Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

Finance 26841

February 26, 2019
The tendency for a decision maker to search for confirmation that a recent decision he
or she made was a good decision represents which one of the following characteristics?
A. overconfidence
B. overoptimism
C. affect heuristic
D. confirmation bias
E. representativeness heuristic
Mountaintop Inns, a Kentucky company, has determined that a majority of its
customers are located in the Pennsylvania area. It therefore is considering using a
lockbox system offered by a bank located in Pittsburgh, Pennsylvania. The bank has
estimated that use of the system will reduce collection time by one day. In addition to
the variable charge shown below, there is also a fixed charge of $4,320 per year for the
lockbox system. Assume a year has 365 days. What is the NPV of the lockbox system
given the following information?
A. -$156,727
B. -$131,301
C. -$74,208
D. $11,507
E. $26,433
Motor City Productions sells original automotive art on a prepaid basis as each piece is
uniquely designed to the customer's specifications. For one project, the cash flows are
estimated as follows. Based on the internal rate of return (IRR), should this project be
accepted if the required return is 9 percent?
A. Accept the project.
B. Reject the project.
C. The IRR cannot be used to evaluate this type of project.
D. The firm should be indifferent to either accepting or rejecting this project.
E. Insufficient information is provided to make a decision based on IRR.
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, give or take 2 percent. The tax rate is 35 percent. The
company is conducting a sensitivity analysis with fixed costs of $590,000. What is the
OCF given this analysis?
A. $337,975
B. $285,350
C. $330,500
D. $354,874
E. $414,350
Sensitivity analysis is based on:
A. varying a single variable and measuring the resulting change in the NPV of a project.
B. applying differing discount rates to a project's cash flows and measuring the effect
on the NPV.
C. expanding and contracting the number of years for a project to determine the optimal
project length.
D. the best, worst, and most expected situations.
E. various states of the economy and the probability of each state occurring.
Consider the following two mutually exclusive projects:
What is the crossover rate for these two projects?
A. 6.29 percent
B. 6.48 percent
C. 6.71 percent
D. 6.75 percent
E. 6.94 percent
A stock has a geometric average return of 14.6 percent and an arithmetic average return
of 15.5 percent based on the last 33 years. What is the estimated average rate of return
for the next 6 years based on Blume's formula?
A. 14.79 percent
B. 14.96 percent
C. 15.28 percent
D. 15.36 percent
E. 15.42 percent
Mason Farms purchased a building for $729,000 eight years ago. Six years ago, repairs
were made to the building which cost $136,000. The annual taxes on the property are
$11,000. The building has a current market value of $825,000 and a current book value
of $494,000. The building is totally paid for and solely owned by the firm. If the
company decides to use this building for a new project, what value, if any, should be
included in the initial cash flow of the project for this building?
A. $494,000
B. $582,000
C. $825,000
D. $865,000
E. $953,000
Ramon opened a combination laundry and dry cleaning establishment three years ago.
Due to his excellent service and reasonable prices, his business has grown and is doing
quite well financially. He has considered expanding this business by opening another
location but keeps putting off that decision for fear that the second location will not be a
success. Ramon is currently displaying which one of the following behavior
A. self-attribution bias
B. overconfidence
C. regret aversion
D. house money effect
E. frame dependence
Holiday Tours (HT) has an employment contract with its newly hired CEO. The
contract requires a lump sum payment of $10.4 million be paid to the CEO upon the
successful completion of her first three years of service. HT wants to set aside an equal
amount of money at the end of each year to cover this anticipated cash outflow and will
earn 5.65 percent on the funds. How much must HT set aside each year for this
A. $3,184,467
B. $3,277,973
C. $3,006,409
D. $3,318,190
E. $3,466,667
What is the sustainable growth rate assuming the following ratios are constant?
A. 10.30 percent
B. 10.53 percent
C. 10.67 percent
D. 10.89 percent
E. 11.01 percent
Your neighbor goes to the post office once a month and picks up two checks, one for
$18,000 and one for $4,000. The larger check takes 4 days to clear after it is deposited;
the smaller one takes 6 days. Assume 30 days per month. What is the weighted average
A. 4.21 days
B. 4.36 days
C. 4.78 days
D. 5.00 days
E. 6.00 days
Your firm is contemplating the purchase of a new $1,628,000 computer-based order
entry system. The system will be depreciated straight-line to zero over its 5-year life. It
will be worth $158,400 at the end of that time. You will save $633,600 before taxes per
year in order processing costs and you will be able to reduce working capital by
$115,764 (this is a one-time reduction). The net working capital will return to its
original level when the project ends. The tax rate is 35 percent. What is the internal rate
of return for this project?
A. 11.78 percent
B. 13.49 percent
C. 18.21 percent
D. 21.65 percent
E. 23.58 percent
Which one of the following risks is irrelevant to a well-diversified investor?
A. systematic risk
B. unsystematic risk
C. market risk
D. nondiversifiable risk
E. systematic portion of a surprise
An increase in which one of the following will increase a firm's quick ratio without
affecting its cash ratio?
A. accounts payable
B. cash
C. inventory
D. accounts receivable
E. fixed assets
The Hobby Shop has a checking account with a ledger balance of $692. The firm has
$1,063 in uncollected deposits and $846 in outstanding checks. What is the amount of
the disbursement float on this account?
A. $0
B. $217
C. $846
D. $909
E. $1,063
Which one of the following is a type of equity security that has a fixed dividend and a
priority status over other equity securities?
A. senior bond
B. debenture
C. warrant
D. common stock
E. preferred stock
Which one of the following states that the current forward rate is an unbiased predictor
of the future spot exchange rate?
A. unbiased forward rates
B. uncovered interest rate parity
C. international Fisher effect
D. purchasing power parity
E. interest rate parity
At 11 percent interest, how long would it take to quadruple your money?
A. 6.55 years
B. 6.64 years
C. 13.09 years
D. 13.28 years
E. 13.56 years
When credit policy is at the optimal point, the:
A. total costs of granting credit will be maximized.
B. carrying costs of credit will be equal to zero.
C. opportunity cost of credit will be equal to zero.
D. carrying costs will equal the opportunity costs.
E. total costs will equal the opportunity costs.
Kristi wants to start training her most junior assistant, Amy, in the art of project
analysis. Amy has just started college and has no experience or background in business
finance. To get her started, Kristi is going to assign the responsibility for all projects
that have initial costs less than $1,000 to Amy to analyze. Which method is Kristi most
apt to ask Amy to use in making her initial decisions?
A. discounted payback
B. profitability index
C. internal rate of return
D. payback
E. average accounting return
Nieger Mills engages in farming, trucking of farm products, and the milling and
retailing of farm grains. The firm has decided to sell its farming operations to Jasper
Farms. This sale is referred to as a(n):
A. liquidation.
B. divestiture.
C. merger.
D. allocation.
E. restructuring.
The interest rate parity approximation formula is:
A. Ft = S0 × [1 + (RFC + RUS)]t.
B. Ft = S0 × [1 - (RFC - RUS)]t.
C. Ft = S0 × [1 + (RFC - RUS)]t.
D. Ft = S0 × [1 + (RFC × RUS)]t.
E. Ft = S0 × [1 - (RFC + RUS)]t.
By definition, which one of the following contracts is marked to the market on a daily
A. forward contract
B. spot contract
C. hedge
D. swap
E. futures contract
What is the relationship between present value and future value interest factors?
A. The present value and future value factors are equal to each other.
B. The present value factor is the exponent of the future value factor.
C. The future value factor is the exponent of the present value factor.
D. The factors are reciprocals of each other.
E. There is no relationship between these two factors.
Which one of the following types of operations would be subject to the most political
risk if the operation were conducted outside of a firm's home country?
A. accounting and payroll functions
B. partial assembly of components manufactured in the firm's home country
C. military weapons manufacturing
D. packing materials manufacturing for use by the home country firm
E. production of minor parts, such as nuts and bolts, for use by the home country firm
Scenario analysis is defined as the:
A. determination of the initial cash outlay required to implement a project.
B. determination of changes in NPV estimates when what-if questions are posed.
C. isolation of the effect that a single variable has on the NPV of a project.
D. separation of a project's sunk costs from its opportunity costs.
E. analysis of the effects that a project's terminal cash flows has on the project's NPV.
Graphing the crossover point helps explain:
A. why one project is always superior to another project.
B. how decisions concerning mutually exclusive projects are derived.
C. how the duration of a project affects the decision as to which project to accept.
D. how the net present value and the initial cash outflow of a project are related.
E. how the profitability index and the net present value are related.
Under your current cash sales only policy you sell 132 units a month for a total sales
value of $9,240. Your variable cost per unit is $44 and your monthly interest rate is 1
percent. Based on a recent survey, you believe that you can sell an additional 22 units
per month if you offer a net 30 credit policy. What is the net present value of the
proposed switch using the accounts receivable approach?
A. $45,976
B. $46,992
C. $49,081
D. $50,224
E. $53,566
The aftertax cost of debt generally increases when:
I. a firm's bond rating increases.
II. the market rate of interest increases.
III. tax rates decrease.
IV. bond prices rise.
A. I and III only
B. II and III only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
The Sarbanes-Oxley Act of 2002 is a governmental response to:
A. decreasing corporate profits.
B. the terrorists attacks on 9/11/2001.
C. a weakening economy.
D. deregulation of the stock exchanges.
E. management greed and abuses.
West Wind Tours stock is currently selling for $48 a share. The stock has a dividend
yield of 2.6 percent. How much dividend income will you receive per year if you
purchase 200 shares of this stock?
A. $24.96
B. $36.20
C. $124.80
D. $362.00
E. $249.60
Which one of the following terms is used to describe a loan wherein each payment is
equal in amount and includes both interest and principal?
A. amortized loan
B. modified loan
C. balloon loan
D. pure discount loan
E. interest-only loan
The length of time that elapses between the day a firm purchases an inventory item and
the day that item sells is called the:
A. operating cycle.
B. inventory period.
C. accounts receivable period.
D. accounts payable period.
E. cash cycle.