Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

FC 96460

February 27, 2019
Which one of the following refers to the ability of shareholders to undo a firm's
dividend policy and create an alternative dividend policy by reinvesting dividends or
selling shares of stock?
A. perfect foresight model
B. personalization
C. recapitalization
D. offsetting leverage
E. homemade dividend policy
Public offerings of debt and equity must be registered with which one of the following?
A. New York Board of Governors
B. Federal Reserve
C. NYSE Registration Office
D. Securities and Exchange Commission
E. Market Dealers Exchange
A firm is technically insolvent when:
A. it has a negative book value.
B. total debt exceeds total equity.
C. it is unable to meet its financial obligations.
D. it files for bankruptcy protection.
E. the market value of its stock is less than its book value.
You cannot attend the shareholder's meeting for Alpha United so you authorize another
shareholder to vote on your behalf. What is the granting of this authority called?
A. altering
B. cumulative voting
C. straight voting
D. indenture agreement
E. voting by proxy
The length of time between the day a firm purchases an item from its supplier until the
day that supplier is paid for that purchase is called the:
A. operating cycle.
B. inventory period.
C. accounts receivable period.
D. accounts payable period.
E. cash cycle.
Standard deviation measures which type of risk?
A. total
B. nondiversifiable
C. unsystematic
D. systematic
E. economic
Fake Stone, Inc. is projecting sales to decrease by 4 percent next year while the profit
margin remains constant. The firm wants to increase the dividend payout ratio by 2
percent. What is the projected increase in retained earnings for next year?
A. $1,711.15
B. $1,898.67
C. $1,943.65
D. $1,969.92
E. $2,105.63
You need $12,000 in 6 years. How much will you need to deposit today if you can earn
11 percent per year, compounded continuously? Assume this is the only deposit you
A. $6,000.00
B. $6,048.50
C. $6,179.25
D. $6,202.22
E. $6,415.69
A 4-year project has an initial asset investment of $306,600, and initial net working
capital investment of $29,200, and an annual operating cash flow of -$46,720. The
fixed asset is fully depreciated over the life of the project and has no salvage value. The
net working capital will be recovered when the project ends. The required return is 15
percent. What is the project's equivalent annual cost, or EAC?
A. -$158,491
B. -$152,309
C. -$147,884
D. -$145,509
E. -$142,212
Rosewell International receives an average of 268 checks a day with an average amount
per check of $820. The firm is considering a lockbox system which it anticipates will
reduce the average collection time by 1.4 days. The bank charges $0.21 a check for this
service. The daily interest rate on Treasury bills is 0.02 percent. What is the net present
value of this lockbox arrangement?
A. -$61,640
B. -$26,264,
C. $26,264
D. $30,820
E. $61,640
The SLG Corp. uses no debt. The weighted average cost of capital is 12 percent. The
current market value of the equity is $31 million and the corporate tax rate is 34
percent. What is EBIT?
A. $4,180,000
B. $4,821,194
C. $5,636,364
D. $6,230,018
E. $6,568,500
Which of the following statements are correct?
I. The SML approach is dependent upon a reliable measure of a firm's unsystematic
II. The SML approach can be applied to firms that retain all of their earnings.
III. The SML approach assumes a firm's future risks are similar to its past risks.
IV. The SML approach assumes the reward-to-risk ratio is constant.
A. I and III only
B. II and IV only
C. III and IV only
D. I, II, and III only
E. II, III, and IV only
You have been investing $250 a month for the last 13 years. Today, your investment
account is worth $73,262. What is your average rate of return on your investments?
A. 8.94 percent
B. 9.23 percent
C. 9.36 percent
D. 9.41 percent
E. 9.78 percent
Which one of the following increases cash?
A. granting credit to a customer
B. purchasing new machinery
C. making a payment on a bank loan
D. purchasing inventory
E. accepting credit from a supplier
If a firm has the optimal amount of debt, then the:
A. direct financial distress costs must equal the present value of the interest tax shield.
B. value of the levered firm will exceed the value of the firm if it were unlevered.
C. value of the firm is minimized.
D. value of the firm is equal to VL + TC × D.
E. debt-equity ratio is equal to 1.0.
You are considering two savings options. Both options offer a 7.4 percent rate of return.
The first option is to save $900, $2,100, and $3,000 at the end of each year for the next
three years, respectively. The other option is to save one lump sum amount today. If you
want to have the same balance in your savings account at the end of the three years,
regardless of the savings method you select, how much do you need to save today if
you select the lump sum option?
A. $4,410
B. $4,530
C. $4,600
D. $5,080
E. $5,260
Municipal bonds:
A. are less liquid than U.S. Treasury bills.
B. produce income that is subject to federal income taxation.
C. generally pay a higher coupon than corporate bonds.
D. are also referred to as commercial paper.
E. are issued by the federal government.
What is the price-sales ratio for 2009 if the market price is $18.49 per share?
