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principles corporate finance
Questions and Answers of
Principles Corporate Finance
Suppose you are considering acquiring a house by assuming the remainder of the existing 30-year mortgage on the property. If there are 237 fixed monthly payments of $1,041.23 left to be paid, with
You've graduated and have been married for several years and your first child, Mary, has just been born. You want to start saving for Mary's college education. You will put the first of eighteen
You receive an offer for a new credit card offering an introductory APR of 8.5 percent per year. What is the corresponding EAR?a. 8.24%b. 8.50%c. 8.84%d. 8.97%
You have just bought a new condo for $125,000. If you financed 100 percent of the purchase price via a 30-year, 7.75 percent APR loan from your bank, what will be the total amount of interest paid
What maximum price would you be willing to pay for an annual coupon bond with 12 years remaining until maturity, an 8 percent coupon rate, and a YTM of 11 percent?a. $805.23b. $908.65c. $923.67d.
You are evaluating a project with the following cash flows. How many IRRs might there be?a. 4 or lessb. 4 exactlyc. 4 or mored. 5 or less Time 0 1 2 3 4 5 Cash Flow -100 75 100 -35 70 100 -100
There are two ways that stock can earn returns. These two ways are:a. Through coupon payments and dividendsb. Through coupon payments and changes in pricec. Through changes in price and dividendsd.
What is this project's payback period? (10 points)a. 2.00b. 2.25c. 2.50d. 2.75Assume that the appropriate cost of capital for this project is 12 percent. Time 0 1 Cash Flow -$750 $400 2 $300 3 $200 4
What is this project's discounted payback period? (10 points)a. 3.04b. 3.24c. 3.44d. 3.64Assume that the appropriate cost of capital for this project is 12 percent. Time 0 1 Cash Flow -$750 $400 2
What is this project's IRR?a. 25.67%b. 27.19%c. 28.76%d. 29.86%Assume that the appropriate cost of capital for this project is 12 percent. 0 1 2 Time Cash Flow -$750 $400 $300 3 $200 4 $400
What is this project's Modified IRR (MIRR)?a. 18.78%b. 19.65%c. 20.14%d. 21.37%Assume that the appropriate cost of capital for this project is 12 percent. Time Cash Flow 0 1 -$750 $400 $300 2 3 $200
What is this project's NPV?a. $242.86b. $278.53c. $295.42d. $307.98Assume that the appropriate cost of capital for this project is 12 percent. Time Cash Flow 0 -$750 1 $400 2 $300 3 $200 4 $400
Assume that ABC Corp. just paid a dividend of $1 a share and that all future dividends are expected to grow at the rate of 9 percent per year. If the required rate of return for this stock is 15
Assume that XYZ Corp. expects its next dividend to be $50, the two dividends following it to grow at a rate of 15 percent per year, and all subsequent dividends to grow at a rate of 10 percent per
Suppose you pay $100 for a share of preferred stock that pays a dividend of$15 a year indefinitely. What is its nominal rate of return? (10 points)a. 7.87%b. 10%c. 15%d. 17.87%
Which of the following statements is true?a. One of the benefits of incorporating your business is that you become entitled to receive unlimited liability.b. Sole proprietorships are subject to more
Holmes Aircraft recently announced an increase in its net income, yet its net cash flow declined relative to last year. Which of the following could explain this performance?a. The company's interest
Popsi Corporation's current ratio is 0.5, while Cake Company's current ratio is 1.5. Both firms want to "window dress" their coming end-of-year financial statements. As part of their window dressing
Which of the following statements is incorrect!a. The slope of the security market line is measured by beta.b. Two securities with the same stand-alone risk can have different betas.c.
Given the following returns on Stock J and "the market" during the last three years, what is the beta coefficient of Stock J?a. 0.80b. 1.25c. 1.50d. 1.75 Year Stock J Market 1 -13.85% -8.63% 2 22.90
It has been estimated that the new product just presented by your Research and Development (R&D) department will bring in net cash flows of $80,000 per year for four years. Marketing will begin
If you invest $200 each six months for the next six years (beginning six months from now) and these funds will earn 8 percent compounded semiannually, what will be the approximate value of this
A $1000 par bond with an 11 percent coupon rate has a YTM of 7 percent.If interest is paid annually and the bond has 11 years to maturity, what should be the price of this bond?a. $1,000b. $1,300c.
