FIN 87679

Type

Quiz

Book Title

Fundamentals of Corporate Finance Standard Edition 9th Edition

ISBN 13

978-0073382395

February 26, 2019

Pearl, Inc. has offered $860 million cash for all of the common stock in Jam

Corporation. Based on recent market information, Jam is worth $710 million as an

independent operation. For the merger to make economic sense for Pearl, what would

the minimum estimated value of the synergistic benefits from the merger have to be?

A. $0

B. $75 million

C. $150 million

D. $710 million

E. $860 million

You are investing $100 today in a savings account at your local bank. Which one of the

following terms refers to the value of this investment one year from now?

A. future value

B. present value

C. principal amounts

D. discounted value

E. invested principal

Based on the following information, what is the sustainable growth rate of Hendrix

Guitars, Inc.?

A. 7.68 percent

B. 9.52 percent

C. 11.12 percent

D. 13.49 percent

E. 14.41 percent

Which of the following conditions are required for absolute purchasing power parity to

exist?

I. goods must be identical

II. goods must have equal economic value

III. transaction costs must be zero

IV. there can be no barriers to trade

A. I and III only

B. II and IV only

C. I, III, and IV only

D. I, II, and III only

E. I, II, III, and IV

Which of the following are futures exchanges?

I. New York Mercantile Exchange

II. New York Stock Exchange

III. Chicago Board of Trade

IV. NASDAQ

A. I and II only

B. II and III only

C. II and IV only

D. I and III only

E. II, III, and IV only

Fifteen years ago, Jackson Supply set aside $130,000 in case of a financial emergency.

Today, that account has increased in value to $330,592. What rate of interest is the firm

earning on this money?

A. 5.80 percent

B. 6.42 percent

C. 6.75 percent

D. 7.28 percent

E. 7.53 percent

Sara invested $500 six years ago at 5 percent interest. She spends her earnings as soon

as she earns any interest so she only receives interest on her initial $500 investment.

Which type of interest is Sara earning?

A. free interest

B. complex interest

C. simple interest

D. interest on interest

E. compound interest

A stock had returns of 12 percent, 16 percent, 13 percent, 19 percent, 15 percent, and -6

percent over the last six years. What is the geometric average return on the stock for

this period?

A. 10.90 percent

B. 11.18 percent

C. 13.56 percent

D. 14.76 percent

E. 15.01 percent

The Warm Shoe Co. has concluded that additional equity financing will be needed to

expand operations and that the needed funds will be best obtained through a rights

offering. It has correctly determined that as a result of the rights offering, the share price

will fall from $100 to $95 ($100 is the rights-on-price; $95 is the ex-rights price, also

known as the when-issued price). The company is seeking $18 million in additional

funds with a per-share subscription price of $50. How many shares of stock are

outstanding, before the offering? (Assume that the increment to the market value of the

equity equals the gross proceeds of the offering.)

A. 324,000

B. 360,000

C. 1,800,000

D. 3,240,000

E. 3,600,000

Renew It, Inc., is preparing to pay its first dividend. It is going to pay $0.45, $0.60, and

$1 a share over the next three years, respectively. After that, the company has stated that

the annual dividend will be $1.25 per share indefinitely. What is this stock worth to you

per share if you demand a 10.8 percent rate of return on stocks of this type?

A. $6.67

B. $8.21

C. $10.14

D. $11.47

E. $12.03

The seller of a European call option has the:

A. right, but not the obligation, to buy a stock at a specified price on a specified date.

B. right to buy a stock at a specified price during a specified period of time.

C. obligation to sell a stock on a specified date but only at the specified price.

D. obligation to buy a stock some time during a specified period at the specified price.

Which one of the following functions should be the responsibility of the controller

rather than the treasurer?

A. daily cash deposit

B. income tax returns

C. equipment purchase analysis

D. customer credit approval

E. payment to a vendor

You are a jewelry maker. In May of each year, you purchase 10,000 troy ounces of

silver to restock your production inventory. Today, you hedged your position at what

turned out to be the lowest price of the day. Assume the actual price per troy ounce of

silver is 9.215 in May. How much did you gain or lose by hedging your position?

Silver - 5,000 troy oz.: U.S. dollars and cents per troy oz.

A. loss $4,400

B. loss $2,200

C. no gain or loss

D. gain $2,200

E. gain $4,400

A stock has an expected rate of return of 13 percent and a standard deviation of 21

percent. Which one of the following best describes the probability that this stock will

lose at least half of its value in any one given year?

A. 0.1 percent

B. 0.5 percent

C. 1.0 percent

D. 2.5 percent

E. 5.0 percent

Variable costs can be defined as the costs that:

A. remain constant for all time periods.

B. remain constant over the short run.

C. vary directly with sales.

D. are classified as non-cash expenses.

E. are inversely related to the number of units sold.

Tall Guys Clothing has a 45 day collection period. Sales for the next calendar year are

estimated at $2,100, $1,600, $2,500 and $2,300, respectively, by quarter, starting with

the first quarter of the year. Given this information, which one of the following

statements is correct? Assume a year has 360 days.

