Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

FIN 87679

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
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
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
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
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
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