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business
fundamentals of corporate finance

Questions and Answers of Fundamentals Of Corporate Finance

Commercial paper is a form ofa. Promissory note.b. Financial news sheet that circulates in the financial markets.c. C.D.d. None of the above.
Suppose, you are analysing the Company Lynott. You are aware that the company retains 20% of its earnings which are reinvested at a real rate of return of 10%. A P/E ratio for the firm = 27.2 would
Lynott is a Dublin-based company that manufactures heavy-duty linoleum for factory floors. Suppose that investors require a real rate of return of 5.0% on equity in Lynott, and that the firm retains
You are an analyst for Cypress Avenue (above). You consider that investors require a rate of return in Cypress Avenue of 10%. You observe that the firm has a P/E = 10.4. If the firm has a policy of
If Cypress Avenue (above) has a P/E = 10.4, this is consistent with investors’ required rate of return in Cypress Avenue approximately equal toa. 8.4%b. 10%c. 10.8%d. 12%
The firm Cypress Avenue is a landscaping and garden centre. The company has a policy of retaining 40% of its earnings as reinvestment. This policy is expected to continue indefinitely, as is the
Strawberry Fields is a market gardening company that is a sister company of Strawberry Wine. The company has just paid a dividend of 6 per share. The dividends are expected to grow at a constant rate
Company Strawberry Wine is a French vendor of wine and fresh fruits.The company will pay out a dividend of 6.24 euros per share in 12 months’ time, which represents a 60% payout of the company’s
Company Scott, Young and Johnson is a Glasgow company that manufactures heavy metal girders. The company is currently paying a dividend of £2.50 per year. The dividends are expected to grow at a
Robert the Bruce is a Scottish tourist company that expects to pay dividends of £4.75, £5.25, £5.75, and £7 per share for the next 4 years.Thereafter, the company expects its growth rate to be at
Ginger Bakers is a bakery in S.E. London that specialises in baked ginger bread men and cream cakes. Its shares are currently trading at£63.25 ex -dividend. The company is expected to grow at a
Clapton is a London company that specialises in the manufacture of wheel clamps. The company has been generating stable revenues but sees no growth for the foreseeable future. The company’s last
Townsend is a holiday travel agent based in the south of London. The company is a no-growth firm with 2 million shares outstanding. The company is expected to earn a constant £10 million per year on
Daltry Ltd is a UK manufacturer of music speakers. The company has a net profit after tax of £800 million. Dividends paid to shareholders amount to £200 million. What is the company’s retention
Morrison’s Van Hire (MVH) is a Belfast company that specialises in leasing vans. Given the following information:earnings per share (EPS) 1 year from now= £1.60, cost of equity (k) = 10% per
The company Stewart Tartans is expected to pay a dividend of $5 per share 1 year from now. Thereafter, dividends are expected to grow into the foreseeable future at a constant rate of 5% per annum.
Rod’s is a maker of fishing rods and tackle. The company has forecast the following growth rates for the next 3 years: Year 1: 30%, Year 2:25%, and Year 3: 20%. Thereafter, the company expects to
Starky’s is a designer of men’s underwear. The following data relates to shares in Starky’s:Last dividend (recently paid): $10 Projected growth rate of dividends (paid annually): 10%Assuming
Simon, has an expected return of 40% in a portfolio of Art, Paul has an expected return of 8% in Bonds, and Peter has an expected return of 16% in Stocks. If 30% of Mary’s funds are invested with
George has an expected return of 15%, John has an expected return of 20%, and Paul has an expected return of 25%. If 20% of Richard’s funds are invested with George, 35% with John, and 45% with
The probability of a recession is 0.3, the probability of normal growth is 0.4 and the probability of a boom is 0.3. The payoff in the event of a recession is $200, in the event of normal growth is
In the tests of the FF-3F model,a. Two additional risk premiums: for high minus low (book market) and small minus big (firm size) portfolios are in addition to the market risk premium, with loadings
In tests of the CAPM,a. The “first pass” regression is a time series regression that identifies the beta for each stock as the gradient of the stock’s return against the return on the market.b.
