Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

Fin 90282

February 26, 2019
Which of the following are advantages of the corporate form of business ownership?
I. limited liability for firm debt
II. double taxation
III. ability to raise capital
IV. unlimited firm life
A. I and II only
B. III and IV only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Handy Man, Inc. has zero coupon bonds outstanding that mature in 8 years. The bonds
have a face value of $1,000 and a current market price of $640. What is the company's
pre-tax cost of debt?
A. 2.55 percent
B. 5.09 percent
C. 5.66 percent
D. 7.31 percent
E. 7.48 percent
The incremental investment in receivables under the accounts receivable approach is
equal to:
A. P - vQ′.
B. PQ′.
C. PQ + v(Q′ - Q).
D. P(Q′ - Q).
E. PQ(Q′ - Q).
If a firm enters a sale and leaseback agreement, then:
I. the lessee will benefit from an immediate cash inflow.
II. both the lessor and the lessee may benefit if the lessor can benefit more from the tax
benefits of ownership than can the lessee.
III. the lease automatically becomes a nonrecourse lease.
IV. the lessee forfeits the right to repurchase the asset at a later date.
A. I and III only
B. II and IV only
C. I and II only
D. II and III only
E. III and IV only
ABC Co. and XYZ Co. are identical firms in all respects except for their capital
structure. ABC is all equity financed with $480,000 in stock. XYZ uses both stock and
perpetual debt; its stock is worth $240,000 and the interest rate on its debt is 11 percent.
Both firms expect EBIT to be $58,400. Ignore taxes. The cost of equity for ABC is
_____ percent, and for XYZ it is ______ percent.
A. 12.17; 12.68
B. 12.17; 12.94
C. 12.17; 13.33
D. 12.29; 12.68
E. 12.29; 13.33
You are considering a project that you believe is quite risky. To reduce any potentially
harmful results from accepting this project, you could:
A. lower the degree of operating leverage.
B. lower the contribution margin per unit.
C. increase the initial cash outlay.
D. increase the fixed costs per unit while lowering the contribution margin per unit.
E. lower the operating cash flow of the project.
You want to import $147,000 worth of rugs from India. How many rupees will you
need to pay for this purchase if one rupee is worth $0.0202?
A. Rs 6,887,424
B. Rs 7,238,911
C. Rs 7,277,228
D. Rs 8,367,594
E. Rs 8,415,096
You own a classic automobile that is currently valued at $147,900. If the value
increases by 6.5 percent annually, how much will the automobile be worth ten years
from now?
A. $244,035.00
B. $251,008.17
C. $270,013.38
D. $277,628.63
E. $291,480.18
Dexter Metals, paid its first annual dividend yesterday in the amount of $0.18 a share.
The company plans to double each annual dividend payment for the next 3 years. After
that time, it plans to pay $1.25 a share for 2 years than then pay a constant dividend of
$1.60 per share indefinitely. What is one share of this stock worth today if the market
rate of return on similar securities is 10.24 percent?
A. $12.32
B. $12.77
C. $13.20
D. $14.26
E. $14.79
Assume the standard deviation of the returns on ABC stock increases. The effect of this
change on the value of the call options on ABC stock is measured by which one of the
A. theta.
B. vega.
C. rho.
D. delta.
E. gamma.
Your firm spends $48,000 a week to pay bills and maintains a lower cash balance limit
of $50,000. The standard deviation of the disbursements is $8,600. The applicable
weekly interest rate is 0.054 percent and the fixed cost of transferring funds is $65.
What is your cash balance target based on the Miller-Orr model?
A. $48,156
B. $49,990
C. $54,884
D. $68,830
E. $75,726
What is the interest rate charged per period multiplied by the number of periods per
year called?
A. effective annual rate
B. annual percentage rate
C. periodic interest rate
D. compound interest rate
E. daily interest rate
Biltwell Hotels is acquiring all of the assets of Green Roof Inns. As a result, Green
Roof Inns:
A. will become a fully owned subsidiary of Biltwell Hotels.
B. will remain as a shell corporation unless the shareholders opt to dissolve it.
C. will be fully merged into Biltwell Hotels and will no longer exist as a separate entity.
D. and Biltwell Hotels will both cease to exist and a new firm will be formed.
E. will automatically be dissolved.
Cohen Industrial Products uses 2,100 switch assemblies per week and then reorders
another 2,100. The relevant carrying cost per switch assembly is $20, and the fixed
order cost is $300. What is the EOQ?
A. 1,279.84
B. 1,434.14
C. 1,809.97
D. 2,278.42
E. 2,698.15
Old Country Productions requires skilled furniture finishers to put the final touches on
all of the furniture it produces. The firm hired two individuals last year who had been
students in Mr. Tedwell's wood shop class in high school. Both of these employees have
demonstrated exceptional skills and have already been promoted to senior finishing
positions. The firm currently has an opening for one additional finisher. Tom, the head
of the finishing section, has stipulated that he only wants to interview candidates who
have completed Mr. Tedwell's course. Tom's behavior is typical of someone who has
which one of the following characteristic behaviours?
