Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

FIN 94538

February 26, 2019
Which one of the following is the financial statement that summarizes a firm's revenue
and expenses over a period of time?
A. income statement
B. balance sheet
C. statement of cash flows
D. tax reconciliation statement
E. market value report
Kelso Electric is debating between a leveraged and an unleveraged capital structure.
The all equity capital structure would consist of 40,000 shares of stock. The debt and
equity option would consist of 25,000 shares of stock plus $280,000 of debt with an
interest rate of 7 percent. What is the break-even level of earnings before interest and
taxes between these two options? Ignore taxes.
A. $42,208
B. $44,141
C. $46,333
D. $49,667
E. $52,267
The Daily Brew has a debt-equity ratio of 0.72. The firm is analyzing a new project
which requires an initial cash outlay of $420,000 for equipment. The flotation cost is
9.6 percent for equity and 5.4 percent for debt. What is the initial cost of the project
including the flotation costs?
A. $302,400
B. $368,924
C. $455,738
D. $456,400
E. $583,333
Which one of the following accurately defines a perpetuity?
A. a limited number of equal payments paid in even time increments
B. payments of equal amounts that are paid irregularly but indefinitely
C. varying amounts that are paid at even intervals forever
D. unending equal payments paid at equal time intervals
E. unending equal payments paid at either equal or unequal time intervals
A project will produce cash inflows of $3,200 a year for 4 years with a final cash inflow
of $5,700 in year 5. The project's initial cost is $9,500. What is the net present value of
this project if the required rate of return is 16 percent?
A. -$311.02
B. $2,168.02
C. $4,650.11
D. $9,188.98
E. $21,168.02
A business firm ceases to exist as a going concern as a result of which one of the
A. divestiture
B. share repurchase
C. liquidation
D. reorganization
E. capital restructuring
A $1,000 convertible debenture has a conversion price for common stock of $85 per
share. The common stock is selling at $92 a share. What is the conversion value of this
A. $920.00
B. $923.91
C. $1,000.00
D. $1,082.35
E. $1,092.00
Pete paid $1,032 as his total cost of purchasing a bond. This price is referred to as the:
A. quoted price.
B. spread price.
C. clean price.
D. dirty price.
A Treasury yield curve plots Treasury interest rates relative to which one of the
A. market rates
B. comparable corporate bond rates
C. the risk-free rate
D. inflation
E. maturity
The most recent financial statements for Watchtower, Inc. are shown here (assuming no
income taxes):
Assets and costs are proportional to sales. Debt and equity are not. No dividends are
paid. Next year's sales are projected to be $5,002. What is the amount of the external
financing need?
A. $197
B. $203
C. $211
D. $218
E. $223
Suppose your company imports computer motherboards from Singapore. The exchange
rate is currently 1.5803S$/US$. You have just placed an order for 30,000 motherboards
at a cost to you of 170.90 Singapore dollars each. You will pay for the shipment when it
arrives in 120 days. You can sell the motherboards for $148 each. What will your profit
be if the exchange rate goes up by 8 percent over the next 120 days?
A. $913,564
B. $1,008,121
C. $1,216,407
D. $1,435,999
E. $1,502,400
The change in variable costs that occurs when production is increased by one unit is
referred to as the:
A. marginal cost.
B. average cost.
C. total cost.
D. scenario cost.
E. net cost.
Company A can borrow money at a fixed rate of 7.5 percent or a variable rate set at
prime plus 0.5 percent. Company B can borrow money at a variable rate of prime plus 1
percent or a fixed rate of 7 percent. Company A prefers a fixed rate and company B
prefers a variable rate. Given this information, which one of the following statements is
A. Company A can swap with B and pay a fixed rate of 7.25 percent.
B. If Company A swaps with B, Company A could pay a fixed rate of 6.5 percent.
C. If Company B swaps with A, Company B must pay a fixed rate of 8 percent.
D. Company B can swap with A such that Company B pays the variable prime rate.
Your portfolio is invested 26 percent each in Stocks A and C, and 48 percent in Stock B.
What is the standard deviation of your portfolio given the following information?
A. 12.38 percent
B. 12.64 percent
C. 12.72 percent
D. 12.89 percent
E. 13.73 percent
When the operating cash flow of a project is equal to zero, the project is operating at
A. maximum possible level of production.
B. minimum possible level of production.
C. financial break-even point.
D. accounting break-even point.
E. cash break-even point.
Which one of the following describes the lower bound of a call's value?
A. strike price or zero, whichever is greater
B. stock price minus the exercise price or zero, whichever is greater
C. strike price or the stock price, whichever is lower
D. strike price or zero, whichever is lower
E. stock price minus the exercise price or zero, whichever is lower
You have a $12,000 portfolio which is invested in stocks A and B, and a risk-free asset.
$5,000 is invested in stock A. Stock A has a beta of 1.76 and stock B has a beta of 0.89.
How much needs to be invested in stock B if you want a portfolio beta of 1.10?
A. $3,750.00
B. $4,333.33
C. $4,706.20
D. $4,943.82
E. $5,419.27
Which one of the following statements is generally correct?
A. Private placements must be registered with the SEC.
B. All secondary markets are auction markets.
C. Dealer markets have a physical trading floor.
D. Auction markets match buy and sell orders.
E. Dealers arrange trades but never own the securities traded.
Which one of the following was the least volatile over the period of 1926-2007?
A. large-company stocks
B. inflation
C. long-term corporate bonds
D. U.S. Treasury bills
E. intermediate-term government bonds
Put-call parity is defined as the relationship between which of the following variables?
I. risk-free asset
II. underlying stock price
III. call option
IV. put option
A. I and II only
B. II and III only
C. II, III, and IV only
D. I, II, and III only
E. I, II, III, and IV
Melvin was attempting to gain control of Western Wood Products until he realized that
the existing shareholders in the firm had the right to purchase additional shares at a
below-market price given his hostile takeover attempt. Thus, Melvin decided to forego
investing in this firm. What term applies to the tactic used by Western Wood Products to
stave off this takeover attempt?
A. pac-man defense
B. shark repellent plan
C. golden parachute provision
D. greenmail provision
E. share rights plan
You are comparing a lease to a purchase. The NPV associated with this analysis is
referred to as the:
A. open interest net present value.
B. depreciated net present value.
C. net advantage to leasing.
D. profitability index.
E. net value of purchasing.
Lakonishok Equipment has an investment opportunity in Europe. The project costs €12
million and is expected to produce cash flows of €2.7 million in year 1, €3 million in
year 2, and €2.8 million in year 3. The current spot exchange rate is $1.3/€. The current
risk-free rate in the United States is 5 percent, compared to that in Europe of 3.5
percent. The appropriate discount rate for the project is estimated to be 18 percent, the
U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of
three years for an estimated €6.5 million. What is the NPV of the project?
A. -$2,448,215
B. -$2,016,686
C. -$1,878,787
D. $879,402
E. $2,316,519
Which one of the following statements is correct based on the historical record for the
period 1926-2007?
A. The standard deviation of returns for small-company stocks was double that of large-
company stocks.
B. U.S. Treasury bills had a zero standard deviation of returns because they are
considered to be risk-free.
C. Long-term government bonds had a lower return but a higher standard deviation on
average than did long-term corporate bonds.
D. Inflation was less volatile than the returns on U.S. Treasury bills.
E. Long-term government bonds underperformed intermediate-term government bonds.
Decker's is a chain of furniture retail stores. Furniture Fashions is a furniture maker and
a supplier to Decker's. Decker's has a beta of 1.38 as compared to Furniture Fashion's
beta of 1.12. The risk-free rate of return is 3.5 percent and the market risk premium is 8
percent. What discount rate should Decker's use if it considers a project that involves
the manufacturing of furniture?
A. 12.46 percent
B. 12.92 percent
C. 13.50 percent
D. 14.08 percent
E. 14.54 percent
The dividend growth model can be used to compute the cost of equity for a firm in
which of the following situations?
I. firms that have a 100 percent retention ratio
II. firms that pay a constant dividend
III. firms that pay an increasing dividend
IV. firms that pay a decreasing dividend
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III only
E. II, III, and IV only
You have saved a total of $200,000 over the past several years. Jane, a trusted business
associate, recently approached you with an offer. She has offered you a partnership in a
new firm that she expects to be exceedingly profitable. Your initial investment in the
partnership would be $125,000. However, Jane cannot give you any odds on that
success occurring. You have decided to keep your $125,000 and forego this opportunity
simply because you don't know the probability of success. Which one of the following
behavior characteristics do you have?
A. aversion to ambiguity
B. recency bias
C. sentiment-based risk aversion
D. clustering illusion
E. money illusion
Steele Insulators is analyzing a new type of insulation for interior walls. Management
has compiled the following information to determine whether or not this new insulation
should be manufactured. The insulation project has an initial fixed asset requirement of
$1.3 million, which would be depreciated straight-line to zero over the 12-year life of
the project. Projected fixed costs are $742,000 and the anticipated annual operating
cash flow is $241,000. What is the degree of operating leverage for this project?
A. 3.78
B. 3.92
C. 4.08
D. 4.27
E. 4.53
Which one of the following states that the expected percentage change in the exchange
rate between two countries is equal to the difference in the countries' interest rates?
A. unbiased forward rates condition
B. uncovered interest parity
C. international Fisher effect
D. purchasing power parity
E. interest rate parity
Which one of the following statements is correct concerning taxes and leasing?
A. Tax-deferral is a legitimate reason for leasing.
B. The lessee should be the party with the higher tax bracket.
C. Generally speaking, lessors tend to benefit from leases while lessees do not.
D. If a firm has significant net operating losses, it should be the lessor in a lease.
The Fisher Effect primarily emphasizes the effects of _____ on an investor's rate of
A. default
B. market
C. interest rate
D. inflation
E. maturity
According to the Rule of 72, you can do which one of the following?
A. double your money in five years at 7.2 percent interest
B. double your money in 7.2 years at 8 percent interest
C. double your money in 8 years at 9 percent interest
D. triple your money in 7.2 years at 5 percent interest
E. triple your money at 10 percent interest in 7.2 years