Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

FC 39012

February 27, 2019
A firm has annual sales of $320,000, a price-earnings ratio of 24, and a profit margin of
4.2 percent. There are 14,000 shares of stock outstanding. What is the price-sales ratio?
A. 0.97
B. 1.01
C. 1.08
D. 1.15
E. 1.22
Which type of business organization has all the respective rights and privileges of a
legal person?
A. sole proprietorship
B. general partnership
C. limited partnership
D. corporation
E. limited liability company
On the day you entered college, you borrowed $18,000 on an interest-only, four-year
loan at 5.25 percent from your local bank. Payments are to be paid annually. What is the
amount of your loan payment in year 2?
A. $945
B. $1,890
C. $3,600
D. $5,106
E. $6,250
A potential merger which produces synergy:
A. should be rejected due to the projected negative cash flows.
B. should be rejected because the synergy will dilute the benefits of the merger.
C. has a net present value of zero.
D. creates value and therefore should be pursued.
E. reduces the anticipated net income from the target firm.
An asset costs $420,000 and will be depreciated in a straight-line manner over its 3-year
life. It will have no salvage value. The corporate tax rate is 32 percent, and the
appropriate interest rate is 8 percent. What lease payment amount will make the lessee
and the lessor equally well off?
A. $145,717.08
B. $154,141.11
C. $157,778.03
D. $162,795.34
E. $165,025.50
All else constant, which one of the following will increase a firm's cost of equity if the
firm computes that cost using the security market line approach? Assume the firm
currently pays an annual dividend of $1 a share and has a beta of 1.2.
A. a reduction in the dividend amount
B. an increase in the dividend amount
C. a reduction in the market rate of return
D. a reduction in the firm's beta
E. a reduction in the risk-free rate
Precise Machinery is analyzing a proposed project. The company expects to sell 2,100
units, give or take 5 percent. The expected variable cost per unit is $260 and the
expected fixed costs are $589,000. Cost estimates are considered accurate within a plus
or minus 4 percent range. The depreciation expense is $129,000. The sales price is
estimated at $750 per unit, give or take 2 percent. The tax rate is 35 percent. The
company is conducting a sensitivity analysis on the sales price using a sales price
estimate of $755. What is the operating cash flow based on this analysis?
A. $337,975
B. $293,089
C. $86,675
D. $354,874
E. $368,015
The difference between the underwriters' cost of buying shares in a firm commitment
and the offering price of those securities to the public is called the:
A. gross spread.
B. under price amount
C. filing fee.
D. new issue premium.
E. offer price.
Which one of the following will produce the highest present value interest factor?
A. 6 percent interest for five years
B. 6 percent interest for eight years
C. 6 percent interest for ten years
D. 8 percent interest for five years
E. 8 percent interest for ten years
Your firm has an average receipt size of $60. A bank has approached you concerning a
lockbox service that will decrease your total collection time by 1 day. You typically
receive 28,000 checks per day. The daily interest rate is 0.016 percent. What is the NPV
of the lockbox project if the bank charges a fee of $210 per day?
A. $367,500
B. $427,500
C. $903,350
D. $1,412,500
E. $1,680,000
Currently, your firm requires 2 days to process the checks which customers mail in to
pay for their credit purchases. The average mail time associated with these payments is
2.3 days and the check clearing time is 2.1 days. If your firm adopts a lockbox system,
the mail time will be cut in half. In addition, if employees are reassigned, checks could
be processed the same day they are received. How long will your collection time be if
both the lockbox system and the job reassignments are implemented?
A. 3.85 days
B. 4.10 days
C. 4.25 days
D. 4.40 days
E. 4.55 days
The Jean Outlet is an all equity firm that has 146,000 shares of stock outstanding. The
company has decided to borrow the $1.1 million to repurchase 7,500 shares of its stock
from the estate of a deceased shareholder. What is the total value of the firm if you
ignore taxes?
A. $18,387,702
B. $18,500,000
C. $19,666,667
D. $21,000,000
E. $21,413,333
A stock split:
A. increases the total value of the common stock account.
B. decreases the value of the retained earnings account.
C. increases the par value per share.
D. increases the value of the capital in excess of par account.
E. decreases the market value per share.
A general rule used as the basis for decision making is referred to as:
A. a loss aversion technique.
B. heuristics.
C. self-attribution.
D. narrow framing
E. confirmation bias
Which one of the following statements is correct?
A. Project analysis should only include the cash flows that affect the income statement.
B. A project can create a positive operating cash flow without affecting sales.
C. The depreciation tax shield creates a cash outflow for a project.
D. Interest expense should always be included as a cash outflow when analyzing a
E. The opportunity cost of a company-owned building that is going to be used in a new
project should be included as a cash inflow to the project.
A firm has a debt-equity ratio of 57 percent, a total asset turnover of 1.12, and a profit
margin of 4.9 percent. The total equity is $511,640. What is the amount of the net
A. $28,079
B. $35,143
C. $44,084
D. $47,601
E. $52,418
The common stock of Westover Foods is currently priced at $27.90 a share. One year
from now, the stock price is expected to be either $25 or $30 a share. The risk-free rate
of return is 4.2 percent. What is the current value of one call option on this stock if the
exercise price is $27.50?
A. $0
B. $1.95
C. $2.00
D. $3.80
E. $4.00
Which one of the following is a suggested method of reducing a U.S. importer's
short-run exposure to exchange rate risk?
A. entering a forward exchange agreement timed to match the invoice date
B. investing U.S. dollars when an order is placed and using the investment proceeds to
pay the invoice
C. exchanging funds on the spot market at the time an order is placed with a foreign
D. exchanging funds on the spot market at the time an order is received
E. exchanging funds on the spot market at the time an invoice is payable
An amortized loan:
A. requires the principal amount to be repaid in even increments over the life of the
B. may have equal or increasing amounts applied to the principal from each loan
C. requires that all interest be repaid on a monthly basis while the principal is repaid at
the end of the loan term.
