Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

Finance 84370

February 27, 2019
A payoff profile:
A. determines the price of an option contract.
B. determines whether a forward or a futures contract is needed.
C. applies only to contract sellers.
D. determines the price of a collar.
E. illustrates potential gains and losses.
One year ago, Deltona Motor Parts deposited $16,500 in an investment account for the
purpose of buying new equipment three years from today. Today, it is adding another
$12,000 to this account. The company plans on making a final deposit of $20,000 to the
account one year from today. How much will be available when it is ready to buy the
equipment, assuming the account pays 5.5 interest?
A. $53,408
B. $53,919
C. $56,211
D. $56,792
E. $58,021
A one-for-four reverse stock split will:
A. increase the par value by 25 percent.
B. increase the number of shares outstanding by 400 percent.
C. increase the market value but not affect the par value per share.
D. increase a $1 par value to $4.
E. increase a $1 par value to $5.
Shares of Hot Donuts common stock are currently selling for $32.35. The last annual
dividend paid was $1.10 per share and the market rate of return is 10.7 percent. At what
rate is the dividend growing?
A. 7.06 percent
B. 8.67 percent
C. 10.42 percent
D. 12.60 percent
E. 14.10 percent
Which one of the following will decrease the operating cycle?
A. decreasing the inventory turnover rate
B. decreasing the accounts payable period
C. increasing the accounts receivable turnover rate
D. increasing the accounts payable period
E. increasing the accounts receivable period
Suzie is a chemist who has been experimenting with fragrances in her home laboratory
and feels that she now has three viable perfumes that could be successfully marketed.
She knows a venture capitalist who has offered to finance her business to the point
where she would be ready to begin the manufacturing and marketing stage. Which type
of financing is Suzie being offered?
A. syndicate
B. introduction
C. second-stage
D. mezzanine-level
E. seed money
Hungry Howie's is currently operating at 96 percent of capacity. The profit margin and
the dividend payout ratio are projected to remain constant. Sales are projected to
increase by 3 percent next year. What is the projected addition to retained earnings for
next year?
A. $1,309.19
B. $1,421.40
C. $1,884.90
D. $2,667.78
E. $3,001.40
Sue's Bakery is planning on merging with Ted's Deli. Sue's will pay Ted's shareholders
the current value of their stock in shares of Sue's Bakery. Sue's currently has 4,500
shares of stock outstanding at a market price of $19 a share. Ted's has 2,100 shares
outstanding at a price of $20 a share. What is the value of the merged firm?
A. $106,500
B. $107,800
C. $125,400
D. $127,500
E. $131,600
You are considering a project with an initial cost of $7,800. What is the payback period
for this project if the cash inflows are $1,100, $1,640, $3,800, and $4,500 a year over
the next four years, respectively?
A. 3.21 years
B. 3.28 years
C. 3.36 years
D. 4.21 years
E. 4.29 years
You find a certain stock that had returns of 4 percent, -5 percent, -15 percent, and 16
percent for four of the last five years. The average return of the stock for the 5-year
period was 13 percent. What is the standard deviation of the stock's returns for the
five-year period?
A. 21.39 percent
B. 24.98 percent
C. 27.16 percent
D. 31.23 percent
E. 34.02 percent
The excess return earned by an asset that has a beta of 1.34 over that earned by a
risk-free asset is referred to as the:
A. market risk premium.
B. risk premium.
C. systematic return.
D. total return.
E. real rate of return.
The most common means of financing a temporary cash deficit is a:
A. long-term secured bank loan.
B. short-term secured bank loan.
C. short-term issue of corporate bonds.
D. long-term unsecured bank loan.
E. short-term unsecured bank loan.
What was the highest price per troy ounce for the December silver futures contract
Silver - 5,000 troy oz.: dollars and cents per troy oz.
A. $10.185
B. $10.225
C. $10.250
D. $10.814
E. $10.830
A business formed by two or more individuals who each have unlimited liability for all
of the firm's business debts is called a:
A. corporation.
B. sole proprietorship.
C. general partnership.
D. limited partnership.
E. limited liability company.
Which one of the following statements related to warrants is correct?
A. Warrants are generally issued as an attachment to publicly-issued bonds.
B. Warrants are excluded from trading on an organized exchange.
C. Warrants are structured as long-term put options.
D. Warrants are issued by individual investors.
E. Warrants are generally added as an incentive to a private debt issue.
An investment has the following cash flows and a required return of 13 percent. Based
on IRR, should this project be accepted? Why or why not?
A. No; The IRR exceeds the required return by about 0.06 percent.
B. No; The IRR is less than the required return by about 0.94 percent.
C. Yes; The IRR exceeds the required return by about 0.06 percent.
D. Yes; The IRR exceeds the required return by about 0.94 percent.
E. Yes; The IRR is less than the required return by about 0.06 percent.
The owners' equity accounts for Blueswell Industries are shown here:
If Blueswell Industries declares a 1-for-5 reverse stock split, there will be ____ shares
outstanding at a par value of _____ per share.
