Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

FC 67751

February 26, 2019
Which one of the following terms is applied to the financial planning method which
uses the projected sales level as the basis for determining changes in balance sheet and
income statement account values?
A. percentage of sales method
B. sales dilution method
C. sales reconciliation method
D. common-size method
E. trend method
Hollister & Hollister is considering a new project. The project will require $522,000 for
new fixed assets, $218,000 for additional inventory, and $39,000 for additional
accounts receivable. Short-term debt is expected to increase by $165,000. The project
has a 6-year life. The fixed assets will be depreciated straight-line to a zero book value
over the life of the project. At the end of the project, the fixed assets can be sold for 20
percent of their original cost. The net working capital returns to its original level at the
end of the project. The project is expected to generate annual sales of $875,000 and
costs of $640,000. The tax rate is 34 percent and the required rate of return is 14
percent. What is the amount of the earnings before interest and taxes for the first year of
this project?
A. $97,680
B. $130,000
C. $148,000
D. $217,320
E. $235,000
An investment project has an installed cost of $518,297. The cash flows over the 4-year
life of the investment are projected to be $287,636, $203,496, $103,802, and $92,556,
respectively. What is the NPV of this project if the discount rate is zero percent?
A. $47,306
B. $72,418
C. $91,110
D. $128,415
E. $169,193
The Black-Scholes option pricing model can be used for:
A. American options but not European options.
B. European options but not American options.
C. call options but not put options.
D. put options but not call options.
E. both zero coupon bonds and coupon bonds.
A firm should select the capital structure that:
A. produces the highest cost of capital.
B. maximizes the value of the firm.
C. minimizes taxes.
D. is fully unlevered.
E. equates the value of debt with the value of equity.
Marie's Fashions is considering a project that will require $28,000 in net working
capital and $87,000 in fixed assets. The project is expected to produce annual sales of
$75,000 with associated costs of $57,000. The project has a 5-year life. The company
uses straight-line depreciation to a zero book value over the life of the project. The tax
rate is 30 percent. What is the operating cash flow for this project?
A. -$1,520
B. -$580
C. $420
D. $15,680
E. $17,820
The percentage of the next dollar you earn that must be paid in taxes is referred to as
the _____ tax rate.
A. mean
B. residual
C. total
D. average
E. marginal
Steve purchased a stock last year for $34 a share. The stock increased in value to $36 a
share before declining to its current value of $30. Steve has decided to sell the stock but
only if he can receive $34 a share or better. Steve is suffering most from which one of
the following behavioral conditions?
A. representativeness heuristic
B. house money
C. get-evenitis
D. randomness
E. arbitrage reaction
Pewter & Glass is an all equity firm that has 80,000 shares of stock outstanding. The
company is in the process of borrowing $600,000 at 9 percent interest to repurchase
12,000 shares of the outstanding stock. What is the value of this firm if you ignore
A. $2.5 million
B. $4.0 million
C. $5.0 million
D. $5.5 million
E. $6.0 million
Country Markets has an unlevered cost of capital of 12 percent, a tax rate of 38 percent,
and expected earnings before interest and taxes of $15,700. The company has $11,000
in bonds outstanding that have a 6 percent coupon and pay interest annually. The bonds
are selling at par value. What is the cost of equity?
A. 12.55 percent
B. 13.36 percent
C. 13.64 percent
D. 14.07 percent
E. 14.29 percent
A supplier, who requires payment within ten days, should be most concerned with
which one of the following ratios when granting credit?
A. current
B. cash
C. debt-equity
D. quick
E. total debt
Assume the spot rate for the British pound currently is 0.6211 per $1. Also assume the
one-year forward rate is 0.6347 per $1. A risk-free asset in the U.S. is currently earning
3.4 percent. If interest rate parity holds, what rate can you earn on a one-year risk-free
British security?
A. 1.18 percent
B. 1.57 percent
C. 3.67 percent
D. 5.66 percent
E. 5.92 percent
Which one of the following is a correct ranking of securities based on their volatility
over the period of 1926-2007? Rank from highest to lowest.
A. large company stocks, U.S. Treasury bills, long-term government bonds
B. small company stocks, long-term corporate bonds, large company stocks
C. small company stocks, long-term corporate bonds, intermediate-term government
D. large company stocks, small company stocks, long-term government bonds
E. intermediate-term government bonds, long-term corporate bonds, U.S. Treasury bills
Automobiles are often leased, and several terms are unique to auto leases. Suppose you
are considering leasing a car. The price you and the dealer agree on for the car is
$32,000. This is the base capitalized cost. Other costs added to the capitalized cost price
include the acquisition (bank) fee, insurance, or extended warranty. Assume these costs
are $390. Capitalization cost reductions include any down payment, credit of trade-in,
or dealer rebate. Assume you make a down payment of $2,600, and there is no trade-in
or rebate. If you drive 11,000 miles per year, the lease-end residual value for this car
will be $18,700 after three years. The lease factor, which is the interest rate on the loan,
is the APR of the loan divided by 2,400. (We're not really sure where the 2,400 comes
from, either.) The lease factor the dealer quotes you is 0.00208. The monthly lease
payment consists of three parts; a depreciation fee, a finance fee, and sales tax. The
depreciation fee is the net capitalization cost minus the residual value, divided by the
term of the lease. The net capitalization cost is the cost of the car minus any cost
reductions plus any additional costs. The finance fee is the net capitalization cost plus
the residual, times the money factor, and the monthly sales tax is simply the monthly
lease payments times the tax rate. What is your monthly lease payment for a 36-month
lease if the sales tax is 8 percent?
A. $329.08
B. $342.63
C. $379.82
D. $402.24
E. $441.63
Which of the following statements are correct?
