Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

FC 30564

February 23, 2019
Which of the following are inversely related to variable costs per unit?
I. contribution margin per unit
II. number of units sold
III. operating cash flow per unit
IV. net profit per unit
A.I and II only
B.III and IV only
C.II, III, and IV only
D.I, III, and IV only
E.I, II, III, and IV
Sleep Tight is acquiring Restful Inns for $52,500 in cash. Sleep Tight has 3,000 shares
of stock outstanding at a market price of $38 a share. Restful Inns has 2,100 shares of
stock outstanding at a market price of $24 a share. Neither firm has any debt. The
incremental value of the acquisition is $1,700. What is the price per share of Sleep
Tight after the acquisition?
Shortage costs include which of the following?
I. disruption of production schedules
II. inventory ordering costs
III. lost customer goodwill
IV. brokerage costs
A.I and II only
B.II and III only
C.II, III, and IV only
D.I, II, and III only
E.I, II, III, and IV
You are employed as a commission-based sales clerk for a cosmetics retail store. You
know that on average, exactly 50 percent of the customers that enter your store will
make at least one purchase. Thus far this morning, you have waited on eight customers
without making a single sale. You are convinced that the next customer you wait on will
buy something. This belief is known as:
A.aversion to ambiguity.
B.the law of small numbers.
C.anchoring and adjusting.
D.gambler's fallacy.
E.false consensus.
Scott purchased a shovel, a rake, and a wheelbarrow from The Local Hardware Store
yesterday. Today, the store issued a bill for these items and mailed it to Scott. What is
the name given to this bill?
A.ledger statement
The seller of a forward contract:
A.is obligated to make delivery and accept the forward price.
B.has the option of making delivery and receiving the greater of the spot price or the
contract price.
C.has the option of either making delivery or accepting delivery.
D.is obligated to take delivery and pays the lower of the spot market price or the
contract price.
Naylor's is an all equity firm with 60,000 shares of stock outstanding at a market price
of $50 a share. The company has earnings before interest and taxes of $87,000. Naylor's
has decided to issue $750,000 of debt at 7.5 percent. The debt will be used to
repurchase shares of the outstanding stock. Currently, you own 500 shares of Naylor's
stock. How many shares of Naylor's stock will you continue to own if you unlever this
position? Assume you can loan out funds at 7.5 percent interest. Ignore taxes.
A.300 shares
B.350 shares
C.375 shares
D.425 shares
E.500 shares
Geoff Industries offers its credit customers a 2 percent discount if they pay within 10
days. This discount is referred to as a:
A.cash discount.
B.purchase discount.
C.collection discount.
D.market discount.
E.receivables discount.
You expect to deliver 40,000 bushels of wheat to the market in July. Today, you hedge
your position by selling futures contracts on half of your expected delivery at the final
price of the day. Assume that the market price turns out to be 582.0 when you actually
deliver the wheat. How much more or less would you have earned if you had not
bought the futures contracts?
Wheat - 5,000 bu.: U.S. cents per bu.
A.$8,000 less
B.$4,000 less
C.neither more nor less
D.$4,000 more
E.$8,000 more
We are evaluating a project that costs $854,000, has a 15-year life, and has no salvage
value. Assume that depreciation is straight-line to zero over the life of the project. Sales
are projected at 154,000 units per year. Price per unit is $41, variable cost per unit is
$20, and fixed costs are $865,102 per year. The tax rate is 33 percent, and we require a
14 percent return on this project. Suppose the projections given for price, quantity,
variable costs, and fixed costs are all accurate to within 14 percent. What is the
worst-case NPV?
Shelley won a lottery and will receive $1,000 a year for the next ten years. The value of
her winnings today discounted at her discount rate is called which one of the following?
A.single amount
B.future value
C.present value
D.simple amount
E.compounded value
The equity of Blooming Roses has a total market value of $16,000. Currently, the firm
has excess cash of $1,200 and net income of $15,400. There are 750 shares of stock
outstanding. What will be the percentage change in the stock price per share if the firm
pays out all of its excess cash as a cash dividend?
A.-9.40 percent
B.-7.50 percent
C.-5.80 percent
D.-2.75 percent
E.0.00 percent
The incremental cash flows of leasing consider which of the following?
