Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

FE 13497

February 26, 2019
Which one of the following risks would a floating-rate bond tend to have less of as
compared to a fixed-rate coupon bond?
A. real rate risk
B. interest rate risk
C. default risk
D. liquidity risk
E. taxability risk
Which one of the following statements is correct given the following two sets of project
cash flows?
A. The cash flows for Project B are an annuity, but those of Project A are not.
B. Both sets of cash flows have equal present values as of time zero given a positive
discount rate.
C. The present value at time zero of the final cash flow for Project A will be discounted
using an exponent of three.
D. The present value of Project A cannot be computed because the second cash flow is
equal to zero.
E. As long as the discount rate is positive, Project B will always be worth less today
than will Project A.
Based on M&M Proposition II with taxes, the weighted average cost of capital:
A. is equal to the aftertax cost of debt.
B. has a linear relationship with the cost of equity capital.
C. is unaffected by the tax rate.
D. decreases as the debt-equity ratio increases.
E. is equal to RU × (1 - TC).
Which one of the following statements is correct concerning the issuance of long-term
A. A direct long-term loan has to be registered with the SEC.
B. Direct placement debt tends to have more restrictive covenants than publicly issued
C. Distribution costs are lower for public debt than for private debt.
D. It is easier to renegotiate public debt than private debt.
E. Wealthy individuals tend to dominate the private debt market.
Hybrid cars are touted as a "green" alternative; however, the financial aspects of hybrid
ownership are not as clear. Consider a hybrid model that has a list price of $5,420
(including tax consequences) more than a comparable car with a traditional gasoline
engine. Additionally, the annual ownership costs (other than fuel) for the hybrid were
expected to be $420 more than the traditional model. The EPA mileage estimate is 23
mpg for the traditional model and 25 mpg for the hybrid model. Assume the appropriate
interest rate is 10 percent, all cash flows occur at the end of the year, you drive 15,900
miles per year, and keep either car for 6 years. What price per gallon would make the
decision to buy they hybrid worthwhile?
A. $18.79
B. $21.48
C. $27.19
D. $28.32
E. $30.10
The Sarbanes-Oxley Act of 2002 requires firms to report ESO grants within how many
days of the grant?
A. 2 calendar days
B. 2 business days
C. 7 calendar days
D. 30 business days
E. 45 calendar days
Steve invested $100 two years ago at 10 percent interest. The first year, he earned $10
interest on his $100 investment. He reinvested the $10. The second year, he earned $11
interest on his $110 investment. The extra $1 he earned in interest the second year is
referred to as:
A. free interest.
B. bonus income.
C. simple interest.
D. interest on interest.
E. present value interest.
Interest rates that include an inflation premium are referred to as:
A. annual percentage rates.
B. stripped rates.
C. effective annual rates.
D. real rates.
E. nominal rates.
The Wire House purchases its inventory one quarter prior to the quarter of sale. The
purchase price is 55 percent of the sales price. The accounts payable period is 45 days.
The accounts payable balance at the beginning of quarter one is $62,000. What is the
amount of the expected disbursements for quarter two given the following expected
quarterly sales?
A. $20,500
B. $21,725
C. $24,250
D. $26,000
E. $26,675
The procedure of allocating a fixed amount of funds for capital spending to each
business unit is called:
A. marginal spending.
B. capital preservation.
C. soft rationing.
D. hard rationing.
E. marginal rationing.
You own 1,000 shares of stock in Avondale Corporation. You will receive a $0.80 per
share dividend in one year. In two years, Avondale will pay a liquidating dividend of
$35 per share. The required return on Avondale stock is 16 percent. You only want $200
total in dividends in year one and accomplish this by using homemade dividends. What
will your total dividend amount be in year two?
A. $17,900
B. $20,764
C. $35,696
D. $41,402
E. $43,878
Relative purchasing power parity:
A. states that identical items should cost the same regardless of the currency used to
make the purchase.
B. relates differences in inflation rates to differences in exchange rates.
C. compares the real rate of return to the nominal rate of return.
D. explains the differences in real rates across national boundaries.
E. relates future exchange rates to current spot rates.
A national firm has sales of $729,000 and cost of goods sold of $478,000. At the
beginning of the year, the inventory was $37,000. At the end of the year, the inventory
balance was $41,000. What is the inventory turnover rate?
