FE 40401

Type

Quiz

Book Title

Fundamentals of Corporate Finance Standard Edition 9th Edition

ISBN 13

978-0073382395

February 26, 2019

Which of the following are examples of diversifiable risk?

I. earthquake damages an entire town

II. federal government imposes a $100 fee on all business entities

III. employment taxes increase nationally

IV. toymakers are required to improve their safety standards

A. I and III only

B. II and IV only

C. II and III only

D. I and IV only

E. I, III, and IV only

Which one of the following best defines the variance of an investment's annual returns

over a number of years?

A. The average squared difference between the arithmetic and the geometric average

annual returns.

B. The squared summation of the differences between the actual returns and the average

geometric return.

C. The average difference between the annual returns and the average return for the

period.

D. The difference between the arithmetic average and the geometric average return for

the period.

E. The average squared difference between the actual returns and the arithmetic average

return.

All of the following are related to a proposed project. Which of these should be

included in the cash flow at time zero?

I. purchase of $1,400 of parts inventory needed to support the project

II. loan of $125,000 used to finance the project

III. depreciation tax shield of $1,100

IV. $6,500 of equipment needed to commence the project

A. I and II only

B. I and IV only

C. II and IV only

D. I, II, and IV only

E. I, II, III, and IV

Which of the following statements correctly reflect the effects of granting credit to

customers?

I. Total revenues may increase if both the quantity sold and the price per unit increase

when credit is granted.

II. A firm's cash cycle generally increases if credit is granted, all else equal.

III. Both the cost of default and the cost of discounts must be considered before

granting credit.

IV. A firm may have to increase its long-term borrowing if it decides to grant credit to

its customers.

A. I, II, and III only

B. II, III, and IV only

C. I, III, and IV only

D. I, II, and IV only

E. I, II, III, and IV

Decisions made by financial managers should primarily focus on increasing which one

of the following?

A. size of the firm

B. growth rate of the firm

C. gross profit per unit produced

D. market value per share of outstanding stock

E. total sales

The bid price is:

A. an aftertax price.

B. the aftertax contribution margin.

C. the highest price you should charge if you want the project.

D. the only price you can bid if the project is to be profitable.

Which one of the following will increase the accounts payable period, all else constant?

A. an increase in the cost of goods sold account value

B. an increase in the ending accounts payable balance

C. an increase in the cash cycle

D. a decrease in the operating cycle

E. an increase in the accounts payable turnover rate

Which one of the following time periods is included in the accounts receivable period

but not in the cash collection period?

A. the period of time between the receipt of a check and the availability of those funds

B. time it takes a firm to process incoming receipts

C. period of time a check is in the mail

D. the amount of time that it takes a bank to credit a firm's account for a deposit made

E. period of time it takes an invoice to reach a customer by mail

Soo Lee Imports issued 17-year bonds 2 years ago at a coupon rate of 10.3 percent. The

bonds make semiannual payments. These bonds currently sell for 102 percent of par

value. What is the yield-to-maturity?

A. 9.98 percent

B. 10.04 percent

C. 10.13 percent

D. 10.27 percent

E. 10.42 percent

Which one of the following makes the capital structure of a firm irrelevant?

A. taxes

B. interest tax shield

C. 100 percent dividend payout ratio

D. debt-equity ratio that is greater than 0 but less than 1

E. homemade leverage

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 with

costs of $640,000. The tax rate is 34 percent and the required rate of return is 14

percent. What is the project's cash flow at time zero?

A. -$536,000

B. -$614,000

C. -$720,000

D. -$779,000

E. -$944,000

Which one of the following business types is best suited to raising large amounts of

capital?

A. sole proprietorship

B. limited liability company

C. corporation

D. general partnership

E. limited partnership

On an average day, Goose Down Feathers receives $2,400 in checks from customers.

These checks clear the bank in an average of 1.7 days. The applicable daily interest rate

is 0.04 percent. What is the present value of the float? Assume each month has 30 days.

A. $115.20

B. $618.40

C. $2,400.00

D. $4,080.00

E. $4,256.50

Alex invested $10,500 in an account that pays 6 percent simple interest. How much

money will he have at the end of four years?

A. $12,650

B. $12,967

C. $13,020

D. $13,256

E. $13,500

Which one of the following will be used in the computation of the best-case analysis of

a proposed project?

A. minimal number of units that are expected to be produced and sold

B. the lowest expected salvage value that can be obtained for a project's fixed assets

C. the most anticipated sales price per unit

D. the lowest variable cost per unit that can reasonably be expected

E. the highest level of fixed costs that is actually anticipated

Suppose you purchase a September cocoa futures contract at the last price of the day as

shown in the table below. What will be your profit or loss on this contract if the price

turns out to be $1,707 per metric ton at expiration?

Futures:

Cocoa - 10 metric tons, $ per ton

A. $30

B. $110

C. $150

D. $1,100

E. $1,500

Which of the following are correct according to pecking-order theory?

