Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

FIN 48807

February 26, 2019
Which one of the following best states the primary goal of financial management?
A. maximize current dividends per share
B. maximize the current value per share
C. increase cash flow and avoid financial distress
D. minimize operational costs while maximizing firm efficiency
E. maintain steady growth while increasing current profits
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
E. never
Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no
debt. Penn believes the acquisition will increase its total aftertax annual cash flows by
$3.7 million indefinitely. The current market value of Teller is $103 million, and that of
Penn is $151.7 million. The appropriate discount rate for the incremental cash flows is 9
percent. Penn is trying to decide whether it should offer 44 percent of its stock of $133
million in cash to Teller's shareholders. The cost of the cash alternative is _____, while
the cost of the stock alternative is _____.
A. $103,000,000; $130,156,889
B. $103,000,000; $133,000,000
C. $133,000,000; $103,000,000
D. $133,000,000; $130,156,889
E. $236,000,000; $103,000,000
How much will you pay per pound for a September 130 orange juice futures call
Orange juice - 15,000 lbs: U.S. cents per lb.
A. $0.0045
B. $0.0065
C. $0.0450
D. $0.0650
E. $0.1135
Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds with
similar characteristics are yielding 6.75 percent. The company also has 750,000 shares
of 7 percent preferred stock and 2.5 million shares of common stock outstanding. The
preferred stock sells for $53 a share. The common stock has a beta of 1.34 and sells for
$42 a share. The U.S. Treasury bill is yielding 2.8 percent and the return on the market
is 11.2 percent. The corporate tax rate is 38 percent. What is the firm's weighted
average cost of capital?
A. 10.39 percent
B. 10.64 percent
C. 11.18 percent
D. 11.30 percent
E. 11.56 percent
Why is payback often used as the sole method of analyzing a proposed small project?
A. Payback considers the time value of money.
B. All relevant cash flows are included in the payback analysis.
C. It is the only method where the benefits of the analysis outweigh the costs of that
D. Payback is the most desirable of the various financial methods of analysis.
E. Payback is focused on the long-term impact of a project.
Rosie O'Grady's spends $98,000 a week to pay bills and maintains a lower cash balance
limit of $95,000. The standard deviation of the disbursements is $14,600. The
applicable interest rate is 4.8 percent and the fixed cost of transferring funds is $50.
What is this firm's total cost of holding cash based on the BAT model?
A. $1,431
B. $2,862
C. $3,034
D. $4,912
E. $4,946
Mike is a stock broker and financial planner. Phil is one of Mike's clients. Phil prefers
to meet with Mike just once a year to review his investment portfolio. At their most
recent meeting, Phil stated he believes the stock market is going to decline in value over
the next six months. Thus, Phil instructed Mike to sell every stock he owns that is
currently worth more than what he paid to purchase it. Phil also instructed Mike to
retain any stock that would create a capital loss if sold. Phil is displaying the behavior
known as:
A. overconfidence.
B. arbitrage theory.
C. the disposition effect.
D. the house money effect.
E. a confirmation bias.
Which one of the following statements is correct concerning a portfolio beta?
A. Portfolio betas range between -1.0 and +1.0.
B. A portfolio beta is a weighted average of the betas of the individual securities
contained in the portfolio.
C. A portfolio beta cannot be computed from the betas of the individual securities
comprising the portfolio because some risk is eliminated via diversification.
D. A portfolio of U.S. Treasury bills will have a beta of +1.0.
E. The beta of a market portfolio is equal to zero.
In the spot market, $1 is currently equal to 0.6211. Assume the expected inflation rate in
the U.K. is 4.2 percent while it is 3.4 percent in the U.S. What is the expected exchange
rate one year from now if relative purchasing power parity exists?
A. 0.6161
B. 0.6178
C. 0.6239
D. 0.6261
E. 0.6278
We are evaluating a project that costs $854,000, has a 15-year life, and has no salvage
value. Assume that depreciation is straight-line to zero over the life of the project. Sales
are projected at 154,000 units per year. Price per unit is $41, variable cost per unit is
$20, and fixed costs are $865,102 per year. The tax rate is 33 percent, and we require a
14 percent return on this project. Suppose the projections given for price, quantity,
variable costs, and fixed costs are all accurate to within ±14 percent. What is the worst-
case NPV?
