Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

FIN 76737

February 26, 2019
An ordinary annuity is best defined by which one of the following?
A. increasing payments paid for a definitive period of time
B. increasing payments paid forever
C. equal payments paid at regular intervals over a stated time period
D. equal payments paid at regular intervals of time on an ongoing basis
E. unequal payments that occur at set intervals for a limited period of time
Which one of the following rates represents the change, if any, in your purchasing
power as a result of owning a bond?
A. risk-free rate
B. realized rate
C. nominal rate
D. real rate
E. current rate
Each business day, on average, a company writes checks totaling $26,000 to pay its
suppliers. The usual clearing time for the checks is 5 days. Meanwhile, the company is
receiving payments from its customers each day, in the form of checks, totaling
$40,000. The cash from the payments is available to the firm after 2 days. What is the
amount of the firm's average net float?
A. $30,00
B. $50,000
C. $80,000
D. $110,000
E. $130,000
Webster & Moore paid $139,000, in cash, for a piece of equipment 3 years ago. At the
beginning of last year, the company spent $21,000 to update the equipment with the
latest technology. The company no longer uses this equipment in its current operations
and has received an offer of $89,000 from a firm that would like to purchase it. Webster
& Moore is debating whether to sell the equipment or to expand its operations so that
the equipment can be used. When evaluating the expansion option, what value, if any,
should the firm assign to this equipment as an initial cost of the project?
A. $0
B. $21,000
C. $89,000
D. $110,000
E. $160,000
The excess return is computed as the:
A. return on a security minus the inflation rate.
B. return on a risky security minus the risk-free rate.
C. risk premium on a risky security minus the risk-free rate.
D. the risk-free rate plus the inflation rate.
The expected return on a portfolio:
I. can never exceed the expected return of the best performing security in the portfolio.
II. must be equal to or greater than the expected return of the worst performing security
in the portfolio.
III. is independent of the unsystematic risks of the individual securities held in the
IV. is independent of the allocation of the portfolio amongst individual securities.
A. I and III only
B. II and IV only
C. I and II only
D. I, II, and III only
E. I, II, III, and IV
The financial planning process:
I. involves internal negotiations among divisions.
II. quantifies senior manager's goals.
III. considers only internal factors.
IV. reconciles company activities across divisions.
A. III and IV only
B. II and III only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Townsend Enterprises has a PEG ratio of 5.3, net income of $49,200, a price-earnings
ratio of 17.6, and a profit margin of 7.1 percent. What is the earnings growth rate?
A. 0.33 percent
B. 1.06 percent
C. 3.32 percent
D. 5.30 percent
E. 10.60 percent
Phil has researched TLM Technologies and believes the firm is poised to vastly increase
in value. He wants to invest in this company. Phil has decided to purchase TLM
Technologies bonds so that he can have a steady stream of interest income. However, he
still wishes that he could share in the firm's success along with TLM's shareholders.
Which one of the following bond features will help Phil fulfill his wish?
A. put provision
B. positive covenant
C. warrant
D. crossover rating
E. call provision
Kate is leasing some equipment from Ajax Leasing for a period of one-year. Ajax pays
the maintenance, taxes, and insurance costs for this equipment. The life of the
equipment is 7 years. Which type of lease does Kate have?
A. open
B. straight
C. operating
D. financial
E. tax-oriented
Which of the following statements related to the BAT model is correct?
I. The BAT model is used to determine the target cash balance for a firm.
II. The BAT model is rarely used in business due to its complex nature.
III. The BAT model is a model that helps eliminate a firm's collection float.
IV. One disadvantage of the BAT model is the fact that it assumes all cash outflows are
known with certainty.
A. I and II only
B. III and IV only
C. II and III only
D. I and III only
E. I and IV only
The present value of an investment's future cash flows divided by the initial cost of the
investment is called the:
A. net present value.
B. internal rate of return.
C. average accounting return.
D. profitability index.
E. profile period.
You are viewing a graph that plots the NPVs of a project to various discount rates that
could be applied to the project's cash flows. What is the name given to this graph?
A. project tract
B. projected risk profile
C. NPV profile
D. NPV route
E. present value sequence
Al's has a price-earnings ratio of 18.5. Ben's also has a price-earnings ratio of 18.5.
Which one of the following statements must be true if Al's has a higher PEG ratio than
A. Al's has more net income than Ben's.
B. Ben's is increasing its earnings at a faster rate than the Al's.
C. Al's has a higher market value per share than does Ben's.
D. Ben's has a lower market-to-book ratio than Al's.
E. Al's has a higher net income than Ben's.
Brown Trucking is buying a U.S. Treasury bill today with the understanding that the
seller will buy it back tomorrow at a slightly higher price. This investment is known as
A. commercial paper transaction.
B. repurchase agreement.
C. private certificate of deposit.
D. revenue anticipation note.
Scott purchased a shovel, a rake, and a wheelbarrow from The Local Hardware Store
