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the following three channels: (1) financial intermediaries that transform the nature of the securities they issue and invest in, (2) market intermediaries that simply make the markets work better, and (3) non-market transactions in which the market is not involved. […]

2 – 15 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition 38. Which of the following is an example of an indirect agency cost? a) A company buys the latest computer equipment for its employees. b) Senior management […]

Part 1 The Financial Environment CHAPTER 2 BUSINESS (CORPORATE) FINANCE CHAPTER LEARNING OBJECTIVES 2.1 List the four forms of business organizations and describe the advantages and disadvantages of each. • Sole proprietorship: a business owned and operated by one person […]

Part 2 Financial Analysis Tools CHAPTER 3 FINANCIAL STATEMENTS CHAPTER LEARNING OBJECTIVES 3.1 Define what International Financial Reporting Standards (IFRS) are and state their significance for Canadian firms. 3.2 Organize a firm’s transactions and explain what are the most important […]

Financial Analysis Tools 3 – 14 Answer: d Type: Definition Level of Difficulty: Easy Learning Objective: Describe the Canadian tax system and explain the differences between how a corporation and an individual are taxed. Section Reference: The Canadian Tax System […]

Part 2 Financial Analysis Tools CHAPTER 4 FINANCIAL STATEMENT ANALYSIS AND FORECASTING CHAPTER LEARNING OBJECTIVES 4.1 Identify the issues to consider in applying consistent financial analysis. 4.2 Explain why return on equity is a key financial ratio used to assess […]

4 – 35 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition Section Reference: Formula Forecasting 79. Which of the following is true at the sustainable growth rate? a) The firm sells all of its inventory. b) The firm’s […]

4 – 21 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition c) 117,857 units d) 500,000 units Answer: b, Contribution margin: $7 per unit. Contribution margin percentage=7/15=0.4667 Fixed costs are $750,000 BE is $750,000/.4667 = $1,607,028 or 107,135 […]

Time Value of Money 5 – 20 b) increases c) decreases d) There is no connection between the effective annual rate and the quoted rate. Answer: c Type: Concept Difficulty: Hard Learning Objective: Differentiate between quoted rates and effective rates, […]

Part 3 Valuation Basics CHAPTER 5 TIME VALUE OF MONEY CHAPTER LEARNING OBJECTIVES 5.1 Explain the importance of the time value of money and how it is related to an investor’s opportunity costs. Time value of money is the idea […]

Valuation Basics 6 – 18 Section Reference: Interest Rate Determinants 46. Which one of the following is not true? a) A bond issuer’s rating is affected by its default risk. b) An investor holding the bond until maturity expects to […]

Part 3 Valuation Basics CHAPTER 6 BOND VALUATION AND INTEREST RATES CHAPTER LEARNING OBJECTIVES 6.1 Describe the basic structure and the various features of different types of bonds. 6.2 Explain how to value a bond given an appropriate discount rate. […]

7 – 33 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition d) 11.40% Answer: d, Compute g = 13.5%*(1–60%) = 5.4%, then kc = 0.60/10+0.054 = 11.4% Type: Calculation Difficulty: Easy Learning Objective: Explain how to value common […]

7 – 21 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition Type: Calculation Difficulty: Easy Learning Objective: Explain how to value common shares using the dividend discount model. Section Reference: Common Share Valuation: The Dividend Discount Model (DDM) […]

Part 3 Valuation Basics CHAPTER 7 EQUITY VALUATION CHAPTER LEARNING OBJECTIVES 7.1 Identify the basic characteristics of equity securities (i.e., preferred shares and common shares). 7.2 Explain how to value preferred shares. 7.3 Explain how to value common shares using […]

8 – 21 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition b) It stipulates that investors should diversify their investments so as to be unnecessarily exposed to a single negative event. c) It shows how to form portfolios […]

Part 4 The Financial Environment CHAPTER 8 RISK, RETURN, AND PORTFOLIO THEORY CHAPTER LEARNING OBJECTIVES 8.1 Distinguish between ex post and ex ante returns and explain how they are estimated. 8.2 Distinguish between arithmetic and geometric means. 8.3 Explain how […]

