Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

FC 57046

February 26, 2019
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
You have 100 British pounds. A friend of yours is willing to exchange 180 Canadian
dollars for your 100 British pounds. What will be your profit or loss if you accept your
friend's offer, given the following exchange rates?
A. 7.63 loss
B. 13.29 loss
C. 28.51 loss
D. 7.63 profit
E. 28.51 profit
Roger's Home Appliances offers credit to customers it deems worthy of this privilege.
To determine if a customer is worthy, the firm computes a numerical value which is
used to estimate the probability that the customer will default if credit is granted to
them. The process of computing this numerical value is referred to as:
A. credit scoring.
B. credit capacity.
C. receipts assessment.
D. conditions for credit.
E. consumer analysis.
The EOQ model is designed to minimize:
A. production costs.
B. inventory obsolescence.
C. the carrying costs of inventory.
D. the costs of replenishing inventory.
E. the total costs of holding inventory.
High Country Builders currently pays an annual dividend of $1.35 and plans on
increasing that amount by 2.5 percent each year. Valley High Builders currently pays an
annual dividend of $1.20 and plans on increasing its dividend by 3 percent annually.
Given this information, you know for certain that the stock of High Country Builders'
has a higher ______ than the stock of Valley High Builders.
A. market price
B. dividend yield
C. capital gains yield
D. total return
E. The answer cannot be determined based on the information provided.
Which two of the following are the best justifications for a reverse stock split?
I. combine a reverse stock split with a stock repurchase to enable a firm to go dark
II. increase the respectability of the stock
III. avoid delisting
IV. reduce transaction costs for shareholders
A. I and II only
B. I and III only
C. II and III only
D. II and IV only
E. III and IV only
The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its
operations. Some recent financial information for the company is shown here:
MHMM is considering an investment that has the same P/E ratio as the firm. The cost
of the investment is $798,270, and it will be financed with a new equity issue. What
would the ROE on the investment have to be if we wanted the price after the offering to
be $110 per share? Assume the PE ratio remains constant.
A. 18.28 percent
B. 21.41 percent
C. 27.63 percent
D. 37.27 percent
E. 40.03 percent
You are comparing stock A to stock B. Given the following information, what is the
difference in the expected returns of these two securities?
A. -0.85 percent
B. 1.95 percent
C. 2.05 percent
D. 13.45 percent
E. 13.55 percent
Which of the following characteristics relate to the cash break-even point for a given
I. The project never pays back.
II. The IRR equals the required rate of return.
III. The NPV is negative and equal to the initial cash outlay.
IV. The operating cash flow is equal to the depreciation expense.
A. I and III only
B. II and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
How many days of sales are in receivables? (Use 2009 values)
A. 17.08 days
B. 23.33 days
C. 26.49 days
D. 29.41 days
E. 32.97 days
Firm A is being acquired by Firm B for $54,000 worth of Firm B stock. The incremental
value of the acquisition is $5,600. Firm A has 2,400 shares of stock outstanding at a
price of $21 a share. Firm B has 2,700 shares of stock outstanding at a price of $50 a
share. What is the actual cost of the acquisition using company stock?
A. $50,509
B. $52,276
C. $54,571
D. $56,780
E. $60,600
Given the (1) exercise price E, (2) time to maturity T, and (3) European put-call parity,
the present value of E plus the value of the call option is equal to the:
A. current market value of the stock.
B. present value of the stock minus the value of the put.
C. value of the put minus the market value of the stock.
D. value of a risk-free asset.
E. stock value plus the put value.
The most recent financial statements for 7 Seas, Inc. are shown here:
Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity
are not. The company maintains a constant 50 percent dividend payout ratio. Like every
other firm in its industry, next year's sales are projected to increase by exactly 16
percent. What is the external financing need?
A. $1,241.76
B. $1,411.16
C. $1,583.09
D. $2,211.87
E. $2,349.98
Which one of the following correctly states one of the conditions established by the IRS
for a lease to be considered valid for tax purposes?
