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Text: Fundamentals of Corporate Finance, Tenth Canadian Edition by Stephen A. Ross,

Concepts: Chapter 1 to 10

Chapter 1 – Intro

Chapters 5 & 6 – Time Value of Money

Chapter 7 – Bonds

Chapter 8 – Stock Valuation

Chapter 2 & 3 – Financial Statements

Chapter 9 & 10 – Capital Budgeting

THEORY QUESTIONS
Ch 1 Theory
Question 1 (1 point)
Which one of the following business types is best suited to raising large amounts of
capital?
General partnership.
Sole proprietorship.
Corporation.
Limited liability company.
Limited partnership.
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Question 2 (1 point)
You are interested in purchasing 100 shares of stock in one of the largest
corporations in the Canada. You would most likely purchase the shares in
A primary market operated as a dealer market.
A primary market operated as an auction market.
A secondary market operated as a dealer market.
A secondary market operated as an auction market.
A secondary market operated as a money market.
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Question 3 (1 point)
Which of the following securities is not included as part of the capital market?
Preferred stock
Common stock
Commercial paper
Government bonds
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Question 4 (1 point)
A financial manager’s goal of maximizing current or short-term earnings may not be appropriate because:
share ownership is widely dispersed.
increased earnings may be accompanied by acceptably higher levels of risk.
earnings are subjective; they can be defined in various ways such as accounting or economic earnings.
it considers the timing of the benefits.
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Chapter 5 and 6
Question 5 (1 point)
An effective annual rate is:
The same as the quoted or stated rate
The interest rate charged per period multiplied by the number of periods per
year
The same as the Annual Percentage Rate (APR)
The interest rate adjusted as if it were compounded once per year.
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Question 6 (1 point)
You are considering between two loan offers (you need to borrow money to buy a car). All
else equal, you should accept the loan:
with the lowest effective annual rate
with the highest stated interest rate (APR).
with the lowest annual percentage rate (APR)
with the most frequent compounding period.
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Question 7 (1 point)
Thomas wants to save $1,200 a year in a manner that maximizes his savings. To do this, he should:
Treat his $100 monthly savings deposits as an annuity due.
Deposit $1,200 into his savings account on the last day of each year.
Treat his $100 monthly savings deposits as an ordinary annuity.
Deposit $300 into his account at the end of each quarter.
Deposit $600 into his account at the end of every six-month period.
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Question 8 (1 point)
Which of the following CANNOT be calculated?
The present value of an annuity due.
The future value of a perpetuity.
The present value of a perpetuity.
The future value of an annuity due.
The interest rate on a perpetuity given the present value and payment amount
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Chapter 9 and 10
Question 9 (1 point)
Which of the following costs would you include when making a capital budgeting decision?
Sunk cost
Opportunity cost
Interest expenses
Past research and development expenditure
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Question 10 (1 point)
A company considering a project, spends $20 million researching whether it is possible to create a durable
plastic from the process waste from feedstock preparation. How should the $20 million best be considered
when calculating the NPV of the project?
As a fixed overhead expense
As an opportunity cost
As a sunk cost
As a capital cost
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Question 11 (1 point)
You have just started work at a large frozen food manufacturer and have been assigned to lead a team that
makes recommendations to the CFO on capital expenditures for the coming year. You estimate the cost of
capital is 10% and that the investments will produce the following after tax cash flows (in millions of
dollars).
Year Project A Project B
0
-40
-30
1
25
20
2
15
9
3
10
9
You remember from your finance course that there are a number of methods to determine which projects
should be selected. You use your financial calculator and determine the following:
IRR of project A is 14.39%
IRR of project B is 15.27%
NPV of project A is $2.6371 million
NPV of project B is $2.3817 million
If projects A and B are mutually exclusive, which project (s) should you select?
Only project B
Both projects A and B
Reject projects A and B
Only project A
Question 12 (1 point)
A Project’s payback period is determined to be four years. If it is later discovered that
additional cash flows will be generated in years five and six, then:
the Project’s payback period will be increased.
the Project’s payback period will be unchanged.
