Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

FIN 30922

February 26, 2019
According to the Statement of Cash Flows, an increase in interest expense will _____
the cash flow from _____ activities.
A. decrease; operating
B. decrease; financing
C. increase; operating
D. increase; financing
E. increase; investment
Sessler Manufacturers made two announcements concerning its common stock today.
First, the company announced that the next annual dividend will be $1.75 a share.
Secondly, all dividends after that will decrease by 1.5 percent annually. What is the
maximum amount you should pay to purchase a share of this stock today if you require
a 14 percent rate of return?
A. $11.29
B. $12.64
C. $13.27
D. $14.00
E. $14.21
PC Enterprises wants to commence a new project but is unable to obtain the financing
under any circumstances. This firm is facing:
A. financial deferral.
B. financial allocation.
C. capital allocation.
D. marginal rationing.
E. hard rationing.
Which one of the following represents the level of output where a project produces a
rate of return just equal to its requirement?
A. capital break-even
B. cash break-even
C. accounting break-even
D. financial break-even
E. internal break-even
What is the expected return and standard deviation for the following stock?
A. 15.49 percent; 14.28 percent
B. 15.49 percent; 14.67 percent
C. 17.00 percent; 15.24 percent
D. 17.00 percent; 15.74 percent
E. 17.00 percent'; 16.01 percent
The Market Outlet has a beta of 1.38 and a cost of equity of 14.945 percent. The risk-
free rate of return is 4.25 percent. What discount rate should the firm assign to a new
project that has a beta of 1.25?
A. 13.54 percent.
B. 13.72 percent.
C. 13.94 percent.
D. 14.14 percent.
E. 14.36 percent.
The Mish Mash Store has a beginning cash balance of $440 on March 1. The firm has
projected sales of $610 in February, $680 in March, and $740 in April. The cost of
goods sold is equal to 70 percent of sales. Goods are purchased one month prior to the
month of sale. The accounts payable period is 30 days and the accounts receivable
period is 10 days. The firm has monthly cash expenses of $160. What is the projected
ending cash balance at the end of March? Assume every month has 30 days.
A. $258
B. $461
C. $507
D. $567
E. $621
The June Bug has a $270,000 bond issue outstanding. These bonds have a 7.5 percent
coupon, pay interest semiannually, and have a current market price equal to 98.6
percent of face value. The tax rate is 39 percent. What is the amount of the annual
interest tax shield?
A. $3,948.75
B. $4,112.60
C. $5,311.22
D. $7,897.50
E. $8,225.20
Assume that Fake Stone, Inc. is operating at full capacity. Also assume that all costs, net
working capital, and fixed assets vary directly with sales. The debt-equity ratio and the
dividend payout ratio are constant. What is the pro forma net fixed asset value for next
year if sales are projected to increase by 7.5 percent?
A. $19,800
B. $21,070
C. $23,600
D. $24,240
E. $26,810
You are analyzing a project with an initial cost of 130,000. The project is expected to
return 20,000 the first year, 50,000 the second year and 100,000 the third and final year.
There is no salvage value. The current spot rate is 0.6211. The nominal risk-free return
is 5.5 percent in the U.K. and 6 percent in the U.S. The return relevant to the project is
14 percent in the U.S. Assume that uncovered interest rate parity exists. What is the net
present value of this project in U.S. dollars?
A. -$8,030
B. -$5,409
C. $2,505
D. $4,730
E. $4,947
Forest Gardens, Inc., has a beginning receivables balance on February 1 of $730. Sales
for February through May are $720, $760, $820, and $850, respectively. The accounts
receivable period is 30 days. What is the amount of the April collections? Assume a
year has 360 days.
A. $720
B. $760
C. $790
D. $820
E. $850
An investment project costs $21,500 and has annual cash flows of $4,200 for 6 years. If
the discount rate is 20 percent, what is the discounted payback period?
A. 4.41 years
B. 4.67 years
C. 5.12 years
D. 5.40 years
E. never
Based on the following information, the value of the U.S. dollar will _____ with respect
to the yen and will _____ with respect to the Canadian dollar.