I. cost of the asset
II. lease payment amount
III. applicable tax rate
IV. annual depreciation expense
A.I and III only
B.II and IV only
C.II, III, and IV only
D.I, II, and IV only
E.I, II, III, and IV
The accounting manager of Gateway Inns has noted that every time the inn's average
occupancy rate increases by 2 percent, the operating cash flow increases by 5.3 percent.
What is the degree of operating leverage if the contribution margin per unit is $47?
You are considering changing jobs. Your goal is to work for three years and then return
to school full-time in pursuit of an advanced degree. A potential employer just offered
you an annual salary of $41,000, $44,000, and $46,000 a year for the next three years,
respectively. All salary payments are made as lump sum payments at the end of each
year. The offer also includes a starting bonus of $2,500 payable immediately. What is
this offer worth to you today at a discount rate of 6.75 percent?
Val's Marina Supply has 3,500 shares of stock outstanding with a par value of $1.00 per
share and a market value of $19 per share. The balance sheet shows $3,500 in the
common stock account, $24,000 in the capital in excess of par account, and $31,400 in
the retained earnings account. The firm just announced a 100 percent stock dividend.
What is the value of the capital in excess of par account after the dividend?
Trish receives $480 on the first of each month. Josh receives $480 on the last day of
each month. Both Trish and Josh will receive payments for next three years. At a 9.5
percent discount rate, what is the difference in the present value of these two sets of
A firm is currently operating at full capacity. Net working capital, costs, and all assets
vary directly with sales. The firm does not wish to obtain any additional equity
financing. The dividend payout ratio is constant at 40 percent. If the firm has a positive
external financing need, that need will be met by:
A.accounts payable.
B.long-term debt.
C.fixed assets.
D.retained earnings.
E.common stock.
The length of time between the day a firm purchases an item from its supplier until the
day that supplier is paid for that purchase is called the:
A.operating cycle.
B.inventory period.
C.accounts receivable period.
D.accounts payable period.
E.cash cycle.
Which one of the following will generally have the highest priority when assets are
distributed in a bankruptcy proceeding?
A.consumer claim
B.dividend payment to preferred shareholder
C.company contribution to the employees' retirement account
D.payment to an unsecured creditor
E.payment of employee wages
Hungry Howie's maintains a constant payout ratio. The firm is currently operating at
full capacity. What is the maximum rate at which the firm can grow without acquiring
any additional external financing?
A.9.74 percent
B.10.52 percent
C.11.06 percent
D.11.58 percent
E.12.23 percent
You are considering the following two mutually exclusive projects. Both projects will
be depreciated using straight-line depreciation to a zero book value over the life of the
project. Neither project has any salvage value.
Should you accept or reject these projects based on net present value analysis?
A.accept Project A and reject Project B
B.reject Project A and accept Project B
C.accept both Projects A and B
D.reject both Projects A and B
E.You cannot make this decision based on net present value analysis.
Which one of the following is true regarding forward contracts?
A.The upfront costs to enter a forward contract can be significant.
B.If a buyer of a forward contract earns a $200 profit then the seller will also profit by
C.The buyer wins when market prices are less than the forward price.
D.The payoff profile for the buyer of a forward contract is an upward sloping linear
E.If the seller of a forward contract earns a profit then the buyer has neither a profit nor
a loss.
A firm has an interval measure of 48. This means that the firm has sufficient liquid
assets to do which one of the following?
A.pay all of its debts that are due within the next 48 hours
B.pay all of its debts that are due within the next 48 days
C.cover its operating costs for the next 48 hours
D.cover its operating costs for the next 48 days
E.meet the demands of its customers for the next 48 hours
When you assign the lowest anticipated sales price and the highest anticipated costs to a
project, you are analyzing the project under the condition known as:
A.best case sensitivity analysis.
B.worst case sensitivity analysis.
C.best case scenario analysis.
D.worst case scenario analysis.
E.base case scenario analysis.
What is the closing value on this day for one March futures contract on silver?
Silver - 5,000 troy oz.: U.S. dollars and cents per troy oz.