8 – 41 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition Section Reference: The Efficient Frontier 87. For the following efficient frontier, the expected return of the minimum variance portfolio is: a) <3.0% b) Between 3.0% and 4.0% […]

Risk, Return, and Portfolio Theory 8 – 52 109. Discuss the validity of the following statement: “diversification benefits decreased because correlation between stocks increased.” Answer: Diversification benefits come from the low correlation between stocks. As the number of stocks in […]

Portfolio and Capital Market Theory 9 – 40 Answer: c, Total portfolio value = $2,000 + $3,000 + $4,000 + $5,000 = $14,000 Portfolio beta, $2,000 $3,000 $4,000 $5, 000 0.9 1.6 1.8 1.2 1.41 $14,000 $14,000 $14, 000 $14,000 […]

9 – 21 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition 45. Suppose you have $2,000 to invest. The market portfolio has an expected return of 10.5 percent and a standard deviation of 16 percent. The risk-free rate […]

Part 4 Portfolio and Capital Market Theory CHAPTER 9 THE CAPITAL ASSET PRICING MODEL (CAPM) CHAPTER LEARNING OBJECTIVES 9.1 Describe how the efficient frontier is affected once the possibility of risk-free borrowing and investing is introduced. 9.2 Explain how modern […]

Level of Difficulty: Intermediate Solution: C Stocks are financial assets. Examples of real assets are residential structures, non-residential structures, machinery and equipment, durables, inventories, and land. Learning objective: 1.3 Level of Difficulty: Basic Solution: B Level of Difficulty: Intermediate Solution: […]

Solution: C Solution: A Solution: C Solution: C. The three forms of EMH are weak, semi-strong (not semi-weak), and strong. Solution: C Solution: D. Insider information is considered private information, which is only reflected in the strong form of EMH. […]

Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited Part 4 Portfolio and Capital Market Theory CHAPTER 10 MARKET EFFICIENCY CHAPTER LEARNING OBJECTIVES 10.1 Explain what market efficiency is and […]

Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita 3 years ( ) ( ) 4 43 1.06 1 3.0557% 1.07 F= − = 4 years ( ) ( ) 5 54 1.05 1 1.0935% 1.06 F= − = 5 […]

Derivative Securities 11 – 14 14 32. Use the following statements to answer this question: I. Forward contacts are more affected by credit risk than future contracts. II. Clearinghouses improve the level of risk associated with futures transactions. a) I […]

Part 5 Derivative Securities CHAPTER 11 Forwards, Futures, and Swaps CHAPTER LEARNING OBJECTIVES 11.1 Describe forward contracts, including how they are used and priced. 11.2 Explain what futures contracts are and why they can be viewed as the public market […]

Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita Chapter 11: Forward, Futures, and Swaps Multiple Choice Questions 1. Section: 11.1 Forward Contracts Learning Objective: 11.1 Level of difficulty: Intermediate Solution: B If a Canadian firm has to pay U.S. […]

Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita (B) Solving for the price of the put: P = C – S + PV(X) = 30 – 130 + (110/1.05) = –100 + 104.762 = $4.762 (C) Solving for the […]

Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita Chapter 12: Options Multiple Choice Questions 1. Section: 12.1 Call Options Learning Objective: 12.1 Level of Difficulty: Basic Solution: B A call option is in the money if the asset price […]

Part 5 Derivative Securities CHAPTER 12 OPTIONS CHAPTER LEARNING OBJECTIVES 12.1 Describe the basic nature of call options and the factors that influence their value. 12.2 Describe the basic nature of put options and the payoffs associated with long and […]

12 – 17 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition Type: Calculation Difficulty: Medium Learning Objective: Explain how to use put-call parity to estimate call and put prices, and explain how it can be used to synthetically […]

Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita Difficulty: Intermediate Solution: How do we account for the political risk of expropriation or insurrection or the imposition of foreign exchange controls that prevent the firm’s getting its investment back? How […]

13 – 53 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition Differentiation: offer “differentiated” products. Firms can provide products that are differentiated from others in several ways. The most obvious is to have a product that is itself […]