A. 12.26 times
B. 12.78 times
C. 14.22 times
D. 18.56 times
E. 19.70 times
Nadine's Boutique has a 30 day accounts payable period. The firm has expected
quarterly sales of $1,100, $1,400, $1,700, and $2,100, respectively, for next year. The
quarterly cost of goods sold is equal to 68 percent of the next quarter's sales. The firm
has a beginning accounts payable balance of $550 as of Quarter 1. What is the amount
of the projected cash disbursements for accounts payable for Quarter 3 of the next year?
Assume a year has 360 days.
A. $1,195
B. $1,208
C. $1,247
D. $1,337
E. $1,380
Sunset United is analyzing a proposed project. The company expects to sell 15,000
units, plus or minus 4 percent. The expected variable cost per unit is $120 and the
expected fixed costs are $311,000. The fixed and variable cost estimates are considered
accurate within a plus or minus 3 percent range. The depreciation expense is $74,000.
The tax rate is 35 percent. The sales price is estimated at $170 a unit, plus or minus 2
percent. What is the contribution margin per unit for a sensitivity analysis using a
variable cost per unit of $125?
A. $30
B. $45
C. $50
D. $24
E. $27
You want to invest in a riskless project in Sweden. The project has an initial cost of
SKr4.1million and is expected to produce cash inflows of SKr1.75 million a year for
three years. The project will be worthless after three years. The expected inflation rate
in Sweden is 3.2 percent while it is 4.3 percent in the U.S. A risk-free security is paying
5.5 percent in the U.S. The current spot rate is $1 = SKr7.7274. What is the net present
value of this project in Swedish kroner? Assume the international Fisher effect applies.
A. SKr587,561
B. SKr601,458
C. SKr623,333
D. SKr658,029
E. SKr719,774
Futures contracts:
A. are identical to forward contracts except for the size of the contract.
B. provides an option to purchase an asset at a specified price on the settlement date.
C. are marked to the market on a daily basis.
D. cannot be resold.
E. are limited to contracts on financial assets.
A business created as a distinct legal entity and treated as a legal "person" is called a:
A. corporation.
B. sole proprietorship.
C. general partnership.
D. limited partnership.
E. unlimited liability company.
Hoyes Lumber generally receives 3 checks a month. The check amounts and the
collection delay for each check are shown below. Given this information, what is the
amount of the average daily float? Assume each month has 30 days.
A. $1,386.67
B. $1,407.19
C. $4,750.00
D. $6,833.33
E. $6,933.33
You are analyzing the following two mutually exclusive projects and have developed
the following information. What is the crossover rate?
A. 13.17 percent
B. 13.33 percent
C. 14.32 percent
D. 14.96 percent
E. 15.20 percent
Family Travel Plans is the sole shareholder in its subsidiary, Traveler's Insurance Co.
Family Travel Plans has decided to divest itself of its insurance operations and does so
by distributing the shares in the subsidiary to the shareholders of Family Travel Plans.
This distribution of shares is called a(n):
A. lockup transaction.
B. bear hug.
C. equity carve-out.
D. spin-off.
E. split-up.
Samuelson Electronics has a required payback period of three years for all of its
projects. Currently, the firm is analyzing two independent projects. Project A has an
expected payback period of 2.8 years and a net present value of $6,800. Project B has
an expected payback period of 3.1 years with a net present value of $28,400. Which
projects should be accepted based on the payback decision rule?
A. Project A only
B. Project B only
C. Both A and B
D. Neither A nor B
E. Answer cannot be determined based on the information given.
Dog Gone Good Engines has a bond issue outstanding with 17 years to maturity. These
bonds have a $1,000 face value, a 9 percent coupon, and pay interest semi-annually.
The bonds are currently quoted at 87 percent of face value. What is the company's pre-
tax cost of debt if the tax rate is 38 percent?
A. 4.10 percent
B. 4.42 percent
C. 6.61 percent
D. 8.90 percent
E. 10.67 percent
There are two distinct discount rates at which a particular project will have a zero net
present value. In this situation, the project is said to:
A. have two net present value profiles.
B. have operational ambiguity.
C. create a mutually exclusive investment decision.
D. produce multiple economies of scale.
Whistle Stop Trains pays a constant $16 dividend on its stock. The company will
maintain this dividend for the next 14 years and will then cease paying dividends
forever. What is the current price per share if the required return on this stock is 15
A. $77.78
B. $82.48
C. $91.59
D. $106.67
E. $112.00
A firm evaluates all of its projects by using the NPV decision rule. At a required return
of 14 percent, the NPV for the following project is _____ and the firm should _____ the
A. $5,684.22; reject
B. $7,264.95; accept
C. $7,264.95; reject
D. $9,616.93; accept
E. $9,616.93; reject
Today, you borrowed $6,200 on your credit card to purchase some furniture. The
interest rate is 14.9 percent, compounded monthly. How long will it take you to pay off
this debt assuming that you do not charge anything else and make regular monthly
payments of $120?