I. As the standard deviation of the returns on a stock increase, the value of a put option
II. The value of a call option decreases as the time to expiration increases.
III. A decrease in the risk-free rate increases the value of a put option.
IV. Increasing the strike price increases the value of a put option.
A. I and III only
B. II and IV only
C. I and II only
D. I, III, and IV only
E. I, II, and III only
Which of the following correspond to a wide frequency distribution?
I. relatively low risk
II. relatively low rate of return
III. relatively high standard deviation
IV. relatively large risk premium
A. II only
B. III only
C. I and II only
D. II and III only
E. III and IV only
Aardvark Enterprises has agreed to be acquired by Lawson Products in exchange for
$30,000 worth of Lawson Products stock. Lawson has 3,000 shares of stock outstanding
at a price of $28 a share. Aardvark has 1,200 shares outstanding with a market value of
$23 a share. The incremental value of the acquisition is $1,400. What is the value of
Lawson Products after the merger?
A. $79,400
B. $83,000
C. $111,600
D. $113,000
E. $143,000
What is the value of a 3-month put with a strike price of $45 given the Black-Scholes
option pricing model and the following information?
A. $0.57
B. $0.63
C. $0.91
D. $1.36
E. $1.54
Fixed Appliance Co. wishes to maintain a growth rate of 8 percent a year, a constant
debt-equity ratio of 0.34, and a dividend payout ratio of 52 percent. The ratio of total
assets to sales is constant at 1.3. What profit margin must the firm achieve?
A. 13.92 percent
B. 14.46 percent
C. 14.97 percent
D. 15.33 percent
E. 15.74 percent
Morris Industries has a capital structure of 55 percent common stock, 10 percent
preferred stock, and 45 percent debt. The firm has a 60 percent dividend payout ratio, a
beta of 0.89, and a tax rate of 38 percent. Given this, which one of the following
statements is correct?
A. The aftertax cost of debt will be greater than the current yield-to-maturity on the
firm's bonds.
B. The firm's cost of preferred is most likely less than the firm's actual cost of debt.
C. The firm's cost of equity is unaffected by a change in the firm's tax rate.
D. The cost of equity can only be estimated using the SML approach.
E. The firm's weighted average cost of capital will remain constant as long as the
capital structure remains constant.
Birds and More is considering a project which requires the purchase of $164,000 of
fixed assets. The net present value of the project is $4,500. Equity shares will be issued
as the sole means of financing this project. The price-earnings ratio of the project equals
that of the existing firm. What will the new market value per share be after the project is
implemented given the following current information on the firm?
A. $20.68
B. $20.72
C. $20.80
D. $20.95
E. $21.10
A stock has an expected return of 11 percent, the risk-free rate is 6.1 percent, and the
market risk premium is 4 percent. What is the stock's beta?
A. 1.18
B. 1.23
C. 1.29
D. 1.32
E. 1.35
Williams' Paints is weighing a lease versus a purchase of some new machinery. The
purchase price is $312,000. The equipment will be depreciated to zero over the 4-year
life of the project after which time it is expected to have a resale value of $76,000. The
firm uses straight-line depreciation and can borrow money at 8 percent. The equipment
can be leased for $66,000 a year for 4 years. Williams' Paints does not expect to owe
any taxes for the next 4 years because of its net operating losses. What is the net
advantage to leasing?
A. $9,846
B. $11,900
C. $24,924
D. $28,207
E. $37,537
Which one of the following pairs of businesses could probably benefit the most by
sharing complementary resources?
A. roofer and architect
B. tennis court and pharmacy
C. ski resort and golf course
D. dry cleaner and maid service
E. trucking company and lawn service
Ratios that measure how efficiently a firm manages its assets and operations to generate
net income are referred to as _____ ratios.
A. asset management
B. long-term solvency
C. short-term solvency
D. profitability
E. turnover
Gateway Communications is considering a project with an initial fixed asset cost of
$2.46 million which will be depreciated straight-line to a zero book value over the 10-
year life of the project. At the end of the project the equipment will be sold for an
estimated $300,000. The project will not directly produce any sales but will reduce
operating costs by $725,000 a year. The tax rate is 35 percent. The project will require
$45,000 of inventory which will be recouped when the project ends. Should this project
be implemented if the firm requires a 14 percent rate of return? Why or why not?
A. No; The NPV is -$172,937.49.
B. No; The NPV is -$87,820.48.
C. Yes; The NPV is $251,860.34
D. Yes; The NPV is $387,516.67
E. Yes; The NPV is $466,940.57
Your company is reviewing a project with estimated labor costs of $21.20 per unit,
estimated raw material costs of $37.18 a unit, and estimated fixed costs of $20,000 a
month. Sales are projected at 42,000 units over the one-year life of the project. All
estimates are accurate within a range of plus or minus 5 percent. What are the total
variable costs for the worst-case scenario?
A. $890,400
B. $1,561,560
C. $2,445,830
D. $2,451,960
E. $2,691,960
Which one of the following is a working capital management decision?
A. determining the amount of equipment needed to complete a job
B. determining whether to pay cash for a purchase or use the credit offered by the
C. determining the amount of long-term debt required to complete a project
D. determining the number of shares of stock to issue to fund an acquisition
E. determining whether or not a project should be accepted
Terry is calculating the present value of a bonus he will receive next year. The process
he is using is called:
A. growth analysis.
B. discounting.
C. accumulating.
D. compounding.
E. reducing.
Automatic dividend reinvestment plans:
I. require that stockholders reinvest all of the dividends to which they are entitled.
II. sometimes grant shareholders the privilege of purchasing additional shares at a
discounted price.
III. help shareholders create their own homemade dividend policies.
IV. help make corporate dividend policies irrelevant to individual stockholders.
A. II only
B. III only
C. II and III only
D. II, III, and IV only
E. I, II, III, and IV