A. endowment effect
B. framing effect
C. representativeness heuristic
D. narrow framing
E. affect heuristic
The Thunder Dan's Corporation's purchases from suppliers in a quarter are equal to 65
percent of the next quarter's forecasted sales. The payables period is 60 days. Wages,
taxes, and other expenses are 16 percent of sales, and interest and dividends are $60 per
quarter. No capital expenditures are planned. Sales for the first quarter of the following
year are projected at $720. The projected quarterly sales are:
What is the amount of the total disbursements for Quarter 2?
A. $564.27
B. $579.43
C. $582.15
D. $585.30
E. $590.67
The Green Hornet sells earnings forecasts for international securities. Its credit terms
are 2/10, net 30. Based on experience, 55 percent of all customers will take the
discount. The firm sells 2,600 forecasts every month at a price of $1,100 each. What is
the firm's average balance sheet amount in accounts receivable?
A. $940,274
B. $1,408,272
C. $1,786,521
D. $1,811,012
E. $1,915,387
The flotation cost for a firm is computed as:
A. the arithmetic average of the flotation costs of both debt and equity.
B. the weighted average of the flotation costs associated with each form of financing.
C. the geometric average of the flotation costs associated with each form of financing.
D. one-half of the flotation cost of debt plus one-half of the flotation cost of equity.
E. a weighted average based on the book values of the firm's debt and equity.
Which of the following statements are correct in relation to M&M Proposition II with
no taxes?
I. The required return on assets is equal to the weighted average cost of capital.
II. Financial risk is determined by the debt-equity ratio.
III. Financial risk determines the return on assets.
IV. The cost of equity declines when the amount of leverage used by a firm rises.
A. I and III only
B. II and IV only
C. I and II only
D. III and IV only
E. I and IV only
Granite Works maintains a debt-equity ratio of 0.65 and has a tax rate of 32 percent.
The firm does not issue preferred stock. The pre-tax cost of debt is 9.8 percent. There
are 25,000 shares of stock outstanding with a beta of 1.2 and a market price of $19 a
share. The current market risk premium is 8.5 percent and the current risk-free rate is
3.6 percent. This year, the firm paid an annual dividend of $1.10 a share and expects to
increase that amount by 2 percent each year. Using an average expected cost of equity,
what is the weighted average cost of capital?
A. 8.44 percent
B. 8.78 percent
C. 8.96 percent
D. 9.13 percent
E. 9.20 percent
The board of directors of Wilson Sporting Equipment met this afternoon and passed a
resolution to pay a cash dividend of $0.42 a share next month. In relation to this
dividend, today is referred to as which one of the following dates?
A. decision date
B. date-of-record
C. declaration date
D. payment date
E. ex-dividend date
A firm has total assets of $311,770 and net fixed assets of $167,532. The average daily
operating costs are $2,980. What is the value of the interval measure?
A. 31.47 days
B. 48.40 days
C. 56.22 days
D. 68.05 days
E. 104.62 days
Which one of the following indicates a portfolio is being effectively diversified?
A. an increase in the portfolio beta
B. a decrease in the portfolio beta
C. an increase in the portfolio rate of return
D. an increase in the portfolio standard deviation
E. a decrease in the portfolio standard deviation
Which one of the following ratios identifies the amount of assets a firm needs in order
to generate $1 in sales?
A. current ratio
B. equity multiplier
C. retention ratio
D. capital intensity ratio
E. payout ratio
The interest rate that is quoted by a lender is referred to as which one of the following?
A. stated interest rate
B. compound rate
C. effective annual rate
D. simple rate
E. common rate
Douglass Gardens pays an annual dividend that is expected to increase by 4.1 percent
per year. The stock commands a market rate of return of 12.6 percent and sells for
$24.90 a share. What is the expected amount of the next dividend?
A. $2.03
B. $2.12
C. $3.17
D. $2.20
E. $2.28
Hungry Howie's is currently operating at 82 percent of capacity. What is the total asset
turnover ratio at full capacity?
A. .68
B. .78
C. .95
D. 1.29
E. 1.46
Saucier & Co. currently sells 2,200 units a month for total monthly sales of $86,500.
The company is considering replacing its current cash only credit policy with a net 30
policy. The variable cost per unit is $18 and the monthly interest rate is 1.2 percent.
What is the switch break-even level of sales? Assume the selling price per unit and the
variable costs per unit remain constant.
A. 1,943 units
B. 2,117 units
C. 2,249 units
D. 2,406 units
E. 2,548 units
Which of the following statements related to market efficiency tend to be supported by
current evidence?
I. Markets tend to respond quickly to new information.
II. It is difficult for investors to earn abnormal returns.
III. Short-run prices are difficult to predict accurately based on public information.
IV. Markets are most likely weak form efficient.
A. I and III only
B. II and IV only
C. I and IV only
D. I, III, and IV only
E. I, II, and III only
Which one of the following is most directly affected by the level of systematic risk in a
A. variance of the returns
B. standard deviation of the returns
C. expected rate of return
D. risk-free rate
E. market risk premium
Assume you are an overconfident manager. You are most apt to do which one of the
following more so than you would if you were not overconfident?
A. research a project more thoroughly before committing funds to commence it
B. accept risky projects that turn out to be less profitable than you expected
C. wait until new technology proves its worth before incorporating it into your firm's
D. avoid mergers and acquisitions
E. invest excess company cash more conservatively than your peers at other firms