Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

FC 53023

February 27, 2019
A lockbox system:
A. entails the use of a bank which is centrally located to collect payments on a
nationwide basis.
B. is designed to deposit a customer's check into the firm's bank account prior to
recording the receipt of that check to a customer's account.
C. is used to reduce the disbursement float of a firm.
D. is efficient regardless of the locations selected for lockbox destinations.
E. automatically records payments to a customer's account when the customer's check is
received at the lockbox location.
Western Beef Exporters is considering a project that has an NPV of $32,600, an IRR of
15.1 percent, and a payback period of 3.2 years. The required return is 14.5 percent and
the required payback period is 3.0 years. Which one of the following statements
correctly applies to this project?
A. The net present value indicates accept while the internal rate of return indicates
B. Payback indicates acceptance.
C. The payback decision rule could override the accept decision indicated by the net
present value.
D. The payback rule will automatically be ignored since both the net present value and
the internal rate of return indicate an accept decision.
E. The net present value decision rule is the only rule that matters when making the
final decision.
Global Communications has a 7 percent, semiannual coupon bond outstanding with a
current market price of $1,023.46. The bond has a par value of $1,000 and a yield to
maturity of 6.72 percent. How many years is it until this bond matures?
A. 12.26 years
B. 12.53 years
C. 18.49 years
D. 24.37 years
E. 25.05 years
Josh's, Inc. has 7,000 shares of stock outstanding with a par value of $1.00 per share
and a market value of $32 a share. The balance sheet shows $76,000 in the capital in
excess of par account, $7,000 in the common stock account, and $64,800 in the retained
earnings account. The firm just announced a 10 percent stock dividend. What is the
value of the capital in excess of par account after the dividend?
A. $50,600
B. $54,300
C. $76,000
D. $97,700
E. $101,400
Money market securities have which of the following characteristics?
I. long maturities
II. low default risk
III. high degree of liquidity
IV. low rates of return
A. I and III only
B. II and III only
C. I and IV only
D. II, III, and IV only
E. I, II, III, and IV
Which one of the following statements related to Chapter 7 bankruptcy is correct?
A. A firm in Chapter 7 bankruptcy is reorganizing its operations such that it can return
to being a viable concern.
B. Under a Chapter 7 bankruptcy, a trustee will assume control of the firm's assets until
those assets can be liquidated.
C. Chapter 7 bankruptcies are always involuntary on the part of the firm.
D. Under a Chapter 7 bankruptcy, the claims of creditors are paid prior to the
administrative costs of the bankruptcy.
E. Chapter 7 bankruptcy allows a firm to restructure its equity such that new shares of
stock are generally issued prior to the firm coming out of bankruptcy.
You want to have $35,000 saved 6 years from now to buy a house. How much less do
you have to deposit today to reach this goal if you can earn 5.5 percent rather than 5
percent on your savings? Today's deposit is the only deposit you will make to this
savings account.
A. $733.94
B. $791.18
C. $824.60
D. $845.11
E. $919.02
Assume the spot exchange rate for the Hungarian forint is HUF 215. Also assume the
inflation rate in the United States is 4 percent per year while it is 9.5 percent in
Hungary. What is the expected exchange rate 5 years from now?
A. 269
B. 276
C. 281
D. 294
E. 299
It will cost $6,000 to acquire an ice cream cart. Cart sales are expected to be $3,600 a
year for three years. After the three years, the cart is expected to be worthless as the
expected life of the refrigeration unit is only three years. What is the payback period?
A. 1.48 years
B. 1.67 years
C. 1.82 years
D. 1.95 years
E. 2.00 years
Tedder Mining has analyzed a proposed expansion project and determined that the
internal rate of return is lower than the firm desires. Which one of the following
changes to the project would be most expected to increase the project's internal rate of
A. decreasing the required discount rate
B. increasing the initial investment in fixed assets
C. condensing the firm's cash inflows into fewer years without lowering the total
amount of those inflows
D. eliminating the salvage value
E. decreasing the amount of the final cash inflow
How many days on average does it take Precision Tool to sell its inventory? (Use 2009
A. 164.30 days
B. 187.77 days
C. 219.63 days
D. 247.46 days
E. 283.31 days
Given the following information, what is the value of d2 as it is used in the
Black-Scholes option pricing model?
A. -1.1346
B. -0.8657
C. -0.8241
D. -0.7427
E. -0.7238
M&M Proposition I with no tax supports the argument that:
A. business risk determines the return on assets.
B. the cost of equity rises as leverage rises.
C. the debt-equity ratio of a firm is completely irrelevant.
D. a firm should borrow money to the point where the tax benefit from debt is equal to
the cost of the increased probability of financial distress.
E. homemade leverage is irrelevant.
New York Deli's has 7 percent preferred stock outstanding that sells for $36 a share.
This stock was originally issued at $50 per share. What is the cost of preferred stock?
