Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

FE 85644

February 27, 2019
Which one of the following best describes the primary advantage of being a limited
partner instead of a general partner?
A. tax-free income
B. active participation in the firm's activities
C. no potential financial loss
D. greater control over the business affairs of the partnership
E. maximum loss limited to the capital invested
You own a lot in Key West, Florida, that is currently unused. Similar lots have recently
sold for $1.2 million. Over the past five years, the price of land in the area has increased
10 percent per year, with an annual standard deviation of 23 percent. A buyer has
recently approached you and wants an option to buy the land in the next 9 months for
$1,310,000. The risk-free rate of interest is 7 percent per year, compounded
continuously. How much should you charge for the option? (Round your answer to the
nearest $1,000.)
A. $52,000
B. $58,000
C. $63,000
D. $72,000
E. $77,000
Stellar Plastics is analyzing a proposed project. The company expects to sell 12,000
units, plus or minus 3 percent. The expected variable cost per unit is $3.20 and the
expected fixed costs are $30,000. The fixed and variable cost estimates are considered
accurate within a plus or minus 5 percent range. The depreciation expense is $26,000.
The tax rate is 34 percent. The sales price is estimated at $7.50 a unit, plus or minus 4
percent. What is the operating cash flow for a sensitivity analysis using total fixed costs
of $31,000?
A. $19,580
B. $22,436
C. $27,210
D. $31,460
E. $37,540
Which one of the following refers to the fact that an individual may reply differently if
a question is asked in a different manner?
A. loss aversion
B. gambler's fallacy
C. frame dependence
D. overconfidence
E. format reference
Georga's Restaurants has 4,500 bonds outstanding with a face value of $1,000 each and
a coupon rate of 8.25 percent. The interest is paid semi-annually. What is the amount of
the annual interest tax shield if the tax rate is 37 percent?
A. $137,362.50
B. $162,411.90
C. $187,750.00
D. $210,420.00
E. $233,887.50
An increase in which of the following will increase the accounting break-even quantity?
Assume straight-line depreciation is used.
I. annual salary for the firm's president
II. contribution margin per unit
III. cost of equipment required by a project
IV. variable cost per unit
A. I and III only
B. I and IV only
C. II and III only
D. I, III, and IV only
E. I, II, and IV only
A stock has annual returns of 6 percent, 14 percent, -3 percent, and 2 percent for the
past four years. The arithmetic average of these returns is _____ percent while the
geometric average return for the period is _____ percent.
A. 4.57; 4.75
B. 4.75; 4.57
C. 6.33; 6.19
D. 6.19; 6.33
E. 6.33; 6.33
A proposed acquisition may create synergy by:
I. increasing the market power of the combined firm.
II. improving the distribution network of the acquiring firm.
III. providing the combined firm with a strategic advantage.
IV. reducing the utilization of the acquiring firm's assets.
A. I and III only
B. II and III only
C. I and IV only
D. I, II, and III only
E. I, II, III, and IV
Breakwater Aquatics has a 45 day accounts receivable period. The estimated quarterly
sales for this year, starting with the first quarter, are $6,800, $7,100, $8,200, and $6,400,
respectively. What is the accounts receivable balance at the beginning of the third
quarter? Assume a year has 360 days.
A. $3,400
B. $3,550
C. $6,950
D. $7,100
E. $7,650
Wexford Industrial Supply is considering a new project with estimated depreciation of
$26,000, fixed costs of $79,000, and total sales of $187,000. The variable costs per unit
are estimated at $11.80. What is the accounting break-even level of production?
A. 4,871 units
B. 5,333 units
C. 5,415 units
D. 6,949 units
E. 7,248 units
An agent who maintains an inventory from which he or she buys and sells securities is
called a:
A. broker.
B. trader.
C. capitalist.
D. principal.
E. dealer.
Which of the following increase the costs associated with a merger?
A. changing the title to all the combined firm's assets
B. disbanding the operations of the target firm
C. hiring an underwriter to distribute the IPO shares
D. issue costs associated with warrants that must be offered to the shareholders of the
acquiring firm
E. seeking approval of the shareholders of both the acquiring and the acquired firm
Flagler, Inc. needs to raise $30 million to finance its expansion into new markets. The
company will sell new shares of equity via a general cash offering to raise the needed
funds. The offer price is $30 per share and the company's underwriters charge a 10
percent spread. How many shares need to be sold?
A. 1,111,111 shares
B. 1,250,000 shares
C. 1,666,667 shares
D. 2,500,000 shares
E. 3,333,333 shares
Spot trades must be settled:
A. at the time of the trade.
B. on the day following the trade date.
C. within two business days.
D. within three business days.
E. within one week of the trade date.
The party who owns a leased asset is called the:
A. lessee.
B. lessor.
C. guarantor.
D. trustee.
If Paul's Hardware were to acquire Suburban Hardware, the acquisition would be
classified as a _____ acquisition.
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. integrated
Which one of the following involves a payment in shares by a stock issuer that
increases the number of shares a shareholder owns but also decreases the value per
A. cash dividend
B. stock dividend
C. stock repurchase
D. stock split
E. reverse stock split
Grand Adventure Properties offers a 9.5 percent coupon bond with annual payments.