In tests of the CAPM,a. The outcome returns as a function of beta are generally higher for all portfolios than is predicted by the CAPM.b. The outcome returns as a function of beta are generally
A risk-free government security yields 7% and the expected market return is 12%. Fogerty’s beta is 0.8 and its growth rate is 4%. Its last dividend (recently paid) was $2.0. Fogerty’s current
If the beta of a stock is greater than 1.0, the stock return will tend to exaggerate that of the market, in other words, the stock will tend to go up more than the market goes up and tend to go down
b. 0.c. Less than 1 but greater than zero.d. Negative.
If the price of gold tends to increase when the market goes down (and decrease when the market goes up) the beta of gold should be:a. Greater than
The beta of a “market risk-free” portfolio is:a. −1.0 b.+0.5 c.+1.0 d.0
We have the following two stocks Jackson and Browne:Security Expected rate of return Beta Jackson 10.5% 1.2 Browne 11.5% 1.8 If the expected market rate of return is 9% and the risk-free rate is 5%,
The CAPM states that the expected market risk premium of an investment is proportional to its:a. Beta.b. Standard deviation.c. Variance.d. Alpha.
A firm disposes of assets with book value $2.0 million. The assets actually sell for $1.0 million. If the corporate tax rate is 30%,a. The tax paid on the sale of the assets is zero.b. The tax paid
A firm disposes of assets with book value $1.0 million. The assets actually sell for $2.0 million. If the corporate tax rate is 30%, the tax paid on the sale of the assets isa. zerob. $0.3 millionc.
A firm disposes of assets with book value $1.0 million. The assets actually sell for this amount. If the corporate tax rate is 30%, the tax paid on the sale of the assets isa. zerob. $0.3 millionc.
A decrease in the firm’s Accounts payable leads to an in the firm’s available cash, whereas a decrease in Accounts receivable leads to a in the firm’s available cash.a. increase, increaseb.
An increase in the firm’s Accounts payable leads to an in the firm’s available cash, whereas an increase in Accounts receivable leads to a in the firm’s available cash.a. increase, increaseb.
A firm has Net plant and equipment = $100 million in 20x0. The following year it reports Depreciation = $10 million. It makes zero expenditure on Net plant and equipment, but disposes of assets with
A firm has Net plant and equipment = $100 million in 20x0. The following year it reports Depreciation = $10 million, and expenditure on Net plant and equipment = $15 million. The Net plant and
A firm has Net plant and equipment = $100 million in 20x0. The following year it reports Depreciation = $10 million, and expenditure on Net plant and equipment is zero. The Net plant and equipment
A firm’s Income Statement shows Depreciation = $2 million, Net operating income (NOI) = $12 million, Ordinary dividends = $3 million.The Addition to Retained earnings in the Balance Sheet should
A firm’s Income Statement reveals EBIT = $12 million, Interest payments = $4 million, and Depreciation = $2 million. The corporate tax rate is 30%. The firm’s corporate tax liability should bea.
The company Orbison provides for the technological needs of offices The company has capital equipment that costs $300,000 today. It has a salvage value of $0 at the end of 5 years. The company
Company Nelson specialises in the production of telescopic instruments.The firm has a machine which is used only rarely if the other machines are at full capacity. The machine has a book value of
If inventories increase by $40,000, debtors decrease by $25,000, creditors decrease by $10,000 and cash increases by $30,000. What is the change in working capital?a. $55,000b. $10,000c. $15,000d.
In the first year of a project inventories increase by $50,000, accounts payables increase by $20,000 and accounts receivables decrease by$30,000. What is the change in working capital?a. $0b.