A. $984,613
B. $1,267,008
C. $1,489,511
D. $1,782,409
E. $1,993,870
The primary purpose of a flip-in provision is to:
A. increase the number of shares outstanding while also increasing the value per share.
B. dilute a corporate raider's ownership position.
C. reduce the market value of each share of stock.
D. give the existing corporate directors the sole right to remove a poison pill.
E. provide additional compensation to any senior manager who loses his or her job as a
result of a corporate takeover.
Which of the following are current assets?
I. patent
II. Inventory
III. accounts payable
IV. cash
A. I and III only
B. II and IV only
C. I, II, and IV only
D. I, II and III only
E. II, III, and IV only
Which one of the following is an underlying assumption of the dividend growth model?
A. A stock has the same value to every investor.
B. A stock's value is equal to the discounted present value of the future cash flows
which it generates.
C. A stock's value changes in direct relation to the required return.
D. Stocks that pay the same annual dividend have equal market values.
E. The dividend growth rate is inversely related to a stock's market price.
A supplier grants your firm credit terms of 2/10, net 40. What is the effective annual
rate of the discount if the firm purchases $4,600 worth of merchandise?
A. 27.24 percent
B. 27.86 percent
C. 28.80 percent
D. 29.03 percent
E. 29.27 percent
You are borrowing $17,800 to buy a car. The terms of the loan call for monthly
payments for 5 years at 8.6 percent interest. What is the amount of each payment?
A. $287.71
B. $291.40
C. $301.12
D. $342.76
E. $366.05
High Mountain Foods has an equity multiplier of 1.55, a total asset turnover of 1.3, and
a profit margin of 7.5 percent. What is the return on equity?
A. 8.94 percent
B. 10.87 percent
C. 12.69 percent
D. 14.38 percent
E. 15.11 percent
Heer Enterprises needs someone to supply it with 225,000 cartons of machine screws
per year to support its manufacturing needs over the next 7 years, and you've decided to
bid on the contract. It will cost you $1,170,000 to install the equipment necessary to
start production; you'll depreciate this cost straight-line to zero over the project's life.
You estimate that in 7 years, this equipment can be salvaged for $75,000. Your fixed
production costs will be $360,000 per year, and your variable production costs should
be $12.75 per carton. You also need an initial investment in net working capital of
$112,500, all of which will be recovered when the project ends. Your tax rate is 32
percent and you require a 13 percent return on your investment. What bid price per
carton should you submit?
A. $17.04
B. $16.56
C. $15.79
D. $15.03
E. $14.81
You just received $225,000 from an insurance settlement. You have decided to set this
money aside and invest it for your retirement. Currently, your goal is to retire 25 years
from today. How much more will you have in your account on the day you retire if you
can earn an average return of 10.5 percent rather than just 8 percent?
A. $417,137
B. $689,509
C. $1,050,423
D. $1,189,576
E. $1,818,342
What is the standard deviation of the returns on a $30,000 portfolio which consists of
stocks S and T? Stock S is valued at $12,000.
A. 1.07 percent
B. 1.22 percent
C. 1.36 percent
D. 1.49 percent
E. 1.63 percent
Assume the spot rate on the Canadian dollar is C$0.9872. The risk-free nominal rate in
the U.S. is 5.4 percent while it is only 3.8 percent in Canada. Which one of the
following four-year forward rates best establishes the approximate interest rate parity
A. C$0.9255
B. C$0.9308
C. C$1.0267
D. C$1.0519
E. C$1.0597
Which one of the following increases the net present value of a project?
A. an increase in the required rate of return
B. an increase in the initial capital requirement
C. a deferment of some cash inflows until a later year
D. an increase in the aftertax salvage value of the fixed assets
E. a reduction in the final cash inflow
Markley and Stearns is a multi-divisional firm that uses its WACC as the discount rate
for all proposed projects. Each division is in a separate line of business and each
presents risks unique to those lines. Given this, a division within the firm will tend to:
A. receive less project funding if its line of business is riskier than that of the other
B. avoid risky projects so it can receive more project funding.
C. become less risky over time based on the projects that are accepted.
D. have equal probability of receiving funding as compared to the other divisions.
E. prefer higher risk projects over lower risk projects.
The stock of Edwards Homes, Inc. has a current market value of $23 a share. The 3-
month call with a strike price of $20 is selling for $3.80 while the 3-month put with a
strike price of $20 is priced at $0.54. What is the continuously compounded risk-free
rate of return?
