Corporate Finance (The Mcgraw-Hill/Irwin Series in Finance, Insurance, and Real Estate) 11th Edition

You are considering a project in Norway with an initial cost of NKr135,000. The project is expected to return a one-time payment of NKr200,000 at the end of Year 5. The risk-free rate of return is 2.6 percent in the U.S. and 3.1 percent in Norway. The inflation rate is 1.6

Graham and Harvey (2001) found that _____ were the two most popular capital budgeting methods. A. IRR and payback B. IRR and NPV C. NPV and PI D. IRR and modified IRR E. discounted payback and NPV Answer: B. B. B. Prepackaged bankruptcies: A. generally benefit only the bankrupt firm. B. require creditor approval within 7 days of

Firm A is acquiring Firm T for $22,500 in cash. Firm A has 2,300 shares of stock outstanding at a market value of $26 a share. Firm T has 1,200 shares of stock outstanding at a market price of $17 a share. Neither firm has any debt. The net present

I. M. Greedy has been granted options on 500,000 shares. The stock is currently trading at $48 a share and the options are at the money. The standard deviation of returns averages 31 percent. The options mature in 5 years and the risk-free rate is 3.68 percent. What is the value of

Companies will generally have a: A. low beta if their sales are directly related to the market cycle. B. high beta if their sales are highly dependent on the market cycle. C. high beta if sales are independent of the market cycle. D. high beta if their sales are highly variable but unrelated to

In a reverse stock split: A. the number of shares outstanding increases and owners' equity decreases. B. the firm buys back existing shares of stock on the open market. C. the firm sells new shares of stock on the open market. D. the number of shares outstanding decreases but owners' equity is unchanged. E. shareholders

If a bond has a make-whole call provision, the: A. call premium can be either positive or negative. B. bond's market price will always equal its face value. C. bondholder will receive the face value amount plus interest if the bond is called. D. bondholder will receive the face value amount minus any interest

The annual interest paid by a bond divided by the bond's face value is called the: A. coupon. B. face value. C. maturity. D. yield to maturity. E. coupon rate. Answer: E. E. E. A flow of unending and equal payments that occur at regular intervals of time is called a(n): A. annuity due. B. indemnity. C. perpetuity. D. amortized

Theo is depositing $1,300 today in an account with an expected rate of return of 8.1 percent. If he deposits an additional $3,200 two years from today, and $4,000 three years from today, what will his account balance be ten years from today? A. $14,044.89 B. $16,412.31 C. $15,182.53 D. $15,699.54 E. $17,741.71 Answer: D. D.

A project has earnings before interest and taxes of $5,750, fixed costs of $50,000, a selling price of $13 a unit, and a sales quantity of 11,500 units. Depreciation is $7,500. What is the variable cost per unit? A. $6.75 B. $7.00 C. $7.25 D. $7.50 E. $7.75 Answer: D. D. D. A bond with a

Three months ago, you purchased a put option contract on WXX stock with a strike price of $61 and an option price of $.60. The option expires today when the value of WXX stock is $63.50. Ignoring trading costs and taxes, what is your total profit on your investment? A. -$310 B. -$60 C.

Based on the period of 1926 through 2014, _____ have tended to outperform other securities over the long-term. A. U.S. Treasury bills B. large-company stocks C. long-term corporate bonds D. small-company stocks E. long-term government bonds Answer: D. D. D. One advantage of a partnership is the: A. personal liability for all firm debts. B. limited life of

Westover Industries has 60,000 shares outstanding. Each share has one attached warrant. A warrant holder can purchase one new share of stock for five warrants plus $5 per warrant. The stock is currently selling for $27 per share. All else held constant, what will the stock price be if all of the

A project will produce an operating cash flow of $7,300 a year for three years. The initial investment for fixed assets will be $11,600, which will be depreciated straight-line to zero over the asset's 4-year life. The project will require an initial $500 in net working capital plus an additional

Metal Manufacturers receives three checks per month. The first check is for $194,000 and takes two days to clear. The second check is for $318,000 and clears in one day. The third check is for $38,000 and clears in 2.5 days. What is the weighted average delay, the average daily