the Project’s payback period will be reduced.
the discount rate must be known to determine whether the payback period changes.
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Question 13 (1 point)
If the NPV of a project is greater than 0, then its profitability index is:
greater than 0.
greater than 1
less than 1.
None of the choices.
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Chapter 8
Question 14 (1 point)
A cumulative dividend is defined as a dividend that is:
Treated as an interest expense.
Paid only to senior holders of common stock.
Paid as an extra payment if the share of stock is called.
Carried forward, if not paid when due, and accumulates until the next time the
corporation pays dividends
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Question 15 (1 point)
A higher required rate (discount rate) would:
increase the price of corporate bonds.
reduce the price of preferred stock.
increase the price of common stock.
reduce the cost of dividends.
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Question 16 (1 point)
The rate of return of common stock is usually greater than the simple dividend yield
because:
investors perceive risk in common stock.
investors expect both a current dividend and future growth.
the company must make profits before it can pay dividends.
dividends are not tax-deductible.
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Question 17 (1 point)
Which of the following does NOT correctly complete this sentence: Preferred stock
is much like debt in that
Both are entitled to receive a stated payment from the corporation during the
year.
The holders of both are entitled to receive a stated payment in the event of
liquidation.
Both payments are subject to the same tax treatment for the issuing firm.
Both have priority over common shareholders in the event of liquidation
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Chapter 7
Question 18 (1 point)
A bond that pays no separate interest payments is called a(n):
Zero coupon (strip) bond.
Junk bond
Premium bond.
Coupon bond.
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Question 19 (1 point)
The principal amount of a bond that is repaid at the end of the loan term is called the
bond’s:
Coupon
Face value
Coupon rate
Yield to maturity
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Question 20 (1 point)
Smith Corporation has two bonds outstanding: bond A and bond B. These bonds are similar
in every way except for their years to maturity. Bond A has 5 years remaining to maturity
while bond B has 10 years to maturity. If market interest rates rise which of the options
below is most likely to happen?
Price of bond B will increase less than the price of bond A
Price of bond B will increase more than the price of bond A
Price of bond B will decrease more than the price of bond A
Price of bond B will decrease less than the price of bond A
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Question 21 (1 point)
ABC bonds are selling for a quoted price of 134.567 and have a face value of
$1,000. The market price of ABC bond is
$1345.67
$1000
$134.567
$13456.70
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Chapter 2 and 3
Question 22 (1 point)
An item that may be converted to cash within one year or one operating cycle of the firm is classified as a:
current liability
long-term liability.
current asset.
long-term asset.
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Question 23 (1 point)
Which of the following would represent a source of funds and, indirectly, an increase in cash balances?
A decrease in net income.
A reduction in accounts receivable.
A reduction in notes payable.
The repurchase of shares of the firm’s stock.
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Question 24 (1 point)
The statement of cash flows does not include which of the following sections?
Cash flows from investing activities
Cash flows from financing activities
Cash flows from sales activities
Cash flows from operating activities
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Question 25 (1 point)
refers to the cash flow that results from the firm’s ongoing, normal business activities.
Operating cash flow
Cash flow to creditors.
Net working capital
Capital spending
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Chapter 10
Question 26 (2 points)
Please use this information provided below to answer both chapter 10 questions. This
information will appear at the beginning of both ch 10 questions and will not change.
Your company is upgrading to more efficient production equipment for your firm’s only
product. This upgrade was based on the recommendations of a consulting firm the company
hired at a cost of $34,400. The new equipment will cost $2,000,000 and shipping costs of
$10,000 will be incurred. Because the industry is changing rapidly, the equipment will be
obsolete in 4 years so there will be no salvage value. The new equipment will allow you to
make more of your product in the same amount of time. As a result your total sales will
increase by $400,000 annually and expenses will decrease by $260,000 annually. Because
