Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

FIN 26040

February 26, 2019
Which one of the following statements is correct?
A. The credit period begins when the discount period ends.
B. The discount period is the length of time granted to a customer to pay for a purchase.
C. The credit period begins on the invoice date.
D. With terms of 2/10, net 30, the net credit period is 20 days.
E. With EOM dating, all sales are assumed to have occurred on the 15th of each month.
You are considering renting a kiosk in the local mall for a period of three months. Any
sale you make will be a one-time sale. There is only a 79 percent chance you will
collect payment on a credit sale. The product you want to sell has a variable cost of
$3.88 and a sales price of $4.99. The monthly interest rate is 1.5 percent. Should you
offer people 30 days to pay? Why or why not?
A. yes; because the NPV of a credit sale is $0.09.
B. yes; because the NPV of a credit sale is $0.03.
C. no; because the NPV of a credit sale is -$0.08.
D. no; because the NPV of a credit sale is -$0.02.
E. It doesn't matter because the NPV of a credit sale is approximately zero.
The top-down approach to computing the operating cash flow:
A. ignores noncash expenses.
B. applies only if a project increases sales.
C. applies only to cost cutting projects.
D. is equal to sales - costs - taxes + depreciation.
E. is used solely to compute a bid price.
You need a 25-year, fixed-rate mortgage to buy a new home for $240,000. Your
mortgage bank will lend you the money at a 7.5 percent APR for this 300-month loan,
with interest compounded monthly. However, you can only afford monthly payments of
$850, so you offer to pay off any remaining loan balance at the end of the loan in the
form of a single balloon payment. What will be the amount of the balloon payment if
you are to keep your monthly payments at $850?
A. $738,464
B. $745,316
C. $767,480
D. $810,220
E. $847,315
A bond has a market price that exceeds its face value. Which of the following features
currently apply to this bond?
I. discounted price
II. premium price
III. yield-to-maturity that exceeds the coupon rate
IV. yield-to-maturity that is less than the coupon rate
A. III only
B. I and III only
C. I and IV only
D. II and III only
E. II and IV only
Consider the following premerger information about Firm A and Firm B:
Assume that Firm A acquires Firm B via an exchange of stock at a price of $25 for each
share of B's stock. Both A and B have no debt outstanding. What will the earnings per
share of Firm A be after the merger?
A. $1.60
B. $1.86
C. $1.95
D. $2.02
E. $2.10
Bell Weather Goods has several proposed independent projects that have positive
NPVs. However, the firm cannot initiate any of the projects due to a lack of financing.
This situation is referred to as:
A. financial rejection.
B. project rejection.
C. soft rationing.
D. marginal rationing.
E. capital rationing.
The _____ of a security divided by the beta of that security is equal to the slope of the
security market line if the security is priced fairly.
A. real return
B. actual return
C. nominal return
D. risk premium
E. expected return
Sue and Neal are twins. Sue invests $5,000 at 7 percent when she is 25 years old. Neal
invests $5,000 at 7 percent when he is 30 years old. Both investments compound
interest annually. Both Sue and Neal retire at age 60. Which one of the following
statements is correct assuming that neither Sue nor Neal has withdrawn any money
from their accounts?
A. Sue will have less money when she retires than Neal.
B. Neal will earn more interest on interest than Sue.
C. Neal will earn more compound interest than Sue.
D. If both Sue and Neal wait to age 70 to retire, then they will have equal amounts of
E. Sue will have more money than Neal as long as they retire at the same time.
Miller Mfg. is analyzing a proposed project. The company expects to sell 8,000 units,
plus or minus 2 percent. The expected variable cost per unit is $11 and the expected
fixed costs are $287,000. The fixed and variable cost estimates are considered accurate
within a plus or minus 5 percent range. The depreciation expense is $68,000. The tax
rate is 32 percent. The sales price is estimated at $64 a unit, give or take 3 percent.
What is the operating cash flow under the best case scenario?
A. $144,150
B. $148,475
C. $107,146
D. $168,630
E. $174,220
At an output level of 50,000 units, you calculate that the degree of operating leverage is
1.8. What will be the percentage change in operating cash flow if the new output level
is 54,500 units?
A. 5.00 percent
B. 6.17 percent
C. 16.20 percent
D. 17.43 percent
E. 20.00 percent
Brad purchased an option that he can only exercise on the final day of the option period.
Which type of option did he purchase?
A. European
B. American
C. inflexible
D. dated
E. pointed
A bank offers your firm a revolving credit arrangement for up to $115 million at an
interest rate of 2 percent per quarter. The bank also requires you to maintain a
compensating balance of 5 percent against the unused portion of the credit line, to be
deposited in a non-interest-bearing account. Assume you have a short-term investment
account at the bank that pays 1.3 percent per quarter, and assume the bank uses
compound interest on its revolving credit loans. What is the effective annual interest
rate on the revolving credit arrangement if your firm does not borrow any money during
the year?
A. 0 percent
B. 5.0 percent
C. 5.2 percent
D. 5.3 percent
E. 5.5 percent
You want to be a millionaire when you retire in 40 years. You can earn an 11 percent
annual return. How much more will you have to save each month if you wait 10 years
to start saving versus if you start saving at the end of this month?
A. $79.22
B. $114.13
C. $168.47
D. $201.15
E. $240.29
Which one of the following is a direct result of a 2-for-1 stock split?
A. a 100 percent increase in the number of shareholders