A. 1,800; $1.00
B. 1,800; $5.00
C. 9,000; $5.00
D. 45,000; $0.20
E. 45,000; $1.00
Which one of the following statements is correct in relation to a firm's short-run
financial risk?
A. Short-run financial risk results from permanent changes in prices due to new
B. A financially sound firm can become financially distressed as the result of its
short-run exposure to financial risk.
C. Each segment of a business should be responsible for hedging its own short-run
financial risk.
D. Short-run financial risk is defined as temporary price changes which result directly
from natural disasters, such as tornadoes, droughts, and floods.
E. Thus far, hedging techniques have been unsuccessful in reducing short-run financial
Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a
lockbox system to speed up collections from its customers located on the East Coast. A
Philadelphia-area bank will provide this service for an annual fee of $25,000 plus 10
cents per transaction. The estimated reduction in collection and processing time is one
day. The average customer payment in this region is $8,200. Treasury bills are currently
yielding 5 percent per year. Assume a year has 365 days. Approximately how many
customers each day, on average, are needed to make the system profitable for Cow
Chips, Inc.?
A. 56
B. 67
C. 74
D. 83
E. 89
The primary difference between a line of credit and a revolving credit arrangement is
A. type of collateral used to secure the loan.
B. length of the credit period.
C. fact that the line of credit is a secured loan and the revolving credit arrangement is
D. fact that the line of credit is an unsecured loan and the revolving credit arrangement
is secured.
E. classification as either a committed or a noncommitted loan.
Young's Home Supply has a debt-equity ratio of 0.80. The cost of equity is 14.5 percent
and the aftertax cost of debt is 4.9 percent. What will the firm's cost of equity be if the
debt-equity ratio is revised to 0.75?
A. 10.89 percent
B. 11.47 percent
C. 11.70 percent
D. 13.89 percent
E. 14.23 percent
Which one of the following statements concerning variable costs is correct?
A. Variable costs minus fixed costs equal marginal costs.
B. Variable costs are equal to fixed costs when production is equal to zero.
C. An increase in variable costs increases the operating cash flow.
D. Variable costs are inversely related to fixed costs.
E. Variable costs per unit are inversely related to the contribution margin per unit.
Which one of the following defines the relationship between the value of an option and
the option's time to expiration?
A. theta.
B. vega.
C. rho.
D. delta.
E. gamma.
You own the following portfolio of stocks. What is the portfolio weight of stock C?
A. 39.85 percent
B. 42.86 percent
C. 44.41 percent
D. 48.09 percent
E. 52.65 percent
Financial plans generally tend to ignore which one of the following?
A. dividend policy
B. manager's goals and objectives
C. risks associated with cash flows
D. operating capacity levels
E. capital structure policy
Assume that you invest in a portfolio of large-company stocks. Further assume that the
portfolio will earn a rate of return similar to the average return on large-company stocks
for the period 1926-2007. What rate of return should you expect to earn?
A. less than 10 percent
B. between 10 and 12.5 percent
C. between 12.5 and 15 percent
D. between 15 and 17.5 percent
E. more than 17.5 percent
Johnson Tire Distributors has debt with both a face and a market value of $12,000. This
debt has a coupon rate of 6 percent and pays interest annually. The expected earnings
before interest and taxes are $2,100, the tax rate is 30 percent, and the unlevered cost of
capital is 11.7 percent. What is the firm's cost of equity?
A. 22.46 percent
B. 22.87 percent
C. 23.20 percent
D. 23.59 percent
E. 25.14 percent
A basic interest rate swap generally involves trading a:
A. short-term rate for a long-term rate.
B. foreign rate for a domestic rate.
C. government rate for a corporate rate.
D. fixed rate for a variable rate.
You want to have $1 million in your savings account when you retire. You plan on
investing a single lump sum today to fund this goal. You are planning on investing in an
account which will pay 7.5 percent annual interest. Which of the following will reduce
the amount that you must deposit today if you are to have your desired $1 million on
the day you retire?
I. Invest in a different account paying a higher rate of interest.
II. Invest in a different account paying a lower rate of interest.
III. Retire later.
IV. Retire sooner.
A. I only
B. II only
C. I and III only
D. I and IV only
E. II and III only
Russell's Deli has cash of $136, accounts receivable of $87, accounts payable of $215,
and inventory of $409. What is the value of the quick ratio?
A. 0.31
B. 0.53
C. 0.71
D. 1.04
E. 1.07
Pro forma statements for a proposed project should:
I. be compiled on a stand-alone basis.
II. include all the incremental cash flows related to the project.
III. generally exclude interest expense.
IV. include all project-related fixed asset acquisitions and disposals.
A. I and II only
B. II and III only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV