Fin 77943

Type

Quiz

Book Title

Fundamentals of Corporate Finance Standard Edition 9th Edition

ISBN 13

978-0073382395

February 26, 2019

Which one of the following statements correctly applies to U.S. industrial firms based

on the period of 1984 -2004?

A. Earnings growth rates tend to lag dividend growth rates.

B. Dividends tend to fluctuate significantly from quarter to quarter.

C. The percentage of these firms paying dividends in 2004 was higher than in 1984.

D. The total amount of dividends paid by these firms was greater in 2004 than in 1984.

E. Non-dividend paying firms in 1984 were more apt to commence paying regular

dividends than to implement a stock repurchase program.

What is the net present value of a project with the following cash flows if the required

rate of return is 12 percent?

A. -$1,574.41

B. -$1,208.19

C. -$842.12

D. $729.09

E. $1,311.16

Yesterday, the president of RB Enterprises received a phone call from DLK, a

competitor. DLK is a sole proprietorship. An unexpected family situation has caused the

owner to suddenly want to retire and relocate closer to his family. Thus, the assets of

DLK are being offered to RB Enterprises at a bargain basement price. While RB

Enterprises had not anticipated purchasing these assets, it was decided that the

opportunity was too good to pass up. This illustrates which of the following needs to

hold cash?

A. precautionary

B. transaction

C. speculative

D. compensation

E. float

You are comparing two investment options that each pay 5 percent interest,

compounded annually. Both options will provide you with $12,000 of income. Option A

pays three annual payments starting with $2,000 the first year followed by two annual

payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which

one of the following statements is correct given these two investment options?

A. Both options are of equal value given that they both provide $12,000 of income.

B. Option A has the higher future value at the end of year three.

C. Option B has a higher present value at time zero than does option A.

D. Option B is a perpetuity.

E. Option A is an annuity.

Last year, T-bills returned 2 percent while your investment in large-company stocks

earned an average of 5 percent. Which one of the following terms refers to the

difference between these two rates of return?

A. risk premium

B. geometric return

C. arithmetic

D. standard deviation

E. variance

Jamestown Supply is trying to decide whether to lease or buy some new equipment.

The equipment costs $72,000, has a 4-year life, and will be worthless after the 4 years.

The equipment will be replaced. The cost of borrowed funds is 9 percent and the tax

rate is 34 percent. The equipment can be leased for $23,800 a year. What is the amount

of the aftertax lease payment?

A. $13,897

B. $14,250

C. $14,667

D. $15,708

E. $15,820

Which of the following statements concerning risk are correct?

I. Nondiversifiable risk is measured by beta.

II. The risk premium increases as diversifiable risk increases.

III. Systematic risk is another name for nondiversifiable risk.

IV. Diversifiable risks are market risks you cannot avoid.

A. I and III only

B. II and IV only

C. I and II only

D. III and IV only

E. I, II, and III only

This morning, you borrowed $9,500 at 7.65 percent annual interest. You are to repay the

loan principal plus all of the loan interest in one lump sum four years from today. How

much will you have to repay?

A. $12,757.92

B. $12,808.13

C. $12,911.89

D. $13,006.08

E. $13,441.20

Douglass & Frank has a debt-equity ratio of 0.45. The pre-tax cost of debt is 7.6 percent

while the unlevered cost of capital is 13.3 percent. What is the cost of equity if the tax

rate is 39 percent?

A. 13.79 percent

B. 14.86 percent

C. 15.92 percent

D. 18.40 percent

E. 18.87 percent

Which of the following will reduce collection time?

I. billing customers electronically rather than by mail

II. accepting debit cards but not checks as payment for a sale

III. offering cash discounts for early payment

IV. reducing the processing delay by one day

A. I and II only

B. I and III only

C. I, II, and III only

D. II, III, and IV only

E. I, II, III, and IV

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

Luis is going to receive $20,000 six years from now. Soo Lee is going to receive

$20,000 nine years from now. Which one of the following statements is correct if both

Luis and Soo Lee apply a 7 percent discount rate to these amounts?