A. 4.43 percent
B. 4.50 percent
C. 4.68 percent
D. 5.00 percent
E. 5.23 percent
This afternoon, you deposited $1,000 into a retirement savings account. The account
will compound interest at 6 percent annually. You will not withdraw any principal or
interest until you retire in forty years. Which one of the following statements is correct?
A. The interest you earn six years from now will equal the interest you earn ten years
from now.
B. The interest amount you earn will double in value every year.
C. The total amount of interest you will earn will equal $1,000 × .06 × 40.
D. The present value of this investment is equal to $1,000.
E. The future value of this amount is equal to $1,000 × (1 + 40).06.
Which one of the following statements concerning a sole proprietorship is correct?
A. The life of a sole proprietorship is potentially unlimited.
B. A sole proprietor can generally raise large sums of capital quite easily.
C. Transferring ownership of a sole proprietorship is easier than transferring ownership
of a corporation.
D. A sole proprietorship is taxed the same as a C corporation.
E. It is easy to create a sole proprietorship.
Which of the following statements is correct concerning the term structure of interest
I. Expectations of lower inflation rates in the future tend to lower the slope of the term
structure of interest rates.
II. The term structure of interest rates includes both an inflation premium and an
interest rate risk premium.
III. The real rate of return has minimal, if any, affect on the slope of the term structure
of interest rates.
IV. The term structure of interest rates and the time to maturity are always directly
A. I and II only
B. II and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, and IV only
You own a July $15 call on ABC stock. Assume today is April 20 and the call has zero
intrinsic value. Which one of the following best describes this option?
A. worthless
B. unfunded
C. expired
D. in-the-money
E. out-of-the-money
Consider a firm with a contract to sell an asset 3 years from now for $90,000. The asset
costs $71,000 to produce today. At what rate will the firm just break even on this
A. 7.87 percent
B. 8.01 percent
C. 8.23 percent
D. 8.57 percent
E. 8.90 percent
What is the present value of $150,000 to be received 8 years from today if the discount
rate is 11 percent?
A. $65,088.97
B. $71,147.07
C. $74,141.41
D. $79,806.18
E. $83,291.06
What concerns might a loan officer have when loaning funds to a sole proprietorship
that he or she might not have when loaning funds to a corporation?
Explain how the unethical use of uncollected funds has been impacted by the growth of
on-line retailing and banking.
Compensating balances are frequently a part of revolving lending arrangements with
banks, yet they add to the cost of financing for the borrower. Why, then, would
borrowers agree to such terms? What other types of alternative financing are available?
What are the key features of the accounting, cash, and financial break-even points?
Float management systems may provide only minimal benefits to a firm. Given that
most firms have other projects with higher positive net present values, why should a
firm's managers spend time implementing a float management system?
It is commonly recommended that the managers of a firm compare the performance of
their firm to that of its peers.
Give an example of a protective put and explain how this strategy reduces investor risk.
What is cross-hedging? Why do you suppose firms use this method of risk
management? What are some of the drawbacks?
From a liability point of view, what is the difference between investing in a sole
proprietorship and a general partnership?
How do the actual effects of the Sarbanes-Oxley Act of 2002 compare to the initial
intent of that Act?
Explain how the slope of the security market line is determined and why every stock
that is correctly priced, according to CAPM, will lie on this line.
What is the relationship between the value of the dollar and the value of the euro in
relation to the rate of inflation in the United States?
Identify some real-world factors which might make it more difficult for an individual to
effectively create a homemade dividend policy.
Explain the "leasing paradox" and also explain why leasing is or is not a "zero sum
Why might a firm opt to sell and leaseback an asset which it currently owns?
What lesson does the future value formula provide for young workers who are looking
ahead to retiring some day?
How can an investor lose money on a stock while making money on a bond investment
if there is a reward for bearing risk? Aren't stocks riskier than bonds?
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?
Provide an example of a managerial decision that illustrates each one of the following
Behavior: Overconfidence
Behavior: Affect heuristic
Behavior: Loss aversion
Student answers will vary but should correctly display the type of behavior indicated.