Description

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

Concepts: Chapter 1 to 10

Chapter 1 – Intro

Chapters 5 & 6 Ã¢â‚¬â€œ Time Value of Money

Chapter 7 – Bonds

Chapter 8 Ã¢â‚¬â€œ Stock Valuation

Chapter 2 & 3 Ã¢â‚¬â€œ Financial Statements

Chapter 9 & 10 Ã¢â‚¬â€œ 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.

Next Page

Page 1 of 45

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.

Next Page

Page 2 of 45

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

Next Page

Page 3 of 45

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.

Next Page

Page 4 of 45

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.

Next Page

Page 5 of 45

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.

Next Page

Page 6 of 45

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.

Next Page

Page 7 of 45

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

Next Page

Page 8 of 45

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

Next Page

Page 9 of 45

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

Next Page

Page 10 of 45

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.

Next Page

Page 12 of 45

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.

Next Page

Page 13 of 45

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

Next Page

Page 14 of 45

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.

Next Page

Page 15 of 45

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.

Next Page

Page 16 of 45

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

Next Page

Page 17 of 45

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.

Next Page

Page 18 of 45

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

Next Page

Page 19 of 45

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

Next Page

Page 20 of 45

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

Next Page

Page 21 of 45

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.

Next Page

Page 22 of 45

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.

Next Page

Page 23 of 45

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

Next Page

Page 24 of 45

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

Next Page

Page 25 of 45

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

Ãâ€¢Ãâ€™ÃÂ¢

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

Next Page

Page 30 of 45

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

Next Page

Page 31 of 45

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

Next Page

Page 32 of 45

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

Next Page

Page 33 of 45

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

Next Page

Page 34 of 45

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.

Next Page

Page 35 of 45

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

Next Page

Page 36 of 45

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%

Next Page

Page 37 of 45

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

Next Page

Page 38 of 45

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

Next Page

Page 39 of 45

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

ÃÂ

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

Next Page

Page 41 of 45

Chapter 8

Question 42 (2 points)

THI preferred shares have a par value of $95, pay a dividend of 4.25%, and are currently

ÃÂ°

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

Next Page

Page 42 of 45

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

Next Page

Page 43 of 45

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%

Next Page

Page 44 of 45

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

Next Page

Page 45 of 45

Purchase answer to see full

attachment