Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

FIN 29323

February 23, 2019
Today, you are retiring. You have a total of $411,016 in your retirement savings and
have the funds invested such that you expect to earn an average of 7.10 percent,
compounded monthly, on this money throughout your retirement years. You want to
withdraw $2,500 at the beginning of every month, starting today. How long will it be
until you run out of money?
A.31.97 years
B.34.56 years
C.42.03 year
D.48.19 years
E.You will never run out of money.
Which one of the following variables is the exponent in the present value formula?
A.present value
B.future value
C.interest rate
E.There is no exponent in the present value formula.
Beginning three months from now, you want to be able to withdraw $1,500 each quarter
from your bank account to cover college expenses over the next 4 years. The account
pays 1.25 percent interest per quarter. How much do you need to have in your account
today to meet your expense needs over the next 4 years?
Graphing the crossover point helps explain:
A.why one project is always superior to another project.
B.how decisions concerning mutually exclusive projects are derived.
C.how the duration of a project affects the decision as to which project to accept.
D.how the net present value and the initial cash outflow of a project are related.
E.how the profitability index and the net present value are related.
The net book value of equipment will:
A.remain constant over the life of the equipment.
B.vary in response to changes in the market value.
C.decrease at a constant rate when MACRS depreciation is used.
D.increase over the taxable life of an asset.
E.decrease slower under straight-line depreciation than under MACRS.
Champion Bakers uses specialized ovens to bake its bread. One oven costs $689,000
and lasts about 4 years before it needs to be replaced. The annual operating cost per
over is $41,000. What is the equivalent annual cost of an oven if the required rate of
return is 13 percent?
The Farmer's Market just paid an annual dividend of $5 on its stock. The growth rate in
dividends is expected to be a constant 5 percent per year indefinitely. Investors require a
13 percent return on the stock for the first 3 years, a 9 percent return for the next 3
years, a 7 percent return thereafter. What is the current price per share?
You work for a nuclear research laboratory that is contemplating leasing a diagnostic
scanner (leasing is a very common practice with expensive, high-tech equipment). The
scanner costs $2 million and it would be depreciated straight-line to zero over 4 years.
Because of radiation contamination, it will actually be completely valueless in 4 years.
Assume the tax rate is 33 percent. You can borrow at 6 percent before taxes. How much
would the lease payment have to be in order for both the lessor and the lessee to be
indifferent about the lease?
Aaron's Sailboats has decided to take the company public by offering a total of 120,000
shares of common stock to the public. The firm has hired an underwriter who arranges a
full commitment underwriting and suggests an initial selling price of $28 a share with
an 8.5 percent spread. As it turns out, the underwriters only sell 97,400 shares. How
much cash will Aaron's Sailboats receive from its first public offering?
You work for a nuclear research laboratory that is contemplating leasing a diagnostic
scanner (leasing is a very common practice with expensive, high-tech equipment). The
scanner costs $3.5 million and it would be depreciated straight-line to zero over 4 years.
Because of radiation contamination, it will actually be completely valueless in 4 years.
You can lease it for $875,000 per year for 4 years. Assume the tax rate is 33 percent.
You can borrow at 10 percent before taxes. What is the net advantage to leasing from
your company's standpoint?
The Shoe Outlet has paid annual dividends of $0.65, $0.70, $0.72, and $0.75 per share
over the last four years, respectively. The stock is currently selling for $26 a share.
What is this firm's cost of equity?
A.7.56 percent
B.7.93 percent
C.10.38 percent
D.10.53 percent
E.11.79 percent
Suzie is the controller of The Price Rite Company. She has been granted to the right to
buy 1,000 shares of her employer's stock at $25 a share anytime within the next three
years. Which one of the following has Suzie been granted?
A.employee stock option
B.company bonus option
C.employee grant
D.employee exercise option
E.company benefits option
Callable bonds generally:
A.grant the bondholder the option to call the bond anytime after the deferment period.
B.are callable at par as soon as the call-protection period ends.
C.are called when market interest rates increase.
D.are called within the first three years after issuance.
Which one of the following managers determines which customers must pay cash and
which can charge their purchases?
