Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

FC 44489

February 26, 2019
Steve just computed the present value of a $10,000 bonus he will receive in the future.
The interest rate he used in this process is referred to as which one of the following?
A. current yield
B. effective rate
C. compound rate
D. simple rate
E. discount rate
Callable bonds generally:
A. grant the bondholder the option to call the bond anytime after the deferment period.
B. are callable at par as soon as the call-protection period ends.
C. are called when market interest rates increase.
D. are called within the first three years after issuance.
Which one of the following is an unintended result of the Sarbanes-Oxley Act?
A. more detailed and accurate financial reporting
B. increased management awareness of internal controls
C. corporations delisting from major exchanges
D. increased responsibility for corporate officers
E. identification of internal control weaknesses
Which one of the following statements related to payback and discounted payback is
A. Payback is a better method of analysis than is discounted payback.
B. Discounted payback is used more frequently in business than is payback.
C. Discounted payback does not require a cutoff point like the payback method does.
D. Discounted payback is biased towards long-term projects while payback is biased
towards short-term projects.
E. Payback is used more frequently even though discounted payback is a better method.
Blasco Industries is currently at full-capacity sales. Which one of the following is
limiting sales to this level?
A. net working capital
B. long-term debt
C. inventory
D. fixed assets
E. debt-equity ratio
City Center Pharmacy has 11,500 shares of stock outstanding with a par value of $1 per
share and a market value of $10 a share. The company just announced a 3-for-7 reverse
stock split. What will the market value per share be after the reverse stock split?
A. $4.29
B. $7.00
C. $10.00
D. $23.33
E. $25.21
Sister Pools sells outdoor swimming pools and currently has an aftertax cost of capital
of 11.6 percent. Al's Construction builds and sells water features and fountains and has
an aftertax cost of capital of 10.8 percent. Sister Pools is considering building and
selling its own water features and fountains. The sales manager of Sister Pools
estimates that the water features and fountains would produce 20 percent of the firm's
future total sales. The initial cash outlay for this project would be $85,000. The
expected net cash inflows are $16,000 a year for 7 years. What is the net present value
of the Sister Pools project?
A. -$11,044
B. -$9,115
C. -$7,262
D. -$4,508
E. $1,219
Lucas will receive $6,800, $8,700, and $12,500 each year starting at the end of year
one. What is the future value of these cash flows at the end of year five if the interest
rate is 7 percent?
A. $32,418
B. $32,907
C. $33,883
D. $35,411
E. $36,255
The semiannual, 8-year bonds of Alto Music are selling at par and have an effective
annual yield of 8.6285 percent. What is the amount of each interest payment if the face
value of the bonds is $1,000?
A. $41.50
B. $42.25
C. $43.15
D. $85.00
E. $86.29
Isaac has analyzed two mutually exclusive projects of similar size and has compiled the
following information based on his analysis. Both projects have 3- year lives.
Isaac has been asked for his best recommendation given this information. His
recommendation should be to accept:
A. both projects.
B. project B because it has the shortest payback period.
C. project B and reject project A based on their net present values.
D. project A and reject project B based on their average accounting returns.
E. neither project.
Which one of the following best defines the primary purpose of a protective put?
A. ensure a maximum purchase price in the future
B. offset an equivalent call option
C. limit the downside risk of asset ownership
D. lock in a risk-free rate of return on a financial asset
E. increase the upside potential return on an investment
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. What is the contribution margin per
unit under the best case scenario?
A. $209.52
B. $494.60
C. $469.52
D. $490.00
E. $515.40
Delta Importers has a pure discount loan with a face value of $180,000 due in one year.
The assets of the firm are currently worth $265,000. The shareholders in this firm
basically own a _____ option on the assets of the firm with a strike price of _____.
A. put; $180,000.
B. put; $265,000.
C. warrant; $265,000.
D. call; $180,000.
E. call; $265,000.
Troyer Markets and Deb's Grocery are all-equity firms. Troyer Markets has 2,400
shares outstanding at a market price of $14.80 a share. Deb's Grocery has 3,200 shares
outstanding at a price of $28 a share. Deb's Grocery is acquiring Troyer Markets for
$37,500 in cash. What is the merger premium per share?