D. requires that all payments be equal in amount and include both principal and interest.
E. repays both the principal and the interest in one lump sum at the end of the loan
Three years ago, Knox Glass purchased a machine for a 3-year project. The machine is
being depreciated straight-line to zero over a 5-year period. Today, the project ended
and the machine was sold. Which one of the following correctly defines the aftertax
salvage value of that machine? (T represents the relevant tax rate)
A. Sale price + (Sales price - Book value) × T
B. Sale price + (Sales price - Book value) × (1 - T)
C. Sale price + (Book value - Sale price) × T
D. Sale price + (Book value - Sale price) × (1 - T)
E. Sale price × (1 - T)
Val's Pizzeria is contemplating the acquisition of some new commercial ovens. The
purchase price is $38,000. The equipment will be depreciated based on MACRS
depreciation which allows for 33.33 percent, 44.44 percent, 14.82 percent, and 7.41
percent depreciation over years 1 to 4, respectively. The equipment will be worthless at
the end of 4 years. The equipment can be leased for $12,500 a year. The firm can
borrow money at 8 percent and has a 35 percent tax rate. What is the amount of the
depreciation tax shield in year 3?
A. $1,525.27
B. $1,624.50
C. $1,971.06
D. $2,325.00
E. $2,631.60
Randall's, Inc. has 20,000 shares of stock outstanding with a par value of $1.00 per
share. The market value is $12 per share. The balance sheet shows $42,000 in the
capital in excess of par account, $20,000 in the common stock account, and $50,500 in
the retained earnings account. The firm just announced a 5 percent (small) stock
dividend. What will the balance in the retained earnings account be after the dividend?
A. $38,500
B. $39,500
C. $50,500
D. $61,500
E. $62,500
Treynor Industries is investing in a new project. The minimum rate of return the firm
requires on this project is referred to as the:
A. average arithmetic return.
B. expected return.
C. market rate of return.
D. internal rate of return.
E. cost of capital.
A stock is currently priced at $45. A call option with an expiration of one year has an
exercise price of $60. The risk-free rate is 14 percent per year, compounded
continuously, and the standard deviation of the stock's return is infinitely large. What is
the price of the call option?
A. $39.47
B. $42.08
C. $45.00
D. $52.63
E. $60.00
The value of a target firm to the acquiring firm is equal to:
A. the value of the target firm as a separate entity plus the incremental value derived
from the acquisition.
B. the purchase cost of the target firm.
C. the value of the merged firm minus the value of the target firm as a separate entity.
D. the purchase cost plus the incremental value derived from the acquisition.
E. the incremental value derived from the acquisition.
A 10-year, 4.5 percent, semiannual coupon bond issued by Tyler Rentals has a $1,000
face value. The bond is currently quoted at 98.7. What is the clean price of this bond if
the next interest payment will occur 2 months from today?
A. $987.00
B. $994.50
C. $1,002.00
D. $1,011.25
E. $1,022.50
How many diverse securities are required to eliminate the majority of the diversifiable
risk from a portfolio?
A. 5
B. 10
C. 25
D. 50
E. 75
Samantha opened a savings account this morning. Her money will earn 5 percent
interest, compounded annually. After five years, her savings account will be worth
$5,600. Assume she will not make any withdrawals. Given this, which one of the
following statements is true?
A. Samantha deposited more than $5,600 this morning.
B. The present value of Samantha's account is $5,600.
C. Samantha could have deposited less money and still had $5,600 in five years if she
could have earned 5.5 percent interest.
D. Samantha would have had to deposit more money to have $5,600 in five years if she
could have earned 6 percent interest.
E. Samantha will earn an equal amount of interest every year for the next five years.
Which one of the following grants an individual the right to vote on behalf of a
A. proxy
B. by-laws
C. indenture agreement
D. stock option
E. stock audit
What is the value of a 6-month call with a strike price of $25 given the Black-Scholes
option pricing model and the following information?
A. $0
B. $0.93
C. $1.06
D. $1.85
E. $2.14
Big Falls Tours just paid a dividend of $1.55 per share. The dividends are expected to
grow at 30 percent for the next 8 years and then level off to a 7 percent growth rate
indefinitely. What is the price of this stock today given a required return of 15 percent?
A. $67.54
B. $69.90
C. $72.47
D. $77.67
E. $78.19
You bought one of Great White Shark Repellant Co.'s 10 percent coupon bonds one
year ago for $760. These bonds pay annual payments, have a face value of $1,000, and
mature 14 years from now. Suppose you decide to sell your bonds today when the
required return on the bonds is 14 percent. The inflation rate over the past year was 3.7
percent. What was your total real return on this investment?
A. 8.97 percent
B. 9.11 percent
C. 9.18 percent
D. 9.44 percent
E. 9.58 percent
Barstow Industrial Supply has decided to raise $27.52 million in additional funding via
a rights offering. The firm will issue one right for each share of stock outstanding. The
offering consists of a total of 860,000 new shares. The current market price of the stock
is $35. Currently, there are 5.16 million shares outstanding. What is the value of one
A. $0.37
B. $0.43
C. $0.48
D. $0.52
E. $0.60
Della's Pool Halls has 12,000 shares of stock outstanding with a par value of $1 per
share and a market price of $39 a share. The firm just announced a 4-for-3 stock split.
How many shares of stock will be outstanding after the split?
A. 9,000 shares
B. 10,000 shares
C. 12,000 shares
D. 14,600 shares
E. 16,000 shares