Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

FC 73872

February 26, 2019
A financial lease:
A. is generally called a capital lease by accountants.
B. requires the lessor to maintain the asset.
C. is a partially amortized lease.
D. is often called a single net lease.
The accounting manager of Gateway Inns has noted that every time the inn's average
occupancy rate increases by 2 percent, the operating cash flow increases by 5.3 percent.
What is the degree of operating leverage if the contribution margin per unit is $47?
A. 0.38
B. 0.57
C. 1.75
D. 2.10
E. 2.65
Dog's can borrow money at either a fixed rate of 8.25 percent or a variable rate set at
prime plus 0.5 percent. Cat's can borrow money at either a variable rate of prime plus 1
percent or a fixed rate of 8 percent. Dog's prefers a fixed rate and Cat's prefers a
variable rate. Given this information, which one of the following statements is correct?
A. After a swap with Cat's, Dog's could end up paying a fixed rate of 7.8 percent.
B. Cat's should end up paying the prime rate if it agrees to an interest rate swap with
C. Both firms will profit if they swap an 8.15 percent fixed rate for a prime plus 0.75
percent variable rate.
D. Dog's will end up paying no more than 7.75 percent as a fixed rate after a swap with
E. Dog's and Cat's cannot swap interest rates in a manner that will be profitable for both
Northern Railway is considering a project which will produce annual sales of $975,000
and increase cash expenses by $859,000. If the project is implemented, taxes will
increase from $141,000 to $154,000 and depreciation will increase from $194,000 to
$272,000. The company is debt-free. What is the amount of the operating cash flow
using the top-down approach?
A. $25,000
B. $103,000
C. $157,000
D. $181,000
E. $209,000
This morning a cereal maker agreed to pay a farmer $4.40 a bushel for 5,000 bushels of
wheat that the farmer will ship to the factory four months from now. What is this legally
binding agreement called?
A. forward contract
B. spot contract
C. swap
D. exchange
E. floating contract
Your company has an available balance of $7,911. A deposit of $2,480 that was made
this morning is not yet included in the bank's balance. There are also 4 checks
outstanding with a value of $325 each. What is the net float?
A. net collection float of $1,180
B. net collection float of $2,480
C. net float of $6,731
D. net disbursement float of $1,300
E. net disbursement float of $2,480
Today, you are buying a one-year call on one share of Webster United stock with a
strike price of $40 per share and a one-year risk-free asset that pays 4 percent interest.
The cost of the call is $1.85 per share and the amount invested in the risk-free asset is
$38.46. What is the most you can lose on these purchases over the next year?
A. -$1.85
B. -$0.31
C. $0
D. $0.42
E. $1.54
A stock had returns of 15 percent, 8 percent, 12 percent, -21 percent, and -4 percent for
the past five years. Based on these returns, what is the approximate probability that this
stock will return at least 15 percent in any one given year?
A. less than 0.5 percent
B. greater than 0.5 percent but less than 1.0 percent
C. greater than 1.0 percent but less than 2.5 percent
D. greater than 2.5 percent but less than 16 percent
E. greater than 16.0 percent
Which one of the following time periods is associated with high rates of inflation?
A. 1929-1933
B. 1957-1961
C. 1978-1981
D. 1992-1996
E. 2001-2005
What are the pro forma retained earnings for next year if Fake Stone, Inc. grows at a
rate of 2.5 percent and both the profit margin and the dividend payout ratio remain
A. $4,946.90
B. $5,023.10
C. $5,592.20
D. $5,920.67
E. $6,293.30
Nelson Paints recently went public by offering 65,000 shares of common stock to the
public. The underwriters provided their services in a best efforts underwriting. The
offering price was set at $16 a share and the gross spread was $2. After completing their
sales efforts, the underwriters determined that they sold a total of 57,500 shares. How
much cash did Nelson Paints receive from its IPO?
A. $805,000
B. $910,000
C. $920,000
D. $1,035,000
E. $1,040,000
Which of the following variables used in the covered interest arbitrage formula are
correctly defined?
