Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

FIN 78901

February 26, 2019
The optimal investment in current assets for an operating firm occurs at the point
A. both shortage costs and carrying costs equal zero.
B. shortage costs are equal to zero.
C. carrying costs are equal to zero.
D. carrying costs exceed shortage costs.
E. the total costs of holding current assets is minimized.
Mutually exclusive projects are best defined as competing projects which:
A. would commence on the same day.
B. have the same initial start-up costs.
C. both require the total use of the same limited resource.
D. both have negative cash outflows at time zero.
E. have the same life span.
A group of individual investors is in the process of acquiring all of the publicly-traded
shares of OM Outfitters. Once the shares are acquired, they will no longer be publicly
traded. Which of the following terms applies to this process?
A. tender offer
B. proxy contest
C. going-private transaction
D. leveraged buyout
E. consolidation
Your grandfather left you an inheritance that will provide an annual income for the next
10 years. You will receive the first payment one year from now in the amount of
$4,000. Every year after that, the payment amount will increase by 6 percent. What is
your inheritance worth to you today if you can earn 9.5 percent on your investments?
A. $31,699.15
B. $36,666.67
C. $41,121.21
D. $43,464.12
E. $46,908.17
The international Fisher effect states that _____ rates are equal across countries.
A. spot
B. one-year future
C. nominal
D. inflation
E. real
You are planning a trip to Australia. Your hotel will cost you A$145 per night for seven
nights. You expect to spend another A$2,800 for meals, tours, souvenirs, and so forth.
How much will this trip cost you in U.S. dollars given the following exchange rates?
A. $2,559
B. $2,604
C. $2,631
D. $5,452
E. $5,688
A stock has returns of 18 percent, 11 percent, -21 percent, and 6 percent for the past
four years. Based on this information, what is the 95 percent probability range of
returns for any one given year?
A. -13.56 to 20.56 percent
B. -24.60 to 31.80 percent
C. -30.62 to 37.62 percent
D. -47.68 to 54.68 percent
E. -71.73 to 71.73 percent
You decided to speculate in the market and sold 8 gold futures contracts when the
futures price was $867.50 per ounce. The price on the contract maturity date was
$730.40. What was your total profit or loss if the contract size was 100 ounces?
A. -$109,680
B. -$13,710
C. $13,710
D. $54,840
E. $109,680
High Brow Express deals strictly with two customers. The average amount each
customer pays per month along with the collection delay associated with each payment
is shown below. Given this information, what is the weighted average delay? Assume
that every month has 30 days.
A. 1.79 days
B. 1.84 days
C. 2.00 days
D. 2.07 days
E. 2.16 days
At the beginning of the year, you have an outstanding short-term loan of $274 which
was used to cover your cash needs for the previous year. The interest expense for the
year is $19. The projected net cash flow for this year is $123, prior to any payment of
principal or interest on this loan. What is your anticipated loan balance at year end?
A. $151
B. $170
C. $176
D. $189
E. $193
Total risk is measured by _____ and systematic risk is measured by _____.
A. beta; alpha
B. beta; standard deviation
C. alpha; beta
D. standard deviation; beta
E. standard deviation; variance
Bruno's Lunch Counter is expanding and expects operating cash flows of $26,000 a
year for 4 years as a result. This expansion requires $39,000 in new fixed assets. These
assets will be worthless at the end of the project. In addition, the project requires $3,000
of net working capital throughout the life of the project. What is the net present value of
this expansion project at a required rate of return of 16 percent?
A. $18,477.29
B. $21,033.33
C. $28,288.70
D. $29,416.08
E. $32,409.57
The common stock of Auto Deliveries sells for $28.16 a share. The stock is expected to
pay $1.35 per share next year when the annual dividend is distributed. The firm has
established a pattern of increasing its dividends by 3 percent annually and expects to
continue doing so. What is the market rate of return on this stock?
A. 7.42 percent
B. 7.79 percent
C. 19.67 percent
D. 20.14 percent
E. 20.86 percent
Which one of the following statements is correct concerning the cash balance of a firm?
A. Most firms attempt to maintain a zero cash balance at all times.
B. The cumulative cash surplus shown on a cash budget is equal to the ending cash
balance plus the minimum desired cash balance.
C. On a cash balance report, the cumulative cash surplus at the end of May is used as
June's beginning cash balance.
D. A cumulative cash deficit indicates a borrowing need.
E. The ending cash balance must equal the minimum desired cash balance.
What was the average rate of inflation over the period of 1926-2007?
A. less than 2.0 percent
B. between 2.0 and 2.5 percent
C. between 2.5 and 3.0 percent
D. between 3.0 and 3.5 percent
E. greater than 3.5 percent
Gladstone Pavers has a long-term debt ratio of 0.6 and a current ratio of 1.3. Current
liabilities are $700, sales are $4,440, the profit margin is 9.5 percent, and the return on
equity is 19.5 percent. How much does the firm have in net fixed assets?
A. $4,880.18
B. $5,197.69
C. $5,666.67
D. $5,848.15
E. $6,107.70
Scholastic Toys is considering developing and distributing a new board game for
children. The project is similar in risk to the firm's current operations. The firm
maintains a debt-equity ratio of 0.40 and retains all profits to fund the firm's rapid
growth. How should the firm determine its cost of equity?
A. by adding the market risk premium to the aftertax cost of debt
B. by multiplying the market risk premium by (1 - 0.40)
C. by using the dividend growth model
D. by using the capital asset pricing model
E. by averaging the costs based on the dividend growth model and the capital asset
pricing model
Jen's Fashions is growing quickly. Dividends are expected to grow at a 22 percent rate
for the next 3 years, with the growth rate falling off to a constant 8 percent thereafter.