A. 2.43
B. 3.29
C. 3.67
D. 4.12
E. 4.38
You are employed as a commission-based sales clerk for a cosmetics retail store. You
know that on average, exactly 50 percent of the customers that enter your store will
make at least one purchase. Thus far this morning, you have waited on eight customers
without making a single sale. You are convinced that the next customer you wait on will
buy something. This belief is known as:
A. aversion to ambiguity.
B. the law of small numbers.
C. anchoring and adjusting.
D. gambler's fallacy.
E. false consensus.
A business partner whose potential financial loss in the partnership will not exceed his
or her investment in that partnership is called a:
A. generally partner.
B. sole proprietor.
C. limited partner.
D. corporate shareholder.
E. zero partner.
Roger's Distributors receives an average of 216 checks a day. The average amount per
check is $629. The firm is considering a lockbox system which it anticipates will reduce
the average collection time by 1.5 days. The daily interest rate on Treasury bills is 0.011
percent. What is the amount of the expected daily savings of the lockbox system?
A. $2.04
B. $6.92
C. $14.95
D. $18.10
E. $22.42
Consider the following financial statement information for the Bulldog Icers
How long is the cash cycle?
A. 36.6 days
B. 37.2 days
C. 41.0 days
D. 41.4 days
E. 42.8 days
Panelli's is analyzing a project with an initial cost of $102,000 and cash inflows of
$65,000 in year one and $74,000 in year two. This project is an extension of the firm's
current operations and thus is equally as risky as the current firm. The firm uses only
debt and common stock to finance its operations and maintains a debt-equity ratio of
0.45. The aftertax cost of debt is 4.8 percent, the cost of equity is 12.7 percent, and the
tax rate is 35 percent. What is the projected net present value of this project?
A. $15,411
B. $15,809
C. $16,333
D. $16,938
E. $17,840
The expected inflation rate in Finland is 2.8 percent while it is 3.7 percent in the U.S. A
risk-free asset in the U.S. is yielding 4.9 percent. What approximate real rate of return
should you expect on a risk-free Finnish security?
A. 1.2 percent
B. 1.7 percent
C. 2.1 percent
D. 2.5 percent
E. 2.8 percent
A 16-year, 4.5 percent coupon bond pays interest annually. The bond has a face value of
$1,000. What is the percentage change in the price of this bond if the market yield to
maturity rises to 5.7 percent from the current rate of 5.5 percent?
A. 2.14 percent decrease
B. 1.97 percent decrease
C. 0.21 percent increase
D. 1.97 percent increase
E. 2.14 percent increase
Hungry Howie's is currently operating at 78 percent of capacity. What is the
full-capacity level of sales?
A. $21,106.00
B. $21,580.62
C. $22,179.49
D. $24,506.17
E. $25,301.91
Heavy Equipment Rentals borrows money on a nonrecourse basis from The Financial
Group to fund its purchases of construction equipment such as backhoes, graders, earth
movers, etc. This equipment is then leased to contractors. The leases are classified as
tax-oriented leases. Which one of the following terms best describes these lease of
construction equipment?
A. leveraged lease
B. sale and leaseback arrangement
C. operating lease
D. perpetual lease
E. straight lease
What is the intrinsic value of the November $25 call on Dove stock?
A. -$0.98
B. $0
C. $0.15
D. $6.12
E. $7.10
It is easier to evaluate a firm using financial statements when the firm:
A. is a conglomerate.
B. has recently merged with its largest competitor.
C. uses the same accounting procedures as other firms in the industry.
D. has a different fiscal year than other firms in the industry.
E. tends to have many one-time events such as asset sales and property acquisitions.
Which one of the following statements related to unexpected returns is correct?
A. All announcements by a firm affect that firm's unexpected returns.
B. Unexpected returns over time have a negative effect on the total return of a firm.
C. Unexpected returns are relatively predictable in the short-term.
D. Unexpected returns generally cause the actual return to vary significantly from the
expected return over the long-term.
E. Unexpected returns can be either positive or negative in the short term but tend to be
zero over the long-term.
Which one of the following is a primary market transaction?
A. sale of currently outstanding stock by a dealer to an individual investor
B. sale of a new share of stock to an individual investor
C. stock ownership transfer from one shareholder to another shareholder
D. gift of stock from one shareholder to another shareholder
E. gift of stock by a shareholder to a family member
You are expecting a payment of 480,000PLN three years from now. The risk-free rate of
return is 3 percent in the U.S. and 4 percent in Poland. The inflation rate is 2.5percent in
the U.S. and 3 percent in Poland. Currently, you can buy 277PLN for 100USD. How
much will the payment three years from now be worth in U.S. dollars?
A. $154,751
B. $168,189
C. $219,511
D. $1,317,269
E. $1,369,888
Assume that 98.48 equal $1. Also assume that SKr7.7274 equal $1. How many
Japanese yen can you acquire in exchange for 3,000 Swedish krone?
A. 235
B. 261
C. 38,233
D. 39,024
E. 39,520
Beatrice Markets is expecting a period of intense growth and has decided to retain more
of its earnings to help finance that growth. As a result, it is going to reduce its annual
dividend by 30 percent a year for the next 2 years. After that, it will maintain a constant
dividend of $2.50 a share. Last year, the company paid $3.60 as the annual dividend per
share. What is the market value of this stock if the required rate of return is 14.5
A. $14.63
B. $16.70
C. $18.08
D. $19.61
E. $21.23
Suppose the current spot rate for the Norwegian kroner is $1 = NKr6.6869. The
expected inflation rate in Norway is 6 percent and in the U.S. it is 3.5 percent. A
risk-free asset in the U.S. is yielding 4 percent. What risk-free rate of return should you
expect on a Norwegian security?
A. 3.5 percent
B. 4.0 percent
C. 4.5 percent
D. 5.0 percent
E. 6.5 percent