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principles corporate finance
Corporate Finance Demystified By T Adair 1st Edition T Adair - Solutions
Suppose you are considering an investment that grew by 32 percent across a five-year holding period. If you wanted to state this rate of return as an effective annual rate (that is, with annual compounding), what would it be?a. 5.71%b. 6.40%c. 7.27%d. 36.67%
You are considering purchasing shares of Microsap's stock. These shares just paid a dividend of $2.00 per share, and dividends are expected to grow at a rate of 15 percent per year for the next three years, after which the growth rate is expected to fall off to a constant 8 percent per year
When using the formula for the present value of a constantly growing perpetuity, P0 = D1/(r - g), what is the entire "set" of variables that have to exhibit temporal congruence with one another? a. r and D 1 b. P, and D 0 1 c. P, r, and g d. D, r, and g 1
If you wanted to start and own a business, which of the following forms of business organization would minimize both your personal liability for the firm's obligations and the total amount of taxes that your income from the business is subject to?a. A general partnership.b. A limited partnership,
Radakad, Inc., makes floppy diskettes. Radakad just paid a $3 per share dividend, but future dividends are expected to decline at a rate of 15 percent per year indefinitely due to the shrinking market for floppy disks. If the required rate of return on Radakad's stock is 13 percent, what is this
The primary goal of financial management should be to:a. Maximize the owner's equity account on the balance sheet.b. Maximize the number of shares of stock.c. Maximize firm profit.d. None of the above is correct.
How long will it take money to quadruple (i.e., increase by 300 percent)in an account earning an 8 percent EAR? (You may assume that interest is paid smoothly and continuously throughout the year, so answers in terms of fractional years, if necessary, are OK.)a. 8.00 yearsb. 9.01 yearsc. 18.01
Happy Days Medical Devices has a bond outstanding that has an 8 percent coupon rate and a market price of $912.35. If the bond matures in 15 years and interest is paid semiannually, what is the YTM?a. 4.54%b. 9.08%c. 9.29%d. 9.47%
Suppose that "Contract X" is an annuity due, specifying that the owner will receive 10 annual payments of $1,000 each, with the first payment occurring immediately upon the start of the contract. Now imagine a 30-year annuity of these contracts, where you will receive one Contract X that starts one
Your company is evaluating a new project, and you've estimated that the cost of capital for the project will be 8 percent. Assume that you have also projected the following cash flows for the project:What will this project's discounted payback be?a. 2.82 yearsb. 3.27 yearsc. 4.27 yearsd. 4.60 years
Your company is evaluating a new project, and you've estimated that the cost of capital for the project will be 8 percent. Assume that you have also projected the following cash flows for the project:What will this project's Internal Rate of Return (IRR) be?a. 13.28%b. 15.68%c. 19.66%d. 21.32% Year
Your company is evaluating a new project, and you've estimated that the cost of capital for the project will be 8 percent. Assume that you have also projected the following cash flows for the project:What will this project's Net Present Value (NPV) be?a. $2,123.27b. $3,160.52c. $4,693.81d.
Your company is evaluating a new project, and you've estimated that the cost of capital for the project will be 8 percent. Assume that you have also projected the following cash flows for the project:What will this project's Profitability Index (PI) be?a. 0.71b. 0.52c. 1.17d. 1.25 Year Cash Flow 0
You are considering the following two mutually exclusive projects. If the cost of capital for both projects is 7 percent, which statement concerning capital-budgeting rules listed will be correct in this situation?a. Both NPV and IRR will choose the correct project(s).b. Neither NPV nor IRR will
If the government were to change the tax laws so that all fixed asset purchases could be immediately expensed, this would cause all capital budgeting decisions involving the purchase of fixed assets to:a. Experience an increase in NPV.b. Experience an increase in total project cash flow for all
You are considering investing in a stock which had the returns listed here over the past five years. Year 2002 2001 2000 1999 1998 Return 8.00% -13.60% -10.45% 12.80% -18.76%
What was the average annual return during this period?a. -4.40%b. 3.10%c. 8.69%d. 12.19%
Continuing the previous problem, what was the standard deviation in annual returns during this period?a. 12.51%b. 12.85%c. 13.94%d. 14.37%
How many possible PI may the set of cash flows shown here have?a. As many as 1b. As many as 2c. As many as 3d. As many as 4 Time 0 2 Cash Flow -$1,000 -$200 $1,500 3 -$100 4 $2,000 5 -$200
Due to unforeseen circumstances, you have to take out a student loan for your senior year. Which one of the following loans should you choose?a. A loan with a nominal 10 percent interest rate with monthly compounding.b. A loan with a nominal 10 percent interest rate with yearly compounding.c. A
Find the value at time 50 of the set of end-of-year cash flows shown, if the appropriate rate of return is 11 percent per year:a. $179,255b. $1,255,000c. $33,079,044d. $6,106,191,094 Year(s) 1 through 10. 11 through 79 Cash Flow(s) Per Year $25,000 $10,000 80 through 100 $15,000
Jackson Heights Homes (JHH) has an issue of preferred stock that is supposed to pay a $4 dividend every quarter; however, they have not paid the last 24 quarterly dividends, the latest of which was due today. These dividends are cumulative, and you have just learned that JHH will pay back all the
Suppose that a Woodchuck logging machine can "chuck" (i.e., throw or hurl)13 tons of wood an hour when freshly serviced, but that its performance decreases by 5 percent an hour until the next servicing. After a Woodchuck has been run for 12 hours since its previous servicing, how much wood can a
The firm's decision as to how to raise money is more formally referred to as:a. The capital-structure decisionb. The capital-budgeting decisionc. The dividend decisiond. The financial-management decision
Suppose that a mutual fund has a five-year nominal rate of return of 50 percent. If this five-year rate was constructed from semiannual effective rates, what would be the equivalent EAR?a. 9.10%b. 10.25%c. 50.00%d. 61.05%
JoeBook's common stock just paid a dividend of $0.57 per share, and dividends are expected to grow at a rate of 11 percent per year for the next two years, after which the growth rate is expected to fall off to a constant 5 percent per year thereafter. If the required rate of return for this stock
In a Time Value of Money (TVM) problem with all other variables held constant and where Future Value (FV) or Payment (PMT), as appropriate, are input as negative numbers, increasing N will:a. Increase the Present Values (PVs) of both a lump sum and annuity.b. Decrease the PVs of both a lump sum and
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 the first payment being due exactly one month after you assume the loan, what price are you
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 equal deposits into her college fund one year from now (on her first birthday). You anticipate that her