I. Firms stockpile internally-generated cash.

II. There is an inverse relationship between a firm's profit level and its debt level.

III. Firms avoid external debt at all costs.

IV. A firm's capital structure is dictated by its need for external financing.

A. I and III only

B. II and IV only

C. I, III, and IV only

D. I, II, and IV only

E. I, II, III, and IV

You are in charge of a project that has a degree of operating leverage of 2.64. What will

happen to the operating cash flows if the number of units you sell increase by 6

percent?

A. 15.84 percent decrease

B. 2.27 percent decrease

C. no change

D. 2.27 percent increase

E. 15.84 percent increase

Which one of the following terms is used to identify a British perpetuity?

A. ordinary annuity

B. amortized cash flow

C. annuity due

D. discounted loan

E. consol

Suzie owns five different bonds valued at $36,000 and twelve different stocks valued at

$82,500 total. Which one of the following terms most applies to Suzie's investments?

A. index

B. portfolio

C. collection

D. grouping

E. risk-free

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the

following?

A. 0.0

B. 0.5

C. 1.0

D. 1.5

E. 2.0

Which of the following help convince managers to work in the best interest of the

stockholders? Assume there are no golden parachutes.

I. compensation based on the value of the stock

II. stock option plans

III. threat of a company takeover

IV. threat of a proxy fight

A. I and II only

B. III and IV only

C. I, II, and III only

D. I, III, and IV only

E. I, II, III, and IV

Theresa is analyzing a project that currently has a projected NPV of zero. Which of the

following changes that she is considering will help that project produce a positive NPV

instead? Consider each change independently.

I. increase the quantity sold

II. decrease the fixed leasing cost for equipment

III. decrease the labor hours needed to produce one unit

IV. increase the sales price

A. I and II only

B. I and IV only

C. II, III, and IV only

D. I, II, and IV only

E. I, II, III, and IV

The current market value of the assets of Smethwell, Inc. is $56 million, with a standard

deviation of 16 percent per year. The firm has zero-coupon bonds outstanding with a

total face value of $40 million. These bonds mature in 2 years. The risk-free rate is 4.5

percent per year compounded continuously. What is the value of d1?

A. 1.67

B. 1.84

C. 1.93

D. 2.00

E. 2.06

Which of the following values will be equal to zero when a firm is producing the

accounting break-even level of output?

I. operating cash flow

II. internal rate of return

III. net income

IV. payback period

A. I only

B. III only

C. II and III only

D. I and IV only

E. I, II, and III only

Which of the following statements is correct in relation to a stock investment?

I. The capital gains yield can be positive, negative, or zero.

II. The dividend yield can be positive, negative, or zero.

III. The total return can be positive, negative, or zero.

IV. Neither the dividend yield nor the total return can be negative.

A. I only

B. I and II only

C. I and III only

D. I and IV only

E. IV only

The implied standard deviation used in the Black-Scholes option pricing model is:

A. based on historical performance.

B. a prediction of the volatility of the return on the underlying asset over the life of the

option.

C. a measure of the time decay of an option.

D. an estimate of the future value of an option given a strike price (E).

E. a measure of the historical intrinsic value of an option.

Each year you sell 950 units of a product at a price of $899 each. The variable cost per

unit is $575 and the carrying cost per unit is $16.90. You have been buying 100 units at

a time. Your fixed cost of ordering is $60. What is the economic order quantity?

A. 82 units

B. 95 units

C. 105 units

D. 113 units

E. 124 units

The sustainable growth rate:

A. assumes there is no external financing of any kind.

B. assumes no additional long-term debt is available.

C. assumes the debt-equity ratio is constant.

D. assumes the debt-equity ratio is 1.0.

E. assumes all income is retained by the firm.

The interest tax shield is a key reason why:

A. the required rate of return on assets rises when debt is added to the capital structure.

B. the value of an unlevered firm is equal to the value of a levered firm.

C. the net cost of debt to a firm is generally less than the cost of equity.

D. the cost of debt is equal to the cost of equity for a levered firm.

E. firms prefer equity financing over debt financing.

Which one of the following statements related to dividend policy is correct?

A. The primary question related to dividend policy is whether or not a firm should ever

pay a dividend.

B. Both dividends and dividend policy are irrelevant.

C. Dividend policy focuses on the timing of dividend payments.

D. Homemade dividends increase the importance of a firm's dividend policy decisions.

E. Whether or not a firm ever pays a dividend is irrelevant to equity valuation.

Mark owns both a March $20 put and a March $20 call on Alpha stock. Which one of

the following statements correctly relates to Mark's position? Ignore taxes and

transaction costs.

A. A price decrease in Alpha stock will increase the value of Mark's call option.

B. A March $30 call is worth more than Mark's $20 call.

C. The time premium on an April $20 put is less than the time premium on Mark's put.

(Assume both puts expire in the same calendar year.)

D. A price increase in Alpha stock from $26 to $28 will increase the value of Mark's

put.

E. If the intrinsic value of Mark's put increases by $1 then the intrinsic value of his call

must either decrease by $1 or equal zero.

What is the amount of the dividends paid for 2009?

A. $11,100

B. $15,000

C. $32,600

D. $41,200

E. $45,100

The sensitivity of an option's value to a change in the risk-free rate is measured by

which one of the following?

A. theta.

B. vega.

C. rho.

D. delta.

E. gamma.

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