Fundamentals of Corporate Finance 7th Edition

1) Changing management is the only reason that firms make acquisitions. Answer: FALSE Answer: FALSE Answer: FALSE 2) Accrued interest declines with each payment on an amortizing loan. Answer: TRUE Answer: TRUE Answer: TRUE 3) MM's proposition II states that the expected return on equity increases as the firm's debt-equity ratio increases. Answer: TRUE Answer: TRUE Answer: TRUE 4) One root of

1) A firm with a debt-equity ratio of 1/2, return on assets of 15%, and return on debt of 10% will have return on equity of: A.15.00% B.16.67% C.20.00% D.21.17% Answer: B requity = 0.15 + 1/3(0.15 - 0.10) = 16.67% Answer: B requity = 0.15 + 1/3(0.15 - 0.10) = 16.67% Answer: B requity = 0.15

1) The S&P 500 accounts for nearly 75% of the total value of stocks traded in the United States. Answer: TRUE Answer: TRUE Answer: TRUE 2) The degree of operating leverage (DOL) shows the relationship between sales and pretax profits. Answer: TRUE Answer: TRUE Answer: TRUE 3) In the United States, auctions of common stock are rare. For

1) Leveraged buyouts are acquisitions where a large fraction of the purchase price is financed with debt. Answer: TRUE Answer: TRUE Answer: TRUE 2) A capital budget shows a proposed list of investments. Answer: TRUE Answer: TRUE Answer: TRUE 3) The probability that all six of an executive's stock-option grants from 1995 to 2002 were dated just before

1) A cash conversion cycle is the period between a firm's payment for materials and collection on its sales. Answer: TRUE Answer: TRUE Answer: TRUE 2) Insider trading is the purchase or sale of shares based on information that is not available to public investors, and such behavior is accepted by the Securities Exchange

1) An investor owns 300 shares of stock currently selling for $70 per share. What should the investor expect to have after the stock declares a three-for-two split? A.200 shares selling for $93.10 each B.200 shares selling for $105.00 each C.450 shares selling for $46.67 each D.450 shares selling for $93.10 each Answer: C Current

1) The main purpose in contracting to purchase foreign currency in the forward market is to: A.earn a premium (interest) on the exchange B.lock into a price now C.take advantage of future price reductions D.avoid the more expensive spot rates Answer: B Answer: B Answer: B 2) In the context of housing, what is an ARM? A.A mortgage with

1) What is the after-tax cost of preferred stock that pays a 12% dividend and sells at par if the firm's tax rate is 35%? A.7.8% B.8.5% C.12.0% D.16.2% Answer: C There is no adjustment for taxes on preferred stock. Therefore, after-tax cost = before-tax cost. Answer: C There is no adjustment for taxes on preferred

1) Historically, internally generated cash covers less than half of a firm's capital requirements. Answer: FALSE Answer: FALSE Answer: FALSE 2) A common characteristic of money market instruments is their high degree of liquidity. Answer: TRUE Answer: TRUE Answer: TRUE 3) Market price is not the same as book value or liquidation value. Answer: TRUE Answer: TRUE Answer: TRUE 4) Transaction risk

1) The risk that remains in a stock portfolio after efforts to diversify is known as unique risk. Answer: FALSE Answer: FALSE Answer: FALSE 2) The cost of holding inventory is the interest paid on the money used to buy the inventory. Answer: FALSE Answer: FALSE Answer: FALSE 3) Other things equal, an increase in average accounts receivable

1) What is the annually compounded rate of interest on an account with an APR of 10% and monthly compounding? A.10.00% B.10.47% C.10.52% D.11.05% Answer: B (1.00833) 12 - 1 = 10.47% Answer: B (1.00833) 12 - 1 = 10.47% Answer: B (1.00833) 12 - 1 = 10.47% 2) Which of the following cash outflows does not reduce a

1) Capital budgeting decisions are used to determine how to raise the cash necessary for investments. Answer: FALSE Answer: FALSE Answer: FALSE 2) A Treasury bond's bid price will be lower than the ask price. Answer: TRUE Answer: TRUE Answer: TRUE 3) All large corporations have little debt; it is a necessary condition for maximizing growth. Answer: FALSE Answer: FALSE Answer: FALSE 4)

1) Short-term securities have high interest-rate risk. Answer: FALSE Answer: FALSE Answer: FALSE 2) An increase in accounts receivable balance provides an increase in cash flow. Answer: FALSE Answer: FALSE Answer: FALSE 3) Capital budgeting analysis focuses on cash flow as opposed to profits. Answer: TRUE Answer: TRUE Answer: TRUE 4) An economic gain is derived from mergers when two firms are