Chuck is considering investing in a new project with Berry Fruit Products, a small market gardening operation. The project will need an initial investment of $200,000 and will generate $500,000
Fitzgerald Beauty is anticipating a new line of perfume, Ella, which will require an outlay of $1.85 million. The investment will result in additional cash flows of $601,950, $900,000, and 1,250,000
Company Crosby Ltd is an entertainment provider. The company is considering the development of a software search engine for its products:Web-Bing, which would require an outlay of $1.85 million. If
Sinatra Systems is setting up to manufacture a new line of video console games in Las Vegas. The cost of the manufacturing equipment is$1,750,000. Expected cash flows over the next 4 years are
PeggyLee specialises in cosmetic denture and gum enhancement. The company is investing in equipment at a cost of $6 million. Brenda who is the firm’s financial officer considers that the project
The company Holiday is proposing to undertake a scale expansion of its tourist holidays. It would cost $40 million and produce an expected cash flow of $8 million a year in perpetuity before interest
Company Davis is a US manufacturer of prestige golf clubs. The company’s market equity is valued at $20 million, and the market value of its risk-free debt is $10 million. Sammy who is a junior
Company Deano represents a chain of Italian restaurants. The company’s market equity is valued at 60 million, and the market value of its debt is 40 million. Martin, who is Deano’s financial
If the cost of capital is 15%, the project’s NPV is:a. $10,889b. $12,666c. −$9, 924d. −$8, 900
Platters is a company that specialises in delivering a range of Spanishstyle tapas products to bars in California. The company is considering a project which will require an initial investment of
Fats Domino is an Italian company that makes pizzas. The company owns farmland for wheat. Planted with wheat, the net cash flows are expected to be 5,000 annually per acre for Fats Domino in
Money that a firm has already spent or committed to spend regardless of whether a project is continued is aa. Sunk cost.b. Opportunity costs.c. Fixed cost.d. None of the above.
Suppose that following an initial investment cost, the cash flows of an investment are expected to remain positive. Which of the following is most true.a. If the IRR on the project exceeds the
The WACC is used to discounta. The FCE (free cash flow to equity).b. The FCF (free cash flow).c. The cash flow to equity andd. None of the above.debt combined.
Which of the following statements is most comprehensive in relation to the WACC?a. The WACC is a weighted average of the project’s cost of equity and debt with the cost of debt multiplied by (1 −
Which of the following statements is most comprehensive?a. Free CFE captures the cash flow available to equity but which is not necessarily distributed as a dividend.b. FCF captures the cash flow
Joseph Cocker & Sons manufactures industrial ovens in Sheffield, UK.The company has NO debt in its capital structure. There are no taxes.The firm considers that the firm’s cost of capital is 10%.
According to MM and their propositions regarding debt:a. All else equal, in the absence of corporate tax, the firm’s capital structure is “irrelevant”.b. All else equal, the present value of
Which of the following statements is correct?a. The present value of the tax savings due to the corporate tax deductibility of interest rates on the firm’s debt provides the firm with a theoretical
When comparing levered versus unlevered capital structures, leverage works to increase earnings per share (EPS) for successful companies because:a. Although debt leads to a reduction of income
Which of the following statements is correct assuming that the corporate tax rate is zero?a. For a successful firm, leverage can increase dividends per share.b. Even when leverage increases dividend
Which of the following statements is correct?a. Consistency of the MM propositions with the CAPM requires that investors adjust their cost of equity capital in accordance with the CAPM.b. Consistency
Which of the following statements is correct? Provided a firm’s investments exceed the firm’s rate of borrowing, with additional leveragea. The firm’s income available for its shareholders
After retirement, you would like to have $90,000 income each year for 25 years. How much should you have saved in the retirement to receive this income, if the interest is 3.0% per year (assume that
Joe is expecting to retire 28 years from now, at which time he wishes to have accumulated $750,000 in his retirement fund (money at that time). If the interest rate is 5% per year, how much should
If the present value of $1.00 received N years from today at an interest rate of int% is 0.270, what is the future value of $1.00 invested today at an interest rate of int% for N years?a. $1.00b.
If the one-year discount factor is 0.8333, what is the discount rate per year?a. 10%b. 20%c. 30%d. None of the above
What is the present value annuity factor of $1.00 at a discount rate of 10% for 15 years?a. 5.0b. 7.6c. 10.0d. 13.9
Donald has $100 today. He is aware of TWO investment opportunities:(a) invest $50 and expect to receive $55 in one year’s time, or(b) invest $100 today and expect to receive $120 in one year’s
What quarterly payment is necessary to accumulate $3.75 million over 20 years if the annual interest rate is 4% compounded quarterly?Assume payments are made at the end of each quarter.a. $733.0b.