A. $0
B. $0.825
C. $1.108
D. $1.216
E. $1.320
You are the beneficiary of a life insurance policy. The insurance company informs you
that you have two options for receiving the insurance proceeds. You can receive a lump
sum of $200,000 today or receive payments of $1,400 a month for 20 years. You can
earn 6 percent on your money. Which option should you take and why?
A. You should accept the payments because they are worth $209,414 to you today.
B. You should accept the payments because they are worth $247,800 to you today.
C. You should accept the payments because they are worth $336,000 to you today.
D. You should accept the $200,000 because the payments are only worth $189,311 to
you today.
E. You should accept the $200,000 because the payments are only worth $195,413 to
you today.
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an
expected return of 13 percent and Stock Y with an expected return of 8 percent. Your
goal is to create a portfolio with an expected return of 12.4 percent. All money must be
invested. How much will you invest in stock X?
A. $800
B. $1,200
C. $4,600
D. $8,800
E. $9,200
On July 7, you purchased 500 shares of Wagoneer, Inc. stock for $21 a share. On
August 1, you sold 200 shares of this stock for $28 a share. You sold an additional 100
shares on August 17 at a price of $25 a share. The company declared a $0.95 per share
dividend on August 4 to holders of record as of Wednesday, August 15. This dividend is
payable on September 1. How much dividend income will you receive on September 1
as a result of your ownership of Wagoneer stock?
A. $0
B. $190
C. $285
D. $360
E. $475
The unbiased forward rate is a:
A. condition where a future spot rate is equal to the current spot rate.
B. guarantee of a future spot rate at one point in time.
C. condition where the spot rate is expected to remain constant over a period of time.
D. relationship between the future spot rate of two currencies at an equivalent point in
You would like to invest in the following project.
Sis, your boss, insists that only projects returning at least $1.06 in today's dollars for
every $1 invested can be accepted. She also insists on applying a 14 percent discount
rate to all cash flows. Based on these criteria, you should:
A. accept the project because the PI is 0.90.
B. accept the project because the PI is 1.04.
C. accept the project because the PI is 1.11.
D. reject the project because the PI is 0.90.
E. reject the project because the PI is 0.96.
The bid price always assumes which one of the following?
A. A project has a one-year life.
B. The aftertax net income of the project is zero.
C. The net present value of the project is zero.
D. Any assets purchased will have a positive salvage value at the end of the project.
E. Assets will be depreciated based on MACRS.
A bond's coupon rate is equal to the annual interest divided by which one of the
A. call price
B. current price
C. face value
D. clean price
E. dirty price
Which one of the following inventory-related costs is considered a shortage cost?
A. storage costs
B. insurance cost
C. cost of safety reserves
D. obsolescence cost
E. opportunity cost of capital used for inventory purchases
A forward contract:
A. requires that payment be made in full when the contract is originated.
B. provides the buyer with an option to buy an asset on the settlement date at the
forward price.
C. is a binding agreement on both the buyer and the seller and nets out as a zero sum
D. is marked to the market daily at the seller's request.
E. allows for immediate delivery at an agreed upon price which is to be paid on the
settlement date.
Tony currently owns 12,000 shares of GL Tools. He has just been notified that the firm
is issuing additional shares of stock and that he is being given a chance to purchase
some of these shares prior to the shares being offered to the general public. What is this
type of an offer called?
A. best efforts offer
B. firm commitment offer
C. general cash offer
D. rights offer
E. priority offer
On the Statement of Cash Flows, which of the following are considered operating
I. costs of goods sold
II. decrease in accounts payable
III. interest paid
IV. dividends paid
A. I and III only
B. III and IV only
C. I, II, and III only
D. I, III, and IV only
E. I, II, III, and IV
Edward's Manufactured Homes purchased some machinery 2 years ago for $319,000.