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 during the first 12 monthly payments?a. $8,364.09b. $8,783.83c. $9,129.84d. $9,649.07
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. $967.32
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. Through both direct and indirect payments
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 $400
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 $300 $200 4 $400
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 4 $400
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 percent, what should the price today be?a. $16.67b. $18.17c. $20.52d. $22.63
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 year. If the required rate of return for this stock is 18 percent, what should be the price of this
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 regulations than corporations.c. Sole proprietorships do not have to pay corporate tax.d. All of the
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 expense increased.b. The company's depreciation expense declined.c. The company's operating income
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 strategy, each firm will double its current liabilities by adding short-term debt and placing the
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. Company-specific risk can be diversified away.d. The market risk premium is affected by attitudes about risk.
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 12.37 3 35.15 19.37
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 immediately to sell this product.If these expectations are correct and your firm's discount rate is 12
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 investment at the end of the six years?a. $1,100b. $2,254c. $3,005d. $4,127
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. $1,437d. None of the above is correct
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 percent to "infinity." If the required rate of return on this firm's common stock is 10 percent, what
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 been depreciating the equipment over a five-year period using straight-line depreciation, what will
'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 put positiond. A short put position
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. Reject more projects than if it used debtd. Always face a positive tax bill
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 rate is 35 percent?a. 1.797%b. 2.336%c. 3.594%d. 5.738%
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 rate is 35 percent?a. 1.797%b. 2.336%c. 3.594%d. 5.738%
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, \($1,000\) face value each, 8 percent annual coupon, 22 years to maturity, market price = \($1,101.23\) per
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 value of \($114.5\) million selling at 96 percent of par. What capital structure weight would you use
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 different costs of debt.c. They might have different tax rates.d. They might have different betas for
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 introduced in isolation (i.e., by a firm that did not have existing products).b. Both incremental revenues
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 proceduresd. Neither procedure
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 this value?a. 22.5000b. 24.7500c. 24.9750d. 24.9975
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 various scenarios.b. We would need to have at least one scenario with a negative NPV.c. We would need 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 following statements is true?a. NPV for this project is indifferent to changes in r.b. NPV for this
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 following statements is true?a. IRR for this project is indifferent to changes in r.b. IRR for this
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 that selling the new product will require the purchase of \($10\) million in fixed assets, which
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 put positiond. A short put position
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. Corporate financed. International finance
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 dividend decisiond. The retained-earnings decision
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 uncertain.b. The cash flows from the firm back to investors occur at the same time as the cash flows from
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 for the same firm will have equal values.
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 decisionc. The dividend decisiond. The retained-earnings decision
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 demand dividends or growth in stock price.d. Whether the firm or the investor will pay taxes on
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 financed. International finance
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 institutions and marketsc. Corporate financed. International finance
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 (or no time to implement any 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 power.b. Are not subject to the same oversight as the sale of stocks and bonds to the public.c. Take
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 organization would you recommend to her, and why?a. A corporation, because it would have double
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 like to minimize their personal liability, which of the following forms of business organization
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 principals, and shareholders are the agents.d. Managers are the agents, and shareholders 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 a job well done.c. Allowing shareholders to fire underperforming managers.d. Diluting the ownership
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. Maximize the value of an all-equity firm
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 their agency relationship with lenders.c. Agents in their agency relationship with managers, but as
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. Corporations paying taxes on corporate earnings and investors paying taxes on the earnings paid out to
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 owners from litigation.c. The degree of taxation and protection for the firm from product-liability
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 assets, because doing so ties up cash flow.b. A firm decreasing assets, because doing so ties up cash
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 the bill forb. As the amount of current liabilities, above and beyond current assets, that the firm
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 depreciation when calculating the income statement versus just ignoring it?a. Including depreciation
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. $5,149,998.33c. $5,339,998.33d. $5,425,000.00
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. 24.43%d. 28.19%
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 Earnings before interest and taxes S 2510 Interest paid Taxable income Taxes (35%) Net income Dividends
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