I. RFC: Foreign country nominal risk-free interest rate
II. RUS: U.S. real risk-free interest rate
III. F1: 360-day forward rate
IV. S0: Current spot rate expressed in units of foreign currency per one U.S. dollar
A. I and II only
B. III and IV only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
The Design Team just decided to save $1,500 a month for the next 5 years as a safety
net for recessionary periods. The money will be set aside in a separate savings account
which pays 4.5 percent interest compounded monthly. The first deposit will be made
today. What would today's deposit amount have to be if the firm opted for one lump
sum deposit today that would yield the same amount of savings as the monthly deposits
after 5 years?
A. $80,459.07
B. $80,760.79
C. $81,068.18
D. $81,333.33
E. $81,548.20
The incremental cash flows of leasing consider which of the following?
I. cost of the asset
II. lease payment amount
III. applicable tax rate
IV. annual depreciation expense
A. I and III only
B. II and IV only
C. II, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV
Keyser Petroleum just purchased some equipment at a cost of $67,000. What is the
proper methodology for computing the depreciation expense for year 2 if the equipment
is classified as 5-year property for MACRS?
A. $67,000 × (1 - 0.20) × 0.32
B. $67,000/(1 - 0.20 - 0.32)
C. $67,000 × (1 + 0.32)
D. $67,000 × (1 - 0.32)
E. $67,000 × 0.32
Homemade leverage is:
A. the incurrence of debt by a corporation in order to pay dividends to shareholders.
B. the exclusive use of debt to fund a corporate expansion project.
C. the borrowing or lending of money by individual shareholders as a means of
adjusting their level of financial leverage.
D. best defined as an increase in a firm's debt-equity ratio.
E. the term used to describe the capital structure of a levered firm.
A just-in-time inventory system:
I. when implemented properly reduces the cost of inventory to zero.
II. increases the inventory turnover rate.
III. is sufficient to handle immediate production needs.
IV. minimizes the costs of holding inventory.
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
Assume you graph a project's net present value given various sales quantities. Which
one of the following is correct regarding the resulting function?
A. The steepness of the function relates to the project's degree of operating leverage.
B. The steeper the function, the less sensitive the project is to changes in the sales
C. The resulting function will be a hyperbole.
D. The resulting function will include only positive values.
E. The slope of the function measures the sensitivity of the net present value to a
change in sales quantity.
Thayer Farms stock has a beta of 1.12. The risk-free rate of return is 4.34 percent and
the market risk premium is 7.92 percent. What is the expected rate of return on this
A. 8.35 percent
B. 9.01 percent
C. 10.23 percent
D. 13.21 percent
E. 13.73 percent
What is the delta of a put option given the following information?
A. -0.685
B. -0.315
C. 0.315
D. 0.525
E. 0.685
Which of the following statements are correct?
I. An increase in the accounts payable period shortens the cash cycle.
II. The cash cycle is equal to the operating cycle minus the inventory period.
III. A negative cash cycle is preferable to a positive cash cycle.
IV. The cash cycle plus the accounts receivable period is equal to the operating cycle.
A. I only
B. III and IV only
C. I and III only
D. I and IV only
E. I, II, and III only
Sewer's Paradise is an all equity firm that has 5,000 shares of stock outstanding at a
market price of $15 a share. The firm's management has decided to issue $30,000 worth
of debt and use the funds to repurchase shares of the outstanding stock. The interest rate
on the debt will be 10 percent. What are the earnings per share at the break-even level
of earnings before interest and taxes? Ignore taxes.
A. $1.46
B. $1.50
C. $1.67
D. $1.88
E. $1.94
The camera you want to buy costs $289 in the U.S. How much will the identical camera
cost in Canada if the exchange rate is C$1 = $0.8262? Assume absolute purchasing
power parity exists.
