Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

Fin 85949

February 26, 2019
An 8 percent corporate bond that pays interest semi-annually was issued last year.
Which two of the following most likely apply to this bond today if the current yield-to-
maturity is 7 percent?
I. a structure as an interest-only loan
II. a current yield that equals the coupon rate
III. a yield-to-maturity equal to the coupon rate
IV. a market price that differs from the face value
A. I and III only
B. I and IV only
C. II and III only
D. II and IV only
E. III and IV only
A flexible short-term financial policy:
I. increases shortage costs due to frequent cash-outs.
II. tends to increase sales as compared to a restrictive policy.
III. requires a sizeable investment in current assets.
IV. incurs more carrying costs than a restrictive policy.
A. I and IV only
B. II and III only
C. I, II, and III only
D. II, III, and IV only
E. I, III, and IV only
You have just received notification that you have won the $1.4 million first prize in the
Centennial Lottery. However, the prize will be awarded on your 100th birthday, 70 years
from now. The appropriate discount rate is 8 percent. What is the present value of your
A. $4,288.16
B. $6,404.20
C. $15,309.91
D. $23,333.33
E. $25,000.00
Which one of the following statements is correct?
A. The shareholders of an acquired firm are generally given a choice of accepting either
cash or shares of stock when the acquisition is tax-free.
B. To be a tax-free acquisition, the shareholders of an acquired firm must receive shares
in the acquiring firm that are equal to 95 percent or less of the value of the shares held
in the acquired firm.
C. The assets of an acquired firm are recorded on the books of the acquiring firm at
their current book value regardless of the tax status of the acquisition.
D. Target firm shareholders demand a higher selling price when an acquisition is a non-
taxable event.
E. If the assets of a firm are written up as part of the acquisition process, the increase in
value is considered to be a taxable gain.
The conversion value of a convertible bond is equal to which one of the following?
A. Conversion ratio × Stock price
B. Conversion ratio × Conversion price
C. Face value of the bond/Conversion premium
D. Face value of the bond × (1 + Conversion premium)
E. Stock price × (1 + Conversion ratio)
Glendale Paving currently has 120,000 shares of stock outstanding that sell for $54 per
share. Assume no market imperfections or tax effects exist. What will the new share
price be if the firm declares a 40 percent stock dividend?
A. $31.12
B. $32.08
C. $35.19
D. $38.57
E. $40.00
Phil can afford $180 a month for 5 years for a car loan. If the interest rate is 8.6 percent,
how much can he afford to borrow to purchase a car?
A. $7,750.00
B. $8,348.03
C. $8,752.84
D. $9,266.67
E. $9,400.00
A preferred stock pays an annual dividend of $2.60. What is one share of this stock
worth today if the rate of return is 11.75 percent?
A. $18.48
B. $20.00
C. $22.13
D. $28.80
E. $30.55
What is the amount of the cash flow from investment activity for 2009?
A. $18,100
B. $24,800
C. $29,300
D. $32,000
E. $39,400
The Card Shoppe needs to maintain 23 percent of its sales in net working capital.
Currently, the shoppe is considering a 6-year project that will increase sales from its
current level of $387,000 to $421,000 the first year and to $465,000 a year for the
following 5 years of the project. What amount should be included in the project analysis
for net working capital in year 6 of the project?
A. -$17,940
B. -$2,990
C. $0
D. $2,990
E. $17,940
Holdup Bank has an issue of preferred stock with a $5 stated dividend that just sold for
$92 per share. What is the bank's cost of preferred?
A. 4.60 percent
B. 4.64 percent
C. 5.39 percent
D. 5.43 percent
E. 5.54 percent
Cool Comfort currently sells 300 Class A spas, 450 Class C spas, and 200 deluxe model
spas each year. The firm is considering adding a mid-class spa and expects that if it
does it can sell 375 of them. However, if the new spa is added, Class A sales are
expected to decline to 225 units while the Class C sales are expected to decline to 200.
The sales of the deluxe model will not be affected. Class A spas sell for an average of
$12,000 each. Class C spas are priced at $6,000 and the deluxe model sells for $17,000
each. The new mid-range spa will sell for $8,000. What is the value of the erosion?
A. $600,000
B. $1,200,000
C. $1,800,000
D. $2,400,000
E. $3,900,000
By definition, which one of the following must equal zero at the cash break-even point?
A. net present value
B. internal rate of return
C. contribution margin
D. net income
E. operating cash flow
Nelson's Interiors has $2.13 million in net working capital. The firm has fixed assets
with a book value of $23.23 million and a market value of $26.16 million. The firm has
no long-term debt. The Home Centre is buying Nelson's Interiors for $29.5 million in
cash. The acquisition will be recorded using the purchase accounting method. What is
the amount of goodwill that The Home Centre will record on its balance sheet as a
result of this acquisition?
