Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

Fin 96881

February 26, 2019
Which one of the following statements is true?
A. Market crashes tend to be accompanied by low market volume.
B. The Asian market crash was followed by a quick recovery.
C. The market crash of 1929 and the crash of 1987 are very similar in both the
percentage decline in market value and in the ensuing market recovery.
D. Market crashes tend to follow market bubbles.
E. Market bubbles and crashes prove that financial markets are inefficient.
The expected rate of return on a stock portfolio is a weighted average where the weights
are based on the:
A. number of shares owned of each stock.
B. market price per share of each stock.
C. market value of the investment in each stock.
D. original amount invested in each stock.
E. cost per share of each stock held.
A bond that has only one payment, which occurs at maturity, defines which one of the
A. debenture
B. callable
C. floating-rate
D. junk
E. zero coupon
Which one of the following statements is correct?
A. The risk-free rate represents the change in purchasing power.
B. Any return greater than the inflation rate represents the risk premium.
C. Historical real rates of return must be positive.
D. Nominal rates exceed real rates by the amount of the risk-free rate.
Which of the following features do preferred shareholders and bondholders frequently
have in common?
I. lack of voting rights
II. conversion option into common stock
III. annuity payments
IV. fixed liquidation value
A. I and II only
B. III and IV only
C. II, III, and IV only
D. I, III, and IV only
E. I, II, III, and IV
Silver Enterprises has acquired All Gold Mining in a merger transaction. The following
balance sheets represent the premerger book values for both firms.
Assume the merger is treated as a purchase for accounting purposes. The market value
of All Gold Mining's fixed assets is $3,800; the market values for current and other
assets are the same as the book values. Assume that Silver Enterprises issues $5,000 in
new long-term debt to finance the acquisition. The post-merger balance sheet will
reflect goodwill of _____ and total equity of _____.
A. $640; $2,700
B. $640; $4,610
C. $890; $2,700
D. $890; $4,610
E. $890; $5,500
Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When
the project ends, those assets are expected to have an aftertax salvage value of $45,000.
How is the $45,000 salvage value handled when computing the net present value of the
A. reduction in the cash outflow at time zero
B. cash inflow in the final year of the project
C. cash inflow for the year following the final year of the project
D. cash inflow prorated over the life of the project
E. not included in the net present value
Free Motion Enterprises paid a $2.20 per share annual dividend last week. Dividends
are expected to increase by 3.75 percent annually. What is one share of this stock worth
to you today if your required rate of return is 15 percent?
A. $19.06
B. $19.30
C. $19.56
D. $20.29
E. $20.59
Which one of the following statements is correct given the following exchange rates?
A. On Thursday, one U.S. dollar was equal to 0.1023 South African rand.
B. On Friday, one Thai baht was equal to $35.21.
C. Both the South African rand and the Thai baht appreciated against the U.S. dollar
from Thursday to Friday.
D. The South African rand appreciated from Thursday to Friday against the U.S. dollar.
E. The U.S. dollar depreciated from Thursday to Friday against the Thai baht.
Simple Foods has a zero coupon bond issue outstanding that matures in 9 years. The
bonds are selling at 42 percent of par value. What is the company's aftertax cost of debt
if the tax rate is 38 percent?
A. 5.48 percent
B. 5.73 percent
C. 6.12 percent
D. 7.73 percent
E. 9.88 percent
Home Roasted Turkeys disburses checks every 4 weeks that average $70,000 and take 5
days to clear. How much interest can the company earn if it delays transfer of funds
from an interest-bearing account that pays 0.02 percent per day for these 5 days? Ignore
the effects of compound interest. Assume 52 weeks in a year.
A. $36
B. $91
C. $182
D. $364
E. $910
Bright Morning Foods has expected earnings before interest and taxes of $48,600, an
unlevered cost of capital of 13.2 percent, and debt with both a book and face value of
$25,000. The debt has an 8.5 percent coupon. The tax rate is 34 percent. What is the
value of the firm?
A. $245,500
B. $247,600
C. $251,500
D. $264,800
E. $271,300
Calculate the standard deviation of the following rates of return:
A. 10.79 percent
B. 12.60 percent
C. 13.48 percent
D. 14.42 percent
E. 15.08 percent
Weisbrough United currently has a cash sales only policy. Under this policy, the firm
sells 410 units a month at a price of $219 a unit. The variable cost per unit is $148 and
the carrying cost per unit is $3.30. The monthly interest rate is 1.3 percent. The firm
believes it can increase its sales to 475 units a month if it institutes a net 30 credit
policy. What is the net present value of the switch using the one-shot approach?