The required return is 12 percent and the company just paid a $3.80 annual dividend.
What is the current share price?
A. $128.96
B. $131.11
C. $146.17
D. $148.87
E. $152.20
Which one of the following is the primary difference between a swap contract and a
forward contract?
A. underlying asset
B. number of exchanges
C. daily marking to the market
D. option versus obligation
E. time of payment
Music City, Inc. has an average collection period of 56 days. Its average daily
investment in receivables is $50,000. What are the annual credit sales?
A. $268,407
B. $307,109
C. $325,893
D. $728,215
E. $767,123
Which one of the following is the correct formula for approximating the change in an
option's value given a small change in the value of the underlying stock?
A. Change in option value ≈ Change in stock value/Delta
B. Change in option value ≈ Change in stock value/(1 - Delta)
C. Change in option value ≈ Change in stock value/(1 + Delta)
D. Change in option value ≈ Change in stock value × (1 - Delta)
E. Change in option value ≈ Change in stock value × Delta
A company has two open seats, Seat A and Seat B, on its board of directors. There are 6
candidates vying for these 2 positions. There will be a single election to determine the
winner of both open seats. As the owner of 100 shares of stock, you will receive one
vote per share for each open seat. You decide to cast all 200 of your votes for a single
candidate. What is this type of voting called?
A. democratic
B. cumulative
C. straight
D. deferred
E. proxy
All new interstate security issues are regulated by the:
A. registration statement.
B. Green Shoe provision.
C. Securities Exchange Act of 1934.
D. Securities Act of 1933.
E. Federal Reserve Act of 1931.
The government has imposed a fine on the Corner Tavern. The fine calls for annual
payments of $150,000, $100,000, $75,000, and $50,000, respectively, over the next four
years. The first payment is due one year from today. The government plans to invest the
funds until the final payment is collected and then donate the entire amount, including
the investment earnings, to help the local community shelter. The government will earn
6.25 percent on the funds held. How much will the community shelter receive four
years from today?
A. $349,674.06
B. $366,875.00
C. $422,497.56
D. $458,572.71
E. $515,737.67
You started an online business three weeks ago. Thus far, you have averaged 10 sales a
day, which is one sale for every five hits. You are now considering giving up your day
job and becoming a full-time online retailer. You have calculated the amount of income
you can earn based on 10 sales a day and know that level of income would support you
in a comfortable fashion. The belief that you will have 10 sales per day on average if
this becomes your full-time occupation is based on which one of the following?
A. mental accounting
B. anchoring and adjustment
C. law of small numbers
D. bubble and crash theory
E. confirmation bias
You don't particularly like to shop so only go to the mall once a month. To help make
the trek more enjoyable, you always have lunch at the restaurant located inside the mall.
Since you are such a creature of habit, you always order the same meal. You've noticed
that the price of that meal has increased every time you have been there over the past
six months. Thus, you expect the meal to increase in price next month. This is an
example of which one of the following?
A. recency bias
B. anchoring and adjustment
C. frame dependence
D. aversion to ambiguity
E. clustering illusion
Beginning three months from now, you want to be able to withdraw $1,500 each quarter
from your bank account to cover college expenses over the next 4 years. The account
pays 1.25 percent interest per quarter. How much do you need to have in your account
today to meet your expense needs over the next 4 years?
A. $21,630.44
B. $21,847.15
C. $22,068.00
D. $22,454.09
E. $22,711.18
Which of the following are examples of cost reductions that can result from an
I. allocating fixed overhead across a wider range of products
II. lowering office payroll costs by combining job functions
III. benefiting from economies of scale when purchasing raw materials
IV. reducing the number of management personnel required
A. I and III only
B. II and IV only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Which one of the following statements is correct concerning the lease versus buy
A. The lessor is primarily concerned with returning the asset at the end of the lease term
without incurring any additional charges.
B. The lessor is primarily concerned about the use of the asset.
C. If Dell Computer became a lessor of its own computers it would be engaging in
direct leasing.
D. A firm should always purchase, rather than lease, any asset that has a projected
positive salvage value at the end of the relevant period of use.
Bruce & Co. expects its EBIT to be $100,000 every year forever. The firm can borrow
at 11 percent. Bruce currently has no debt, and its cost of equity is 18 percent. The tax
rate is 31 percent. Bruce will borrow $61,000 and use the proceeds to repurchase
shares. What will the WACC be after recapitalization?
A. 16.30 percent
B. 16.87 percent
C. 17.15 percent
D. 18.29 percent
E. 18.86 percent
Stock splits can be used to:
A. adjust the market price of a stock such that it falls within a preferred trading range.
B. decrease the excess cash held by a firm thereby lowering agency costs.
C. increase both the number of shares outstanding and the market price per share.
D. increase the total equity of a firm.
E. adjust the debt-equity ratio.
A firm with a variable-rate loan wants to protect itself from increases in interest rates.
Which of the following would interest this firm?
I. interest rate floor
II. interest rate cap
III. put option on an interest rate
IV. call option on an interest rate
A. I only
B. I and III only
C. I and IV only
D. II and III only
E. II and IV only
Which one of the following statements is correct concerning a cash management system
that employs both lockboxes and a concentration bank account?
A. All customer payments must be submitted to a lockbox.
B. The party which collects the checks from the lockbox is responsible for recording the
payment on the customer's account.
C. Payments received in a lockbox are transferred immediately to the concentration
D. The firm's cash manager determines how the funds in the concentration account are
E. The concentration account must be zeroed out on a daily basis.