A.purchasing manager
B.credit manager
D.production manager
E.payables manager
A project has an initial cost of $18,400 and produces cash inflows of $7,200, $8,900,
and $7,500 over three years, respectively. What is the discounted payback period if the
required rate of return is 16 percent?
A.2.31 years
B.2.45 years
C.2.55 years
D.2.62 years
Pearson Electric recently registered 250,000 shares of stock under SEC Rule 415. The
firm plans to sell 150,000 shares this year and the remaining 100,000 shares next year.
What type of registration was this?
A.standby registration
B.shelf registration
C.Regulation A registration
D.Regulation Q registration
E.private placement registration
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.
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
Which one of the following statements is correct concerning a portfolio of 20 securities
with multiple states of the economy when both the securities and the economic states
have unequal weights?
A.Given the unequal weights of both the securities and the economic states, the
standard deviation of the portfolio must equal that of the overall market.
B.The weights of the individual securities have no effect on the expected return of a
portfolio when multiple states of the economy are involved.
C.Changing the probabilities of occurrence for the various economic states will not
affect the expected standard deviation of the portfolio.
D.The standard deviation of the portfolio will be greater than the highest standard
deviation of any single security in the portfolio given that the individual securities are
well diversified.
E.Given both the unequal weights of the securities and the economic states, an investor
might be able to create a portfolio that has an expected standard deviation of zero.
Which one of the following securities is used as a means of investing in a foreign stock
that otherwise could not be traded in the United States?
A.American Depository Receipt
B.Yankee bond
C.Yankee stock
The owners' equity accounts for Blueswell Industries are shown here:
If Blueswell Industries declares a 1-for-5 reverse stock split, there will be ____ shares
outstanding at a par value of _____ per share.
A.1,800; $1.00
B.1,800; $5.00
C.9,000; $5.00
D.45,000; $0.20
E.45,000; $1.00
Jill is the CFO of Summertime Adventures which is a seasonal firm specializing in
products related to water sports. The firm purchases inventory one month before it is
sold and pays for its purchases 60 days after the invoice date. Sales are highest during
July and August. Currently, Jill is preparing the cash disbursements section of the firm's
cash budget. Which one of the following statements is supported by this information?
A.Inventory purchases will be highest during the months of July and August.
B.Inventory purchases will be highest during the months of May and June.
C.Payments to suppliers will be highest during the months of June and July.
D.Payments to suppliers will be highest during the months of July and August.
E.Payments to suppliers will be highest during the months of August and September.
Which one of the following categories of securities has had the most volatile returns
over the period 1926-2007?
A.long-term corporate bonds
B.large-company stocks
C.intermediate-term government bonds
D.U.S. Treasury bills
E.small-company stocks
Hanover Tires is being acquired by Better Tires for $89,000 worth of Better Tires stock.
Hanover Tires has 2,500 shares of stock outstanding at a price of $36 a share. Better
Tires has 6,000 shares outstanding with a market value of $23 a share. The incremental
value of the acquisition is $4,200. How many new shares of stock will be issued to
complete this acquisition?
A.2,472 shares
B.3,016 shares
C.3,133 shares
D.3,870 shares
E.3,987 shares
Which of the following have been suggested as reasons why the stockholders in
acquiring firms may not benefit to any significant degree from an acquisition?
I. the price paid for the target firm might equal the target firm's total value
II. management may have priorities other than the interest of the stockholders
III. the takeover market may not be competitive
IV. anticipated merger gains may not be fully achieved
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
Which one of the following statements currently applies to a NYSE broker?
A.owns a "seat" on the exchange
B.buys at the bid price
C.remains at his or her specified post
D.matches customer buy and sell orders
E.trades for his or her personal account
Valerie just completed analyzing a project. Her analysis indicates that the project will
have a 6-year life and require an initial cash outlay of $320,000. Annual sales are
estimated at $589,000 and the tax rate is 34 percent. The net present value is a negative
$320,000. Based on this analysis, the project is expected to operate at the:
A.maximum possible level of production.
B.minimum possible level of production.
C.financial break-even point.