A registration statement is effective on the 20th day after filing unless: A. the SEC is backlogged with statements. B. a tombstone ad is issued indicating its demise. C. a letter of comment suggesting changes is issued by the SEC. D. a syndicate can be formed sooner. E. the issue exceeds $50 million in which

The act where an owner of an option buys or sells the underlying asset, as is his right, is called ______ the option. A. striking B. exercising C. opening D. splitting E. strangling Answer: B. B. B. Event studies of dividend omissions indicate that: A. this type of announcement generally has no effect on abnormal returns. B. the cumulative

Ted purchased an annuity today that will pay $1,000 a month for five years. He received his first monthly payment today. Allison purchased an annuity today that will pay $1,000 a month for five years. She will receive her first payment one month from today. Which one of the following

Which one of the following statements is correct concerning the organizational structure of a corporation? A. The vice president of finance reports to the chairman of the board. B. The controller reports to the chief financial officer. C. The controller reports to the president. D. The treasurer reports to the chief executive officer. E. The

Which one of the following statements is correct? A. Both partnerships and corporations incur double taxation. B. Sole proprietorships and partnerships are taxed in a similar fashion. C. Partnerships are the most complicated type of business to form. D. Both partnerships and corporations have limited liability for general partners and shareholders. E. All types of

In working on a bid project you have determined that $245,000 of fixed assets will be required and that they will be depreciated straight-line to zero over the 5-year life of the project. You have also determined that the discount rate should be 14.5 percent and the tax rate will be

Your firm receives 46 checks per month. Of these, 13 are for $1,250 and 33 are for $870. The delay for the $1,250 checks is 1.5 days; the $870 checks are delayed 2 days. What is the weighted average delay? A. 1.96 days B. 1.93 days C. 1.91 days D. 1.86 days E. 1.82 days

Assuming market efficiency, which one of these is the least sensible explanation of why convertibles and warrants are issued? A. Cash flows from these securities best match the cash flows of the firm. B. The firm is relatively large with a low level of financial leverage. C. The securities are useful when it is

A global conglomerate has a debt beta of zero. If the cost of equity is 12.23 percent, and the risk-free rate is 4.36 percent, what is the firm's pretax cost of debt? A. 4.36% B. 8.30% C. 7.87% D. 0% E. 12.23% Answer: A. A. A. You purchased two WXO 15 call option contracts at a quoted

Bikes and More just announced its next annual dividend will be $2.42 a share and all future dividends will increase by 2.5 percent annually. What is the market rate of return if this stock is currently selling for $22 a share? A. 13.62% B. 13.84% C. 13.58% D. 13.50% E. 13.46% Answer: D. D. D. You

Assume the delta of a call option on a firm's assets is .608. This means a $65,000 project will increase the value of the firm's equity by: A. $27,902. B. $39,520. C. $43,820. D. $63,131. E. $89,600. Answer: B. B. B. Which one of these is not a reason why executives place less value on employee

Which one of the following is most apt to cause a firm to have a higher price-earnings ratio? A. slow industry outlook B. very low current earnings C. low market share D. low prospect of firm growth E. low investor opinion of firm Answer: B. B. B. Ritter's study of SEO's suggests that: A. managers appear to

The price of one country's currency expressed in terms of another country's currency is called the: A. absolute currency rate. B. cross inflation rate. C. depository rate. D. exchange rate. E. foreign interest rate. Answer: D. D. D. A merger in which an entirely new firm is created and both the acquired and acquiring firms cease

Over the period of 1926 through 2014, the annual rate of return on _____ has been more volatile than the annual rate of return on _____. A. large-company stocks; small-company stocks B. U.S. Treasury bills; small-company stocks C. U.S. Treasury bills; long-term government bonds D. long-term corporate bonds; small-company stocks E. large-company stocks; long-term corporate

Which one of these is a positive covenant? A. The firm must maintain a current ratio of 1.2 or better. B. The firm will not issue any debt with higher seniority. C. The firm cannot be acquired in a friendly takeover. D. No dividend increases will be allowed. E. The market debt-equity ratio cannot exceed

Which one of the following is a correct statement concerning risk premium? A. The greater the volatility of returns, the greater the risk premium. B. The lower the volatility of returns, the greater the risk premium. C. The lower the average rate of return, the greater the risk premium. D. The risk premium is

Derivatives can be used to either hedge or speculate. These strategies: A. increase risk in both cases. B. decrease risk in both cases. C. spread or minimize risk in both cases. D. offset risk by hedging and increase risk by speculating. E. offset risks by speculating and increase risk by hedging. Answer: D. D. D. Stock

Leo received $7,500 today and will receive another $5,000 two years from today. He will invest these funds when he receives them and expects to earn a rate of return of 11.5 percent. What value does he expect his investments to have five years from today? A. $18,758.04 B. $18,806.39 C. $19,856.13 D. $20,314.00 E.

