Test Bank for Solution Manual Fundamentals of
Corporate Finance 10th CANADIAN Edition By Ross
(All Chapters Covered) Updated 2024 / Questions
with Correct Verified Answers
1. 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:
a. Sensitivity analysis
b. Scenario analysis
c. Break-even analysis
d. Something else - Correct Answer - b
2. 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%)?
a. 7.9%
b. 8.21%
c. 149.03%
d. Some other amount - Correct Answer - b
3. Which of the following is NOT an accurate description of the overarching goal of
financial management?
a. Maximize shareholder wealth
b. Maximize the current value per share of existing stock
c. Maximize shareholder dividends
pg. 1
,d. All of the above would always be consistent with the stated goal of financial
management - Correct Answer - C
4. 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. A CEO lies on his personal taxes to reduce his tax bill.
b. The CEO gets a luxury suite at the local NFL stadium. He says it is to bring clients but
mostly takes his family.
c. 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.
d. 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.
e. All of these are examples of agency problems. - Correct Answer - b
5. 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?
a. The $7.5M and the $10M
b. The $1.5M and the $5M
c. The $5M and the $10M
d. All of the costs are relevant to a capital budgeting decision.
e. Only the $10M - Correct Answer – A
6. 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?
a. +$5,000
pg. 2
,b. +$15,000
c. -$5,000
d. -$15,000
e. there is no cash flow impact from NWC - Correct Answer - a
7. 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:
a. $666.67
b. $791.32
c. $773.31
d. Some other number - Correct Answer - c
8. 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:
a. Do project A in any case
b. Do project B in any case
c. Do project B, but only if the NPV is positive
d. Choose the one with the shorter payback period - Correct Answer - d
9. 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.
a. Choose Brand A based on its NPV.
b. Choose Brand B based on its NPV.
c. Choose Brand A based on its EAC.
d. Choose Brand B based on its EAC.
pg. 3
, e. Don't do either since both have a negative NPV. - Correct Answer - d
10. 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?
a. $560,000.
b. $1,560,000
c. $1,260,000
d. Some other number - Correct Answer – b
11. 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?
a. 8.62%
b. 8.08%
c. 6.37%
d. 5.23% - Correct Answer - b
12. The weighted average cost of capital for a firm with debt is the:
a. Discount rate that the firm should apply to all of the projects it undertakes.
b. Appropriate discount rate to use to value the cash flows of its existing business.
c. Minimum discount rate the firm should require on any new project.
d. Rate of return equity shareholders should expect to earn on their investment in this
firm. - Correct Answer - b
13. Jackson, Utley, Minucci and Price (JUMP) Footwear uses its WACC as the discount
rate for all of the projects it undertakes. The firm:
a. Will correctly maximize shareholder value by choosing all projects with a positive
NPV based on this discount rate.
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