A. $238.77
B. $242.19
C. $243.52
D. $348.60
E. $349.79
The cost of equity for a firm:
A. tends to remain static for firms with increasing levels of risk.
B. increases as the unsystematic risk of the firm increases.
C. ignores the firm's risks when that cost is based on the dividend growth model.
D. equals the risk-free rate plus the market risk premium.
E. equals the firm's pretax weighted average cost of capital.
An analysis which combines scenario analysis with sensitivity analysis is called _____
A. forecasting
B. combined
C. complex
D. simulation
E. break-even
The Daily News published an ad today wherein it announced its desire to purchase
shares of a competing newspaper, the Oil Town Gossip. Which one of the following
terms is best described by this announcement?
A. merger request
B. consolidation
C. tender offer
D. spinoff
E. divestiture
The liquidity premium is compensation to investors for:
A. purchasing a bond in the secondary market.
B. the lack of an active market wherein a bond can be sold for its actual value.
C. acquiring a bond with an unfavorable tax status.
D. redeeming a bond prior to maturity.
E. purchasing a bond that has defaulted on its coupon payments.
Which two of the following are the most likely reasons why a stock price might not
react at all on the day that new information related to the stock issuer is released?
I. insiders knew the information prior to the announcement
II. investors need time to digest the information prior to reacting
III. the information has no bearing on the value of the firm
IV. the information was anticipated
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
Consider a 6-year project with the following information: initial fixed asset investment
= $460,000; straight-line depreciation to zero over the 6-year life; zero salvage value;
price = $34; variable costs = $19; fixed costs = $188,600; quantity sold = 90,528 units;
tax rate = 32 percent. What is the sensitivity of OCF to changes in quantity sold?
A. $10.20 per unit
B. $11.16 per unit
C. $11.38 per unit
D. $12.33 per unit
E. $12.54 per unit
Currently, $1 will buy C$1.2103 while $1.2762 will buy €1. What is the exchange rate
between the Canadian dollar and the euro?
A. C$1 = €0.6474
B. C$1 = €0.6539
C. C$1 = €1.2762
D. C$1.5446 = €1
E. C$1.5528 = €1
Revol-Tech is a technology firm with excellent growth prospects. The firm wishes to do
something to acknowledge the loyalty of the shareholders but needs all of its available
cash to fund the firm's rapid growth. The market price of the stock is currently trading
at the upper end of its preferred trading range. The firm is most apt to consider which
one of the following in this situation?
A. liquidating dividend
B. stock split
C. reverse stock split
D. small stock dividend
E. special cash dividend
A capital lease is recorded as an asset on the balance sheet in an amount equal to:
A. the dollar amount of each lease payment multiplied by the total number of lease
payments in the original agreement.
B. the dollar amount of each lease payment multiplied by the number of lease payments
C. the dollar amount of each lease payment multiplied by the number of lease payments
per year.
D. the lesser of the present value of the remaining lease payments or the cost of the
E. the future value of the lease agreement at the time the agreement was made.
On an average day, your firm receives $11,800 in checks from customers. These checks
clear the bank in an average of 2.1 days. The applicable daily interest rate is 0.015
percent. What is the highest daily fee your firm should pay to completely eliminate the
collection float? Assume each month has 30 days.
A. $3.42
B. $3.72
C. $17.78
D. $34.18
E. $37.20
Which one of the following statements is correct?
A. The majority of firms in the U.S. are structured as corporations.
B. Corporate profits are taxable income to the shareholders when earned.
C. Corporations can raise large amounts of capital generally easier than partnerships
D. Stockholders face no potential losses related to their corporate investment.
E. Corporate shareholders elect the corporate president.
Precision Tool is analyzing two machines to determine which one it should purchase.
The company requires a 15 percent rate of return and uses straight-line depreciation to a
zero book value over the life of its equipment. Machine A has a cost of $892,000,
annual operating costs of $26,300, and a 4-year life. Machine B costs $1,127,000, has
annual operating costs of $19,500, and has a 5-year life. Whichever machine is
purchased will be replaced at the end of its useful life. Precision Tool should purchase
Machine _____ because it lowers the firm's annual cost by approximately _______ as
compared to the other machine.
A. A; $16,965.
B. A; $17,404
C. B; $16,965
D. B; $17,404
E. B; $17,521