Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

FIN 33224

February 26, 2019
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 will provide you with the same value that you would have
if you just purchased BAT stock?
A. sell a put option on BAT stock and invest at the risk-free rate of return
B. buy both a call option and a put option on BAT stock and also lend out funds at the
risk-free rate
C. sell a put and buy a call on BAT stock as well as invest at the risk-free rate of return
D. lend out funds at the risk-free rate of return and sell a put option on BAT stock
E. borrow funds at the risk-free rate of return and invest the proceeds in equivalent
amounts of put and call options on BAT stock
How is the principal amount of an interest-only loan repaid?
A. The principal is forgiven over the loan period so does not have to be repaid.
B. The principal is repaid in equal increments and included in each loan payment.
C. The principal is repaid in a lump sum at the end of the loan period.
D. The principal is repaid in equal annual payments.
E. The principal is repaid in increasing increments through regular monthly payments.
Which one of the following statements concerning stock exchanges is correct?
A. NASDAQ is a broker market.
B. The NYSE is a dealer market.
C. The exchange with the strictest listing requirements is NASDAQ.
D. Some large companies are listed on NASDAQ.
E. Most debt securities are traded on the NYSE.
The total direct costs of underwriting an equity IPO:
A. tends to increase on a percentage basis as the proceeds of the IPO increase.
B. is generally between 7 and 8 percent, regardless of the issue size.
C. can be as high as 25 percent for small issues.
D. excludes the gross spread.
E. excludes both the gross spread and the underpricing cost.
New Town Bank offers you a $40,000 line of credit with an interest rate of 1.85 percent
per quarter. The loan agreement also requires that 3 percent of the unused portion of the
credit line be deposited in a non-interest bearing account as a compensating balance.
Short-term investments are currently paying 1.1 percent per quarter. What is the
effective annual interest rate on the line of credit if you borrow the entire $40,000 for
one year? Assume any funds borrowed or invested use compound interest.
A. 4.47 percent
B. 4.58 percent
C. 7.61 percent
D. 7.78 percent
E. 12.33 percent
A project has a unit price of $5,000, a variable cost per unit of $4,000, fixed costs of
$17,000,000, and depreciation expense of $6,970,000. What is the accounting break-
even quantity?
A. 6,970 units
B. 10,030 units
C. 17,000 units
D. 21,470 units
E. 23,970 units
A repurchase agreement generally has a maximum life of:
A. 1 day.
B. a few days.
C. one month.
D. one to three months.
E. three to six months.
The reward-to-risk ratio for stock A is less than the reward-to-risk ratio of stock B.
Stock A has a beta of 0.82 and stock B has a beta of 1.29. This information implies that:
A. stock A is riskier than stock B and both stocks are fairly priced.
B. stock A is less risky than stock B and both stocks are fairly priced.
C. either stock A is underpriced or stock B is overpriced or both.
D. either stock A is overpriced or stock B is underpriced or both.
E. both stock A and stock B are correctly priced since stock A is riskier than stock B.
The common stock of Jensen Shipping has an expected return of 16.3 percent. The
return on the market is 10.8 percent and the risk-free rate of return is 3.8 percent. What
is the beta of this stock?
A. .92
B. 1.23
C. 1.33
D. 1.67
E. 1.79
The controller of a corporation generally reports directly to the:
A. board of directors.
B. chairman of the board.
C. chief executive officer.
D. president.
E. vice president of finance.
A corporate bond is quoted at a price of 103.16 and carries a 6.50 percent coupon. The
bond pays interest semiannually. What is the current yield on one of these bonds?
A. 6.24 percent
B. 6.30 percent
C. 6.36 percent
D. 6.62 percent
E. 6.66 percent
Getty Markets has bonds outstanding that pay a 5 percent semiannual coupon, have a
5.28 percent yield to maturity, and a face value of $1,000. The current rate of inflation
is 4.1 percent. What is the real rate of return on these bonds?
A. 0.86 percent
B. 0.90 percent
C. 1.04 percent
D. 1.13 percent
E. 1.19 percent
Greenbrier Industrial Products' bonds have a 7.60 percent coupon and pay interest
annually. The face value is $1,000 and the current market price is $1,062.50 per bond.
The bonds mature in 16 years. What is the yield to maturity?
A. 6.94 percent
B. 7.22 percent
C. 7.46 percent
D. 7.71 percent
E. 7.80 percent
You are the sole shareholder of a small corporation. Presently, you wish to diversify
your holdings and thus want to sell a portion of your shares but do not want to incur the
costs associated with SEC filings. Which one of the following markets, if any, might be
conducive to this sale?
