Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

FC 42755

February 26, 2019
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
One year ago, you purchased a stock at a price of $47.50 a share. Today, you sold the
stock and realized a total loss of 22.11 percent. Your capital gain was -$12.70 a share.
What was your dividend yield?
A. 4.63 percent
B. 4.88 percent
C. 5.02 percent
D. 12.67 percent
E. 14.38 percent
The interest rate risk premium is the:
A. additional compensation paid to investors to offset rising prices.
B. compensation investors demand for accepting interest rate risk.
C. difference between the yield to maturity and the current yield.
D. difference between the market interest rate and the coupon rate.
A stock has a beta of 1.2 and an expected return of 17 percent. A risk-free asset
currently earns 5.1 percent. The beta of a portfolio comprised of these two assets is
0.85. What percentage of the portfolio is invested in the stock?
A. 71 percent
B. 77 percent
C. 84 percent
D. 89 percent
E. 92 percent
Which one of the following is the formula that explains the relationship between the
expected return on a security and the level of that security's systematic risk?
A. capital asset pricing model
B. time value of money equation
C. unsystematic risk equation
D. market performance equation
E. expected risk formula
Taylor's Men's Wear has a debt-equity ratio of 42 percent, sales of $749,000, net income
of $41,300, and total debt of $198,400. What is the return on equity?
A. 7.79 percent
B. 8.41 percent
C. 8.74 percent
D. 9.09 percent
E. 9.16 percent
M&M Proposition II with taxes:
A. has the same general implications as M&M Proposition II without taxes.
B. states that a firm's capital structure is irrelevant.
C. supports the argument that business risk is determined by the capital structure
D. supports the argument that the cost of equity decreases as the debt-equity ratio
E. concludes that the capital structure decision is irrelevant to the value of a firm.
Increasing which one of the following will increase the operating cash flow assuming
that the bottom-up approach is used to compute the operating cash flow?
A. erosion effects
B. taxes
C. fixed expenses
D. salaries
E. depreciation expense
Winnebagel Corp. currently sells 28,200 motor homes per year at $42,300 each, and
11,280 luxury motor coaches per year at $79,900 each. The company wants to introduce
a new portable camper to fill out its product line. It hopes to sell 19,740 of these
campers per year at $11,280 each. An independent consultant has determined that if
Winnebagel introduces the new campers, it should boost the sales of its existing motor
homes by 4,700 units per year, and reduce the sales of its motor coaches by 1,222 units
per year. What is the amount that should be used as the annual sales figure when
evaluating this project?
A. $297,613,400
B. $301,002,300
C. $314,141,800
D. $323,839,400
E. $327,289,500
Green Roof Inns is preparing a bond offering with a 6 percent, semiannual coupon and
a face value of $1,000. The bonds will be repaid in 10 years and will be sold at par.
Given this, which one of the following statements is correct?
A. The bonds will become discount bonds if the market rate of interest declines.
B. The bonds will pay 10 interest payments of $60 each.
C. The bonds will sell at a premium if the market rate is 5.5 percent.
D. The bonds will initially sell for $1,030 each.
E. The final payment will be in the amount of $1,060.
Hot Tub Builders sells to three retail outlets. Each retailer pays once a month in the
amounts shown below. The collection delay associated with each payment is also given
below. What is the amount of the average daily receipts if you assume each month has
30 days?
A. $2,389.70
B. $8,190.00
C. $14,608.13
D. $23,896.97
E. $81,900.00
Frank's Auto Repair can purchase a new machine for $136,000. The machine has a 4-
year life and can be sold at the end of year 4 for $15,000. Frank's uses 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 can be leased for
$35,900 a year. The firm can borrow money at 7.5 percent and has a 32 percent tax rate.
The company does not expect to owe any taxes for at least the next 4 years due to net
operating losses. What is the incremental annual cash flow for year 4 if the company
decides to lease rather than purchase the equipment?
A. -$50,900
B. -$35,900
C. -$20,900
D. $15,900
E. $35,900
Taylor's Tools declared a $0.48 a share dividend on Friday, March 7. The dividend will
be paid on Monday, April 7. The ex-dividend date is Tuesday, March 18. What is the
record date?
A. Friday, March 14
B. Monday, March 17
C. Wednesday, March 19
D. Thursday, March 20
E. Friday, March 21
The Dockside Inn has net income for the most recent year of $8,450. The tax rate was
38 percent. The firm paid $1,300 in total interest expense and deducted $1,900 in
depreciation expense. What was the cash coverage ratio for the year?
A. 10.48 times
B. 11.48 times
C. 12.39 times
D. 12.95 times
E. 13.07 times
The current dividend yield on Clayton's Metals common stock is 2.5 percent. The
company just paid a $1.48 annual dividend and announced plans to pay $1.54 next year.
The dividend growth rate is expected to remain constant at the current level. What is the
required rate of return on this stock?