A. appreciate; appreciate
B. appreciate; depreciate
C. depreciate; appreciate
D. depreciate; depreciate
E. depreciate; remain constant
Your car dealer is willing to lease you a new car for $245 a month for 48 months.
Payments are due on the first day of each month starting with the day you sign the lease
contract. If your cost of money is 6.5 percent, what is the current value of the lease?
A. $10,331.03
B. $10,386.99
C. $12,197.74
D. $12,203.14
E. $13,008.31
Answer this question based on the dividend growth model. If you expect the market rate
of return to increase across the board on all equity securities, then you should also
A. an increase in all stock values.
B. all stock values to remain constant.
C. a decrease in all stock values.
D. dividend-paying stocks to maintain a constant price while non-dividend paying
stocks decrease in value.
Fireplaces and More is considering the purchase of a delivery truck costing $29,000.
The truck will be used for 5 years and then it will be worthless. The financing rate for
the purchase is 7.5 percent and the corporate tax rate is 32 percent. The firm uses
straight-line depreciation. What is the break-even lease payment amount?
A. $7,148
B. $7,318
C. $7,546
D. $8,038
E. $8,254
You recently purchased a stock that is expected to earn 22 percent in a booming
economy, 9 percent in a normal economy, and lose 33 percent in a recessionary
economy. There is a 5 percent probability of a boom and a 75 percent chance of a
normal economy. What is your expected rate of return on this stock?
A. -3.40 percent
B. -2.25 percent
C. 1.25 percent
D. 2.60 percent
E. 3.50 percent
Which one of the following statements is correct?
A. Net float decreases every time a firm issues a check to pay one of its suppliers.
B. A positive net float indicates that collection float exceeds disbursements float.
C. Firms prefer a zero net float over a positive net float.
D. Net float is equal to collection float minus disbursement float.
E. Net float is equal to a firm's available balance minus its book balance.
You plan on saving $5,200 this year, nothing next year, and $7,500 the following year.
You will deposit these amounts into your investment account at the end of each year.
What will your investment account be worth at the end of year three if you can earn 8.5
percent on your funds?
A. $13,528.12
B. $13,621.57
C. $13,907.11
D. $14,526.50
E. $14,779.40
Tobin's Q relates the market value of a firm's assets to which one of the following?
A. initial cost of creating the firm
B. current book value of the firm
C. average asset value of similar firms
D. average market value of similar firms
E. today's cost to duplicate those assets
KT Enterprises has expanded its operations into a new field, which is the production of
everyday dinnerware. If this project goes well, the firm has the option to expand its
production into fine china. What type of option is this?
A. financial
B. strategic
C. put
D. intangible
E. call
Which one of the following statements is correct in relation to independent projects?
A. The internal rate of return cannot be used to determine the acceptability of a project
that has financing type cash flows.
B. A project with investing type cash flows is acceptable if its internal rate of return
exceeds the required return.
C. A project with financing type cash flows is acceptable if its internal rate of return
exceeds the required return.
D. The net present value profile is upsloping for projects with both investing and
financing type cash flows.
E. Projects with financing type cash flows are acceptable only when the internal rate of
return is negative.
Which one of the following statements is correct?
A. A firm with a restrictive financing policy secures sufficient long-term financing to
fund all its assets.
B. A firm with a flexible financing policy frequently invests in marketable securities.
C. A firm with a flexible financing policy tends to use short-term financing on a
frequent basis.
D. Firms tend to avoid short-term financing under both restrictive and flexible financing
E. Firms with seasonal sales select flexible financing policies.
Scott is considering a project that will produce cash inflows of $2,100 a year for 4
years. The project has a 12 percent required rate of return and an initial cost of $5,000.
What is the discounted payback period?
A. 2.97 years
B. 3.11 years
C. 3.26 years
D. 4.38 years
E. never
What is the present value of $1,100 per year, at a discount rate of 10 percent if the first
payment is received 6 years from now and the last payment is received 28 years from
A. $6,067.36
B. $6,138.87
C. $6,333.33
D. $6,420.12
E. $6,511.08
A project has a net present value of zero. Which one of the following best describes this
A. The project has a zero percent rate of return.
B. The project requires no initial cash investment.
C. The project has no cash flows.
D. The summation of all of the project's cash flows is zero.
E. The project's cash inflows equal its cash outflows in current dollar terms.
The entire repayment of which one of the following loans is computed simply by
computing a single future value?