A. The lease should have high payments at the beginning of the lease period and low
payments at the end of the lease period.
B. Any renewal option should be based on a value which is less than the fair market
value of the asset at the time of renewal.
C. The term of the lease must be less than 80 percent of the economic life of the asset.
D. The lessee should have the option to purchase the asset at a discounted price at the
end of the lease term.
E. The lessor must have a reasonable expectation of earning an aftertax profit.
Douglass Interiors is considering two mutually exclusive projects and have determined
that the crossover rate for these projects is 11.7 percent. Project A has an internal rate of
return (IRR) of 15.3 percent and Project B has an IRR of 16.5 percent. Given this
information, which one of the following statements is correct?
A. Project A should be accepted as its IRR is closer to the crossover point than is
Project B's IRR.
B. Project B should be accepted as it has the higher IRR.
C. Both projects should be accepted as both of the project's IRRs exceed the crossover
D. Neither project should be accepted since both of the project's IRRs exceed the
crossover rate.
The Miller-Orr model:
A. recommends selling securities in an amount equal to (U* - C) when the cash balance
reaches L.
B. requires that marketable securities be sold whenever the cash balance falls below the
target level.
C. bases the optimal level of cash solely on the opportunity costs of holding cash.
D. supports the argument that the target cash balance declines as order costs increase.
On May 1, your firm had a beginning cash balance of $175. Your sales for April were
$430 and your May sales were $480. During May, you had cash expenses of $110 and
payments on your accounts payable of $290. Your accounts receivable period is 30
days. What is your firm's beginning cash balance on June 1?
A. $145
B. $155
C. $205
D. $215
E. $265
A bond is quoted at a price of $989. This price is referred to as which one of the
A. call price
B. face value
C. clean price
D. dirty price
E. wholesale price
Cool Shades, Inc. (CSI) manufactures biotech sunglasses. The variable materials cost is
$1.69 per unit, and the variable labor cost is $3.04 per unit. Suppose the firm incurs
fixed costs of $750,000 during a year in which total production is 450,000 units and the
selling price is $11.50 per unit. What is the cash break-even point?
A. 76,453 units
B. 88,652 units
C. 110,783 units
D. 128,907 units
E. 140,768 units
Which of the following can be used to compute the return on equity?
I. Profit margin × Return on assets
II. Return on assets × Equity multiplier
III. Net income/Total equity
IV. Return on assets × Total asset turnover
A. I and III only
B. II and III only
C. II and IV only
D. I, II, and III only
E. I, II, III, and IV
The date on which a shareholder is officially listed as the recipient of stock rights is
called the:
A. issue date.
B. offer date
C. declaration date
D. holder-of-record date.
You are preparing to make monthly payments of $65, beginning at the end of this
month, into an account that pays 6 percent interest compounded monthly. How many
payments will you have made when your account balance reaches $9,278?
A. 97
B. 108
C. 119
D. 124
E. 131
The length of time between the purchase of inventory and the receipt of cash from the
sale of that inventory is called the:
A. operating cycle.
B. inventory period.
C. accounts receivable period.
D. accounts payable period.
E. cash cycle.
What is the value of five August $25 call contracts on Dove stock?
A. $34
B. $68
C. $340
D. $680
E. $3,400
A stock pays a constant annual dividend and sells for $56.10 a share. If the market rate
of return on this stock is 15.85 percent, what is the amount of the next annual dividend?
A. $7.67
B. $7.94
C. $8.21
D. $8.89
E. $10.30
A project has a payback period that exactly equals the project's life. The project is
operating at:
A. its maximum capacity.
B. the financial break-even point.
C. the cash break-even point.
D. the accounting break-even point.
E. a zero level of output.
The Peanut Shack has 6,000 shares of stock outstanding with a par value of $1 per
share. The current market value of the firm is $145,600. The company just announced a
3-for-2 stock split. What will the market price per share be after the split?