What is the FV of $2,500 invested for three years at an interest rate of 3% per annum compounded semi-annually?a. $5,783b. $4,429c. $4,419d. $2,734
Hilary has a 20-year mortgage with a fixed monthly payment. Which of the following statements regarding Hilary’s mortgage is most correct?a. The monthly payments will decline over time.b. The
Bill has funded a retirement investment with $250,000 earning a return of 5.75%. What is the value of the payment that Bill can receive in perpetuity (to the nearest dollar)?a. $12,150b. $13,250c.
Obama Ltd has made an investment that is expected to generate a cash flow of $20,000 each year for the next five years. If Obama uses a discount rate of 5% on this investment, the present value of
Lyndon Company has forecast earnings of $2 million, $4 million, and$6 million, respectively, at the end of the next three years. What is the anticipated accumulated value of these earnings at the end
Ronald wishes to invest $3,500 today in a money market fund that pays quarterly interest at 5.5%. How much will Ronald have at the end of seven years (to the nearest dollar)?a. $5,130b. $5,091c.
George is looking to invest for the next three years. He is looking to invest $7,500 today in a bank-term deposit that will earn interest at 5.75% annually. How much will George have at the end of
The nominal rate of return is 12%. Inflation is 4%. What is the approximate real return?a. 8%b. 10%c. 9.6%d. 12.8%
If the interest rate is 5%, the 2-year discount factor is close to .a. 0.7b. 0.9c. 1.4d. 1.8
If your investment pays the same amount at the beginning of each year for a period of 10 years, the cash flow stream is calleda. An annuity.b. A perpetuity.c. A preference dividend.d. None of the
A perpetuity is defined as:a. Equal cash flows at equal intervals of time forever.b. Equal cash flows at equal intervals of time for a specific period.c. Unequal cash flows at equal intervals of time
Using higher interest rates will:a. Increase the future value of an investment.b. Decrease the future value of an investment.c. Not affect the future value of an investment.d. All of the above are
Which one of the following statements is NOT true?a. The further in the future you receive a dollar, the more it is worth today.b. The value of a dollar invested at a positive interest rate grows
Interest Rate Parity. The following table shows interest rates and exchange rates for the U.S. dollar and Mexican peso. The spot exchange rate is 9. 5 pesos per dollar. Complete the missing
Merger Tactics. Connect each term to its correct definition or description:A. LBO 1.Attempt to gain control of a firm by winning the votes of its B. Poison pill stockholders.C. Tender offer 2.Changes
Talia’s Tutus bought a new sewing machine for $40,000 that will be depreciated using the MACRS depreciation schedule for a 5-year recovery period.a. Find the depreciation charge each year.b. If the
IRR/NPV. If the opportunity cost of capital is 11 percent, which of these projects is worth pursuing?Refer to two projects with the following cash flows: Year Project A Project B 0 -$100 -$100 1 40
Mutually Exclusive Investments. Suppose that you can choose only one of these projects.Which would you choose? The discount rate is still 11 percent.Refer to two projects with the following cash
IRR/NPV. Which project would you choose if the opportunity cost of capital were 16 percent?Refer to two projects with the following cash flows: Year Project A Project B 0 -$100 -$100 1 40 50 2 40 3
IRR. What are the internal rates of return on projects A and B?Refer to two projects with the following cash flows: Year Project A Project B 0 -$100 -$100 1 40 50 2 40 3 40 4 40 50 50 50
Investment Criteria. In light of your answers to problems 2–4, is there any reason to believe that the project with the higher IRR is the better project?Refer to two projects with the following
Profitability Index. If the opportunity cost of capital is 11 percent, what is the profitability index for each project? Does the profitability index rank the projects correctly?Refer to two projects
Payback. What is the payback period of each project?Refer to two projects with the following cash flows: Year Project A Project B 0 -$100 -$100 1 40 50 2 40 3 40 4 40 50 50 50
Investment Criteria. Considering your answers to problems 2, 3, and 7, is there any reason to believe that the project with the lower payback period is the better project?Refer to two projects with
Book Rate of Return. Accountants have set up the following depreciation schedules for the two projects:Calculate book rates of return for each year. Are these book returns the same as the IRR?Refer

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