Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

Finance 91590

February 26, 2019
Denver Shoppes will pay an annual dividend of $1.46 a share next year with future
dividends increasing by 4.2 percent annually. What is the market rate of return if the
stock is currently selling for $38.90 a share?
A. 6.55 percent
B. 7.13 percent
C. 7.46 percent
D. 7.95 percent
E. 8.29 percent
The weighted average cost of capital for a wholesaler:
A. is equivalent to the aftertax cost of the firm's liabilities.
B. should be used as the required return when analyzing a potential acquisition of a
retail outlet.
C. is the return investors require on the total assets of the firm.
D. remains constant when the debt-equity ratio changes.
E. is unaffected by changes in corporate tax rates.
You own 2,200 shares of Deltona Hardware. The company has stated that it plans on
issuing a dividend of $0.42 a share at the end of this year and then issuing a final
liquidating dividend of $2.90 a share at the end of next year. Your required rate of return
on this security is 16 percent. Ignoring taxes, what is the value of one share of this stock
to you today?
A. $2.30
B. $2.43
C. $2.52
D. $2.92
E. $3.32
Assume you can buy 52 British pounds with 100 Canadian dollars. How much profit
can you earn on a triangle arbitrage given the following rates if you start out with 100
U.S. dollars?
A. $0.78
B. $1.04
C. $1.33
D. $1.56
E. $1.64
Al is retired and enjoys his daily life. His one concern is that his bonds provide a steady
stream of income that will continue to allow him to have the money he desires to
continue his active lifestyle without lowering his present standard of living. Although
he has sufficient principal to live on, he only wants to spend the interest income
provided by his holdings and thus is concerned about the purchasing power of that
income. Which one of the following bonds should best ease Al's concerns?
A. 6-year, putable, high coupon bond
B. 5-year TIPS
C. 10-year AAA coupon bond
D. 5-year municipal bond
E. 7- year income bond
Blasco Distributors has become a large conglomerate. Its board of directors recently
concluded that the firm has become so large that it has lost its efficiency. The board
further concluded that the firm could be both more efficient and more profitable if it
were divided into three distinct and separate firms. The board presented this suggested
to the firm's shareholders and those shareholders voted and agreed to divide the firm.
Dividing this firm into separate entities is referred to as a(n):
A. lockup transaction.
B. divestiture.
C. equity carve-out.
D. spin-off.
E. split-up.
Precise Machinery is analyzing a proposed project. The company expects to sell 2,100
units, give or take 5 percent. The expected variable cost per unit is $260 and the
expected fixed costs are $589,000. Cost estimates are considered accurate within a plus
or minus 4 percent range. The depreciation expense is $129,000. The sales price is
estimated at $750 per unit, plus or minus 2 percent. What is the sales revenue under the
worst case scenario?
A. $1,686,825
B. $1,496,250
C. $1,466,325
D. $1,543,500
E. $1,620,675
The value of the risky debt of a firm is equal to the value of:
A. a call option plus the value of a risk-free bond.
B. a risk-free bond plus a put option.
C. the equity of the firm minus a put.
D. the equity of the firm plus a call option.
E. a risk-free bond minus a put option.
Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This
A. took place in the primary market.
B. occurred in a dealer market.
C. was facilitated in the secondary market.
D. involved a proxy.
E. was a private placement.
One year ago, you invested $1,800. Today it is worth $1,924.62. What rate of interest
did you earn?
A. 6.59 percent
B. 6.67 percent
C. 6.88 percent
D. 6.92 percent
E. 7.01 percent
Assume that the returns from an asset are normally distributed. The average annual
return for the asset is 18.1 percent and the standard deviation of the returns is 32.5
percent. What is the approximate probability that your money will triple in value in a
single year?
A. less than 0.5 percent
B. less than 1 percent but greater than 0.5 percent
C. less then 2.5 percent but greater than 1 percent
D. less than 5 percent but greater than 2.5 percent
E. less than 10 percent but greater than 5 percent
Fred's Garage is trying to decide whether to lease or buy some new equipment. The
equipment costs $48,000 and has a 6-year life. The equipment will be worthless after
the 6 years and will have to be replaced. The company has a tax rate of 31 percent, a
cost of borrowed funds of 7.5 percent, and uses straight-line depreciation. The
equipment can be leased for $10,600 a year. What is the amount of the aftertax lease
A. $3,286.00
B. $7,314.00
C. $7,862.55
D. $8,406.16
E. $10,928.60
An increase in which one of the following is an indicator that an accounts receivable
policy is becoming more restrictive?
A. bad debts
B. accounts receivable turnover rate
C. accounts receivable period
D. credit sales
E. operating cycle
An auto maker recently acquired a windshield manufacturer. Which type of an
acquisition was this?
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. indirect
You are considering an annuity which costs $160,000 today. The annuity pays $18,126
a year at an annual interest rate of 7.50 percent. What is the length of the annuity time
A. 12 years
B. 13 years
C. 14 years
D. 15 years
E. 16 years
A leveraged lease is a:
A. lease where the lessee is the owner of the asset for tax purposes.
B. sale and leaseback arrangement.
C. type of operating lease.
D. lease paid with money borrowed by the lessee.
The cash flow related to interest payments less any net new borrowing is called the:
A. operating cash flow.
B. capital spending cash flow.
C. net working capital.
D. cash flow from assets.
E. cash flow to creditors.
Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued
by Winston Industries. The 11.6 percent is referred to as which one of the following?