A. $12.14
B. $16.18
C. $24.27
D. $28.20
E. $36.40
Applying the discounted payback decision rule to all projects may cause:
A. some positive net present value projects to be rejected.
B. the most liquid projects to be rejected in favor of the less liquid projects.
C. projects to be incorrectly accepted due to ignoring the time value of money.
D. a firm to become more long-term focused.
E. some projects to be accepted which would otherwise be rejected under the payback
You work for a nuclear research laboratory that is contemplating leasing a diagnostic
scanner (leasing is a very common practice with expensive, high-tech equipment). The
scanner costs $3 million and it would be depreciated straight-line to zero over 4 years.
Because of radiation contamination, it will actually be completely valueless in 4 years.
You can lease it for $750,000 per year for 4 years. Assume the tax rate is 31 percent.
You can borrow at 8 percent before taxes. Your company does not expect to pay taxes
for the next several years, but the leasing company will pay taxes. What range of lease
payments will allow the lease to be profitable for both parties?
A. $904,026 to $905,123
B. $904,026 to $905,481
C. $904,026 to $905,762
D. $905,123 to $906,417
E. $905,123 to $906,825
Sweatshirts Unlimited is downsizing. The company paid a $2.80 annual dividend last
year. The company has announced plans to lower the dividend by 25 percent each year.
Once the dividend amount becomes zero, the company will cease all dividends and go
out of business. You have a required rate of return of 15.5 percent on this particular
stock given the company's situation. What are your shares in this firm worth today on a
per share basis?
A. $5.19
B. $6.91
C. $8.68
D. $19.29
E. $22.11
A project has a projected IRR of negative 100 percent. Which one of the following
statements must also be true concerning this project?
A. The discounted payback period equals the life of the project.
B. The operating cash flow is positive and equal to the depreciation.
C. The net present value of the project is negative and equal to the initial investment.
D. The payback period is exactly equal to the life of the project.
E. The net present value of the project is equal to zero.
Which of the following individuals have unlimited liability based on their ownership
I. general partner
II. sole proprietor
III. stockholder
IV. limited partner
A. II only
B. I and II only
C. II and IV only
D. I, II, and III only
E. I, II, and IV only
Prezario's has 25,000 shares of stock outstanding with a par value of $1 per share. The
current market value of the firm is $847,000. Currently, the retained earnings account
balance is $428,000 and the capital in excess of par value account balance is $187,000.
The company just announced a 3-for-1 stock split. What is the common stock account
balance after the stock split?
A. $8,333
B. $25,000
C. $75,000
D. $77,333
E. $232,000
List and describe the three basic types of secured inventory loans.
What is the formula for the tax-shield approach to OCF?
Circle Stores stock is priced at $28 a share. A $40 call on this stock has five months
until expiration and a call price of $0.15. Why would an investor purchase a call that is
so far out of the money?
Call options are frequently attached to bonds, making them callable at the option of the
issuer. Consider a firm that just issued two sets of bonds: One is callable, has a 7
percent coupon rate, 15 years to maturity, and cannot be called during the first three
years; the second is noncallable, has a 7 percent coupon rate, 15 years to maturity, and
is identical to the first bond in every way except for the call option. Suppose the
noncallable bonds are sold for $1,000 each. Will the callable bonds sell for more or less
than $1,000? Who "purchases" the option in this case and who "sells" it?
All else equal, firms with (1) excess capacity, (2) low variable costs, and (3) repeat
customers are more apt to offer liberal credit terms to their customers than are other
What role does the weighted average cost of capital play when determining a project's
cost of capital?
Can the initial cash flow at time zero for a project ever be a positive value?
What are the upper and lower bounds for an American call option?
What are some "good" reasons for opting to lease rather than purchase an asset?
Explain how the use of internal equity rather than external equity affects the analysis of
a project.
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.
Why do financial managers need to understand the implications of both the internal and
the sustainable rates of growth?
Explain both a rights offering and the basic characteristics of a right.
Firms encounter several costs when issuing new securities.
Based on the M&M propositions with and without taxes, how much time should a
financial manager spend analyzing the capital structure of a firm? What if the analysis
is based on the static theory?