Test Bank for Solution Manual Fundamentals of

pg. 1 Test Bank for Solution Manual Fundamentals of Corporate Finance 10th CANADIAN Edition By Ross (All Chapters Covered) Updated 2024 / Questions with Correct Verified Answers

• You analyze a potential project, and the NPV is positive. You check to

see if the NPV is still positive if both the cost per unit goes up by 5% and

your sales are 3% lower than expected (simultaneously). You are conducting:

• Sensitivity analysis
• Scenario analysis
• Break-even analysis
• Something else - Correct Answer - b

• You are considering a new credit card. It has an introductory APR of 7.9%.

If the interest is compounded weekly, what is the effective annual rate (to the nearest 0.01%)?

• 7.9%
• 8.21%
• 149.03%
• Some other amount - Correct Answer - b

• Which of the following is NOT an accurate description of the overarching goal of

financial management?

• Maximize shareholder wealth
• Maximize the current value per share of existing stock
• Maximize shareholder dividends 1 / 4

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• All of the above would always be consistent with the stated goal of financial

management - Correct Answer - C

• There are many types of bad financial and ethical decisions. But which of the

following is specifically an example of a corporate agency problem as defined in this

course:

• A CEO lies on his personal taxes to reduce his tax bill.
• The CEO gets a luxury suite at the local NFL stadium. He says it is to bring clients but

mostly takes his family.

• The CEO undertakes a project. The project has a positive expected NPV at decision

time, but once undertaken turns out to be less profitable than expected.

• An employee quits and takes a promotion at a rival firm. The firm hires her because it

thinks she will be great at the job.

• All of these are examples of agency problems. - Correct Answer - b

• Guinn and Espinoza (GUINNESS) Beverages is considering an expansion of their

brewing business. They paid $1.5M for a study that suggest the expansion is positive NPV. They would build the new facility on some land they bought last year for $5M. The land was just appraised at $7.5M. If they proceed it will cost $10M to build the facility.Which of the above costs are relevant (i.e. should be considered) in evaluating this project?

• The $7.5M and the $10M
• The $1.5M and the $5M
• The $5M and the $10M
• All of the costs are relevant to a capital budgeting decision.
• Only the $10M - Correct Answer – A

• Bedell, Azhir, No and Kahn (BANK) Inc. currently has $50,000 cash, $8,000 in

accounts receivable, and $12,000 in accounts payable. BANK projects that next year cash will decrease by $10,000 while accounts payable will decrease by $5,000 (all other NWC accounts remain unchanged). What is the projected cash flow associated with these changes to net working capital?

• +$5,000 2 / 4

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• +$15,000
• -$5,000
• -$15,000
• there is no cash flow impact from NWC - Correct Answer - a

• Fox, Oceanak, Reich and Du (FORD) Motors has offered to sell you a car for

$40,000. They are offering financing with no money down and a 5-year loan with an

APR of 6%, compounded monthly. Your monthly payment would be:

• $666.67
• $791.32
• $773.31
• Some other number - Correct Answer - c

• Peterson, Elosua, Alaukili, Radtke and Liu (PEARL) Co. owns a piece of land, and is

considering several options for what to do with it. Project A consists of building a hotel and conference center that will occupy the entire property. Project B consists of building a mixed use building of shops and condos that will occupy the entire lot. Project A has

the higher IRR, while project B has a slighter higher NPV. PEARL should:

• Do project A in any case
• Do project B in any case
• Do project B, but only if the NPV is positive
• Choose the one with the shorter payback period - Correct Answer - d

• Solomon, Ullman, Daniel and Stiss (SUDS) Laundry needs to replace their washing

machines. Brand A's machines have an NPV of -$10,000 and last 7 years, while Brand B's machines have an NPV of -$12,000 and last 10 years. You will have to replace the machines (in either case) once their useful life is over. Use a discount rate of 9%. Note that SUDS overall has a positive NPV of continuing to operate.

• Choose Brand A based on its NPV.
• Choose Brand B based on its NPV.
• Choose Brand A based on its EAC.
• Choose Brand B based on its EAC. 3 / 4

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• Don't do either since both have a negative NPV. - Correct Answer - d

• Schaaf, Hoots, O'Connor, Eaton and Spinks (SHOES) Footwear projects revenues

of $3.2M with expenses of $1.4M. They will have a depreciation expense of $1.0M and pay an average of 30% in taxes. What is SHOES projected operating cash flow?

• $560,000.
• $1,560,000
• $1,260,000
• Some other number - Correct Answer – b

• Brice, Uhler, Fineberg and Freed (BUFF) Inc. has 2 million shares of common stock

and 100,000 bonds outstanding. It just paid a dividend of $4 per share and expects this dividend to grow 3% per year for the foreseeable future. The required return on its equity is 17%. Its bonds have 20 years to maturity, pay a 5% coupon, and currently sell at $1,130. The firm has an average tax rate of 15%. What is the company's cost of capital?

• 8.62%
• 8.08%
• 6.37%
• 5.23% - Correct Answer - b

12. The weighted average cost of capital for a firm with debt is the:

• Discount rate that the firm should apply to all of the projects it undertakes.
• Appropriate discount rate to use to value the cash flows of its existing business.
• Minimum discount rate the firm should require on any new project.
• Rate of return equity shareholders should expect to earn on their investment in this

firm. - Correct Answer - b

• Jackson, Utley, Minucci and Price (JUMP) Footwear uses its WACC as the discount

rate for all of the projects it undertakes. The firm:

• Will correctly maximize shareholder value by choosing all projects with a positive

NPV based on this discount rate.

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