A. $1.21 million
B. $3.34 million
C. $3.88 million
D. $4.14 million
E. $6.27 million
If a firm creates an interest rate collar on a variable rate loan, then the rate the firm pays
will always:
A. remain constant at the average of the floor and cap rates.
B. remain constant at the floor rate.
C. remain constant at the cap rate.
D. be higher than, or equal to, the cap but lower than, or equal to, the floor.
E. be higher than, or equal to, the floor but lower than, or equal to, the cap.
National Trucking has paid an annual dividend of $1.00 per share on its common stock
for the past fifteen years and is expected to continue paying a dollar a share long into
the future. Given this, one share of the firm's stock is:
A. basically worthless as it offers no growth potential.
B. equal in value to the present value of $1 paid one year from today.
C. priced the same as a $1 perpetuity.
D. valued at an assumed growth rate of one percent.
E. worth $1 a share in the current market.
The Burger Stop spends $52,000 a week to pay bills and maintains a lower cash balance
limit of $60,000. The standard deviation of the disbursements is $7,500. The applicable
weekly interest rate is 0.04 percent and the fixed cost of transferring funds is $50. What
is your optimal average cash balance based on the Miller-Orr model?
A. $79,116
B. $83,208
C. $110,315
D. $237,348
E. $249,624
M&M Proposition I with tax supports the theory that:
A. a firm's weighted average cost of capital decreases as the firm's debt-equity ratio
B. the value of a firm is inversely related to the amount of leverage used by the firm.
C. the value of an unlevered firm is equal to the value of a levered firm plus the value
of the interest tax shield.
D. a firm's cost of capital is the same regardless of the mix of debt and equity used by
the firm.
E. a firm's cost of equity increases as the debt-equity ratio of the firm decreases.
Which of the following represent problems encountered when comparing the financial
statements of two separate entities?
I. Either one, or both, of the firms may be conglomerates and thus have unrelated lines
of business.
II. The operations of the two firms may vary geographically.
III. The firms may use differing accounting methods.
IV. The two firms may be seasonal in nature and have different fiscal year ends.
A. I and II only
B. II and III only
C. I, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
The historical record for the period 1926-2007 supports which one of the following
A. A higher-risk security will provide a higher rate of return next year than will a lower-
risk security.
B. If you need a stated amount of money next year, your best investment option today
for those funds would be long-term government bonds.
C. Increased long-run potential returns are obtained by lowering risks.
D. It is possible for small-company stocks to more than double in value in any one
given year.
E. Inflation was positive each year throughout the period of 1926-2007.
Which one of the following methods of setting prices would reduce the transactions
exposure for both the buyer and seller of a swap contract?
A. setting a permanent price at which a commodity will be traded
B. setting the price at the minimum spot price during a given period of time
C. setting the price equal to the spot price on the delivery date
D. using the average market price over a given period of time
E. setting the contract price equal to some percentage, less than 100 percent, of the
market price on any given day
Consider the following information on Stocks I and II:
The market risk premium is 8 percent, and the risk-free rate is 3.6 percent. The beta of
stock I is _____ and the beta of stock II is _____.
A. 2.08; 2.47
B. 2.08; 2.76
C. 3.21; 3.84
D. 4.47; 3.89
E. 4.47; 4.26
Currently, Glasgow Importers sells 280 units a month at a price of $729 a unit. The firm
believes it can increase its sales by an additional 40 units if it switches to a net 30 credit
policy. The monthly interest rate is 0.5 percent and the variable cost per unit is $480.
What is the net present value of the proposed credit policy switch?
A. -$213,360
B. -$9,240
C. $190,200
D. $1,287,520
E. $1,768,680
Bayside Marina just announced it is decreasing its annual dividend from $1.64 per
share to $1.50 per share effective immediately. If the dividend yield remains at its pre-
announcement level, then you know the stock price:
A. was unaffected by the announcement.
B. increased proportionately with the dividend decrease.
C. decreased proportionately with the dividend decrease.
D. decreased by $0.14 per share.
When you retire 40 years from now, you want to have $1.2 million. You think you can
earn an average of 12 percent on your investments. To meet your goal, you are trying to
decide whether to deposit a lump sum today, or to wait and deposit a lump sum 2 years
from today. How much more will you have to deposit as a lump sum if you wait for 2
years before making the deposit?
A. $1,414.14
B. $2,319.47
C. $2,891.11
D. $3,280.78
E. $3,406.78
Which one of the following acts like an insurance policy if the price of a stock you own
suddenly decreases in value?
A. sale of a European call option
B. sale of an American put option
C. purchase of a protective put
D. purchase of a protective call
E. either the sale or purchase of a put
You are doing some comparison shopping. Five stores offer the product you want at
basically the same price. Which one of the following stores offers the best credit terms
if you plan to forego the discount?
A. store A
B. store B
C. store C
D. store D
E. store E
Which of the following tend to keep dividends low?
I. shareholders desiring current income
II. terms contained in bond indenture agreements
III. the desire to maintain constant dividends over time
IV. flotation costs
A. II and III only
B. I and IV only
C. II, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
The last date on which you can purchase shares of stock and still receive the dividend is
the date which is _____ business days prior to the date of record.
A. 1
B. 2
C. 3
D. 4
E. 5
Your employer contributes $75 a week to your retirement plan. Assume that you work
for your employer for another 20 years and that the applicable discount rate is 7.5
percent. Given these assumptions, what is this employee benefit worth to you today?
A. $40,384.69
B. $42,618.46
C. $44,211.11
D. $44,306.16
E. $44,987.74
Which one of the following correctly applies to the average accounting rate of return?
A. It considers the time value of money.
B. It measures net income as a percentage of the sales generated by a project.
C. It is the best method of analyzing mutually exclusive projects from a financial point
of view.
D. It is the primary methodology used in analyzing independent projects.
E. It can be compared to the return on assets ratio.