Finance 70354

Type

Quiz

Book Title

Fundamentals of Corporate Finance Standard Edition 9th Edition

ISBN 13

978-0073382395

February 26, 2019

Bond S is a 4 percent coupon bond. Bond T is a 10 percent coupon bond. Both bonds

have 11 years to maturity, make semiannual payments, and have a yield-to-maturity of 7

percent. If interest rates suddenly rise by 2 percent, what will the percentage change in

the price of Bond T be?

A. -15.16 percent

B. -14.87 percent

C. -13.56 percent

D. -12.92 percent

E. -12.67 percent

To purchase shares in a rights offering, a shareholder generally just needs to:

A. pay the subscription amount in cash.

B. submit the required form along with the required number of rights.

C. pay the difference between the market price of the stock and the subscription price.

D. submit the required number of rights along with a payment for the underwriting fee.

Jerilu Markets has a beta of 1.09. The risk-free rate of return is 2.75 percent and the

market rate of return is 9.80 percent. What is the risk premium on this stock?

A. 6.47 percent

B. 7.03 percent

C. 7.68 percent

D. 8.99 percent

E. 9.80 percent

Which one of these statements related to growing annuities and perpetuities is correct?

A. The cash flow used in the growing annuity formula is the initial cash flow at time

zero.

B. Growth rates cannot be applied to perpetuities if you wish to compute the present

value.

C. The future value of an annuity will decrease if the growth rate is increased.

D. An increase in the rate of growth will decrease the present value of an annuity.

E. The present value of a growing perpetuity will decrease if the discount rate is

increased.

Delta Lighting has 30,000 shares of common stock outstanding at a market price of

$17.50 a share. This stock was originally issued at $31 per share. The firm also has a

bond issue outstanding with a total face value of $280,000 which is selling for 86

percent of par. The cost of equity is 16 percent while the aftertax cost of debt is 6.9

percent. The firm has a beta of 1.48 and a tax rate of 30 percent. What is the weighted

average cost of capital?

A. 11.07 percent

B. 13.14 percent

C. 14.36 percent

D. 15.29 percent

E. 15.47 percent

You are considering two independent projects with the following cash flows. The

required return for both projects is 16 percent. Given this information, which one of the

following statements is correct?

A. You should accept Project A and reject Project B based on their respective NPVs.

B. You should accept Project B and reject Project A based on their respective NPVs.

C. You should accept Project A and reject Project B based on their respective IRRs.

D. You should accept Project B and reject Project A based on their respective IRRs.

E. You should accept both projects based on both the NPV and IRR decision rules.

Which one of the following statements is correct concerning the costs of issuing

securities?

A. Domestic bonds are generally more expensive to issue than equity IPOs.

B. Abnormal returns are rarely associated with seasoned issues.

C. A seasoned offering is typically more expensive on a percentage basis than an IPO.

D. There tends to be substantial economies of scale when issuing securities.

E. The costs of issuing convertible bonds tend to be less on a percentage basis than the

costs of issuing straight debt.

Consider the income statement for Heir Jordan Corporation:

A 22 percent growth rate in sales is projected. What is the pro forma addition to

retained earnings assuming all costs vary proportionately with sales?

A. $6,299

B. $7,303

C. $7,890

D. $8,011

E. $8,164

Nelson Mfg. owns a manufacturing facility that is currently sitting idle. The facility is

located on a piece of land that originally cost $159,000. The facility itself cost

$1,460,000 to build. As of now, the book value of the land and the facility are $159,000

and $458,000, respectively. The firm owes no debt on either the land or the facility at

the present time. The firm received a bid of $1,500,000 for the land and facility last

week. The firm's management rejected this bid even though they were told that it is a

reasonable offer in today's market. If the firm was to consider using this land and

facility in a new project, what cost, if any, should it include in the project analysis?

A. $0

B. $617,000

C. $1,460,000

D. $1,500,000

E. $1,619,000

Bruce & Co. expects its EBIT to be $100,000 every year forever. The firm can borrow

at 10 percent. Bruce currently has no debt, and its cost of equity is 20 percent. The tax

rate is 31 percent. What will the value of Bruce & Co. be if the firm borrows $54,000

and uses the loan proceeds to repurchase shares?

A. $280,130

B. $346,600

C. $361,740

D. $378,900

E. $381,520

Franklin Minerals recently had a rights offering of 1,000 shares at an offer price of $10

a share. Isabelle is a shareholder who exercised her rights option by buying all of the

rights to which she was entitled based on the number of shares she owns. Currently,

there are six shareholders who have opted not to participate in the rights offering.

Isabelle would like to purchase the unsubscribed shares. Which one of the following

will allow her to do so?

A. standby provision

B. oversubscription privilege

C. open offer privilege

D. new issues provision

E. overallotment provision

Which one of the following is the depreciation method which allows accelerated write-

offs of property under various lifetime classifications?

A. IRR

B. ACRS

C. AAR

D. straight-line to zero

E. straight-line with salvage

Which one of the following categories of securities had the highest average return for

the period 1926-2007?

A. U.S. Treasury bills

B. large company stocks

C. small company stocks

D. long-term corporate bonds

E. long-term government bonds

Which one of the following favors a low dividend policy?

A. the tax on capital gains is deferred until the gain is realized

B. few, if any, positive net present value projects are available to a firm

C. a majority of the shareholders has a low relevant tax rate

D. a majority of the shareholders has better investment opportunities with similar risks

E. corporate tax rates exceed personal tax rates

Which of the following are managerial options once a project is commenced?

I. modifying the production process

II. re-pricing the product

III. revising the marketing plan

IV. modifying the product's color and shape

A. I and II only

B. III and IV only

C. I, II, and III only

D. II, III, and IV only

E. I, II, III, and IV

The Green Fiddle is considering a project that will produce sales of $87,000 a year for

the next 4 years. The profit margin is estimated at 6 percent. The project will cost

$90,000 and will be depreciated straight-line to a book value of zero over the life of the

project. The firm has a required accounting return of 11 percent. This project should be

_____ because the AAR is _____ percent.

A. rejected; 10.03

B. rejected; 10.25

C. rejected; 11.60

D. accepted; 10.25

E. accepted; 11.60

Which one of the following statements is correct?

A. The greater the volatility of returns, the greater the risk premium.

B. The lower the volatility of returns, the greater the risk premium.

C. The lower the average return, the greater the risk premium.

D. The risk premium is unrelated to the average rate of return.

E. The risk premium is not affected by the volatility of returns.

What is the future value of $7,189 invested for 23 years at 9.25 percent compounded

annually?

A. $22,483.60

B. $27,890.87

C. $38,991.07

D. $51,009.13

E. $54,999.88

Which one of the following correctly defines the upward chain of command in a typical

corporate organizational structure?

A. The vice president of finance reports to the chairman of the board.

B. The chief executive officer reports to president.

C. The controller reports to the president.

D. The treasurer reports to the vice president of finance.

According to Jeremy Siegel, the real return on stocks over the long-term has averaged

about:

A. 6.8 percent

B. 8.7 percent

C. 10.4 percent

D. 12.3 percent

E. 14.8 percent

In an efficient market, it is believed by some individuals that the actions of traders who

constantly buy and sell on any perceived market mispricings will in effect cause market

prices to correctly reflect asset values. A person who believes that the actions of these

traders will not result in correctly valued prices are most apt to believe in which one of

the following?

A. gambler's fallacy

B. limits to arbitrage

C. availability bias

D. false consensus

E. clustering illusion

The two-stage dividend growth model evaluates the current price of a stock based on

the assumption a stock will:

A. pay an increasing dividend for a period of time and then cease paying dividends

altogether.

B. increase the dividend amount every other year.

C. pay a constant dividend for the first two quarters of each year and then increase the

dividend the last two quarters of each year.

D. grow at a fixed rate for a period of time after which it will grow at a different rate

indefinitely.

E. pay increasing dividends for a fixed period of time, cease paying dividends for a

period of time, and then commence paying increasing dividends for an indefinite period

of time.

Some time ago, Julie purchased eleven acres of land costing $36,900. Today, that land

is valued at $214,800. How long has she owned this land if the price of the land has

been increasing at 10.5 percent per year?

A. 13.33 years

B. 16.98 years

C. 17.64 years

D. 19.29 years

E. 21.08 years

The Turtle Cave currently has 160,000 shares of stock outstanding that sell for $60 per

share. Assume no market imperfections or tax effects exist. What will the new share

price be if the firm declares a 15 percent stock dividend?

A. $48.72

B. $52.17

C. $60.00

D. $64.50

E. $69.00

Which of the following are cash flows from a corporation into the financial markets?

I. repayment of long-term debt

II. payment of government taxes

III. payment of loan interest

IV. payment of quarterly dividend

A. I and II only

B. I and III only

C. II and IV only

D. I, III, and IV only

E. I, II, and III only

Cape May Products currently sells 650 units a month at a price of $59 a unit. The firm

believes it can increase its sales by an additional 125 units if it switches to a net 30

credit policy. The monthly interest rate is 0.35 percent and the variable cost per unit is

$38. What is the incremental cash inflow from the proposed credit policy switch?

A. $774

B. $2,625

C. $4,750

D. $5,690

E. $7,375

The net book value of equipment will:

A. remain constant over the life of the equipment.

B. vary in response to changes in the market value.

C. decrease at a constant rate when MACRS depreciation is used.

D. increase over the taxable life of an asset.

E. decrease slower under straight-line depreciation than under MACRS.

Which one of the following is an advantage of the average accounting return method of

analysis?

A. easy availability of information needed for the computation

B. inclusion of time value of money considerations

C. the use of a cutoff rate as a benchmark

D. the use of pre-tax income in the computation

E. use of real, versus nominal, average income

The formula which breaks down the return on equity into three component parts is

referred to as which one of the following?

A. equity equation

B. profitability determinant

C. SIC formula

D. Du Pont identity

E. equity performance formula

Which one of the following is included in a firm's market value but yet is excluded

from the firm's accounting value?

A. real estate investment

B. good reputation of the company

C. equipment owned by the firm

D. money due from a customer

E. an item held by the firm for future sale

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