The yield to maturity is 11.2 percent and the maturity date is 11 years from today. What
is the market price of this bond if the face value is $1,000?
A. $895.43
B. $896.67
C. $941.20
D. $946.18
E. $953.30
You are trying to attract new customers that you feel could become repeat customers.
The average price of your product is $619 per unit with a $435 variable cost per unit.
The monthly interest rate is 1.8 percent. Your experience tells you that 9 percent of
these customers will never pay their bill. Should you offer credit terms of net 30 to
attract these potential customers? Why or why not?
A. yes; because the NPV of extending credit is $8,867
B. yes; because the NPV of extending credit is $9,787
C. yes; because the NPV of extending credit is $128
D. no; because the NPV of extending credit is -$459
E. It doesn't matter because the NPV of extending credit is zero.
Great Lakes Health Care common stock offers an expected total return of 9.2 percent.
The last annual dividend was $2.10 a share. Dividends increase at a constant 2.6 percent
per year. What is the dividend yield?
A. 3.75 percent
B. 4.20 percent
C. 4.55 percent
D. 5.25 percent
E. 6.60 percent
A firm has 160,000 shares of stock outstanding, sales of $1.94 million, net income of
$126,400, a price-earnings ratio of 18.7, and a book value per share of $9.12. What is
the market-to-book ratio?
A. 1.62
B. 1.84
C. 2.23
D. 2.45
E. 2.57
The expected return on a stock given various states of the economy is equal to the:
A. highest expected return given any economic state.
B. arithmetic average of the returns for each economic state.
C. summation of the individual expected rates of return.
D. weighted average of the returns for each economic state.
Hand Tools, Inc. receives an average of 611 checks a day. The average amount per
check is $425. The firm is considering a lockbox system which it anticipates will reduce
the average collection time by 1 day. The bank charges $0.275 a check for this service.
The daily interest rate on Treasury bills is 0.013 percent. What is the average daily cost
of the lockbox system?
A. $31.16
B. $54.19
C. $168.03
D. $180.11
E. $199.19
Home Canning Products common stock sells for $44.96 a share and has a market rate of
return of 12.8 percent. The company just paid an annual dividend of $1.04 per share.
What is the dividend growth rate?
A. 8.29 percent
B. 8.45 percent
C. 9.23 percent
D. 9.67 percent
E. 10.25 percent
Some Freight Line Express shareholders are very dissatisfied with the performance of
the firm's current management team. These shareholders want to gain control of the
board of directors so they can have the power to oust current management. As a means
of gaining control, these shareholders have select candidates for all of the open
positions on the firm's board of directors. Since they have insufficient votes to
guarantee the election of these individuals, they are contacting other shareholders and
asking them to vote with them on this important matter. Of course, the current
management team is encouraging shareholders to vote for their candidates for the
board. Which one of the following terms is best illustrated by this situation?
A. tender offer
B. proxy contest
C. going-private transaction
D. leveraged buyout
E. consolidation
Today, you turn 23. Your birthday wish is that you will be a millionaire by your 40th
birthday. In an attempt to reach this goal, you decide to save $50 a day, every day until
you turn 40. You open an investment account and deposit your first $50 today. What
rate of return must you earn to achieve your goal?
A. 10.67 percent
B. 11.85 percent
C. 12.90 percent
D. 13.06 percent
E. 13.54 percent
You sold three $35 call option contracts at a quoted price of $1.40. What is your net
profit or loss on this investment if the price of the underlying asset is $36.70 on the
option expiration date?
A. -$510
B. -$90
C. $90
D. $510
E. $930
Which one of the following statements is correct?
A. The price of an American put is equal to the stock price minus the exercise price.
B. The value of a European call is greater than the value of a comparable American call.
C. The value of a put is equal to one minus the value of an equivalent call.
D. The value of a put minus the value of a comparable call is equal to the value of the
stock minus the exercise price.
Which one of the following does not affect the total equity of a firm but does increase
the number of shares outstanding?
A. special dividend
B. stock split
C. share repurchase
D. rights offer
E. liquidating dividend
A flexible short-term financial policy:
A. increases a firm's need for long-term financing.
B. minimizes net working capital.
C. avoids bad debts by only selling items for cash.
D. maximizes fixed assets and minimizes current assets.
E. is most appropriate for a firm with relatively high carrying costs and relatively low
shortage costs.
The value of a right depends upon:
I. the number of rights required to purchase one new share.
II. the market price of the security.
III. the subscription price.
IV. the price-earnings ratio of the stock.
A. II and III only
B. II and IV only
C. I and II only
D. I, II, and III only
E. I, II, III, and IV
The average annual return on small-company stocks was about _____ percent greater
than the average annual return on large-company stocks over the period 1926-2007.
A. 3
B. 5
C. 7
D. 9
E. 11
The articles of incorporation:
I. describe the purpose of the firm.
II. are amended periodically.
III. set forth the number of shares of stock that can be issued.
IV. detail the method that will be used to elect corporate directors.
A. I and III only
B. I and IV only
C. II and III only
D. II and IV only
E. I, III, and IV only