1) Indexed bonds were completely unknown in the United States until 1997 when the U.S. Treasury began to issue inflation-indexed bonds known as Treasury Inflation-Protected Securities, or TIPS. Answer: FALSE Indexed bonds were not completely unknown in the United States before 1997 . For example, in 1780 American Revolution soldiers were

1) The net working capital of a firm will decrease when accrued wages are paid with cash. Answer: FALSE Answer: FALSE Answer: FALSE 2) The balancing items in a financial planning model are variables that adjust to maintain the consistency of a financial model. They are also known as plugs. Answer: TRUE Answer: TRUE Answer: TRUE 3) As

1) If the market is efficient, stock prices should be expected to react only to new information that is released. Answer: TRUE Answer: TRUE Answer: TRUE 2) A company that borrows $1 million short term and invests the proceeds in inventory will see its cash position unchanged. Answer: TRUE Answer: TRUE Answer: TRUE 3) A healthy current ratio

1) If a project's value is less than its required investment, then the project is attractive financially. Answer: FALSE Answer: FALSE Answer: FALSE 2) Target firms frequently deter potential bidders by devising poison pills, which make the company unappetizing. Answer: TRUE Answer: TRUE Answer: TRUE 3) Assuming a project has the same risk and financing as the firm,

1) The use of a profitability index will always provide results consistent with selecting the project with the: A.highest NPV B.highest IRR C.largest dollar invested per rate of return D.largest return per dollar invested Answer: D Answer: D Answer: D 2) Which of the following terms of sale is the most restrictive? A.Net 30 B.Seasonal dating C.CBD D.COD Answer: C Answer: C Answer: C 3) When

1) Financial models ensure consistency between growth assumptions and financing plans, and they identify the best financing plan. Answer: FALSE Financial models ensure consistency between growth assumptions and financing plans, but they do not identify the best financing plan. Answer: FALSE Financial models ensure consistency between growth assumptions and financing plans, but

1) A project with an IRR that is less than the opportunity cost of capital should be: A.accepted for all project types B.accepted for all lending projects C.accepted for all borrowing projects D.rejected for all projects Answer: C Answer: C Answer: C 2) What is the present value of the following set of cash flows at an interest

1) In a two-for-one stock split, each investor would receive one additional share for each share already held. Answer: TRUE Answer: TRUE Answer: TRUE 2) Financial planning requires accurate and consistent forecasting. Answer: TRUE Answer: TRUE Answer: TRUE 3) Management's perceived signals to investors form an important component of pecking order theory. Answer: TRUE Answer: TRUE Answer: TRUE 4) A risky dollar

1) Calculation of company costs of capital should be conducted with market values whenever possible. Answer: TRUE Answer: TRUE Answer: TRUE 2) The payback rule always makes shareholders better off. Answer: FALSE Answer: FALSE Answer: FALSE 3) It is easier for individual investors to diversify their risk by buying shares in different firms than for the firms to combine

1) Takeovers are often described as part of a broader market for corporate control. Answer: TRUE Answer: TRUE Answer: TRUE 2) A banker's acceptance is usually used in overseas trade. Answer: TRUE Answer: TRUE Answer: TRUE 3) The security market line provides a standard for project rejection. Answer: TRUE Answer: TRUE Answer: TRUE 4) The winner's curse theory assumes that the informed

1) One reason for the difference between profits and cash is that the cost of capital equipment is spread over the forecast life. Answer: TRUE Answer: TRUE Answer: TRUE 2) If you are not better informed than the highly paid professionals in banks and other institutions, you should use derivatives for hedging, not for

1) A farmer can avoid delivery on a futures contract by buying an offsetting futures contract. Answer: TRUE Answer: TRUE Answer: TRUE 2) When bonds are selling at par value, the bonds are known as fixed-rate bonds. Answer: FALSE Answer: FALSE Answer: FALSE 3) Only the IPOs for large corporations are sold in primary markets. Answer: FALSE Answer: FALSE Answer: FALSE 4)

1) Net working capital is determined from the difference between current assets and current liabilities. Answer: TRUE Answer: TRUE Answer: TRUE 2) The appropriate manner of adjusting for inflationary effects is to discount nominal cash flows with real interest rates. Answer: FALSE Answer: FALSE Answer: FALSE 3) Return on assets and return on equity are both profitability ratios. Answer:

1) Whenever there is uncertainty, investors might be interested in trading, either to speculate or to lay off their risks, and a market may rise to meet the trading demand. Answer: TRUE Answer: TRUE Answer: TRUE 2) A project that breaks even in accounting terms will surely have a negative NPV. Answer: TRUE Answer: TRUE Answer: TRUE 3)