John's Johns Inc. just paid a dividend of $2.00 per share on its common stock. Growth in this dividend is expected to be 10 percent for years one, two, and three, after which it is expected to be 2
If a capital-budgeting project has a positive NPV, the IRR isa. Greater than the discount rateb. Less than the discount ratec. Equal to the discount rated. A positive dollar value
Three years ago, Johnson Industrials purchased a piece of equipment for \($685,000,\) which it is looking to replace. If the company just received a bid of \($200,000\) for this equipment, and it has
'llie person who sells an option giving another the right to buy shares in an underlying stock at a prespecified price would be said to have:a. A long call positionb. A short call positionc. A long
A call will be in the money if: a. S>E b. S. E d. C,
If someone had paid \($3\) for a put with E = \($37,\) and the stock was selling for \($40\) at termination of the put, what would be this person's profit on the put? a. -$3 b. -$2 c. $0 d. $3
Which of the following represents the lowest possible value of a firm's WACC? a. R. E b. R, c. RD d. Rx (1-T)
Assuming that a firm uses at least some debt, which of the following expressions must be correct? a. Rx(1-T)>R> WACC b. WACC>R>RX (1-T) c. R>WACC>R, x(1-T) d. R,x(1-T)> WACC>R E
A firm which refuses to use debt in its capital structure even though it is capable of doing so will:a. Have too low of a WACCb. Incorrectly calculate prospective project NPVs as being too highc.
Suppose a company has five-year, semiannual-coupon bonds carrying an 8 percent coupon rate that are selling for $1,200. What would be the beforetax cost of debt on these bonds if the appropriate tax
Suppose a company has five-year, semiannual-coupon bonds carrying an 8 percent coupon rate that are selling for $1,200. What would be the aftertax cost of debt on these bonds if the appropriate tax
Given the following information, what is WBM Corporation's WACC?Common Stock: 1 million shares outstanding, \($40\) per share, \($1\) par value, beta = 1.3 Bonds: 10,000 bonds outstanding, \($1,000\)
Suppose a firm has 19 million shares of common stock outstanding with a par value of \($1.00\) per share. The current market price per share is \($18.35\).The firm has outstanding debt with a par
When calculating WACC, if we wanted to abide by common practice, we would:a. Always use nominal ratesb. Always use effective ratesc. Use nominal rates on bonds onlyd. Use nominal rates on stock only
Which of the following is not a valid reason that two firms might have different WACCs when they evaluate the same project?a. They might have different target capital structures.b. They might have
A new project introducing a new product that is complementary to a firm's existing products would cause:a. Both incremental revenues and costs to be higher than if the new product was being
Which of the two procedures that we discussed in this chapter use the assumption that multiple uncertain inputs will move in tandem?a. Sensitivity analysis onlyb. Scenario analysis onlyc. Both
Suppose you're performing sensitivity analysis on a variable expressed as a percentage; specifically, suppose the base value is 25 percent. What value would represent a 10-basis point decrease in
Which of the following will be necessary for a scenario analysis to give us an idea of the distribution of the output of interest?a. We would need to have some idea of the probabilities of the
Using the sample project from this chapter, perform a sensitivity analysis (+/-10 basis-points) of r's effect on NPV, starting from its base value for this project of 9.40 percent. Which of the
Using the sample project from this chapter, perform a sensitivity analysis (+/-10 basis-points) of r's effect on IRR, starting from its base value for this project of 9.40 percent. Which of the
Your company is considering selling a newly developed portable video product, the j View. You have developed some forecasts for unit sales and selling price per unit, shown below. You also anticipate
The person who buys an option giving him or her the right to sell shares in an underlying stock at a prespecified price would be said to have:a. A long call positionb. A short call positionc. A long
A call will be out of the money if:a. St > Eb. St < Ec. C > Ed. Ct < E
Which of the following subfields of finance involves viewing the cash-flow system described in this chapter from the viewpoint of the firm?a. Investmentsb. Financial institutions and marketsc.