A. interest-only loan
B. balloon loan
C. amortized loan
D. pure discount loan
E. bullet loan
A firm that is very cyclical in nature and requires extra equipment only during its peak
periods should consider leasing that equipment using a(n) _____ lease.
A. operating
B. tax-oriented
C. sale and buyback
D. leveraged
E. financial
What is the form called that is filed with the SEC and discloses the material information
on a securities issuer when that issuer offers new securities to the general public?
A. prospectus
B. red herring
C. indenture
D. public disclosure statement
E. registration statement
A corporate bond was quoted yesterday at 102.16 while today's quote is 102.19. What is
the change in the value of a bond that has a face value of $6,000?
A. $0.30
B. $1.80
C. $3.00
D. $18.00
E. $180.00
The most recent financial statements for Benatar Co. are shown here:
Assets and costs are proportional to sales. Debt and equity are not. The company
maintains a constant 40 percent dividend payout ratio. No external equity financing is
possible. What is the internal growth rate?
A. 2.91 percent
B. 3.44 percent
C. 3.87 percent
D. 4.02 percent
E. 4.14 percent
You want to buy a new sports car for $55,000. The contract is in the form of a 60-month
annuity due at a 6 percent APR, compounded monthly. What will your monthly
payment be?
A. $1,047.90
B. $1,053.87
C. $1,058.01
D. $1,063.30
E. $1,072.11
The most recent financial statements for Last in Line, Inc. are shown here:
Assets and costs are proportional to sales. Debt and equity are not. A dividend of $992
was paid, and the company wishes to maintain a constant payout ratio. Next year's sales
are projected to be $21,830. What is the amount of the external financing need?
A. $12,711
B. $13,333
C. $13,556
D. $13,809
E. $14,357
A.K. Scott's stock is selling for $38 a share. A 3-month call on this stock with a strike
price of $35 is priced at $3.40. Risk-free assets are currently returning 0.18 percent per
month. What is the price of a 3-month put on this stock with a strike price of $35?
A. $0.21
B. $0.49
C. $4.99
D. $5.85
E. $6.20
How does the net present value (NPV) decision rule relate to the primary goal of
financial management, which is creating wealth for shareholders?
Explain how the floor and the ceiling prices for a convertible bond are determined.
In general, what does a high Tobin's Q value indicate and how reliable does that value
tend to be?
Shawn earned an average return of 14.
Assume that long-term interest rates are substantially higher than short-term interest
rates and are expected to remain that way for the foreseeable future. How does this
affect a firm's selection of a financing policy for its current assets?
How can two firms arrive at two different bid prices when bidding for the same job and
given the same bid specifications?
Nelson's Landscaping Services just completed a pro forma statement using the
percentage of sales approach. The pro forma has a projected external financing need of
-$5,500. What are the firm's options in this case?
Explain the primary change that occurred in the structure of the NYSE in 2006 and how
that change affected the exchange members.
Describe the key advantages associated with the corporate form of organization.
Smith & Daughters is getting ready to compile pro forma statements for the next few
years. How can the managers establish a reasonable range of growth rates that they
should consider during this planning process?
Assume a firm sets its bid price for a project at the minimum level as computed using
the discounted cash flow method. Given this, what do you know about the net present
value and the internal rate of return on the project as bid?
What value can the price-sales ratio provide to financial managers that the price-
earnings ratio cannot?
What is forecasting risk and why is it important to the analysis of capital expenditure
projects? What methods can be used to reduce this risk?
Assume a firm has a positive cash balance which is increasing annually. Why then is it
important to analyze a statement of cash flows?
Give some examples of ways in which manager's goals can differ from those of
Explain what a zero-balance account is, how it is used, and how it affects cash
Empirical evidence indicates that the returns to shareholders of the target firm vary
significantly from the returns to the shareholders of the acquiring firm.
How well do you think relative purchasing power parity (PPP) and uncovered interest
parity (UIP) behave? That is, do you think it's possible to forecast the expected future
spot exchange rate accurately? What complications might you run into?