A. The firm will collect $800 in Quarter 2.

B. The accounts receivable balance at the beginning of Quarter 4 will be $1,150.

C. The firm will collect $2,000 in Quarter 3.

D. The firm will have an accounts receivable balance of $2,300 at the end of the year.

E. The firm will collect a total of $2,400 in Quarter 4.

Home Care Providers is paying an annual dividend of $1.10 every other year. The last

dividend was paid two years ago. The firm will continue this policy until 3 more

dividend payments have been paid. One year after the last dividend normal payment,

the company plans to pay a final liquidating dividend of $40 per share. What is the

current market value of this stock if the required return is 17 percent?

A. $18.92

B. $20.74

C. $23.16

D. $24.14

E. $24.53

The Meat Market has $747,000 in sales. The profit margin is 4.1 percent and the firm

has 7,500 shares of stock outstanding. The market price per share is $27. What is the

price-earnings ratio?

A. 6.61

B. 8.98

C. 11.42

D. 13.15

E. 14.27

The dividend market is in equilibrium when:

A. all firms adopt a low dividend policy.

B. half of the firms adopt a low dividend policy and half adopt a high dividend policy.

C. all clienteles are satisfied.

D. dividends remain constant and no special dividends are declared.

E. the total amount of the annual dividends is equal to the net income for the year.

Never Again Enterprises has an agreement with The Worth Bank whereby the bank

handles $3.12 million in collections a day and requires a $1,000,000 compensating

balance. Never Again is contemplating canceling the agreement and dividing its eastern

region so that two other banks will handle its business. Banks A and B will each handle

$1.56 million of collections a day, and each requires a compensating balance of

$1,550,000. Never Again's financial management expects that collections will be

accelerated by one day if the eastern region is divided. The T-bill rate is 5 percent

annually. What is the amount of the annual net savings if this plan is adopted?

A. $10,200

B. $51,000

C. $76,500

D. $102,000

E. $125,000

Oil Well Supply offers 7.5 percent coupon bonds with semiannual payments and a yield

to maturity of 7.68 percent. The bonds mature in 6 years. What is the market price per

bond if the face value is $1,000?

A. $989.70

B. $991.47

C. $996.48

D. $1,002.60

E. $1,013.48

Triangle arbitrage:

I. is a profitable situation involving three separate currency exchange transactions.

II. helps keep the currency market in equilibrium.

III. opportunities can exist in either the spot or the forward market.

IV. is based solely on differences in exchange ratios between spot and futures markets.

A. I and IV only

B. II and III only

C. I, II, and III only

D. II, III, and IV only

E. I, II, III, and IV

The principle of diversification tells us that:

A. concentrating an investment in two or three large stocks will eliminate all of the

unsystematic risk.

B. concentrating an investment in three companies all within the same industry will

greatly reduce the systematic risk.

C. spreading an investment across five diverse companies will not lower the total risk.

D. spreading an investment across many diverse assets will eliminate all of the

systematic risk.

E. spreading an investment across many diverse assets will eliminate some of the total

risk.

You work for a nuclear research laboratory that is contemplating leasing a diagnostic

scanner (leasing is a very common practice with expensive, high-tech equipment). The

scanner costs $2 million and it would be depreciated straight-line to zero over 4 years.

Because of radiation contamination, it will actually be completely valueless in 4 years.

Assume the tax rate is 33 percent. You can borrow at 6 percent before taxes. How much

would the lease payment have to be in order for both the lessor and the lessee to be

indifferent about the lease?

A. $500,000

B. $521,909

C. $552,200

D. $563,333

E. $576,477

If Major Manuscripts, Inc. decides to maintain a constant debt-equity ratio, what rate of

growth can it maintain assuming that no additional external equity financing is

available.

A. 10.23 percent

B. 10.49 percent

C. 10.90 percent

D. 11.27 percent

E. 11.65 percent

A zero-balance account:

A. is used to cover the compensating balance requirement of a line of credit agreement.

B. is only used to deposit funds received at local lockboxes.

C. is funded on an as-needed basis only.

D. is limited to handling payroll disbursements.

E. requires a compensating balance.

You have a portfolio consisting solely of stock A and stock B. The portfolio has an

expected return of 8.7 percent. Stock A has an expected return of 11.4 percent while

stock B is expected to return 6.4 percent. What is the portfolio weight of stock A?

A. 39 percent

B. 46 percent

C. 54 percent

D. 61 percent

E. 67 percent

Which of the following account balance changes occur as a result of a large stock

dividend?

I. increase in common stock

II. decrease in capital in excess of par

III. increase in capital in excess of par

IV. decrease in retained earnings

A. I and III only

B. II and IV only

C. I and IV only

D. II and III only

E. I, III, and IV only

Which one of the following statements is correct?

A. A general partnership is legally the same as a corporation.

B. Both sole proprietorship and partnership income is taxed as individual income.

C. Partnerships are the most complicated type of business to form.

D. All business organizations have bylaws.

E. Only firms organized as sole proprietorships have limited lives.

Which one of the following statements is correct concerning the relationship between a

levered and an unlevered capital structure? Assume there are no taxes.

A. At the break-even point, there is no advantage to debt.

B. The earnings per share will equal zero when EBIT is zero for a levered firm.

C. The advantages of leverage are inversely related to the level of EBIT.

D. The use of leverage at any level of EBIT increases the EPS.

E. EPS are more sensitive to changes in EBIT when a firm is unlevered.

A Treasury bond is quoted at a price of 101:14 with a current yield of 7.236 percent.

What is the coupon rate?

A. 7.20 percent

B. 7.28 percent

C. 7.30 percent

D. 7.34 percent

E. 7.39 percent