What is the more formal name used for describing the corporate-finance decision concerning which projects to invest in?a. The capital-structure decisionb. The capital-budgeting decisionc. The
Which of the following statements concerning the cash flows of finance best describes why the study of corporate finance is so difficult?a. Both the cash flows to the firm and from the firm are
The assumption of most investment formulas is that:a. What you get is what you pay for.b. What you get is more than what you pay for.c. What you get is less than what you pay for.d. Stocks and bonds
What is the more formal name used for describing the corporate finance decision concerning how the firm should raise money from investors?a. The capital-structure decisionb. The capital-budgeting
The corporate finance dividend decision involves determining:a. How the firm will raise the money necessary to fund projects.b. How the firm will pay back money to investors.c. Whether investors will
A movie about a stockbroker who aided investors in picking which firms to invest in would most likely involve which subfield of finance?a. Investmentsb. Financial institutions and marketsc. Corporate
A movie about a dashing young corporate manager choosing the best way to raise money from investors for his firm would most likely involve which subfield of finance?a. Investmentsb. Financial
Investors are best thought of as:a. People with ideas but not enough money.b. People with both ideas and extra money.c. People with no extra money and no ideas.d. People with extra money but no ideas
Capital-budgeting decision rules in corporate finance are expected to choose projects that are worth more than they cost because capital budgeting projects:a. Involve assets with potential monopoly
Which of the following forms of business organization are not considered to be entities in their own right?a. Corporationsb. Partnershipsc. S Corporationsd. C Corporations
Suppose that a friend approached you for advice on what form of business to start, and she indicated that she was more concerned about personal liability than double taxation. Which form of business
Assume that 100 of your closest friends want to start a new business. The business is expected to be quite profitable, but it does have a good deal of risk involved. If all of the 100 friends would
The primary goal of the financial manager should be to:a. Maximize profits.b. Minimize costs.c. Maximize stock price.d. Maximize market share
In the agency relationship between the shareholders and the managers of a corporation:a. Managers and shareholders are both principals.b. Managers and shareholders are both agents.c. Managers are the
Stock options help to mitigate agency problems between shareholders and managers by:a. Aligning the interest of managers with those of shareholders.b. Offering managers a stable, constant reward for
Which of the following is not an appropriate primary goal for a corporation's financial manager?a. Maximize shareholder wealthb. Maximize stock pricec. Maximize the number of shares of stockd.
Shareholders act as:a. Principals in their agency relationship with managers, but as agents in their agency relationship with lenders.b. Agents in both their agency relationship with managers and in
The term double taxation, when used to refer to selected forms of business organizations, refers to:a. Corporations collecting sales tax from customers and paying taxes on corporate earnings.b.
The two major attributes on which the basic forms of business organization differ are:a. Owners' personal liability and the degree of taxation.b. Owners' personal liability and protection for the
From a financial cash-flow perspective, and assuming everything else held constant, which of the following changes to a firm's balance sheet would be a "good" thing, and why?a. A firm increasing
Which of the following is the best way to think of what Net Working Capital (NWC) is trying measure?a. As the amount of current assets, above and beyond current liabilities that the firm has to foot
One of the criticisms mentioned in this chapter about the income statement is that it includes noncash items such as depreciation. Everything else held constant, what will be the effect of including
Your company has taxable income this year of $15,500,000, and faces the corporate tax schedule provided earlier in this chapter. What will be your company's tax bill?a. $3,574,998.68b.
Your company has taxable income this year of $15,500,000, and faces the corporate tax schedule provided earlier in this chapter. What will be your company's average tax rate?a. 34.00%b. 34.45%c.
What was this firm's net capital spending for 2004?a. -$1,890b. $2,420c. $3,215d. $4,310 AHS INC. 2007 Income Statement ($ in millions) Net sales 5 9625 Cost of goods sold 5225 Depreciation 1890
What was this firm's change in net working capital for 2004?a. -$941b. -$200c. $366d. $719 AHS INC. 2007 Income Statement ($ in millions) Net sales S 9625 Cost of goods sold 5225 Depreciation 1890
What was this firm's cash flow to creditors for 2004?a. -$50b. $50c. $150d. $250 AHS INC. 2007 Income Statement ($ in millions) Net sales S 9625 Cost of goods sold 5225 Depreciation 1890 Earnings
Your company has taxable income this year of $15,500,000, and faces the corporate tax schedule provided earlier in this chapter. What will be your company's marginal tax rate?a. 34.00%b. 34.45%c.
