Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

FE 42339

February 26, 2019
The Miller-Orr model assumes that:
A. the cash balance is depleted at regular intervals.
B. all cash flows are known with certainty.
C. the average change in the daily cash flows is positive.
D. management will set both the lower and the upper desired levels of cash.
E. the cash balance fluctuates in a random manner.
John's Auto Repair just took out an $89,000, 10-year, 8 percent, interest-only loan from
the bank. Payments are made annually. What is the amount of the loan payment in year
A. $7,120
B. $8,850
C. $13,264
D. $89,000
E. $96,120
The systematic risk of the market is measured by:
A. a beta of 1.0.
B. a beta of 0.0.
C. a standard deviation of 1.0.
D. a standard deviation of 0.0.
E. a variance of 1.0.
High Point Hotel (HPH) has $165,000 in accounts receivable. To finance a major
purchase, the company assigns these receivables to Cross Town Bank. Which one of the
following statements correctly describes this transaction?
A. HPH will immediately receive $165,000 and will have no further obligation related
to these receivables.
B. HPH will receive some amount of cash immediately while maintaining full
responsibility for any uncollected receivables.
C. Cross Town Bank accepts full responsibility for the collection of the accounts
receivables and, in exchange, immediately pays HPH a discounted value for its
D. Cross Town Bank accepts full responsibility for collecting the accounts receivables
and pays HPH a discounted price for the accounts collected after the normal collection
period has elapsed.
E. HPH receives the full amount of its receivables upon assignment but must reimburse
Cross Town Bank for any uncollected account.
At the optimal order quantity size, the:
A. total cost of holding inventory is fully offset by the restocking costs.
B. carrying costs are equal to zero.
C. restocking costs are equal to zero.
D. total costs equal the carrying costs.
E. carrying costs equal the restocking costs.
Which one of the following best illustrates erosion as it relates to a hot dog stand
located on the beach?
A. providing both ketchup and mustard for its customer's use
B. repairing the roof of the hot dog stand because of water damage
C. selling fewer hot dogs because hamburgers were added to the menu
D. offering French fries but not onion rings
E. losing sales due to bad weather
Val's Marina Supply has 3,500 shares of stock outstanding with a par value of $1.00 per
share and a market value of $19 per share. The balance sheet shows $3,500 in the
common stock account, $24,000 in the capital in excess of par account, and $31,400 in
the retained earnings account. The firm just announced a 100 percent stock dividend.
What is the value of the capital in excess of par account after the dividend?
A. $0
B. $20,500
C. $24,000
D. $55,500
E. $87,000
Firm B is being acquired by Firm A for $162,000 worth of Firm A stock. The
incremental value of the acquisition is $4,600. Firm A has 8,500 shares of stock
outstanding at a price of $36 a share. Firm B has 5,900 shares of stock outstanding at a
price of $27 a share. What is the value per share of Firm A after the acquisition?
A. $35.28
B. $35.71
C. $36.00
D. $36.15
E. $37.04
Phyllis is planning for her retirement in fifteen years. She knows that she can currently
live reasonably well on $38,000 a year given that she is debt-free. Based on her family
history she expects to die ten years after she retires. Thus, she computes her retirement
need as $38,000 a year for 10 years. Which one of the following behaviors applies to
A. regret aversion
B. money illusion
C. self-attribution bias
D. endowment effect
E. myopic loss aversion
Which of the following are sources of cash?
I. decrease in inventory
II. increase in accounts receivable
III. repayment of a bond
IV. sale of preferred stock
A. I and III only
B. I and IV only
C. II and III only
D. I, II, and III only
E. I, III, and IV only
Which of the following apply to a specialist who trades on the floor of the NYSE?
I. provides liquidity for an individual security
II. partially being replaced by SuperDOT
III. pays an annual fee for a trading license
IV. acts as a dealer
A. I and III only
B. II and IV only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
The Pawn Shop loans money at an annual rate of 21 percent and compounds interest
weekly. What is the actual rate being charged on these loans?
A. 23.16 percent
B. 23.32 percent
C. 23.49 percent
D. 23.56 percent
E. 23.64 percent
You are considering the purchase of a new machine. Your analysis includes the
evaluation of two machines which have differing initial and ongoing costs and differing
lives. Whichever machine is purchased will be replaced at the end of its useful life. You
should select the machine which has the:
A. longest life.
B. highest annual operating cost.
C. lowest annual operating cost.
D. highest equivalent annual cost.
E. lowest equivalent annual cost.
You would like to combine a risky stock with a beta of 1.68 with U.S. Treasury bills in
such a way that the risk level of the portfolio is equivalent to the risk level of the overall
market. What percentage of the portfolio should be invested in the risky stock?
A. 32 percent
B. 40 percent
C. 54 percent
D. 60 percent
E. 68 percent
Quest, Inc., is considering a change in its cash-only sales policy. The new terms of sale
would be one month. The required return is 1.6 percent per month. Based on the
following information, what is the NPV of the new policy?
A. $28,750
B. $32,500
C. $35,000
D. $38,250
E. $40,000
The Green Florist has 28,000 shares of stock outstanding with a par value of $1 per
share and a market value of $7 a share. The company just announced a 2-for-5 reverse
stock split. Currently, you own 300 shares of this stock. How many shares will you own
after the reverse stock split?
