Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

Finance 75612

February 26, 2019
The Wildcat Oil Company is trying to decide whether to lease or buy a new computer-
assisted drilling system for its oil exploration business. Management has decided that it
must use the system to stay competitive; it will provide $1.2 million in annual pretax
cost savings. The system costs $6.7 million and will be depreciated straight-line to zero
over 4 years. Wildcat's tax rate is 35 percent, and the firm can borrow at 11 percent.
Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for
payments of $1,750,000 per year. Lambert's policy is to require its lessees to make
payments at the start of the year. Lambert requires Wildcat to pay a $270,000 security
deposit at the inception of the lease. What is the NAL of leasing the equipment?
A. $522,408
B. $541,287
C. $550,318
D. $561,828
E. $564,719
Reliable Cars has sales of $807,200, total assets of $1,105,100, and a profit margin of
9.68 percent. The firm has a total debt ratio of 78 percent. What is the return on equity?
A. 13.09 percent
B. 16.67 percent
C. 17.68 percent
D. 28.56 percent
E. 32.14 percent
You grandfather won a lottery years ago. The value of his winnings at the time was
$50,000. He invested this money such that it will provide annual payments of $2,400 a
year to his heirs forever. What is the rate of return?
A. 4.75 percent
B. 4.80 percent
C. 5.00 percent
D. 5.10 percent
E. 5.15 percent
Electronics, Inc. common stock returned a nifty 22.68 percent rate of return last year.
The dividend amount was $0.25 a share which equated to a dividend yield of 0.84
percent. What was the rate of price appreciation for the year?
A. 21.84 percent
B. 22.38 percent
C. 22.60 percent
D. 22.87 percent
E. 23.52 percent
Real rates are defined as nominal rates that have been adjusted for which of the
A. inflation
B. default risk
C. accrued interest
D. interest rate risk
E. both inflation and interest rate risk
Which one of the following securities is used as a means of investing in a foreign stock
that otherwise could not be traded in the United States?
A. American Depository Receipt
B. Yankee bond
C. Yankee stock
E. gilt
The equivalent annual cost considers which of the following?
I. required rate of return
II. operating costs
III. need for replacement
IV. aftertax salvage value
A. I and II only
B. II and IV only
C. II, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV
A business owned by a solitary individual who has unlimited liability for its debt is
called a:
A. corporation.
B. sole proprietorship.
C. general partnership.
D. limited partnership.
E. limited liability company.
Julie opted to exercise her August option on June 20th and as a result received $2,500
for the sale of her shares. Which one of the following did Julie own?
A. warrant
B. American call
C. American put
D. European call
E. European put
The Metallurgical Specialty Co. deals strictly with four customers. The average amount
each customer pays per month along with the collection delay associated with each
payment is shown below. Given this information, what is the weighted average delay?
Assume each month has 30 days.
A. 1.98 days
B. 2.04 days
C. 2.09 days
D. 2.16 days
E. 2.23 days
The Winter Store just purchased $48,300 of goods from its supplier with credit terms of
1/10, net 25. What is the discounted price?
A. $43,470
B. $46,209
C. $47,817
D. $47,929
E. $48,300
Net working capital is defined as:
A. total liabilities minus shareholders' equity.
B. current liabilities minus shareholders' equity.
C. fixed assets minus long-term liabilities.
D. total assets minus total liabilities.
E. current assets minus current liabilities.
You own one share of a cumulative preferred stock which pays quarterly dividends. The
firm has recently suffered some financial setbacks and has failed to pay the last two
dividends. However, new funding has been arranged and the firm intends to restore all
dividends, both common and preferred, this quarter. As a preferred shareholder, you
should expect to receive the equivalent of ____ quarter(s) of dividends when the next
dividend is paid.
A. 0
B. 1
C. 2
D. 3
E. either 1, 2, or 3
It takes your firm 4.5 days to prepare and mail out all the monthly statements to your
customers. On average, the mail time between your firm and your customers is 2.6
days. Customer checks take an average of 1.8 days to clear the bank. You have
determined that your total average collection time is 6.1 days. How long, on average,
does it take your firm to process the payments from customers?
A. 1.7 days
B. 2.6 days
C. 4.4 days
D. 4.8 days
E. 6.2 days
A cumulative cash deficit indicates a firm:
A. has at least a short-term need for external funding.
B. is facing long-term financial distress.
C. will go out of business within the year.
D. is capable of funding all of its needs internally.
E. is using its cash wisely.
You are the manager of a retail store. You believe the economy is in a recession and that
sales for the month will be unusually slow. Since you have complete discretion over the
pricing at your location, you decide to have a store-wide sale and offer 10 percent off all
merchandise for a 3-day period. You don't expect your superiors to criticize this
decision as you believe they, along with the majority of the other store managers, feel
the same way about the economy as you do. Which one of the following applies to you?
A. recency bias
B. law of small numbers
C. gambler's fallacy
D. false consensus
E. money illusion
You hope to buy your dream car four years from now. Today, that car costs $82,500.
You expect the price to increase by an average of 4.8 percent per year over the next four
years. How much will your dream car cost by the time you are ready to buy it?
A. $98,340.00
B. $98,666.67
C. $99,517.41
D. $99,818.02
E. $100,023.16
You expect interest rates to decline in the near future even though the bond market is
not indicating any sign of this change. Which one of the following bonds should you
purchase now to maximize your gains if the rate decline does occur?