A. 6.55 percent
B. 6.82 percent
C. 7.08 percent
D. 7.39 percent
E. 7.75 percent
A pro forma statement indicates that both sales and fixed assets are projected to
increase by 7 percent over their current levels. Given this, you can safely assume that
the firm:
A. is projected to grow at the internal rate of growth.
B. is projected to grow at the sustainable rate of growth.
C. currently has excess capacity.
D. is currently operating at full capacity.
E. retains all of its net income.
Which one of the following transactions occurs in the primary market?
A. purchase of 500 shares of GE stock from a current shareholder
B. gift of 100 shares of stock to a charitable organization
C. gift of 200 shares of stock by a mother to her daughter
D. a purchase of newly issued stock from AT&T
E. IBM's purchase of GE stock
Jasper Metals is considering installing a new molding machine which is expected to
produce operating cash flows of $73,000 a year for 7 years. At the beginning of the
project, inventory will decrease by $16,000, accounts receivables will increase by
$21,000, and accounts payable will increase by $15,000. All net working capital will be
recovered at the end of the project. The initial cost of the molding machine is $249,000.
The equipment will be depreciated straight-line to a zero book value over the life of the
project. The equipment will be salvaged at the end of the project creating a $48,000
aftertax cash flow. At the end of the project, net working capital will return to its normal
level. What is the net present value of this project given a required return of 14.5
A. $77,211.20
B. $79,418.80
C. $82,336.01
D. $84,049.74
E. $87,925.54
You are borrowing money today at 8.48 percent, compounded annually. You will repay
the principal plus all the interest in one lump sum of $12,800 two years from today.
How much are you borrowing?
A. $9,900.00
B. $10,211.16
C. $10,877.04
D. $11,401.16
E. $11,250.00
Felicia purchased an option which she can exercise anytime within the next six months.
Which type of option did she purchase?
A. market-ready
B. portable
C. daily
D. European
E. American
Interest rate parity:
A. eliminates covered interest arbitrage opportunities.
B. exists when spot rates are equal for multiple countries.
C. means the nominal risk-free rate of return must be the same across countries.
D. exists when the spot rate is equal to the futures rate.
The foreign currency approach to capital budgeting analysis:
I. is computationally easier to use than the home currency approach.
II. produces the same results as the home currency approach.
III. requires an exchange rate for each time period for which there is a cash flow.
IV. computes the NPV of a project in both the foreign and the domestic currency.
A. I and III only
B. II and IV only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV
A.K. Stevenson wants to raise $7.5 million through a rights offering. The subscription
price is set at $24. Currently, the company has 2.1 million shares outstanding with a
current market price of $25 a share. Each shareholder will receive one right for each
share of stock they currently own. How many rights will be needed to purchase one
new share of stock in this offering?
A. 6.40 rights
B. 6.67 rights
C. 6.72 rights
D. 6.87 rights
E. 7.00 rights
Sylvan Trees has a 7 percent coupon bond on the market with ten years left to maturity.
The bond makes annual payments and currently sells for $861.20. What is the yield-to-
A. 8.50 percent
B. 8.68 percent
C. 8.92 percent
D. 9.18 percent
E. 9.27 percent
What is the closing value on this day for one March futures contract on ethanol?
Ethanol - 29,000 U.S. gallons: U.S. dollars and cents per gallon
A. $49,300
B. $49,387
C. $49,416
D. $1.703 million
E. $1.704 million
Which one of the following describes the intrinsic value of a call option?
A. the call's upper bound value
B. the call's lower bound value
C. market price of the underlying security
D. zero, if the call is in-the-money
E. negative amount, if the call is out-of-the-money.
An increase in which of the following will increase the current value of a stock
according to the dividend growth model?
I. dividend amount
II. number of future dividends, provided the current number is less than infinite
III. discount rate
IV. dividend growth rate
A. I and II only
B. III and IV only
C. I, II, and III only
D. I, II, and IV only
E. I, II, III, and IV
Suppose the spot and six-month forward rates on the Norwegian krone are Kr6.36 and
Kr6.56, respectively. The annual risk-free rate in the United States is 5 percent, and the
annual risk-free rate in Norway is 7 percent. What would the six-month forward rate
have to be on the Norwegian krone to prevent arbitrage?
A. Kr6.4233
B. Kr6.4872
C. Kr6.5103
D. Kr6.5174
E. Kr6.6067
On an average day, Town Center Hardware receives $2,420 in checks from customers.
These checks clear the bank in an average of 2.1 days. The applicable daily interest rate
is 0.025 percent. What is the maximum amount this store should pay to completely
eliminate its collection float? Assume each month has 30 days.
A. $1,152.38
B. $1,288.15
C. $2,109.16
D. $4,637.33
E. $5,082.00
Under credit terms of 1/5, net 15, customers should:
A. always pay on the 15th day.
B. take the 5 percent discount and pay immediately.
C. take the discount and pay on the day following the day of sale.
D. either take the discount or pay on the 15th day.
E. both take the discount and pay on the 15th day.
An investor is more likely to prefer a high dividend payout if a firm:
A. has high flotation costs.
B. has few, if any, positive net present value projects.
C. has lower tax rates than the investor.
D. has a stock price that is increasing rapidly.
E. offers substantial gains on its equities, which are taxed at a favorable rate.