B. a 100 percent increase in the common stock account balance
C. a 100 percent decrease in the stock price
D. a 50 percent increase in the number of shares outstanding
E. a 50 percent decrease in the par value per share
Which one of the following is a risk that applies to most securities?
A. unsystematic
B. diversifiable
C. systematic
D. asset-specific
E. total
The outstanding bonds of The River Front Ferry carry a 6.5 percent coupon. The bonds
have a face value of $1,000 and are currently quoted at 101.6. What is the current yield
on these bonds?
A. 1.60 percent
B. 2.37 percent
C. 6.40 percent
D. 6.49 percent
E. 6.88 percent
What is the future value of $15,000 a year for 30 years at 12 percent interest?
A. $2,878,406
B. $3,619,990
C. $3,711,414
D. $3,989,476
E. $4,021,223
Which of the following statements related to the internal rate of return (IRR) are
I. The IRR method of analysis can be adapted to handle non-conventional cash flows.
II. The IRR that causes the net present value of the differences between two project's
cash flows to equal zero is called the crossover rate.
III. The IRR tends to be used more than net present value simply because its results are
easier to comprehend.
IV. Both the timing and the amount of a project's cash flows affect the value of the
project's IRR.
A. I and II only
B. III and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
Meadow Brook Manor would like to buy some additional land and build a new assisted
living center. The anticipated total cost is $23.6 million. The CEO of the firm is quite
conservative and will only do this when the company has sufficient funds to pay cash
for the entire construction project. Management has decided to save $1.2 million a
quarter for this purpose. The firm earns 6.25 percent, compounded quarterly, on the
funds it saves. How long does the company have to wait before expanding its
A. 4.09 years
B. 4.32 years
C. 4.46 years
D. 4.82 years
E. 4.91 years
Forty years ago, your mother invested $5,000. Today, that investment is worth
$430,065.11. What is the average annual rate of return she earned on this investment?
A. 11.68 percent
B. 11.71 percent
C. 11.78 percent
D. 11.91 percent
E. 12.02 percent
National Warehousing just announced it is increasing its annual dividend to $1.18 next
year and establishing a policy whereby the dividend will increase by 3.25 percent
annually thereafter. How much will one share of this stock be worth 8 years from now if
the required rate of return is 9.5 percent?
A. $24.38
B. $25.68
C. $26.51
D. $27.02
E. $27.37
Marie owns shares of Deltona Productions preferred stock which she says provides her
with a constant 14.3 percent rate of return. The stock is currently priced at $45.45 a
share. What is the amount of the dividend per share?
A. $6.00
B. $6.25
C. $6.50
D. $6.60
E. $7.00
Which one of the following correctly defines the retention ratio?
A. one plus the dividend payout ratio
B. addition to retained earnings divided by net income
C. addition to retained earnings divided by dividends paid
D. net income minus additions to retained earnings
E. net income minus cash dividends
Which one of the following statements related to stock repurchases is correct?
A. An open market stock repurchase increases the total wealth of a shareholder if you
ignore taxes, costs, and market imperfections.
B. Targeted repurchases must be offered to all shareholders but can be done in steps
such that only a portion of the shareholders have the option to sell at any one point in
C. When a firm wishes to repurchase shares in the open market, it will do so in a special
trading session that is set up by the SEC.
D. A firm may spend more cash over the course of a year on stock repurchases than it
does on cash dividends.
E. Tender offer prices must be set equal to the opening market price on the day the
tender offer is announced.
Which one of the following statements related to the implied standard deviation (ISD)
is correct?
A. The ISD is an estimate of the historical standard deviation of the underlying security.
B. ISD is equal to (1 - D1).
C. The ISD estimates the volatility of an option's price over the option's lifespan.
D. The value of ISD is dependent upon both the risk-free rate and the time to option
E. ISD confirms the observable volatility of the return on the underlying security.
A general partner:
A. is solely responsible for all the partnership debts.
B. has no say over a firm's daily operations.
C. faces double taxation whereas a limited partner does not.
D. has a maximum loss equal to his or her equity investment.
E. receives a salary in lieu of a portion of the profits.
Peterborough Trucking just purchased some fixed assets that are classified as 3-year
property for MACRS. The assets cost $9,800. What is the amount of the depreciation
expense in year 3?
A. $537.52
B. $1,347.17
C. $1,451.38
D. $1,929.11
E. $2,177.56
Activities of a firm which require the spending of cash are known as:
A. sources of cash.
B. uses of cash.
C. cash collections.
D. cash receipts.
E. cash on hand.
Your parents have made you two offers. The first offer includes annual gifts of $10,000,
$11,000, and $12,000 at the end of each of the next three years, respectively. The other
offer is the payment of one lump sum amount today. You are trying to decide which
offer to accept given the fact that your discount rate is 8 percent. What is the minimum
amount that you will accept today if you are to select the lump sum offer?
A. $28,216
B. $29,407
C. $29,367
D. $30,439
E. $30,691
Which two methods of project analysis are the most biased towards short-term projects?
A. net present value and internal rate of return
B. internal rate of return and profitability index
C. payback and discounted payback
D. net present value and discounted payback
E. discounted payback and profitability index

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