Which one of the five Cs of credit refers to the general economic situation in the
customer's line of business?
Assume the current spot rate is C$1.2103 and the one-year forward rate is C$1.1952.
The nominal risk-free rate in Canada is 3 percent while it is 4 percent in the U.S. Using
covered interest arbitrage you can earn an extra _____ profit over that which you would
earn if you invested $1 in the U.S.
Which one of the following statements concerning variable costs is correct?
A.Variable costs minus fixed costs equal marginal costs.
B.Variable costs are equal to fixed costs when production is equal to zero.
C.An increase in variable costs increases the operating cash flow.
D.Variable costs are inversely related to fixed costs.
E.Variable costs per unit are inversely related to the contribution margin per unit.
Which of the following statements are correct concerning warrants?
I. Warrants are similar to put options.
II. Warrants are similar to call options.
III. When a warrant is exercised, the issuer is not involved in the transaction.
IV. When a warrant is exercised, the issuer must issue new shares of stock.
A.I only
B.II only
C.I and III only
D.II and IV only
E.I and IV only
In the Black-Scholes model, the symbol "" is used to represent the standard deviation
of the:
A.option premium on a call with a specified exercise price.
B.rate of return on the underlying asset.
C.volatility of the risk-free rate of return.
D.rate of return on a risk-free asset.
E.option premium on a put with a specified exercise price.
Assume that Major Manuscripts, Inc. is currently operating at 95 percent of capacity
and that sales are projected to increase to $20,000. What is the projected addition to
fixed assets?
Gene's Art Gallery is notoriously known as a slow-payer. The firm currently needs to
borrow $27,500 and only one company will even deal with them. The terms of the loan
call for daily payments of $100. The first payment is due today. The interest rate is 21.9
percent, compounded daily. What is the time period of this loan? Assume a 365 day
A.264.36 days
B.280.81 days
C.300.43 days
D.316.46 days
E.341.09 days
The equivalent annual cost method is useful in determining:
A.which one of two machines to purchase if the machines are mutually exclusive, have
differing lives, and are a one-time purchase.
B.the tax shield benefits of depreciation given the purchase of new assets for a project.
C.the operating cash flows of a cost-cutting project.
D.which one of two investments to accept when the investments have different required
rates of return.
E.which one of two machines should be purchased when the machines are mutually
exclusive, have different machine lives, and will be replaced once they are worn out.
List and describe the three basic types of secured inventory loans.
What are the primary motives for a hedger and a speculator in the derivatives market? If
a wheat farmer sells wheat futures, is that hedging or speculating?
Explain the difference between systematic and unsystematic risk.
Explain the difference between the effective annual rate (EAR) and the annual
percentage rate (APR). Of the two, which one has the greater importance and why?
Assume all suppliers to a large retail chain offer credit terms of 2/10, net 30. The retail
chain consistently takes the 2 percent discount and pays in 60 days. When pressed on
the issue, the retail chain tells the suppliers they can either accept the payments as they
currently are or lose the business. Is this ethical? How might this impact a small
supplier versus a large supplier?
It is commonly recommended that the managers of a firm compare the performance of
their firm to that of its peers.
In general, what does a high Tobin's Q value indicate and how reliable does that value
tend to be?
Explain why a low-priced, low trading volume stock is more apt to present limits to
arbitrage than is a high-priced, high trading volume stock.
Explain how the beta of a portfolio can equal the market beta if 50 percent of the
portfolio is invested in a security that has twice the amount of systematic risk as an
average risky security.
Explain how cash dividends affect individual shareholders differently than an equal
amount of funds spent on a repurchase.
Float management systems may provide only minimal benefits to a firm. Given that
most firms have other projects with higher positive net present values, why should a
firm's managers spend time implementing a float management system?
You want to deposit sufficient money today into a savings account so that you will have
$1,000 in the account three years from today.
Smith & Daughters is getting ready to compile pro forma statements for the next few
years. How can the managers establish a reasonable range of growth rates that they
should consider during this planning process?
Explain how the Check Clearing Act for the 21st Century affects both collection and
disbursement float.
Explain how the internal rate of return (IRR) decision rule is applied to projects with
financing type cash flows.