13 – 41 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition d) $ 28,350 Answer: a, Project NPV = CF0*PI – CF0 Project Mars’ NPV = $16,000; project Venus’ NPV = $15,600; project Saturn’s NPV = $14,000, and […]

Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita Chapter 13: Capital Budgeting, Risk Considerations, and Other Special Issues Multiple Choice Questions 1. Section: 13.1 Capital Expenditures Learning Objective: 13.1 Difficulty: Intermediate Solution: C. If a firm fails to invest […]

13 – 21 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition d) $21,500.00 Answer: a, 023 $6,800 $7,200 $7,500 $2,609.25 $15,000 1.105 1.105 1.105 CF = − + + + = Type: Calculation Difficulty: Medium Learning Objective: Identify […]

Part 6 Long-Term Investment Decisions CHAPTER 13 CAPITAL BUDGETING, RISK CONSIDERATIONS, AND OTHER SPECIAL ISSUES CHAPTER LEARNING OBJECTIVES 13.1 Describe the capital budgeting process and explain its importance to corporate strategy. 13.2 Identify and apply the main tools used to […]

14 – 21 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition 55. Suppose a project requires a capital investment of $300,000. The project will last for six years, at which time the asset will be sold for $90,000. […]

Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita Chapter 14: Cash Flow Estimation and Capital Budgeting Decisions Multiple Choice Questions 1. Section: 14.1 General Guidelines for Capital Expenditure Analysis Learning Objective: 14.1 Level of difficulty: Intermediate Solution: C. Sunk […]

Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita =1+A60 =1.01* B49 =C60 =F60 =+D61*G6 1 =+D61–(C61–E61) =G60 =1+A61 =1.01* B50 =H62 =F61 =+D62*G6 2 =+D62–(C62–E62) =0.07/12+((A62 – 1)/60*0.005)/12 =D62/I62 =(1– 1/(1+G62)^(241– A62))/G62 =1+A62 =1.01* B51 =C62 =F62 =+D63*G6 3 […]

14 – 39 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition Type: Calculation Difficulty: Medium Learning Objective: Explain how mistakes can easily be made with dealing with inflation. Section Reference: Inflation and Capital Budgeting Decisions 96. Which of […]

Part 6 Long-Term Investment Decisions CHAPTER 14 CASH FLOW ESTIMATION AND CAPITAL BUDGETING DECISIONS CHAPTER LEARNING OBJECTIVES 14.1 Outline the basic framework for capital expenditure analysis. 14.2 Estimate the future cash flows associated with potential investments. 14.3 Explain how to […]

Part 6 Long-Term Investment Decisions CHAPTER 15 MERGERS AND ACQUISITIONS CHAPTER LEARNING OBJECTIVES 15.1 Describe the different types of takeovers. 15.2 Explain securities legislation as it applies to takeovers. 15.3 Differentiate between friendly and hostile acquisitions and describe the process […]

15 – 19 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition a) NDA gains nothing and loses nothing on this deal. b) NDA loses $0.5 billion on this deal. c) NDA loses $1 billion on this deal. d) […]

Solution: B In mergers, the approval of the target company’s shareholders is required, but the shareholders of the acquiring company do not normally have to give their approval. Solution: D A firm with minimal legal problems is more likely to […]

Leasing 16 – 12 zero salvage value. The firm can lease the machine instead of buying it – the present value of the before-tax lease payments is $60,000 and the present value of the tax savings from the lease payments […]

Solutions Manual 1 Chapter 16 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited. Solution: B In operating leases, the lessor is responsible for maintaining the asset. Solution: A Capital leases tend […]

CHAPTER 16 LEASING CHAPTER LEARNING OBJECTIVES 16.1 Identify the basic characteristics of leases and differentiate between operating and financial (or capital) leases. 16.2 Describe the accounting treatment of both operating and financial leases. 16.3 Evaluate the lease decision using discounted […]

17 – 15 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition I. Initial filing II. Preliminary prospectus III. Pricing and distribution IV. Investment bank discussion a) I, II, III, IV b) IV, II, I, III c) I, IV, […]

Solution: D Solution: D. Due diligence is very time-consuming and very expensive to implement. Solution: B. The used car market is a classic example of information asymmetry; it is cited as the most familiar lemons market. Solution: B. Ponzi schemes […]