These assets are classified as 5-year property for MACRS. The company is replacing
this machinery today with newer machines that utilize the latest in technology. The old
machines are being sold for $140,000 to a foreign firm for use in its production facility
in South America. What is the aftertax salvage value from this sale if the tax rate is 35
A. $135,408
B. $140,000
C. $142,312
D. $144,592
E. $146,820
Juno Industrial Supply has a $150,000 line of credit with a 6.5 percent interest rate. The
loan agreement requires a 2 percent compensating balance, which is based on the total
amount borrowed, and which will be held in an interest-free account. What is the
effective interest rate if the firm borrows $90,000 on the line of credit for one year?
A. 6.42 percent
B. 6.47 percent
C. 6.50 percent
D. 6.58 percent
E. 6.63 percent
Which one of the following statements is correct concerning bid prices?
A. The bid price is the maximum price that a firm should bid.
B. A firm can submit a bid that is higher than the computed bid price and still break
C. A bid price ignores taxes.
D. A bid price should be computed based solely on the operating cash flows of the
E. A bid price should be computed based on a zero percent required rate of return.
The president of Global Wholesalers would like to offer special sale prices to the firm's
best customers under the following terms:
1. The prices will apply only to units purchased in excess of the quantity normally
purchased by a customer.
2. The units purchased must be paid for in cash at the time of sale.
3. The total quantity sold under these terms cannot exceed the excess capacity of the
4. The net profit of the firm should not be affected.
5. The prices will be in effect for one week only.
Given these conditions, the special sale price should be set equal to the:
A. average variable cost of materials only.
B. average cost of all variable inputs.
C. sensitivity value of the variable costs.
D. marginal cost of materials only.
E. marginal cost of all variable inputs.
The pooling of interests method of accounting:
I. creates an account called goodwill which is recorded on the balance sheet of the
merged firm.
II. consists of simply combining the balance sheets of the acquiring and the target firm.
III. is currently the accounting method required by FASB for all cash acquisitions.
IV. recognizes the excess of the purchase price over the fair market value and records
that excess as an asset of the acquiring firm.
A. I only
B. II only
C. I and IV only
D. II and III only
E. I, II, and IV only
On an average day, Wilson & Wilson receives $7,800 in checks from customers. These
checks clear the bank in an average of 1.7 days. The applicable daily interest rate is
0.022 percent. What is the highest daily fee this firm should pay to completely eliminate
its collection float? Assume each month has 30 days.
A. $1.72
B. $2.92
C. $17.20
D. $24.30
E. $29.17
Marzella Corp. is analyzing a project that involves expanding the firm into a new
product line. The project includes the construction of a new manufacturing facility and
also creating a new distribution system. The project's financial projections will tend to
have which one of the following characteristics if the person compiling those
projections suffers from overoptimism?
A. over estimated construction costs
B. over estimated expenses
C. over estimated net present values
D. under estimated profits
E. under estimated sales estimates
First Century Bank wants to earn an effective annual return on its consumer loans of 10
percent per year. The bank uses daily compounding on its loans. By law, what interest
rate is the bank required to report to potential borrowers?
A. 9.23 percent
B. 9.38 percent
C. 9.53 percent
D. 9.72 percent
E. 10.00 percent
You want your portfolio beta to be 0.95. Currently, your portfolio consists of $4,000
invested in stock A with a beta of 1.47 and $3,000 in stock B with a beta of 0.54. You
have another $9,000 to invest and want to divide it between an asset with a beta of 1.74
and a risk-free asset. How much should you invest in the risk-free asset?
A. $4,316.08
B. $4,425.29
C. $4,902.29
D. $4,574.71
E. $4,683.92
A project has the following estimated data: price = $74 per unit; variable costs = $39.22
per unit; fixed costs = $6,500; required return = 8 percent; initial investment = $8,000;
life = 4 years. Ignore the effect of taxes. What is the degree of operating leverage at the
financial break-even level of output?
A. 2.716
B. 3.691
C. 4.528
D. 6.003
E. 7.337

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