A. The present values of Luis and Soo Lee's monies are equal.

B. In future dollars, Soo Lee's money is worth more than Luis' money.

C. In today's dollars, Luis' money is worth more than Soo Lee's.

D. Twenty years from now, the value of Luis' money will be equal to the value of Soo

Lee's money.

E. Soo Lee's money is worth more than Luis' money given the 7 percent discount rate.

The buyer of an option contract:

A. receives the option premium in exchange for an obligation to either buy or sell an

underlying asset.

B. pays an option premium in exchange for a right to buy or sell an underlying asset

during a specified period of time.

C. pays the strike price at the time the option is purchased and in exchange receives the

right to exercise the option at any time during the option period.

D. receives the option premium in exchange for guaranteeing the purchase or sale of an

underlying asset if called upon to do so.

E. pays the option premium in exchange for receiving the strike price at a later date.

Todd invested $8,500 in an account today at 7.5 percent compounded continuously.

How much will he have in his account if he leaves his money invested for 5 years?

A. $12,203

B. $12,245

C. $12,287

D. $12,241

E. $12,367

Roadside Markets has a 6.75 percent coupon bond outstanding that matures in 10.5

years. The bond pays interest semiannually. What is the market price per bond if the

face value is $1,000 and the yield to maturity is 6.69 percent?

A. $999.80

B. $999.85

C. $1,003.42

D. $1,004.47

E. $1,007.52

Dressler, Inc., is planning on merging with Weston Foods. Dressler will pay Weston's

shareholders the current value of its stock in shares of Dressler stock. Dressler's

currently has 6,200 shares of stock outstanding at a market price of $30 a share.

Weston's has 2,200 shares outstanding at a price of $28 a share. How many shares of

stock will be outstanding in the merged firm?

A. 6,840 shares

B. 7,061 shares

C. 7,200 shares

D. 8,253 shares

E. 8,609 shares

Electronics Galore has 950,000 shares of common stock outstanding at a market price

of $38 a share. The company also has 40,000 bonds outstanding that are quoted at 106

percent of face value. What weight should be given to the debt when the firm computes

its weighted average cost of capital?

A. 42 percent

B. 46 percent

C. 50 percent

D. 54 percent

E. 58 percent

Which one of the following statements is correct?

A. Book values should always be given precedence over market values.

B. Financial statements are frequently used as the basis for performance evaluations.

C. Historical information provides no value to someone who is predicting future

performance.

D. Potential lenders place little value on financial statement information.

E. Reviewing financial information over time has very limited value.

Which one of the following statements related to cash dividends is correct?

A. Extra cash dividends cannot be repeated in the future.

B. A dividend is never a liability until it has been declared.

C. If a firm has paid regular quarterly dividends for at least five consecutive years it is

legally obligated to continue doing so.

D. Regular cash dividends reduce paid-in capital.

E. The dividend yield expresses the annual dividend as a percentage of net income.

You want to invest in a project in Canada. The project has an initial cost of C$2.2

million and is expected to produce cash inflows of C$900,000 a year for 3 years. The

project will be worthless after the first 3 years. The expected inflation rate in Canada is

4 percent while it is only 3 percent in the U.S. The applicable interest rate for the

project in Canada is 13 percent. The current spot rate is C$1 = $0.8158. What is the net

present value of this project in Canadian dollars?

A. -C$91,889

B. -C$87,924

C. -C$74,963

D. C$165,139

E. C$167,528

The operating cash flow of a cost cutting project:

A. is equal to the depreciation tax shield.

B. is equal to zero because there is no incremental sales.

C. can only be analyzed by projecting the sales and costs for a firm's entire operations.

D. includes any changes that occur in the current accounts.

E. can be positive even though there are no sales.

Last year, which is used as the base year, a firm had cash of $52, accounts receivable of

$218, inventory of $509, and net fixed assets of $1,107. This year, the firm has cash of

$61, accounts receivable of $198, inventory of $527, and net fixed assets of $1,216.