Part 7 Long-Term Financing CHAPTER 17 INVESTMENT BANKING AND SECURITIES LAW CHAPTER LEARNING OBJECTIVES 17.1 Explain what is meant by fiinformation asymmetries” and how these affect the raising of capital. 17.2 Explain the purpose of securities laws and regulations in […]

Part 7 Long-Term Financing CHAPTER 18 DEBT INSTRUMENTS CHAPTER LEARNING OBJECTIVES 18.1 Define “debt” and identify the basic features that distinguish debt from equity financing. 18.2 Identify and describe the different types of short-term debt issued in the money market. […]

Debt Instruments 18 – 12 Learning Objective: Describe the types of debt financing provided by banks. Section Reference: Bank Financing 30. Which of the following securities is secured by assets? a) ABCP b) A fixed interest rate loan c) A […]

Solution: B Solution: B After-tax cost of debt = 6% (1 – 0.4) = 3.6% Solution: D %06.31 98.0 01.1 1 1=−=− + =P k RTB Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita Chapter 18: Debt Instruments Multiple […]

Equity and Hybrid Instruments 19 – 16 Difficulty: Medium Learning Objective: Explain how combining warrants with debt issues or issuing convertible bonds or debentures can provide firms with attractive financing options. Section Reference: Warrant and Convertible Securities 40. The conversion […]

Solution: D All of them may appear in a share structure. Solution: C Preferred shares are considered a part of equity; owners cannot bankrupt the firm. Solution: C Solution: A The exercise price is paid in cash when warrants are […]

Part 7 Long-Term Financing CHAPTER 19 EQUITY AND HYBRID INSTRUMENTS CHAPTER LEARNING OBJECTIVES 19.1 Explain the basic rights associated with share ownership. 19.2 Describe the various classes of shares and the shareholders’ rights associated with each. 19.3 Describe preferred shares […]

Level of difficulty: Intermediate Solution: B The limited and general partnerships are generally formed for tax reasons. However, as long as a trust pays out all its income to its income holders, and owns the debt and equity, the use […]

Part 7 Long-Term Valuation CHAPTER 20 COST OF CAPITAL CHAPTER LEARNING OBJECTIVES 20.1 Explain how the three major problem areas in finance—valuation, cost of capital, and determining cash flows—are related. 20.2 Calculate the weighted average cost of capital (WACC) and […]

Cost of Capital 20 – 14 Type: Concept Difficulty: Medium Learning Objective: Explain how operating leverage and financial leverage affect a firm’s risk. Section Reference: The Effects of Operating and Financial Leverage 35. If a company increases the proportion of […]

Solution: D Invested capital = all interest-bearing liabilities + total equity The invested capital is $50,000 if the invested capital (all interest-bearing liabilities + total equity) is $50,000, which is not necessarily equal to total assets. Solution: D 50.22$ 10.0 […]

Capital Structure Decisions 21 – 18 Type: Concept Difficulty: Medium Learning Objective: Explain how the introduction of corporate taxes affects M&M’s irrelevance result Section Reference: The Impact of Taxes on Capital Structure 45. Coco Company is financed entirely by common […]

Solution: B Invested capital = short-term debt + long-term debt + shareholders’ equity = 90,000 + 200,000 + 450,000 Solution: D ROE represents financial risk and business risk. Solution: B ROE = ROI if a firm is 100 percent financed […]

Part 8 Financial Policies CHAPTER 21 CAPITAL STRUCTURE DECISIONS CHAPTER LEARNING OBJECTIVES 21.1 Explain how business and financial risk affect a firm’s ROE and EPS, and identify the financial break-even points. 21.2 Identify the factors that influence capital structure. 21.3 […]

Dividend Policy 22 – 12 firm, and explain what the “bird in the hand” argument is. Section Reference: The “Bird in the Hand” Argument 29. The Modigliani and Miller dividend irrelevance theorem is based on the argument that: a) Dividends […]

Solution: B Solution: C Retained earnings remain unchanged. Solution: B Ex-dividend date is the second business date before the holder of record date. Solution: A Solution: C Solution: B Solution: C 391,217,1 15.01 000,200,1000,200000,400 1 111 = + +− = […]