The forward rate market is dependent upon: A. current forward rates exceeding current spot rates. B. current spot rates exceeding current forward rates over time. C. current spot rates equaling current forward rates on average over time. D. forward rates equaling the actual future spot rates on average over time. E. current spot rates equaling

The delta of a call measures the: A. time remaining to expiration compared to the option's original maturity. B. change between an option's original value and its current value. C. swing in the price of the call relative to the swing in the underlying stock price. D. ratio of the change in the option

Ratios that measure how efficiently a firm uses its assets to generate sales are known as _______ ratios. A. asset management B. long-term solvency C. short-term solvency D. profitability E. market value Answer: A.A. asset managementB. long-term solvencyC. short-term solvencyD. profitabilityE. market value A.A. asset managementB. long-term solvencyC. short-term solvencyD. profitabilityE. market value A. A. asset management B. long-term solvency C. short-term

Four Wheels requires $1.75 million to fund a new project and has decided to raise the funds via a seasoned stock offering. Assume the firm will incur $140,000 in indirect costs and pay 8.63 percent of the gross proceeds in direct costs. How much does the firm need to raise

Starting today, Alicia is going to contribute $100 a month to her retirement account. Her employer matches her contribution by 50 percent. If these contributions remain constant, and she earns a monthly rate of .55 percent, how much will her savings be worth 40 years from now? A. $399,459.44 B. $300,456.74 C. $349,981.21 D. $299,189.16 E.

Enterprise value equals the: A. combined market value of debt and equity minus excess cash. B. market value of equity minus the market value of debt plus excess cash. C. market value of debt plus the book value of equity minus excess cash. D. combined market value of debt and equity. E. combined book value

Individuals that continually monitor the financial markets seeking mispriced securities: A. tend to make substantial profits on a daily basis. B. tend to make the markets more efficient. C. are never able to find a security that is temporarily mispriced. D. are always quite successful using only well-known public information as their basis of

Suppose the Simmons Co's common stock has a beta of 1.37, the risk-free rate is 3.4 percent, and the market risk premium is 8.2 percent. The yield to maturity in the firm's bonds is 7.6 percent and the debt-equity ratio is .45. What is the RWACC if the tax rate

The discount rate that makes the net present value of an investment exactly equal to zero is called the: A. external rate of return. B. internal rate of return. C. average accounting return. D. profitability index. E. equalizer. Answer: B. B. B. A firm that adopts a flexible short-term financial policy is more apt to have: A.

Small Town Bank has total assets with a market value of $14.23 million and a duration of 2.64 years. The bank's liabilities equal $12.87 million and its equity is $1.36 million on a market value basis. To hedge interest rate risk, what duration should the bank seek for its liabilities? A.

You recently purchased a stock that is expected to earn 12.6 percent in a booming economy, 8.9 percent in a normal economy and lose 5.2 percent in a recessionary economy. Each economic state is equally likely to occur. What is your expected rate of return on this stock? A. 6.47% B. 8.90% C.

Permanently rejecting an investment project today may not be a wise decision primarily because: A. the size of the firm will be less than it would be with the project. B. there are always errors in the estimation of NPVs. C. the management team may be replaced. D. the company is foregoing all future options. E.

The Highlight Company is reviewing a proposed 7-year project with an initial cost of $687,400. The annual fixed costs are $92,800, the variable cost per unit is $49.79, and the sales price per unit is $89. The tax rate is 34 percent and the discount rate is 12 percent. All

Parametric or empirical models rely: A. on security betas explaining systematic factor relationships. B. on finding regularities and relations in past market data. C. on security returns always being located on the capital market line. D. solely on factors within the security's issuing firm's realm of control. E. primarily on financial market models and theories.