A. 60 shares
B. 120 shares
C. 480 shares
D. 600 shares
E. 750 shares
Merchantile Exchange is being acquired by National Sales. The incremental value of
the acquisition is $1,800. Merchantile Exchange has 1,500 shares of stock outstanding
at a price of $18 a share. National Sales has 3,500 shares of stock outstanding at a price
of $54 a share. What is the net present value of the acquisition given that the actual cost
of the acquisition using company stock is $28,780?
A. $8
B. $11
C. $20
D. $37
E. $46
A stock is currently selling for $36 a share. The risk-free rate is 3.8 percent and the
standard deviation is 27 percent. What is the value of d1 of a 9-month call option with a
strike price of $40?
A. -0.21872
B. -0.21179
C. -0.21047
D. -0.20950
E. -0.20356
Spencer Tools would like to offer a special product to its best customers. However, the
firm wants to limit its maximum potential loss on this product to the firm's initial
investment in the project. The fixed costs are estimated at $21,000, the depreciation
expense is $11,000, and the contribution margin per unit is $12.50. What is the
minimum number of units the firm should pre-sell to ensure its potential loss does not
exceed the desired level?
A. 1,220 units
B. 1,680 units
C. 2,215 units
D. 2,560 units
E. 2,750 units
Party A has agreed to exchange $1 million U.S. dollars for $1.21 million Canadian
dollars. What is this agreement called?
A. gilt
D. Yankee agreements
E. swap
The Dilana Corporation is considering a change in its cash-only policy. The new terms
would be net one period. The required return is 2 percent per period. What is the NPV
of the new policy given the following information?
A. -$230,880
B. -$118,420
C. $311,508
D. $428,997
E. $566,840
Which one of the following statements is correct?
A. The subjective approach assesses the risks of each project and assigns an adjustment
factor that is unique just for that project.
B. Overall, a firm makes better decisions when it uses the subjective approach than
when it uses its WACC as the discount rate for all projects.
C. Firms will correctly accept or reject every project if they adopt the subjective
D. Mandatory projects should only be accepted if they produce a positive NPV when
the firm's WACC is used as the discount rate.
The value of a stock option is dependent upon the value of the underlying stock. Thus, a
stock option is a:
A. forward agreement.
B. derivative security.
C. mezzanine asset.
D. contingent security.
E. junior security.
The cash coverage ratio directly measures the ability of a firm's revenues to meet which
one of its following obligations?
A. payment to supplier
B. payment to employee
C. payment of interest to a lender
D. payment of principle to a lender
E. payment of a dividend to a shareholder
The cash found in a cash drawer that a check-out clerk uses to make change is an
example of which of the following motives for holding cash?
A. speculative
B. daily float
C. compensating balance
D. precautionary
E. transaction
Shares of PLS United have been selling with rights attached. Tomorrow, the stock will
sell independent of these rights. Which one of the following terms applies to tomorrow
in relation to this stock?
A. pre-issue date
B. aftermarket date
C. declaration date
D. holder-of-record date
E. ex-rights date
Corporate bylaws:
A. must be amended should a firm decide to increase the number of shares authorized.
B. cannot be amended once adopted.
C. define the name by which the firm will operate.
D. describe the intended life and purpose of the organization.
E. determine how a corporation regulates itself.
A cash discount of 2/5, net 30:
A. grants customers 30 days to pay after the discount period expires.
B. offers customers a maximum of 30 days credit.
C. grants free credit for a period of 30 days.
D. charges a higher price to a cash customer than to a customer who pays in 2 days.
E. grants customers 2 days to pay if they want the 5 percent discount.
You own shares of a stock and believe the stock price will increase in the future.
However, you realize the stock price could decline and want to hedge that risk. Which
one of the following option positions should you take to create the desired hedge?
A. buy a call
B. sell a call
C. buy a put
D. sell a put
E. none of the above
If a firm uses its WACC as the discount rate for all of the projects it undertakes then the
firm will tend to:
I. reject some positive net present value projects.
II. accept some negative net present value projects.
III. favor high risk projects over low risk projects.
IV. increase its overall level of risk over time.
A. I and III only
B. III and IV only
C. I, II, and III only
D. I, II, and IV only
E. I, II, III, and IV
What is the return on equity? (Use 2009 values)
A. 10.26 percent
B. 16.38 percent
C. 20.68 percent
D. 29.96 percent
E. 40.14 percent
Southern Utilities just issued some new preferred stock. The issue will pay a $19 annual
dividend in perpetuity beginning 9 years from now. What is one share of this stock
worth today if the market requires a 7 percent return on this investment?
A. $157.97
B. $164.16
C. $189.08
D. $241.41
E. $271.43
The primary purpose of portfolio diversification is to:
A. increase returns and risks.
B. eliminate all risks.
C. eliminate asset-specific risk.
D. eliminate systematic risk.
E. lower both returns and risks.
Sailcloth & More currently produces boat sails and is considering expanding its
operations to include awnings for homes and travel trailers. The company owns land
beside its current manufacturing facility that could be used for the expansion. The
company bought this land 5 years ago at a cost of $319,000. At the time of purchase,
the company paid $24,000 to level out the land so it would be suitable for future use.
Today, the land is valued at $295,000. The company currently has some unused
equipment that it currently owns valued at $38,000. This equipment could be used for
producing awnings if $12,000 is spent for equipment modifications. Other equipment
costing $490,000 will also be required. What is the amount of the initial cash flow for
this expansion project?
A. -$785,000
B. -$823,000
C. -$835,000
D. -$859,000
E. -$883,000