C. Pink Sheets
E. None of the above
A large U.S. company has 500,000 in excess cash from its foreign operations. The
company would like to exchange these funds for U.S. dollars. In one of the following
markets can this exchange be arranged?
B. national registry
C. national discount window
D. foreign exchange market
E. Eurobond market
Given the following, which feature identifies the most desirable level of output for a
A. operating cash flow equal to the depreciation expense
B. payback period equal to the project's life
C. discounted payback period equal to the project's life
D. zero IRR
E. zero operating cash flow
All of Fake Stone's costs and net working capital vary directly with sales. Sales are
projected to increase by 3.5 percent. What is the pro forma accounts receivable balance
for next year?
A. $1,659.80
B. $1,661.84
C. $1,780.20
D. $1,787.80
E. $1,800.46
Which one of the following is a positively sloped linear function that is created when
expected returns are graphed against security betas?
A. reward-to-risk matrix
B. portfolio weight graph
C. normal distribution
D. security market line
E. market real returns
You are considering two loans. The terms of the two loans are equivalent with the
exception of the interest rates. Loan A offers a rate of 7.75 percent, compounded daily.
Loan B offers a rate of 8 percent, compounded semi-annually. Which loan should you
select and why?
A. A; the effective annual rate is 8.06 percent.
B. A; the annual percentage rate is 7.75 percent.
C. B; the annual percentage rate is 7.68 percent.
D. B; the effective annual rate is 8.16 percent.
E. The loans are equivalent offers so you can select either one.
Supernormal growth is a growth rate that:
A. is both positive and follows a year or more of negative growth.
B. exceeds a firm's previous year's rate of growth.
C. is generally constant for an infinite period of time.
D. is unsustainable over the long term.
E. applies to a single, abnormal year.
Day Interiors is considering a project with the following cash flows. What is the IRR of
this project?
A. 6.42 percent
B. 7.03 percent
C. 7.48 percent
D. 8.22 percent
E. 8.56 percent
The shareholders of a firm will benefit the most from a positive net present value
project when the delta of the call option on the firm's assets is:
A. equal to one.
B. between zero and one.
C. equal to zero.
D. between zero and minus one.
Yesteryear Productions pays no dividend at the present time. The company plans to start
paying an annual dividend in the amount of $0.40 a share for two years commencing
four years from today. After that time, the company plans on paying a constant $0.75 a
share annual dividend indefinitely. How much are you willing to pay to buy a share of
this stock today if your required return is 11.6 percent?
A. $3.78
B. $4.22
C. $4.37
D. $4.71
E. $4.98
Which one of the following is classified as an intangible fixed asset?
A. accounts receivable
B. production equipment
C. building
D. trademark
E. inventory
Which of the following costs related to holding cash are minimized when the level of
cash a firm holds is optimized?
A. opportunity costs
B. trading costs
C. total costs
D. both trading and opportunity costs
E. trading costs, opportunity costs, and total costs
What is the quick ratio for 2009?
A. 0.56
B. 0.60
C. 1.32
D. 1.67
E. 1.79
A firm which opts to "go dark" in response to the Sarbanes-Oxley Act:
A. must continue to provide audited financial statements to the public.
B. must continue to provide a detailed list of internal control deficiencies on an annual
C. can provide less information to its shareholders than it did prior to "going dark".
D. can continue publicly trading its stock but only on the exchange on which it was
previously listed.
E. ceases to exist.
The option that is foregone so that an asset can be utilized by a specific project is
referred to as which one of the following?
A. salvage value
B. wasted value
C. sunk cost
D. opportunity cost
E. erosion
What is the equity multiplier for 2009?
A. 1.67
B. 1.72
C. 1.88
D. 1.93
E. 2.03
If you pay your suppliers five days sooner, then:
A. your payables turnover rate will decrease.
B. you may require additional funds from other sources to fund the cash cycle.
C. the cash cycle will decrease.
D. your operating cycle will increase.
A firm has a debt-total asset ratio of 74 percent and a return on total assets of 13
percent. What is the return on equity?
A. 26 percent
B. 50 percent
C. 65 percent
D. 84 percent
E. 135 percent
The most acceptable method of evaluating the financial statements of a firm is to
compare the firm's current:
A. financial ratios to the firm's historical ratios.
B. financial statements to the financial statements of similar firms operating in other
C. countries.
D. financial ratios to the average ratios of all firms located within the same geographic
E. financial statements to those of larger firms in unrelated industries.
Suppose a stock had an initial price of $80 per share, paid a dividend of $1.35 per share
during the year, and had an ending share price of $87. What was the capital gains yield?
A. 1.55 percent
B. 1.69 percent
C. 8.05 percent
D. 8.75 percent
E. 10.44 percent