1) A spinoff is an action in which: A.the management bids for and acquires the firm B.one firm issues stock to acquire another firm C.successful product lines are sold to competitors D.a portion of the firm's assets is sold off to form a new company Answer: D Answer: D Answer: D 2) An individual's income for the year

1) In 2007, banks across the world revealed huge losses in the U.S. subprime mortgage market. Investors shrank from illiquid securities and there was a "flight to quality." Answer: TRUE Answer: TRUE Answer: TRUE 2) A two-for-one stock split results in a doubling of the number of outstanding shares, but they do not affect

1) Debt financing affects neither the operating risk nor the business risk of the firm. Answer: TRUE Answer: TRUE Answer: TRUE 2) The price at which new shares are sold to investors almost always exceeds par value. The difference is entered into the company's accounts as additional paid-in capital, or capital surplus. Answer: TRUE Answer: TRUE Answer:

1) The strategic planning portion of the capital budgeting process is essentially a "bottom-up" process. Answer: FALSE Answer: FALSE Answer: FALSE 2) The value of the target firm's bonds goes down when a leveraged buyout is announced. Answer: TRUE Answer: TRUE Answer: TRUE 3) While control of large public companies in the United States is exercised through the

1) The reinvestment of cash back into the firm's operations is an example of a flow of savings to investment. Answer: TRUE Answer: TRUE Answer: TRUE 2) When additional funds must be committed to working capital, those funds are assumed to be recovered at the end of the project's life. Answer: TRUE Answer: TRUE Answer: TRUE 3) The

1) Financial slack means having ready access to cash or debt financing. Answer: TRUE Answer: TRUE Answer: TRUE 2) Compared to other countries, the U.S. bankruptcy system is debtor-friendly. Answer: TRUE Answer: TRUE Answer: TRUE 3) Managers that accept projects that only break even on an accounting basis are helping their shareholders. Answer: FALSE Answer: FALSE Answer: FALSE 4) Only small companies

1) An increase in current liabilities is a source of cash for the firm. Answer: TRUE Answer: TRUE Answer: TRUE 2) You should never compare cash flows occurring at different times without first discounting them to a common date. Answer: TRUE Answer: TRUE Answer: TRUE 3) In general, shareholders of the target firm benefit from takeovers. Answer: TRUE Answer: TRUE Answer:

1) Stocks that have more volatile price changes have more valuable call options because call holders: A.capture upside potential without downside risk B.realize that volatility decreases the present value of the exercise price C.have too little variability in the exercise price D.have transferred all risk to put holders Answer: A Answer: A Answer: A 2) Assuming that an asset

1) Advocates of mark-to-market accounting believe that this method works best during periods of great market uncertainty. Answer: FALSE Answer: FALSE Answer: FALSE 2) The put-call parity holds only if an investor plans to hold the options to maturity. Answer: TRUE Answer: TRUE Answer: TRUE 3) If the stock prices follow a random walk, successive stock prices fluctuate

1) In a merger the acquiring firm buys only the assets of the target firm. Answer: FALSE Answer: FALSE Answer: FALSE 2) If factories are operating below full capacity, sales can increase without investment in fixed assets. However, beyond some sales level, new capacity must be added (and additional investment in fixed assets must

1) All financial managers and economists believe that long-run historical returns are the best measure available. Answer: FALSE Answer: FALSE Answer: FALSE 2) When asked about key factors of debt policy, financial managers commonly mention the tax advantage of debt and the importance of maintaining their credit rating. Answer: TRUE Answer: TRUE Answer: TRUE 3) Asked yields can be

1) Making good investment and financing decisions is the chieftask of the financial manager. Answer: TRUE Answer: TRUE Answer: TRUE 2) The "trade-off theory" of capital structure suggests that firms have an optimal level of debt. Answer: TRUE Answer: TRUE Answer: TRUE 3) The total depreciation tax shield equals the product of depreciation and the tax rate. Answer: TRUE Answer:

1) The primary distinction between securities sold in the primary and secondary markets is the: A.riskiness of the securities B.price of the securities C.previous issuance of the securities D.profitability of the issuing corporation Answer: C Answer: C Answer: C 2) When the yield curve is upward-sloping, then: A.short-maturity bonds offer high coupon rates B.long-maturity bonds are priced above par value C.short-maturity

1) Investors usually give some companies with good track records the benefit of the doubt when the companies' performance fails to meet the market expectation. Answer: TRUE Answer: TRUE Answer: TRUE 2) The Sarbanes-Oxley Act sought to prevent a repeat of the corporate scandals that brought about the collapse of Enron and WorldCom. Answer: TRUE Answer:

1) Projects with an NPV of zero decrease shareholders' wealth by the cost of the project. Answer: FALSE Answer: FALSE Answer: FALSE 2) Expenditure on new capital equipment is a cash payment. Answer: TRUE Answer: TRUE Answer: TRUE 3) The most common benchmarks of bank loans are the London Interbank Offered Rate (LIBOR), the federal funds rate, or the