A. coupon rate
B. face rate
C. call rate
D. yield to maturity
E. interest rate
The current president and vice-presidents of Mountain Top Consulting have decided to
form a private investment group with the sole purpose of purchasing Mountain Top
Consulting. These individuals have found a lender who will lend them 85 percent of the
purchase cost if they pledge their personal assets as collateral for the loan. The current
officers agree to this arrangement, borrow the funds, and purchase Mountain Top
Consulting. The purchase of this firm is referred to as a:
A. conglomeration.
B. proxy contest.
C. merger.
D. leveraged buyout.
E. consolidation.
The relevant discount rate for evaluating a lease is the firm's:
A. cost of equity financing.
B. pre-tax cost of borrowing.
C. aftertax cost of borrowing.
D. cost of working capital.
E. rate of return on short-term assets.
The expected risk premium on a stock is equal to the expected return on the stock
minus the:
A. expected market rate of return.
B. risk-free rate.
C. inflation rate.
D. standard deviation.
E. variance.
Merryl Enterprises currently has an operating cycle of 62 days. The firm is analyzing
some operational changes, which are expected to increase the accounts receivable
period by 2 days and decrease the inventory period by 5 days. The accounts payable
turnover rate is expected to increase from 42 to 46 times per year. If all of these changes
are adopted, what will the firm's new operating cycle be?
A. 51 days
B. 57 days
C. 59 days
D. 60 days
E. 65 days
Travis owns both a September $30 call and a September $30 put. If the call finishes at-
the-money, then the put will:
A. also finish in-the-money.
B. finish at-the-money.
C. finish out-of-the-money.
D. either finish at-the-money or in-the-money.
E. either finish at-the-money or out-of-the-money.
On a common-base year financial statement, accounts receivables will be expressed
relative to which one of the following?
A. current year sales
B. current year total assets
C. base-year sales
D. base-year total assets
E. base-year accounts receivables
Trader A has agreed to give 100,000 U.S. dollars to Trader B in exchange for British
pounds based on today's exchange rate of $1 = 0.62. The traders agree to settle this
trade within two business day. What is this exchange called?
A. swap
B. option trade
C. futures trade
D. forward trade
E. spot trade
Which one of the following is a result of a stock repurchase?
A. increase in the number of shares outstanding
B. increase in the market price per share
C. increase in the total equity of the repurchasing firm
D. decrease in EPS
E. PE ratio equal to that resulting from a comparable cash dividend
Plyler Cabinets declared a dividend of $1.20 a share on May 15 to holders of record on
Monday, June 1. The dividend is payable on June 15. Sara purchased 500 shares of
Plyler Cabinets stock on Friday, May 29. How much dividend income will she receive
on June 15 from Plyler Cabinets?
A. $0
B. $0.80
C. $1.60
D. $160.00
E. $320.00
Protective covenants:
A. apply to short-term debt issues but not to long-term debt issues.
B. only apply to privately issued bonds.
C. are a feature found only in government-issued bond indentures.
D. only apply to bonds that have a deferred call provision.
E. are primarily designed to protect bondholders.
Cooper Brands, Inc., has 68,000 shares of stock outstanding at a market price of $63 a
share. The par value is $1 per share. The company has just announced a 5-for-4 stock
split. What will the market price per share be after the split?
A. $50.40
B. $58.20
C. $62.50
D. $78.75
E. $82.50
The Tanning Bed has 10,000 shares of stock outstanding with a par value of $1 per
share and a market value of $8 per share. The balance sheet shows $10,000 in the
common stock account, $60,000 in the capital in excess of par account, and $94,300 in
the retained earnings account. The firm just announced a 100 percent stock dividend.
What will be the value of the common stock account after the dividend?
A. $5,000
B. $10,000
C. $11,000
D. $15,000
E. $20,000
Justice, Inc. has a capital structure which is based on 30 percent debt, 5 percent
preferred stock, and 65 percent common stock. The flotation costs are 11 percent for
common stock, 10 percent for preferred stock, and 7 percent for debt. The corporate tax
rate is 37 percent. What is the weighted average flotation cost?
A. 8.97 percent
B. 9.48 percent
C. 9.62 percent
D. 9.75 percent
E. 10.00 percent
Outdoor Living has agreed to be acquired by New Adventures for $48,000 worth of
New Adventures stock. New Adventures currently has 8,000 shares of stock outstanding
at a price of $32 a share. Outdoor Living has 1,500 shares outstanding at a price of $43
a share. The incremental value of the acquisition is $21,000. What is the value of the
merged firm?
A. $85,500
B. $256,000
C. $277,000
D. $320,500
E. $341,500
A Treasury bond is quoted as 99:11 asked and 99:09 bid. What is the bid-ask spread in
dollars on a $5,000 face value bond?
A. $0.03
B. $0.63
C. $1.00
D. $3.13
E. $6.25
Mary just purchased a bond which pays $60 a year in interest. What is this $60 called?
A. coupon
B. face value
C. discount
D. call premium
E. yield
Which of the following represent potential tax benefits that can directly result from an
I. an increase in depreciation expense
II. an increase in surplus funds
III. the use of net operating losses
IV. an increased use of leverage
A. I and IV only
B. II and III only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV