Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

FE 70231

February 27, 2019
Which of the following are associated with a restrictive short-term financial policy?
I. little, if any, investment in marketable securities
II. liberal credit terms for customers
III. low cash balances
IV. increasing inventory levels
A. I and III only
B. II and IV only
C. I and IV only
D. III and IV only
E. I, II, and III only
The City Street Corporation's common stock has a beta of 1.2. The risk-free rate is 3.5
percent and the expected return on the market is 13 percent. What is the firm's cost of
A. 11.4 percent
B. 12.8 percent
C. 14.9 percent
D. 17.6 percent
E. 19.1 percent
Town Hardware sells goods on credit with payment due 30 days after purchase. If
payment is not received by the 30th day, the store mails a friendly reminder to the
customer. If payment is not received by the 45th day, the store calls the customer and
requests payment and also stops offering credit to that customer. These procedures are
referred to as the store's:
A. customer service policy.
B. credit policy.
C. collection policy.
D. payables policy.
E. disbursements policy.
In a tax-free acquisition, the shareholders of the target firm:
A. receive income which is considered to be tax-exempt.
B. gift their shares to a tax-exempt organization and therefore have no taxable gain.
C. are viewed as having exchanged shares on a dollar-for-dollar basis.
D. sell their shares to a qualifying entity thereby avoiding both income and capital gains
E. sell their shares at cost thereby avoiding the capital gains tax.
As of the beginning of the quarter, Swenson's, Inc. had a cash balance of $460. During
the quarter, the company collected $520 from customers and paid suppliers $360. The
company also paid an interest payment of $20 and a tax payment of $110. In addition,
the company repaid $140 on its long-term debt. What is Callahan's cash balance at the
end of the quarter?
A. -$110
B. $320
C. $350
D. $430
E. $490
Which one of the following statements best defines the efficient market hypothesis?
A. Efficient markets limit competition.
B. Security prices in efficient markets remain steady as new information becomes
C. Mispriced securities are common in efficient markets.
D. All securities in an efficient market are zero net present value investments.
E. Profits are removed as a market incentive when markets become efficient.
What is the net working capital to total assets ratio for 2009?
A. 24.18 percent
B. 36.82 percent
C. 45.49 percent
D. 51.47 percent
E. 65.83 percent
Built Rite Corp. is evaluating an extra dividend versus a share repurchase. In either
case, $5,500 would be spent. Current earnings are $0.80 per share, and the stock
currently sells for $33 per share. There are 250 shares outstanding. Ignore taxes and
other imperfections. You own one share of stock in this company. If the company issues
the dividend, your total investment will be worth ____ as compared to ____ if the
company opts for a share repurchase.
A. $11; $11
B. $11; $22
C. $11; $33
D. $23; $33
E. $33; $33
As long as the inflation rate is positive, the real rate of return on a security will be ____
the nominal rate of return.
A. greater than
B. equal to
C. less than
D. greater than or equal to
E. unrelated to
You are considering the following two mutually exclusive projects. Both projects will
be depreciated using straight-line depreciation to a zero book value over the life of the
project. Neither project has any salvage value.
Should you accept or reject these projects based on the average accounting return?
A. accept Project A and reject Project B
B. reject Project A and accept Project B
C. accept both Projects A and B
D. reject both Projects A and B
E. You cannot make this decision based on the information provided.
Which one of the following is the relationship between the percentage change in
operating cash flow and the percentage change in quantity sold?
A. degree of sensitivity
B. degree of operating leverage
C. accounting break-even
D. cash break-even
E. contribution margin
You are analyzing a project and have gathered the following data:
Based on the payback period of _____ years for this project, you should _____ the
A. 2.79; accept
B. 3.79; accept
C. 2.46; reject
D. 2.79; reject
E. 3.79; reject
Jillian was recently hired by a major retail store. Her job is to determine the probability
that individual customers will fail to pay for their charge sales. Jillian's job best relates
to which one of the following?
A. terms of sale
B. credit analysis
C. collection policy
D. payables policy
E. customer service
Cool Treats is considering either leasing or buying a new freezer unit. The lessor will
charge $12,600 a year for a 2-year lease. The purchase price is $32,000. The freezer has
a 2-year life after which time it is expected to have a resale value of $10,000. Cool
Treats uses straight-line depreciation, borrows money at 8 percent, and has sufficient
tax loss carryovers to offset any potential taxable income the firm might have over the
next 5 years. What is the net advantage to leasing?
A. $167
B. $384
C. $573
D. $710
E. $957
Which one of the following rights is never directly granted to all shareholders of a
publicly-held corporation?
A. electing the board of directors
B. receiving a distribution of company profits
C. voting either for or against a proposed merger or acquisition
D. determining the amount of the dividend to be paid per share
E. having first chance to purchase any new equity shares that may be offered
Traci wants to have $16,000 six years from now and wants to deposit just one lump
sum amount today. The annual percentage rate applicable to her investment is 6.8
percent. Which one of the following methods of compounding interest will allow her to
deposit the least amount possible today?
A. annual
B. daily
C. quarterly
D. monthly
E. continuous
You are analyzing a project and have gathered the following data:
Based on the net present value of _____, you should _____ the project.
A. -$15,030.75; reject
B. -$12,995.84; reject
C. -$9,283.60; accept
D. $9,283.60; accept
E. $12,995.84; accept
You are comparing two annuities which offer quarterly payments of $2,500 for five
years and pay 0.75 percent interest per month. Annuity A will pay you on the first of
each month while annuity B will pay you on the last day of each month. Which one of
the following statements is correct concerning these two annuities?
A. These two annuities have equal present values but unequal futures values at the end
of year five.
B. These two annuities have equal present values as of today and equal future values at
the end of year five.
C. Annuity B is an annuity due.
D. Annuity A has a smaller future value than annuity B.
E. Annuity B has a smaller present value than annuity A.
Which one of the five factors included in the Black-Scholes model cannot be directly
A. risk-free rate
B. strike price
C. standard deviation
D. stock price
E. life of the option
A firm wants to maintain a minimum stock price of $15 a share. Due to a recent market
downturn, the stock is currently selling for $6 a share. The firm should consider a:
A. 3-for-1 stock split.
B. 4-for-1 stock split.
C. 1-for-3 reverse stock split.
D. 1-for-4 reverse stock split.
E. 1-for-5 reverse stock split.
The collar of a floating-rate bond refers to the minimum and maximum:
A. call periods.
B. maturity dates.
C. market prices.
D. coupon rates.
E. yields to maturity.
The intercept point of the security market line is the rate of return which corresponds to:
A. the risk-free rate.
B. the market rate.
C. a return of zero.
D. a return of 1.0 percent.
E. the market risk premium.
Historical returns support which one of the following statements?
A. Financial markets are highly inefficient as suggested by behavioral finance.
B. Professional money managers tend to outperform the Vanguard 500 index fund about
55 percent of the time on average.
C. The longer the time span, the more apt a professional money manager is to
outperform an index fund, such as the S&P 500.
D. Historical data supports the statement that arbitrage is unlimited and results in a
totally efficient market.
E. The financial markets appear to be efficient because, on average, they outperform
professional money managers.
The stand-alone principle advocates that project analysis should be based solely on
which one of the following costs?
A. sunk
B. total
C. variable
D. incremental
E. fixed
Upper Crust Bakers just paid an annual dividend of $2.80 a share and is expected to
increase that amount by 4 percent per year. If you are planning to buy 1,000 shares of
this stock next year, how much should you expect to pay per share if the market rate of
return for this type of security is 11.50 percent at the time of your purchase?
A. $37.33
B. $38.16
C. $38.83
D. $40.38
E. $42.00
Consider the following premerger information about Firm X and Firm Y:
Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at a
merger premium of $3 per share. Also assume that neither firm has any debt before or
after the merger. What is the value of the total equity of the combined firm, XY, if the
purchase method of accounting is used?
A. $1,274,000
B. $1,316,000
C. $1,352,000
D. $1,422,000
E. $1,427,000
You are a broker and have been instructed to place an order for a client to purchase 500
shares of every IPO that comes to market. The next two IPOs are each priced at $25 a
share and will begin trading on the same day. The client is allocated 500 shares of IPO
A and 100 shares of IPO B. At the end of the first day of trading, IPO A was selling for
$23.50 a share and IPO B was selling for $29 a share. What is the client's total profit or
loss on these two IPOs as of the end of the first day of trading?
A. -$425
B. -$350
C. $525
D. $975
E. $1,150
The period of time that extends from the day a credit sale is made until the day the bank
credits a firm's account with the payment for that sale is known as the _____ period.
A. float
B. cash collection
C. sales
D. accounts receivable
E. discount
Recently, a neighbor you have known for years won a lottery and received a $250,000
prize. This neighbor decided to invest all of his winnings in a new business venture that
he knew only had a five percent chance of success. Previous to this, the neighbor had
always been ultra conservative with his money and had refused to invest in this
business venture as recently as last week. Which one of the following behaviors most
applies to your neighbor's decision to invest in this business venture now?
A. overoptimisim
B. affect heuristic
C. loss aversion
D. house money
E. get-evenitis
A firm is operating at 90 percent of capacity. This information is primarily needed to
project which one of the following account values when compiling pro forma
A. sales
B. costs of goods sold
C. accounts receivable
D. fixed assets
E. long-term debt

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