

Options written on volatile assets are worth more than options written on safer assets. Answer: TRUE Answer: TRUE Answer: TRUE The weighted average cost of capital (WACC) on an after-tax basis is calculated as: WACC = (rD) (1 - TC ) (D/V) + (rE) (E/V) where: V = D + E

Given the following data for Golf Corporation: market price/share = $12; Book value/share = $10; Number of shares outstanding = 100 million; market price/bond = $800; Face value/bond = $1,000; Number of bonds outstanding = 1 million; Calculate the proportions of debt (D/V) and equity (E/V) for the firm that you would

Limited liability is an important feature of: A. Sole proprietorships B. Partnerships C. Corporations D. All of the above Answer: C. Answer: C. Answer: C. The MM theory with taxes implies that firms should issue maximum debt. In practice, this is not true because: I) Debt is more risky than equity II) Bankruptcy and its attendant costs is a

The benefit-cost ratio is equal to profitability index plus one. Answer: TRUE Answer: TRUE Answer: TRUE The market value of debt is very close to the book value of debt for healthy firms. Answer: TRUE Answer: TRUE Answer: TRUE Depreciation acts as a tax shield in reducing the taxes. Answer: TRUE Answer: TRUE Answer: TRUE All securities in an

On January 2, Michigan Mining declared a $25-per-share quarterly dividend payable on March 9th to stockholders of record on February 9. What is the latest date by which you could purchase the stock and still get the recently declared dividend? A. February 5 B. February 6 C. February 7 D. February 8 Answer: B. Answer: B. Answer: B. The

Which of these dates occurs last in time (when arranged in the chronological order)? A. Payment date B. Ex-dividend date C. Record date D. Dividend declaration date Answer: A. Answer: A. Answer: A. The Granite Paving Co. wishes to have debt-to-equity ratio of 1.5. Currently it is an unlevered (all equity) firm with a beta of 1.1.

Given the following data: Current assets = 500; Current liabilities = 250; Inventory = 200; Account receivables = 200; calculate the cash ratio: (assume that the firm has no marketable securities) A. 0.4 B. 2.0 C. 1.5 D. None of the above Answer: A.Cash ratio = (500 - 200 - 200)/250 = 0.4 Answer: A.Cash

You would like to have enough money saved to receive a growing annuity for 25 years, growing at a rate of 4% per year, the first payment being $60,000 after retirement, so that you and your family can lead a good life. How much would you need to save in your retirement

In almost al cases the present value break even quantity is higher than the accounting break even quantity. Answer: TRUE Answer: TRUE Answer: TRUE Short-term financial decisions are conceptually easier to make than long-term decisions. Answer: TRUE Answer: TRUE Answer: TRUE An European option gives its owner the right to exercise

Monte Carlo simulation is a tool for considering all possible combinations of variables. Answer: TRUE Answer: TRUE Answer: TRUE Many companies have automatic dividend reinvestment plans (DRIPs). Answer: TRUE Answer: TRUE Answer: TRUE The original work conducted on the dividend payout practices of companies was conducted by Lintner. Answer: TRUE