Part 8 Financial Policies CHAPTER 22 DIVIDEND POLICY CHAPTER LEARNING OBJECTIVES 22.1 Explain what a cash dividend payment is, how dividend payments are made, and why dividend payments are different from interest payments. 22.2 Describe typical dividend payouts and explain […]

Solution: C Solution: C Solution: D As sales increase, cash, inventory, accounts receivable, and trade credit normally increase. Short- term debt does not necessarily increase as sales increase. Solution: C 34.3 000,800000,100 000,003,1000,700500,800000,500 = + +++ == CL CA atioRCurrent […]

determine a company’s overall working capital position. Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited Part 9 Working Capital Management CHAPTER 23 WORKING CAPITAL MANAGEMENT: GENERAL ISSUES CHAPTER LEARNING […]

Working Capital Management: Current Assets and Current Liabilities 24 – 16 Difficulty: Easy Learning Objective: Describe how accounts receivable are managed. Section Reference: Accounts Receivable 45. Creditors are interested in assessing a borrower’s capacity and character, as well as overall […]

Part 9 Working Capital Management CHAPTER 24 WORKING CAPITAL MANAGEMENT: CURRENT ASSETS AND CURRENT LIABILITIES CHAPTER LEARNING OBJECTIVES 24.1 Explain the motivation for holding cash, and the methods used to implement effective cash management techniques. 24.2 Describe how accounts receivable […]

Solution: D Solution: D Near-cash is virtually default free, i.e., little credit risk. Solution: A Historically, mailing time is the longest. Solution: A %49.63111 n 1k 3045 365 n 365 =−      +=−    […]

Level of difficulty: Basic Solution D Choice D is correct. As a result of the transaction, inventories increase (debit) and accounts payable increases (credit). Note that cash and inventories are both on the assets side of the balance sheet. Learning […]

Solutions Manual 1 Chapter 4 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited. Solution: A Accounting standards are different across countries. Even if the input data are the same, the ratios […]

Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita Chapter 5: Time Value of Money Multiple Choice Questions 1. Section: 5.2 Simple Interest; 5.3 Compound Interest Learning Objective: 5.2; 5.3 Level of difficulty: Basic Solution: C. Simple interest rate: $1,000 […]

Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita Yes, Timmy will achieve his goal by a comfortable margin. b. In the equation for part A set FV = $1,000,000, and solve for the number of years, n. This is […]

Difficulty: Intermediate Solution: B Debentures are generally unsecured. Solutions Manual 1 Chapter 6 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited. Solution: A 10 10 )06.1( 1 100 06. )06.1( 1 […]

Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita P 0=D1 kc−g=1 0.15 −0.15 = The formula seems to break down. Looking at it more closely to see what is happening, if the dividends that the firm pays are expected […]

Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita Chapter 7: Equity Valuation Multiple Choice Questions 1. Section: 7.1 Equity Securities Learning Objective: 7.1 Level of difficulty: Basic Solution: A Jason’s ownership=46,000/2,000,000 = 2.3% 2. Section: 7.1 Equity Securities Learning […]

Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita wB = (1,000)(34)/[(600)(23)+(1,000)(34)] = 0.7113 Total return of the portfolio = wAR(A)+wBR(B) = 0.2887(56.52%)+0.7113(11.76%) = 24.68% 41. Section: 8.3 Expected Return and Risk for Portfolios Learning Objective: 8.4 Difficulty: Basic Solution: […]

Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita Chapter 8: Risk, Return, and Portfolio Theory Multiple Choice Questions 1. Section: 8.1 Measuring Returns Learning Objective: 8.1 Difficulty: Basic Solution: B. Capital gain return = (34 – 32)/32 = 0.0625 […]

Solution: A wRF = 7,500/(2,500+7,500) = 0.75 ERP = (wRF)(RF) + (1 – wRF) (ERA) = (0.75)(8%)+(1 – 0.75)(20%) = 11% ))(1( ARFpw  −= = (1 – 0.75)(25%) = 6.25% Introduction to Corporate Finance, Fourth Edition Booth, Cleary, Rakita […]