The intrinsic value of a put is equal to the: A. lesser of the strike price or the stock price. B. lesser of the stock price minus the exercise price or zero. C. lesser of the stock price or zero. D. greater of the strike price minus the stock price or zero. E. greater of

Which one of these statements is true? A. The cumulative finance surplus requirement is computed prior to adjusting for the minimum cash balance. B. A financially sound firm will always have a positive quarterly net cash flow. C. A negative cumulative cash surplus indicates a borrowing need. D. Most firms plan on maintaining a

To determine the value of a rights offering, the stockholder needs to know the following two pieces of information in addition to the current stock price, the: A. subscription price and the number of rights needed to acquire a new share. B. amount of new equity to be raised and the number of

A&M Hardware assumes new customers will default 8 percent of the time but if they don"t default, they will become repeat customers who always pay their bills. Assume the average sale is $383 with a variable cost of $260, and a monthly required return of 1.65 percent. What is the

The forward rate is most apt to equal the spot rate when: A. the real rate of interest is declining. B. the inflation rates in the two countries are equal. C. purchasing power parity exists. D. the real rates of interest in the two countries are equal. E. inflation rates are historically high. Answer: B. B.

Uptown Clothing just paid $1.50 as its annual dividend and increases its dividend by 2.5 percent each year. What will Uptown's stock price be in ten years at a discount rate of 12.25 percent? A. $19.46 B. $22.08 C. $20.19 D. $19.70 E. $21.50 Answer: C. C. C. As part of an unexpected news announcement, Alpha

The hypothesis that market prices reflect all publicly available information is called _____ form efficiency. A. open B. strong C. semistrong D. weak E. stable Answer: C. C. C. Denise will receive annual payments of $10,000 for the next 25 years. The discount rate is 6.8 percent. What is the difference in the present value of these

The positive incremental net gain associated with the combination of two firms through a merger or acquisition is called: A. the agency conflict. B. goodwill. C. the merger cost. D. the consolidation effect. E. synergy. Answer: E. E. E. The basic assumption of the ABC approach to inventory management is that: A. inventory should be divided dependent

BT Corporation has decided to build a new facility for its Ramp;D department. The cost of the facility is estimated at $125 million. BT plans to finance this project using its traditional debt-equity ratio of .65. The issue cost of equity is 6.1 percent and the issue cost of debt is

Thompson's has determined that a new project is expected to have fixed costs of $132,378, a contribution margin of $36.20, and a tax rate of 34 percent. The investment has an initial cost of $548,000 that will be depreciated straight-line to zero over the 5-year life of the project. The

Which one of the following is the best example of systematic risk? A. the price of lumber declines sharply B. airline pilots go on strike C. the Federal Reserve increases interest rates D. a hurricane hits a tourist destination E. people become diet conscious and avoid fast food restaurants Answer: C. C. C. Peggy Grey's Cookies

Consider a bond with a coupon rate of 8 percent that pays semiannual interest and matures in eight years. The market rate of return on bonds of this risk is currently 11 percent. What is the current value of a $1,000 face value bond? A. $830.58 B. $843.07 C. $893.30 D. $929.17 E. $854.08 Answer: B.

A trading opportunity that offers a riskless profit is called a(n): A. put option. B. call option. C. market equilibrium. D. arbitrage. E. cross-hedge. Answer: D. D. D. Marshall's purchased a corner lot five years ago at a cost of $498,000 and then spent $63,500 on grading and drainage so the lot could be used for

Assume the single-factor APT model is applied to a security that has a negative factor beta. The security will: A. always have a positive rate of return. B. have an expected return greater than the risk-free rate. C. have an actual return that is less than the risk-free rate. D. have an expected return

The unlevered cost of capital is: A. the cost of capital for a firm with no equity in its capital structure. B. the cost of capital for a firm with no debt in its capital structure. C. the interest tax shield times pretax net income. D. the cost of preferred stock for an all-equity

You expect an investment to return $11,300, $14,600, $21,900, and $38,400 annually over the next four years, respectively. What is this investment worth to you today if you desire a rate of return of 16.5 percent? A. $64,253.91 B. $58,700.89 C. $63,732.41 D. $55,153.57 E. $59,928.16 Answer: D. D. D. Draw a graph that represents an opportunity