1) A company that borrows $1 million long term and invests the proceeds in inventory will see its cash position unchanged. Answer: TRUE Answer: TRUE Answer: TRUE 2) General partners have limited personal liability for business debts in a limited partnership. Answer: FALSE Answer: FALSE Answer: FALSE 3) A prospectus certificate indicates equity ownership in a firm. Answer: FALSE Answer:

1) Bond ratings measure the bond's credit risk. Answer: TRUE Answer: TRUE Answer: TRUE 2) Both the seller and the buyer in a futures contract are required to put up margins. Answer: TRUE Answer: TRUE Answer: TRUE 3) Percentage of sales models are planning models in which the sales forecasts are the driving variables and most other variables

1) If a project permits a reduction in the level of working capital, this reduction is assumed to increase cash flows. Answer: TRUE Answer: TRUE Answer: TRUE 2) Market value added is the same as economic value added. Answer: FALSE Answer: FALSE Answer: FALSE 3) The decision to offer credit depends on the probability of payment. You should

1) Dividends are likely to shift up and down as earnings fluctuate so that managers can maintain a stable payout ratio. Answer: FALSE Answer: FALSE Answer: FALSE 2) With a line of credit, a firm can borrow and repay whenever it wants so long as the balance does not exceed the credit limit. Answer: TRUE Answer:

1) The WACC is the rate of return that the firm must expect to earn on its average-risk investments in order to provide an acceptable return to its security holders. Answer: TRUE Answer: TRUE Answer: TRUE 2) The inputs that are most worth refining before you commit to a project are the ones that

1) The separation of ownership and management is one distinctive feature of both corporations and sole proprietors. Answer: FALSE Answer: FALSE Answer: FALSE 2) More often than not, the announcement of a stock split does result in a rise in the market price of the stock. Answer: TRUE Answer: TRUE Answer: TRUE 3) Underwriters usually play a triple

1) Debt financing affects neither the business risk nor the financial risk of the firm. Answer: FALSE Answer: FALSE Answer: FALSE 2) Engaging itself in a swap contract, a firm might agree to make a series of regular payments in one currency in return for receiving a series of payments in another currency. Answer: TRUE Answer:

1) A corporation declares $25 million in net income, $1 million in preferred stock dividends, and $7 million in common stock dividends. By how much will shareholders' equity increase on the balance sheet? A.$17 million B.$18 million C.$19 million D.$25 million Answer: A Answer: A Answer: A 2) One of the problems inherent in sensitivity analysis is that: A.NPVs

1) The seller of a put option is betting that the market value of the stock will decrease. Answer: FALSE Answer: FALSE Answer: FALSE 2) The security market line sets a standard for other investmentsinvestors will be willing to hold other investments only if they offer equally good prospects as shown by the points

1) Risk-free strategies that take advantage of misalignments in two prices (e.g., the spot and forward exchange rates) are called arbitrage strategies. Answer: TRUE Answer: TRUE Answer: TRUE 2) Holders of callable bonds know that the company will wish to buy the issue back if interest rates fall, and therefore the price of the

1) Which of the following is least likely to contribute to the positive-NPV investments found in product markets? A.Patented-production processes B.Positive-NPV financing strategies C.Brand-name product recognition D.Lack of competition Answer: B Answer: B Answer: B 2) Financial plans draw out the connections between: A.the firm's plans for growth and the financing requirements B.profit margins and sales growth C.accounting ratios and operational

1) Which of the following is correct for a bond investor whose bond offers a 5% current yield and an 8% yield to maturity? A.The bond is selling at a discount to par value B.The bond has a high default premium C.The promised yield is not likely to materialize D.The bond must be a Treasury

1) An oil producer would sell, rather than buy, crude oil futures for protection from falling prices. Answer: TRUE Answer: TRUE Answer: TRUE 2) The sum of the payout ratio and the plowback ratio will always equal 1.0 . Answer: TRUE Answer: TRUE Answer: TRUE 3) A long-term investor would more likely be interested in current yield than

1) Planners have determined that sales will increase by 20% next year, and that the profit margin will remain at 10% of sales. Which of the following statements is correct? A.Profit will grow by 20% B.The profit margin will grow by 10% C.Profit will grow proportionately faster than sales D.Ten percent of the increase

1) A firm has sales of $5 million, average total assets of $1.6 million, average fixed assets of $1 million, and average current liabilities of $300,000. Given this information, answer the following about the firm's efficiency: a. Calculate asset turnover, fixed asset turnover, and NWC turnover ratios. b. Can the fixed asset turnover