A. short-term; low coupon
B. short-term; high coupon
C. long-term; zero coupon
D. long-term; low coupon
E. long-term; high coupon
An option contract:
I. can be used to hedge risk.
II. can be used to speculate in the market.
III. can be based on a futures contract to create a futures option.
IV. cannot be based on a foreign currency.
A. II and III only
B. I and II only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
Long-run exposure to exchange rate risk relates to:
A. daily variations in exchange rates.
B. variances between spot and future rates.
C. unexpected changes in relative economic conditions.
D. differences between future spot rates and related forward rates.
E. accounting gains and losses created by fluctuating exchange rates.
You currently own 8 percent of the 3.5 million outstanding shares of Webster Mills. The
company has just announced a rights offering with a subscription price of $28. One
right will be issued for each share of outstanding stock. This offering will provided $9
million of new financing for the firm, ignoring all issue costs. Assume that all rights are
exercised. What will be your new ownership position if you opted to sell your rights
rather than exercise them personally?
A. 7.33 percent
B. 7.46 percent
C. 7.87 percent
D. 8.00 percent
E. 8.21 percent
Suzie is the controller of The Price Rite Company. She has been granted to the right to
buy 1,000 shares of her employer's stock at $25 a share anytime within the next three
years. Which one of the following has Suzie been granted?
A. employee stock option
B. company bonus option
C. employee grant
D. employee exercise option
E. company benefits option
Suppose your firm produces breakfast cereal and needs 65,000 bushels of corn in
December for an upcoming promotion. You would like to lock in your costs today
because you are concerned that corn prices might go up between now and December.
To hedge your risk exposure, you could purchase corn futures contracts today
effectively locking in a total settlement price of _____, based on the closing price
shown in the table below.
Corn - 5,000 bu., U.S. cents per bu.
A. $163,800
B. $164,125
C. $174,238
D. $179,400
E. $183,463
The Corner Grocer has a 7-year, 6 percent annual coupon bond outstanding with a
$1,000 par value. The bond has a yield to maturity of 5.5 percent. Which one of the
following statements is correct if the market yield suddenly increases to 6.5 percent?
A. The bond price will increase by $57.14.
B. The bond price will increase by 5.29 percent.
C. The bond price will decrease by $53.62.
D. The bond price will decrease by 5.43 percent.
E. The bond price will decrease by 5.36 percent.
Which of the following are considered weaknesses in the average accounting return
method of project analysis?
I. exclusion of time value of money considerations
II. need of a cutoff rate
III. easily obtainable information for computation
IV. based on accounting values
A. I only
B. I and IV only
C. II and III only
D. I, II, and IV only
E. I, II, III, and IV
The Pancake House has sales of $1,642,000, depreciation of $27,000, and net working
capital of $218,000. The firm has a tax rate of 35 percent and a profit margin of 6
percent. The firm has no interest expense. What is the amount of the operating cash
A. $98,520
B. $125,520
C. $147,480
D. $268,480
E. $343,520
Miley expects to receive the following payments: Year 1 = $60,000; Year 2 = $35,000;
Year 3 = $12,000. All of this money will be saved for her retirement. If she can earn an
average of 10.5 percent on her investments, how much will she have in her account 25
years after making her first deposit?
A. $972,373
B. $989,457
C. $1,006,311
D. $1,147,509
E. $1,231,776
W.V. Trees, Inc. has a debt-equity ratio of 1.4. Its WACC is 10 percent, and its cost of
debt is 9 percent. The corporate tax rate is 33 percent. What is the firm's unlevered cost
of equity capital?
A. 12.38 percent
B. 12.79 percent
C. 13.68 percent
D. 14.10 percent
E. 14.45 percent
A firm evaluates all of its projects by applying the IRR rule. The required return for the
following project is 21 percent. The IRR is _____ percent and the firm should ______
the project.
A. 23.67 percent; reject
B. 24.26 percent; accept
C. 24.26 percent; reject
D. 26.30 percent; accept
E. 26.30 percent; reject
Which of the following are negative covenants that might be found in a bond indenture?
I. The company shall maintain a current ratio of 1.10 or better.
II. No debt senior to this issue can be issued.
III. The company cannot lease any major assets without approval by the lender.
IV. The company must maintain the loan collateral in good working order.
A. I and II only
B. II and III only
C. III and IV only
D. II, III, and IV only
E. I, II, and III only
The length of time between the sale of inventory and the collection of the payment for
that sale is called the:
A. operating cycle.
B. inventory period.
C. accounts receivable period.
D. accounts payable period.
E. cash cycle.
Which one of the following statements is correct concerning the foreign exchange
A. The trading floor of the foreign exchange market is located in London, England.
B. The foreign exchange market is the world's second largest financial market.
C. The four primary currencies that are traded in the foreign exchange market are the
U.S. dollar, the British pound, the French franc, and the euro.
D. Importers, exporters, and speculators are key players in the foreign exchange market.
E. The U.S. created a communications network called SWIFT to facilitate currency
Which one of the following statements is correct?
A. The assignment of receivables involves selling the firm's accounts receivables at full
B. Lines of credit frequently require a cleanup period.
C. With maturity factoring, the borrower receives the loan amount immediately.
D. Commercial paper is short-term financing offered to highly-rated corporations by
major banks.
E. Credit card receivables funding is a relatively inexpensive method of borrowing on a
short-term basis.
Last month, Hill Side Markets introduced a new board game. Consumer demand has
been overwhelming and appears that strong demand will exist over the long-term as
young children absolutely love the game. Given this, which one of the following
options should Hill Side Markets consider in respect to this game?
A. suspension
B. expansion
C. abandonment
D. contraction
E. withdrawal