A. 5.87 years
B. 6.40 years
C. 6.93 years
D. 7.23 years
E. 7.31 years
A. should be geographically located close to a firm's primary customers.
B. should be located in remote locations to increase the net disbursement float.
C. offer no additional benefit to a firm now that the Check Clearing Act for the 21st
Century has been enacted.
D. tend to be negative net present value projects for firms with a large number of
sizeable transactions.
E. tend to also be used as concentration accounts.
Blackwell Brothers sells men's suits. The store offers a 1 percent discount if payment is
received within 10 days. Otherwise, payment is due within 30 days. This credit offering
is referred to as the:
A. terms of sale.
B. credit analysis.
C. collection policy.
D. payables policy.
E. collection float.
The Motor Plant wants to raise $21.4 million through a rights offering so it can
modernize its facilities. The subscription price for the offering is set at $12 a share.
Currently, the company has 2.6 million shares of stock outstanding at a market price of
$12.50 a share. Each shareholder will receive one right for each share of stock they
own. How many rights will a shareholder need to purchase one new share of stock in
this offering?
A. 1.46 rights
B. 1.52 rights
C. 1.55 rights
D. 1.60 rights
E. 1.67 rights
A company that utilizes the MACRS system of depreciation:
A. will have equal depreciation costs each year of an asset's life.
B. will have a greater tax shield in year two of a project than it would have if the firm
had opted for straight-line depreciation, given the same depreciation life.
C. can depreciate the cost of land, if it so desires.
D. will expense less than the entire cost of an asset.
E. cannot expense any of the cost of a new asset during the first year of the asset's life.
Which of the following statements correctly apply to a merger?
I. The titles to individual assets of the acquired firm must be transferred into the
acquiring firm's name.
II. The merged firm will retain the use of the acquiring company's name.
III. The acquiring firm does not have to seek approval for the merger from its
IV. The shareholders of the acquired company must approve the merger.
A. I and III only
B. II and IV only
C. I, II, and III only
D. I, II, and IV only
E. I, II, III, and IV
Which one of the following statements is correct?
A. An increase in the earnings per share as a result of an acquisition will increase the
price per share of the acquiring firm.
B. The price-earnings ratio will remain constant as a result of an acquisition which fails
to create value.
C. If firm A acquires firm B then the number of shares in AB will equal the number of
shares of A plus the number of shares of B.
D. If no value is created when firm A acquires firm B, then the total value of AB will
equal the value of A plus the value of B.
E. Diversification is one of the greatest benefits derived from an acquisition.
The profitability index (PI) of a project is 1.0. What do you know about the project's net
present value (NPV) and its internal rate of return (IRR)?
Explain how an increase in T-bill rates will affect the value of an American call and an
American put.
You want to deposit sufficient money today into a savings account so that you will have
$1,000 in the account three years from today.
Explain both the concept of financial engineering and why it is becoming increasingly
popular in today's business environment.
Identify the five variables that affect the value of an American put option and indicate
how an increase in each of the variables will affect the value of the put.
Give an example of a situation where a firm should adopt the pure play approach for
determining the cost of capital for a project.
What are the primary motives for a hedger and a speculator in the derivatives market? If
a wheat farmer sells wheat futures, is that hedging or speculating?
At an interest rate of 10 percent and using the Rule of 72, how long will it take to
double the value of a lump sum invested today? How long will it take after that until the
account grows to four times the initial investment? Given the power of compounding,
shouldn't it take less time for the money to double the second time?
Identify the three basic legal procedures that one firm can use to acquire another and
briefly discuss the advantages and disadvantages of each.
Explain the meaning of the dividend clientele effect and why it is important.
Assume all suppliers to a large retail chain offer credit terms of 2/10, net 30. The retail
chain consistently takes the 2 percent discount and pays in 60 days. When pressed on
the issue, the retail chain tells the suppliers they can either accept the payments as they
currently are or lose the business. Is this ethical? How might this impact a small
supplier versus a large supplier?
Stock repurchase programs appear to becoming more popular with business firms.
Explain why there is a tendency for IPOs to be underpriced.
Explain how a manufacturer who has an ongoing need for silver as a raw material in the
production process might use futures to hedge. What does the manufacturer hope to
It can be argued that the decision to accept venture capital is one of the most critical
decisions an entrepreneur must make.
Compare and contrast the NYSE with NSADAQ.