D.accounting break-even point.
E.cash break-even point.
Net present value:
A.is the best method of analyzing mutually exclusive projects.
B.is less useful than the internal rate of return when comparing different sized projects.
C.is the easiest method of evaluation for non-financial managers to use.
D.is less useful than the profitability index when comparing mutually exclusive
E.is very similar in its methodology to the average accounting return.
Which one of the following statements is correct?
A.Price levels increased more in the late 1800's than they did in the late 1900's in the
B.10-year U.S. Treasury interest rates since 1979 have been managed by the Federal
Reserve such that the rates vary by less than 50 basis points in any given year.
C.The Bretton Woods accord has reduced exchange rate volatility between the U.S.
dollar and the U.K. pound since it was passed in 1993.
D.Both U.S. inflation rates and exchange rates are more volatile now than they were 50
years ago.
E.Oil prices have tended to stabilize over the past twenty years.
You would like to establish a trust fund that will provide $120,000 a year forever for
your heirs. The trust fund is going to be invested very conservatively so the expected
rate of return is only 5.75 percent. How much money must you deposit today to fund
this gift for your heirs?
Inventory needs under a derived-demand inventory system are:
A.primarily dependent upon the competitive demands placed on a firm's suppliers.
B.based on the anticipated demand for the finished product.
C.based on minimizing the cost of restocking inventory.
D.held constant over time.
You need $12,000 in 6 years. How much will you need to deposit today if you can earn
11 percent per year, compounded continuously? Assume this is the only deposit you
What is cross-hedging? Why do you suppose firms use this method of risk
management? What are some of the drawbacks?
Which do you feel is the more appropriate upper limit for the credit period that a seller
offers to a buyer: the buyer's operating cycle or the buyer's inventory period?
Shawn earned an average return of 14.
You need to analyze a firm's performance in relation to its peers. You can do this either
by comparing the firms' balance sheets and income statements or by comparing the
firms' ratios. If you only had time to use one means of comparison which method would
you use and why?
What role does the weighted average cost of capital play when determining a project's
cost of capital?
Explain what a zero-balance account is, how it is used, and how it affects cash
What are the basic similarities and basic differences between warrants and call options?
Suppose your boss comes to you and asks you to re-evaluate a capital budgeting
project. The first evaluation was in error, he explains, because it ignored flotation costs.
To correct for this, he asks you to evaluate the project using a higher cost of capital
which incorporates these costs. Is your boss' approach correct? Why or why not?
What are the upper and lower bounds for an American call option?
Draw the following two graphs, one above the other: In the top graph, plot firm value
on the vertical axis and total debt on the horizontal axis.
Give an example of a situation where a firm should adopt the pure play approach for
determining the cost of capital for a project.
Explain how a manufacturer who has an ongoing need for silver as a raw material in the
production process might use futures to hedge. What does the manufacturer hope to
From a liability point of view, what is the difference between investing in a sole
proprietorship and a general partnership?
Explain the "leasing paradox" and also explain why leasing is or is not a "zero sum
Identify the five variables that affect the value of an American put option and indicate
how an increase in each of the variables will affect the value of the put.
Call options are frequently attached to bonds, making them callable at the option of the
issuer. Consider a firm that just issued two sets of bonds: One is callable, has a 7
percent coupon rate, 15 years to maturity, and cannot be called during the first three
years; the second is noncallable, has a 7 percent coupon rate, 15 years to maturity, and
is identical to the first bond in every way except for the call option. Suppose the
noncallable bonds are sold for $1,000 each. Will the callable bonds sell for more or less
than $1,000? Who "purchases" the option in this case and who "sells" it?
Kelley wants to purchase shares in Classic Kars, Inc., but is torn between buying shares
of common stock or shares of preferred stock. What should he consider before
determining the type of share he should purchase?
Ted, a wealthy individual, plans to purchase 30 percent of a firm's Class A shares of
outstanding stock. He believes that such a purchase will allow him to control the firm
by electing his candidates to the board over time as current board member's terms
expire. The firm has a cumulative voting process. What factors should Ted be
considering and why to ensure he can gain the control he desires?

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