Under Generally Accepted Accounting Principles (GAAP), a firm that made a product in 2005 and then sold it in 2007 would:a. Show both the revenues and expenses in 2005.b. Show both the revenues and
Construct a common-size income statement for AHS. In this statement, what will be the value for taxable income?a. 11.21%b. 17.25%c. 16.60%d. $1,660 AHS INC. 2007 Income Statement (S in millions) Net
Construct common-size balance sheets for both 2006 and 2007 for AHS.Percentage-wise, which of the following items have grown the most?a. Accounts payableb. Accounts receivablec. Cashd. Notes payable
Using 2006 as the base year, construct a common-base year balance sheet for 2007 for AHS. According to this statement, which of the following items have grown the most compared to their 2006
Construct a combined common-size and common-base year balance sheet for 2007. What will be the common-base year value for the 2007 net fixed assets?a. 0.89b. 0.92c. 1.12d. 1.32 AHS INC. 2007 Income
What will be the value of AHS' current ratio during 2007?a. 1.14b. 1.42c. 1.49d. 1.53 AHS INC. 2007 Income Statement (S in millions) Net sales S 9625 Cost of goods sold 5225 Depreciation 1890
What will be the value of AHS' equity multiplier during 2007?a. 0.44b. 0.56c. 1.78d. 1.82 AHS INC. 2007 Income Statement (S in millions) Net sales S 9625 Cost of goods sold 5225 Depreciation 1890
What will be the value of AHS' TIE during 2007?a. 2.75b. 2.85c. 2.95d. 3.05 AHS INC. 2007 Income Statement (S in millions) Net sales S 9625 Cost of goods sold 5225 Depreciation 1890 Earnings before
What will be the appropriate value of AHS' inventory turnover ratio in 2007?a. 4.56b. 4.78c. 5.32d. 5.90 AHS INC. 2007 Income Statement (S in millions) Net sales S 9625 Cost of goods sold 5225
What will be the appropriate value of AHS' profit margin in 2007?a. 9.34%b. 10.12%c. 11.21%d. 12.53% AHS INC. 2007 Income Statement (S in millions) Net sales S 9625 Cost of goods sold 5225
If a firm had a D/A ratio of 0.4, which of the following values would be equal to its D/E ratio?a. 4/10b. 2/3c. 0.4/1.4d. 10/4
The future value formula for an ordinary annuity gives you a value:a. One period before the first paymentb. The same point in time as the first paymentc. One period after the last paymentd. The same
Suppose you finance $25,000 of the purchase price of a new car with a 60-month loan at 0.4 percent per month. What will your payments be?a. $373.24b. $416.67c. $469.49d. $482.02
Continuing the previous problem, suppose you also have the option of financing the car for 72 months at the same interest rate. If you chose this option, what would your payments be?a. $347.22b.
Suppose you are considering acquiring a house by assuming the remainder of the existing 30-year mortgage on the property. If there are 327 fixed monthly payments of $1,041.23 left to be paid, with
What is the present value of a perpetuity of $10 per year if the first payment will be received one year from now and the appropriate interest rate is 8 percent per year?a. $0.80b. $1.25c. $12.50d.
Suppose that you just turned 30 and are planning for your retirement. You hope to retire at the age of 67, and would like to be able to make end-of-month withdrawals from your retirement account of
Continuing the previous problem, how much must each deposit be if you can only earn 0.5 percent per month in your retirement account?a. $134.82b. $227.82c. $343.82d. $427.82
What would be the present value of a yearly annuity of $105 per year for 10 years if the appropriate rate of interest is 7.5 percent per year and the first payment starts one year from today?a.
What would be the present value of a yearly annuity of $105 per year for 10 years if the appropriate rate of interest is 7.5 percent per year and the first payment arrives today?a. $636.83b.
Which of the following pairs of interest rate quotations would represent a pair of different quotes that we could switch back and forth between using only division and multiplication (i.e., without
Everything else held constant, increasing the number of compounding periods during a year for a given nominal rate will cause:a. The effective rate per compounding period to increase and the EAR to
Suppose you are considering an investment that has an APR, based on monthly compounding, of 13.5 percent. What would be the effective five-year rate of return on this security?a. 14.25%b. 14.37%c.
If you want your money to quadruple (i.e., increase by 300 percent) in five years, what APR (based on monthly compounding) would you need to earn?a. 22.07%b. 28.05%c. 31.95%d. 60.00%
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