A. $228,400
B. $255,590
C. $261,470
D. $282,233
E. $285,902
Al owns 800 shares of The Good Life Co. The company recently issued a statement that
it will pay a dividend per share of $0.55 this year and a $0.60 per share dividend next
year. Al does not want any dividend income this year but does want as much dividend
income as possible next year. Al earns 8.5 percent on his investments. Ignoring taxes,
what will Al's total homemade dividend be next year?
A. $910.20
B. $920.00
C. $930.50
D. $941.80
E. $957.40
Cross Town Express is contemplating the acquisition of some new equipment. The
purchase price is $74,000. The equipment would be depreciated using MACRS
depreciation which allows for 33.33 percent, 44.44 percent, 14.82 percent, and 7.41
percent depreciation over years 1 to 4, respectively. The equipment would be worthless
after that time. The equipment can be leased for $19,100 a year for 4 years. The firm
can borrow money at 9.5 percent and has a 28 percent tax rate. What is the incremental
annual cash flow for year 3 if the company decides to lease the equipment rather than
purchase it?
A. -$16,823
B. -$15,797
C. $14,312
D. $15,797
E. $16,823
Your firm has an average collection period of 42 days. Current practice is to factor all
receivables immediately at a 4 percent discount. Assume that default is extremely
unlikely. What is the effective cost of borrowing?
A. 28.79 percent
B. 36.20 percent
C. 37.78 percent
D. 40.97 percent
E. 42.58 percent
The common stock of Metal Molds has a negative growth rate of 1.5 percent and a
required return of 18 percent. The current stock price is $11.40. What was the amount
of the last dividend paid?
A. $2.07
B. $2.11
C. $2.19
D. $2.22
E. $2.26
Kaiser Marketing recently conducted a survey on behalf of Health Products. The
primary purpose of the survey was to illustrate to Health Products that it was relying on
results of previous studies that, according to Kaiser, were unreliable due to the wording
of the survey questions. To prove this point, Kaiser conducted a two-prong survey. In
the first prong, the survey questions were worded such that the answers tended to sound
positive. In the second prong, the survey questions were re-worded such that the
answers tended to convey a negative feeling. Both sets of survey questions should have
resulted in similar results as the information solicited was essentially identical.
However, the survey results varied significantly. This survey best illustrates which one
of the following?
A. mental accounting
B. overconfidence
C. self attribution bias
D. confirmation bias
E. frame dependence
Two IPOs will commence trading next week. Scott places an order to buy 300 shares of
IPO A. Steve places an order to purchase 300 shares of IPO A and 300 shares of IPO B.
Both IPOs are priced at $20 a share. Scott is allocated 100 shares of IPO A. Steve is
allocated 100 shares of IPO A and 300 shares of IPO B. At the end of the first day of
trading, IPO A is selling for $22.70 a share and IPO B is selling for $18.60 a share.
What is the difference in the total profits or losses that Scott and Steve have as of the
end of the first day of trading?
A. $120
B. $240
C. $360
D. $420
E. $580
Consider the following income statement:
What is the amount of the depreciation tax shield?
A. $23,607
B. $24,192
C. $24,598
D. $26,211
E. $26,919
You are the purchasing agent for a major cookie company. You anticipate that your firm
will need 20,000 bushels of oats in December. You decide to hedge your position today
and did so at the closing price of the day. Assume that the actual market price turns out
to be 228.0 on the day you actually buy the oats. How much did you gain or lose by
hedging your position?
Oats - 5,000 bu.: cents per bu.
A. lost $4,000
B. lost $400
C. saved $40
D. saved $400
E. saved $4,000
On your ninth birthday, you received $300 which you invested at 4.5 percent interest,
compounded annually. Your investment is now worth $756. How old are you today?
A. age 29
B. age 30
C. age 31
D. age 32
E. age 33
Assume that the market prices of the securities that trade in a particular market fairly
reflect the available information related to those securities. Which one of the following
terms best defines that market?
A. riskless market
B. evenly distributed market
C. zero volatility market
D. Blume's market
E. efficient capital market
The base case values used in scenario analysis are the ones considered the most:
A. optimistic.
B. desired by management.
C. pessimistic.
D. conducive to creating a positive net present value.
Estimates of the rate of return on a security based on a historical arithmetic average will
probably tend to _____ the expected return for the long-term while estimates using the
historical geometric average will probably tend to _____ the expected return for the
A. overestimate; overestimate
B. overestimate; underestimate
C. underestimate; overestimate
D. underestimate; underestimate
E. accurately; accurately
Kid's Delight expects to sell $8,200 worth of toys in December, $3,700 worth in
January, $4,400 in February, and $6,100 in March. The wholesale cost is 72 percent of
the retail price. The firm has a receivables period of 30 days, a payables period of 60
days, and buys inventory one month prior to selling it. Which one of the following
statements is correct?
A. The February payments to suppliers are $2,992.
B. The March collections are $3,700.
C. The accounts receivable balance at the end of March is $4,400.
D. The purchases for February are $3,168.
E. The accounts payable balance at the end of January is $5,832.
The assets of Uptown Stores are currently worth $136,400. These assets are expected to
be worth either $120,000 or $150,000 one year from now. The company has a pure
discount bond outstanding with a $130,000 face value and a maturity date of one year.
The risk-free rate is 4.3 percent. What is the value of the equity in this firm?
A. $11,920
B. $14,232
C. $19,507
D. $21,347
E. $26,408
The risk-free rate of return is 3.9 percent and the market risk premium is 6.2 percent.
What is the expected rate of return on a stock with a beta of 1.21?
A. 10.92 percent
B. 11.40 percent
C. 12.22 percent
D. 12.47 percent
E. 12.79 percent
The information content of a dividend increase generally signals that:
A. the firm has a one-time surplus of cash.
B. the firm has few, if any, net present value projects to pursue.
C. management believes earnings growth will be strong going forward.
D. the firm has more cash than it needs due to a decline in future orders.
E. dividends thereafter will be lower.
Nadine is retiring at age 62 and expects to live to age 85. On the day she retires, she has
$348,219 in her retirement savings account. She is somewhat conservative with her
money and expects to earn 6 percent during her retirement years. How much can she
withdraw from her retirement savings each month if she plans to spend her last penny
on the morning of her death?
A. $1,609.92
B. $1,847.78
C. $1,919.46
D. $2,116.08
E. $2,329.05
Why are so many businesses structured as sole proprietorships when the corporate form
of business offers more advantages?
Define liquidity risk, default risk, and taxability risk and explain how these risks relate
to bonds and bond yields.
You are considering two separate investments. Both investments pay 7 percent interest.
Investment A pays simple interest and Investment B pays compound interest. Which
investment should you choose, and why, if you plan on investing for a period of 5
You are considering two lottery payment options: Option A pays $10,000 today and
Option B pays $20,000 at the end of ten years. Assume you can earn 6 percent on your
savings. Which option will you choose if you base your decision on present values?
Which option will you choose if you base your decision on future values?
Describe the foreign currency and home currency approaches to capital budgeting for a
foreign project. Which is better? Which approach would you recommend a U.S. firm
Explain the difference between systematic and unsystematic risk.
What are the basic similarities and basic differences between warrants and call options?
Explain the differences between purchasing an asset and leasing an asset.
In a single sentence, explain how you can determine which cash flows should be
included in the analysis of a project.
Explain how cash dividends affect individual shareholders differently than an equal
amount of funds spent on a repurchase.
What conditions are necessary for absolute purchasing power parity (PPP) to exist? Is it
realistic to believe PPP can exist within a country let alone across national borders?
Explain the difference between the effective annual rate (EAR) and the annual
percentage rate (APR). Of the two, which one has the greater importance and why?
112 = rf + 0.
A portfolio beta is a weighted average of the betas of the individual securities which
comprise the portfolio.
Explain the rationale behind the idea that equity is a call option on a firm's assets. When
would a shareholder allow this call to expire?
You are considering two annuities, both of which pay a total of $20,000 over the life of
the annuity. Annuity A pays $2,000 at the end of each year for the next 10 years.
Annuity B pays $1,000 at the end of each year for the next 20 years. Which annuity has
the greater value today? Is there any circumstance where the two annuities would have
equal values as of today?
Defensive merger tactics are designed to thwart unwanted takeovers and mergers. Do
such activities work to the advantage of shareholders all of the time? Are these types of
activities ethical? Who do you think benefits the most from these activities?