your production will be increasing, inventory levels will need to be increased by $40,000 and
accounts receivable will also increase by $30,000. Rather than paying your suppliers within
10 days, you will move to 30 day payments which will increase accounts payable by
$20,000. The equipment will be depreciated for tax purposes at CCA rate of 20%. The
company’s tax rate is 40% and the company requires a rate of return of 7% on all capital
expenditure projects.
Determine the change in net working capital (NWC)
(Please enter your answer with 2 decimal places. Do not use commas or
units).
Your Answer:
Answer
Question 27 (2 points)
Please use this information provided below to answer both chapter 10 questions. This
information will appear at the beginning of both ch 10 questions and will not change.
Your company is upgrading to more efficient production equipment for your firm’s only
product. This upgrade was based on the recommendations of a consulting firm the company
hired at a cost of $34,400. The new equipment will cost $2,000,000 and shipping costs of
$10,000 will be incurred. Because the industry is changing rapidly, the equipment will be
obsolete in 4 years so there will be no salvage value. The new equipment will allow you to
make more of your product in the same amount of time. As a result your total sales will
increase by $400,000 annually and expenses will decrease by $260,000 annually. Because
your production will be increasing, inventory levels will need to be increased by $40,000 and
accounts receivable will also increase by $30,000. Rather than paying your suppliers within
10 days, you will move to 30 day payments which will increase accounts payable by
$20,000. The equipment will be depreciated for tax purposes at CCA rate of 20%. The
company’s tax rate is 40% and the company requires a rate of return of 7% on all capital
expenditure projects.
Determine the Present Value of the ending cash flows
(Please enter your answer with 2 decimal places. Do not use commas or
units).
Your Answer:
Answer
Question 28 (2 points)
Balance Sheet (*000’s)
Income Statement 2018
(*000’s)
Cash
Accounts receivable
Inventory
Total Current Assets
Net Fixed Assets
Total Assets
2017
300
690
1,020
2,010
5,600
7,610
2018
350
560
1,400
2,310
6,200
8,510
Sales
COGS
S&A Expense
Depreciation
EBIT
Interest
ЕВТ
Taxes
Net Income
8,750
6,200
830
550
1,170
300
870
304.5
565.5
Accounts payable
Notes payable
Total Current Liabilities
Long-term debt
500
130
630
4,600
450
175
625
5,105
Common Stock
Retained Earnings
Total Liabilities & SE
1,950
430
7,610
2,020
760
8,510
Atika Design has been in operation for 10 years. Use the I/S and B/S
provided above to determine the operating cash flow for Atika Design
for year 2018.
(Do not use units or commas. If your answer is negative enter it as
follows, -1234)
Your Answer:
Question 29 (2 points)
Balance Sheet (“000’s)
Income Statement 2018
(*000’s)
Cash
Accounts receivable
Inventory
Total Current Assets
Net Fixed Assets
Total Assets
2017
300
690
1,020
2,010
5,600
7,610
2018
350
560
1,400
2,310
6,200
8,510
Sales
COGS
S&A Expense
Depreciation
EBIT
Interest
EBT
Taxes
Net Income
8,750
6,200
830
550
1,170
300
870
304.5
565.5
Accounts payable
Notes payable
Total Current Liabilities
Long-term debt
500
130
630
4,600
450
175
625
5,105
Common Stock
Retained Earnings
Total Liabilities & SE
1,950
430
7,610
2,020
760
8,510
Atika Design has been in operation for 10 years. Use the I/S and B/S
provided above to determine the cash flow to bondholders (creditors)
from 2017 to 2018 for Atika Design.
(Do not use units or commas. If your answer is negative enter it as
-1234)
Your Answer:
Question 30 (2 points)
A Halifax manufacturing firm has an equity multiplier of 1.62, a total asset turnover
of 1.39, and a profit margin of 7.8 %. The total equity is $672,100. What is the
amount of the net income?
$118,048
$121,212
$120,202
$119,600
$124,097
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Question 31 (2 points)
In 2019, Gwen’s Pastry Shop has annual sales of $238,000, a profit margin of 6%,
and a return on assets of 7.7 %. The firm has in total assets.
$224,528
$256.326
$185,455
$220,984
$176,067
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Chapter 5 and 6
Question 32 (2 points)
Sam is saving to buy a car 3 years from today. He is able to make
monthly deposits of $350 each month for the next 3 years. How
much money will he have saved up 3 years from today? Assume
Sam can earn interest of 12% compounded monthly.
(Please enter your answer with 2 decimal places. Do not use commas or
units)
Your Answer:
Answer
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Question 33 (2 points)
Mrs. Blake established a trust fund that provides $65,000 in scholarships each year
forever. The trust fund earns a fixed 5.5% rate of return. How much money did Mrs.
Black contribute to the fund?
$61,904.76
$68,575.00
$1,181,818.18
$41,935.48
$1,300,000.00
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Question 34 (2 points)
You have borrowed $400,000 to purchase a new home. After
making monthly payments of $990 for 5 years you notice you still
owe the bank $353,900. How much interest (in $s) did you pay
over the 5 year period?
(Please enter your answer with 2 decimal places. Do not use commas or
units)
Your Answer:
Answer
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Question 35 (2 points)
You have $500 that you would like to invest. You have two choices: Savings account
A which earns 8% compounded annually, or savings account B which earns 7.75%
compounded monthly. Which would you choose and why?
B, because it has a higher effective annual rate.
A, because the future value in one year is lower.
B, because the future value in one year is lower.
A, because it has the higher quoted rate.
A, because it has a higher effective annual rate.
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Chapter 7
Question 36 (2 points)
You own some Ontario Hydro bonds with a face value of $1000, 7%
coupon rate (paid semi-annually) that will mature 10 years from now.
You need the money so you are thinking of selling these bonds.
If the current market rate of interest is 4%, what do you expect to
receive for each bond if you sell them today?
Please enter your answer with 2 decimal places. Do not use commas or
units.
Your Answer:
Answer
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Question 37 (2 points)
Bayshore Inc. has a bond issue outstanding with a face value of $1000 and a 7%
coupon rate (semi-annually coupons). Today these bonds have a market value of
$1,100, and will mature 10 years from now.
Suppose you decide to purchase these bonds today for the current market
price. Your annual yield to maturity will be approximately _____%.
3.8%
5.7%
2.8%
7.6%
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Question 38 (2 points)
Bayshore Inc. has a bond issue outstanding with a face value of $1000
and a 7% coupon rate (paid semi-annually). Today these bonds have a
market value of $1,195, and will mature 20 years from now.
Your current yield (CY) is %?
(Please enter your answer with 2 decimal places and in percentage
format. Do not use commas or units)
Your Answer:
Answer
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Question 39 (2 points)
Assume that you purchase a $1,000 corporate bond that has a coupon rate of 10.75% (semi-
annual coupons). What is the amount of interest that you receive every six months?
$107.50
S53.75
$215
$1,000
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Chapter 9
Question 40 (2 points)
You have just started work at a large frozen food manufacturer and have
been assigned to lead a team that makes recommendations to the CFO on
capital expenditures for the coming year. You are evaluating two
projects; Project A and Project B. You estimate the cost of capital is 10%
and that the investments will produce the following after tax cash flows.
Year Project Project
А
B
0 -45 -30
1 25 20
2 10
9
3 10
9
You have calculated the NPV project B to be $2.38. What is the
Profitability Index (PI) of Project B?
(Please enter your answer with 2 decimal places. Do not use commas or
units. If your answer is negative enter it with a negative sign. For
example, if your answer is -$1234.567 enter it as -1234.57).
Your Answer:
Answer
Question 41 (2 points)
CFP is considering the purchase of new manufacturing equipment. The project costs
$25,000 and has expected after tax cash flows of $4,623 per year for the next 8
years. Should the project be accepted if CFPs’ required rate of return is 12%?
No, since the NPV = – $2,034.60
Yes, since the NPV = $9,829.29
Yes, since the Payback = 5.41 years
No, since the NPV = – $9,839.29
Yes, since the NPV = $2,034.60
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Chapter 8
Question 42 (2 points)
THI preferred shares have a par value of $95, pay a dividend of 4.25%, and are currently
а
selling in the market for $100. If you own THREE THI preferred shares, you will receive
S in total dividends each year.
USE 2 DECIMAL PLACES FOR YOUR ANSWER AND DO NOT INCLUDE UNITS.
Your Answer:
Answer
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Question 43 (2 points)
You are considering investing in some common shares of THI Corporation, The
company is expected to pay a dividend of $1.50 in one year. Dividends are expected
to grow at a rate of 3% thereafter. If you require a 16% return on your investment,
what would you be willing to pay for one common share of THI Corp.?
$13.14
$12.43
$11.54
$12.33
$14.30
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Question 44 (2 points)
A stock that pays a constant dividend of $2.50 forever currently sells for $20. What
is the required rate of return?
12.0%
11.5%
13.0%
11.0%
12.5%
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Question 45 (2 points)
A preferred share pays an annual dividend of 4.5%. The market price is $170 and
the par value is $200. What is the annual dollar amount of dividends in year 3?
Please enter your answer with 2 decimal places. Do not enter units or commas.
For example if your answer is $1,234.567; enter 1234.57
Your Answer:
Answer
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