What is the common-base year value of accounts receivable?

A. 0.08

B. 0.10

C. 0.88

D. 0.91

E. 1.18

Which one of the following statements is correct?

A. Seasonal needs are financed externally when firms adhere to a flexible financing

policy.

B. A flexible financing policy tends to increase the risk of encountering financial

distress.

C. Long-term interest rates tend to be less volatile than short-term rates.

D. Most firms tend to finance inventory with long-term debt.

E. Short-term interest rates are generally higher than long-term rates.

Harvey County Choppers, Inc. is experiencing rapid growth. The company expects

dividends to grow at 25 percent per year for the next 7 years before leveling off to 7

percent into perpetuity. The required return on the stock is 12 percent. What is the

current stock price if the annual dividend share that was just paid was $1.05?

A. $60.15

B. $64.36

C. $67.37

D. $72.11

E. $75.19

Naylor's is an all equity firm with 60,000 shares of stock outstanding at a market price

of $50 a share. The company has earnings before interest and taxes of $87,000. Naylor's

has decided to issue $750,000 of debt at 7.5 percent. The debt will be used to

repurchase shares of the outstanding stock. Currently, you own 500 shares of Naylor's

stock. How many shares of Naylor's stock will you continue to own if you unlever this

position? Assume you can loan out funds at 7.5 percent interest. Ignore taxes.

A. 300 shares

B. 350 shares

C. 375 shares

D. 425 shares

E. 500 shares

Brad owns a convertible bond. Which one of the following terms would apply to the

value of this bond if he were to convert it into shares of stock today?

A. conversion premium

B. straight bond value

C. conversion value

D. inverted value

E. prescribed value

Assume that RSF is a wholly-owned subsidiary of the Rolled Steel Company. RSF

provides credit financing solely for large ticket items purchased from the Rolled Steel

Company. Which one of the following terms describes RSF?

A. credit department

B. parent company

C. captive finance company

D. credit union

E. service unit

Assume each month has 30 days and a firm has a 60-day accounts receivable period.

During the second calendar quarter of the year, that firm will collect payment for the

sales it made during which of the following months?

A. October, November, and December

B. November, December, and January

C. December, January, and February

D. January, February, and March

E. February, March, and April

Preston Industries has two separate divisions. Each division is in a separate line of

business. Division A is the largest division and represents 70 percent of the firm's

overall sales. Division A is also the riskier of the two divisions. Division B is the

smaller and least risky of the two. When management is deciding which of the various

divisional projects should be accepted, the managers should:

A. allocate more funds to Division A since it is the largest of the two divisions.

B. fund all of Division B's projects first since they tend to be less risky and then allocate

the remaining funds to the Division A projects that have the highest net present values.

C. allocate the company's funds to the projects with the highest net present values based

on the firm's weighted average cost of capital.

D. assign appropriate, but differing, discount rates to each project and then select the

projects with the highest net present values.

E. fund the highest net present value projects from each division based on an allocation

of 70 percent of the funds to Division A and 30 percent of the funds to Division B.

A stock has annual returns of 13 percent, 21 percent, -12 percent, 7 percent, and -6

percent for the past five years. The arithmetic average of these returns is _____ percent

while the geometric average return for the period is _____ percent.

A. 3.89; 3.62

B. 3.89; 4.60

C. 3.62; 3.89

D. 4.60; 3.62

E. 4.60; 3.89

Miller Mfg. is analyzing a proposed project. The company expects to sell 8,000 units,

plus or minus 2 percent. The expected variable cost per unit is $11 and the expected

fixed costs are $287,000. The fixed and variable cost estimates are considered accurate

within a plus or minus 5 percent range. The depreciation expense is $68,000. The tax

rate is 32 percent. The sales price is estimated at $64 a unit, plus or minus 3 percent.

What is the earnings before interest and taxes under the base case scenario?

A. $46,920

B. $93,160

C. $114,920

D. $69,000

E. $58,480

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