A. 13.68 percent
B. 14.00 percent
C. 14.29 percent
D. 19.44 percent
E. 19.80 percent
If a firm equates its pro forma sales growth to the rate of sustainable growth, and has
positive net income and excess capacity, then the:
A. maximum capacity level will have to increase at the same rate as sales growth.
B. total assets will have to increase at the same rate as sales growth.
C. debt-equity ratio will increase.
D. retained earnings will increase.
Deep Mining and Precious Metals are separate firms that are both considering a silver
exploration project. Deep Mining is in the actual mining business and has an aftertax
cost of capital of 12.8 percent. Precious Metals is in the precious gem retail business
and has an aftertax cost of capital of 10.6 percent. The project under consideration has
initial costs of $575,000 and anticipated annual cash inflows of $102,000 a year for ten
years. Which firm(s), if either, should accept this project?
A. Company A only
B. Company B only
C. both Company A and Company B
D. neither Company A or Company B
E. cannot be determined without further information
How much are you willing to pay for one share of Jumbo Trout stock if the company
just paid a $0.70 annual dividend, the dividends increase by 1.6 percent annually, and
you require a 10 percent rate of return?
A. $8.29
B. $8.33
C. $8.47
D. $8.53
E. $8.59
You own 600 shares of a NASDAQ listed stock that you wish to sell. Which of the
following are options available to you for this purpose?
I. sell the shares to a dealer at the dealer's bid price
II. sell directly to another individual via an ECN
III. offer the shares yourself on NASDAQ via an ECN
IV. have a broker offer the shares for sale on the NYSE
A. I and II only
B. III and IV only
C. II and III only
D. I, II, and III only
E. II, III, and IV only
What is the effective annual rate of 14.9 percent compounded continuously?
A. 15.59 percent
B. 15.62 percent
C. 15.69 percent
D. 15.84 percent
E. 16.07 percent
The pre-tax cost of debt:
A. is based on the current yield to maturity of the firm's outstanding bonds.
B. is equal to the coupon rate on the latest bonds issued by a firm.
C. is equivalent to the average current yield on all of a firm's outstanding bonds.
D. is based on the original yield to maturity on the latest bonds issued by a firm.
E. has to be estimated as it cannot be directly observed in the market.
Northern Lights is trying to decide whether to lease or buy some new equipment. The
equipment costs $51,000, has a 5-year life, and will be worthless after the 5 years. The
company has a tax rate of 34 percent, a cost of borrowed funds of 8.75 percent, and
uses straight-line depreciation. The equipment can be leased for $14,100 a year. What is
the amount of the annual depreciation tax shield?
A. $3,468
B. $5,878
C. $6,936
D. $8,407
E. $10,200
Theo's Bar & Grill needs $147,000 a week to pay bills. The standard deviation of the
weekly disbursements is $9,600. The firm has established a lower cash balance limit of
$40,000. The applicable interest rate is 3.5 percent and the fixed cost of transferring
funds is $45. Based on the BAT model, what is the optimal average cash balance?
A. $36,199
B. $49,568
C. $70,100
D. $99,136
E. $112,400
Treasury bonds are:
A. issued by any governmental agency in the U.S.
B. issued only on the first day of each fiscal year by the U.S. Department of Treasury.
C. bonds that offer the best tax benefits of any bonds currently available.
D. generally issued as semi-annual coupon bonds.
E. totally risk-free.
The stream of customer orders coming in to the NYSE trading floor is called the:
A. paper trail.
B. trading volume.
C. order flow.
D. bid-ask spread.
E. commission trail.
Farmer Mac owns a large orange grove in Florida. The value of his business is directly
related to the price of oranges. Which one of the following is a graphical representation
of this price-value relationship?
A. exchange line
B. net present value profile
C. risk profile
D. market line
E. return grid
What is a prospectus?
A. a letter issued by the SEC authorizing a new issue of securities
B. a report stating that the SEC recommends a new security to investors
C. a letter issued by the SEC that outlines the changes required for a registration
statement to be approved
D. a document that describes the details of a proposed security offering along with
relevant information about the issuer
E. an advertisement in a financial newspaper that describes a security offering
The cash flow of a firm which is available for distribution to the firm's creditors and
stockholders is called the:
A. operating cash flow.
B. net capital spending.
C. net working capital.
D. cash flow from assets.
E. cash flow to stockholders.
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. $118.63
B. $121.06
C. $124.30
D. $129.08
E. $132.50
A firm currently has $600 in debt for every $1,000 in equity. Assume the firm uses
some of its cash to decrease its debt while maintaining its current equity and net
income. Which one of the following will decrease as a result of this action?
A. equity multiplier
B. total asset turnover
C. profit margin
D. return on assets
E. return on equity
The home currency approach:
A. discounts all of a project's foreign cash flows using the current spot rate.
B. employs uncovered interest parity to project future exchange rates.
C. computes the net present value (NPV) of a project in the foreign currency and then
converts that NPV into U.S. dollars.
D. utilizes the international Fisher effect to compute the NPV of foreign cash flows in
the foreign currency.
E. utilizes the international Fisher effect to compute the relevant exchange rates needed
to compute the NPV of foreign cash flows in U.S. dollars.
You own a convertible bond with a face value of $1,000 and a market value of $1,034.
The bond can be converted into 14 shares of stock. What is the conversion price?
A. $71.43
B. $72.00
C. $72.67
D. $73.86
E. $74.33
What is the definition of a syndicate?
A. a venture capitalist
B. a group of attorneys providing services for an IPO
C. block of investors who control a firm
D. a bank that loans funds to finance the start-up of a new firm
E. a group of underwriters sharing the risk of selling a new issue of securities