yesterday. Today, the store issued a bill for these items and mailed it to Scott. What is
the name given to this bill?
A. ledger statement
B. warranty
C. indenture
D. receipt
E. invoice
A project that provides annual cash flows of $12,600 for 12 years costs $67,150 today.
At what rate would you be indifferent between accepting the project and rejecting it?
A. 15.28 percent
B. 15.40 percent
C. 15.51 percent
D. 15.62 percent
E. 15.74 percent
Josh opted to exercise his January option at the end of December and paid $3,250 at
that time to acquire 100 shares of stock. Which one of the following did Josh own?
A. American call
B. American put
C. European call
D. European put
E. European convertible bond
The common stock of Checkers, Inc. is selling for $56 a share and the par value per
share is $1. Currently, the firm has a total market value of $812,000. How many shares
of stock will be outstanding if the firm does a 3-for-2 stock split?
A. 9,667 shares
B. 12,500 shares
C. 14,500 shares
D. 17,750 shares
E. 21,750 shares
Hardwoods, Inc. is a mature manufacturing firm. The company just paid a $10
dividend, but management expects to reduce the payout by 9 percent each year,
indefinitely. How much are you willing to pay today per share to buy this stock if you
require a 15 percent rate of return?
A. $34.79
B. $37.92
C. $38.27
D. $41.33
E. $42.09
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?
A. $2,086,957
B. $2,121,212
C. $2,300,000
D. $2,458,122
E. $2,500,000
Crafter's Supply purchased some fixed assets 2 years ago at a cost of $38,700. It no
longer needs these assets so it is going to sell them today for $25,000. The assets are
classified as 5-year property for MACRS. What is the net cash flow from this sale if the
firm's tax rate is 30 percent?
A. $13,122.20
B. $18,576.00
C. $20,843.68
D. $23,072.80
E. $25,211.09
Suppose you sell nine September silver futures contracts at the last price of the day as
shown in the table below. What will be your profit or loss on this contract if the price
turns out to be $12.09 per ounce at expiration?
Silver - 5,000 troy oz, U.S. cents per troy oz.
A. loss of $27,225
B. loss of $7,050
C. loss of $3,025
D. profit of $3,025
E. profit of $27,225
A rights offering in which an underwriting syndicate agrees to purchase the
unsubscribed portion of an issue is called a _____ underwriting.
A. standby
B. best efforts
C. firm commitment
D. direct fee
E. tombstone
Interest earned on both the initial principal and the interest reinvested from prior
periods is called:
A. free interest.
B. dual interest.
C. simple interest.
D. interest on interest.
E. compound interest.
You are developing a financial plan for a corporation. Which of the following questions
will be considered as you develop this plan?
I. How much net working capital will be needed?
II. Will additional fixed assets be required?
III. Will dividends be paid to shareholders?
IV. How much new debt must be obtained?
A. I and IV only
B. II and III only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Diet Soda and High Caffeine are two firms that compete in the soft drink market. These
two competitors have decided to invest $10 million to form a new company, Fruit Tea,
which will manufacture flavored teas. This new firm is defined as a:
A. consolidation.
B. strategic alliance.
C. joint venture.
D. merged alliance.
Wagner Industrial Motors, which is currently operating at full capacity, has sales of
$29,000, current assets of $1,600, current liabilities of $1,200, net fixed assets of
$27,500, and a 5 percent profit margin. The firm has no long-term debt and does not
plan on acquiring any. The firm does not pay any dividends. Sales are expected to
increase by 4.5 percent next year. If all assets, short-term liabilities, and costs vary
directly with sales, how much additional equity financing is required for next year?
A. -$259.75
B. -$201.19
C. $967.30
D. $1,099.08
E. $1,515.25
Which term relates to the cash flow which results from a firm's ongoing, normal
business activities?
A. operating cash flow
B. capital spending
C. net working capital
D. cash flow from assets
E. cash flow to creditors
Donaldson, Inc. spends $94,000 a week to pay bills and maintains a lower cash balance
limit of $50,000. The standard deviation of the disbursements is $13,000. The
applicable weekly interest rate is 0.045 percent and the fixed cost of transferring funds
is $52. What is your optimal average cash balance based on the Miller-Orr model?
A. $78,778
B. $82,623
C. $231,969
D. $236,334
E. $247,868
Precision Tool is trying to decide whether to lease or buy some new equipment for its
tool and die operations. The equipment costs $1.2 million has a 7-year life, and will be
worthless after the 7 years. The pre-tax cost of borrowed funds is 8 percent and the tax
rate is 32 percent. The equipment can be leased for $242,500 a year. What is the net
advantage to leasing?
A. -$51,566
B. -$34,211
C. $37,549
D. $56,828
E. $79,664
Which one of the following characteristics applies to a limited liability company?
A. available only to firms having a single owner
B. limited liability for limited partners only
C. taxed similar to a partnership
D. taxed similar to a C corporation
E. all income generated is totally tax-free
A firm generated net income of $878. The depreciation expense was $47 and dividends
were paid in the amount of $25. Accounts payables decreased by $13, accounts
receivables increased by $22, inventory decreased by $14, and net fixed assets
decreased by $8. There was no interest expense. What was the net cash flow from
operating activity?
A. $876
B. $902
C. $904
D. $922
E. $930

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