Course Introduction
Business Finance
Study Guide Questions
Business Finance explores the fundamental principles and practices involved in managing the financial activities of a business. The course covers key topics such as financial statement analysis, time value of money, capital budgeting, risk and return, cost of capital, and sources of financing. Students will learn how to apply financial tools and techniques to make informed decisions that maximize the value of a firm. Through case studies and problem-solving exercises, this course prepares students to understand the financial environment of businesses, interpret financial data, and develop strategies for effective financial planning and control.
Recommended Textbook
Intermediate Financial Management 12th Edition by Eugene F. Brigham
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) Which of the following statements is CORRECT?
A)One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.
B)It is generally easier to transfer one's ownership interest in a partnership than in a corporation.
C)One of the advantages of the corporate form of organization is that it avoids double taxation.
D)One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., "one person, one vote."
E)Corporations of all types are subject to the corporate income tax.
Answer: A
Q2) The facts that a proprietorship,as a business,pays no corporate income tax,and that it is easily and inexpensively formed,are two key advantages to that form of business.
A)True
B)False
Answer: True
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3
Chapter 2: Risk and Return: Part I
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Q1) Suppose Stan holds a portfolio consisting of a $10,000 investment in each of 8 different common stocks.The portfolio's beta is 1.25.Now suppose Stan decided to sell one of his stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 1.35.What would the portfolio's new beta be?
A)1.17
B)1.23
C)1.29
D)1.36
E)1.43
Answer: C
Q2) Stock A's beta is 1.7 and Stock B's beta is 0.7.Which of the following statements must be true,assuming the CAPM is correct.
A)In equilibrium, the expected return on Stock B will be greater than that on Stock A.
B)When held in isolation, Stock A has more risk than Stock B.
C)Stock B would be a more desirable addition to a portfolio than A.
D)In equilibrium, the expected return on Stock A will be greater than that on B.
E)Stock A would be a more desirable addition to a portfolio then Stock B.
Answer: D
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Chapter 3: Risk and Return: Part Ii
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Q1) In a portfolio of three different stocks,which of the following could NOT be true?
A)The riskiness of the portfolio is greater than the riskiness of one or two of the stocks.
B)The beta of the portfolio is less than the betas of each of the individual stocks.
C)The beta of the portfolio is greater than the beta of one or two of the individual stocks' betas.
D)The beta of the portfolio cannot be equal to 1.
E)The riskiness of the portfolio is less than the riskiness of each of the stocks if they were held in isolation.
Answer: B
Q2) The Y-axis intercept of the SML indicates the return on an individual asset when the realized return on an average (b = 1)stock is zero.
A)True
B)False
Answer: False
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Chapter 4: Bond Valuation
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Q1) Which of the following statements is CORRECT?
A)A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond.
B)Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used.
C)Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate.
D)The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity. Therefore, if the yield curve is upward sloping, the required rate of return will be lower on the callable bond.
E)Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate.
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Chapter 5: Financial Options
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Q1) Which of the following statements is CORRECT?
A)Call options give investors the right to sell a stock at a certain strike price before a specified date.
B)Options typically sell for less than their exercise value.
C)LEAPS are very short-term options that were created relatively recently and now trade in the market.
D)An option holder is not entitled to receive dividends unless he or she exercises their option before the stock goes ex dividend.
E)Put options give investors the right to buy a stock at a certain strike price before a specified date.
Q2) An option is a contract that gives its holder the right to buy or sell an asset at a predetermined price within a specified period of time.
A)True
B)False
Q3) The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.
A)True
B)False
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Chapter 6: Accounting for Financial Management
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Q1) The annual report contains four basic financial statements: the income statement,balance sheet,statement of cash flows,and statement of stockholders' equity.
A)True
B)False
Q2) On the balance sheet,total assets must always equal total liabilities and equity.
A)True
B)False
Q3) Meric Mining Inc.recently reported $15,000 of sales,$7,500 of operating costs other than depreciation,and $1,200 of depreciation.The company had no amortization charges,it had outstanding $6,500 of bonds that carry a 6.25% interest rate,and its federal-plus-state income tax rate was 35%.How much was the firm's net income after taxes? Meric uses the same depreciation expense for tax and stockholder reporting purposes.
A)$3,284.55
B)$3,457.42
C)$3,639.39
D)$3,830.94
E)$4,022.48
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Chapter 7: Analysis of Financial Statements
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Q1) Companies Heidee and Leaudy have the same tax rate,sales,total assets,and basic earning power.Both companies have positive net incomes.Company Heidee has a higher debt ratio and,therefore,a higher interest expense.Which of the following statements is CORRECT?
A)Company Heidee has a lower times interest earned (TIE) ratio.
B)Company Heidee has a lower equity multiplier.
C)Company Heidee has more net income.
D)Company Heidee pays more in taxes.
E)Company Heidee has a lower ROE.
Q2) Companies Heidee and Leaudy are virtually identical in that they are both profitable,and they have the same total assets (TA),Sales (S),return on assets (ROA),and profit margin (PM).However,Company Heidee has the higher debt ratio.Which of the following statements is CORRECT?
A)Company Heidee has a lower operating income (EBIT) than Company LD.
B)Company Heidee has a lower total assets turnover than Company Leaudy.
C)Company Heidee has a lower equity multiplier than Company Leaudy.
D)Company Heidee has a higher fixed assets turnover than Company Leaudy.
E)Company Heidee has a higher ROE than Company Leaudy.
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Page 9
Chapter 8: Basic Stock Valuation
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Q1) Stocks A and B have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT?
\[\begin{array} { l c c }
&\text {A}&\text {B}\\
\text { Price } & \$ 25 & \$ 25 \\
\text { Expected growth (constant) } & 10 \% & 5 \% \\
\text { Required return } & 15 \% & 15 \%
\end{array}\]
A)Stock A has a higher dividend yield than Stock B.
B)Currently the two stocks have the same price, but over time Stock B's price will pass that of A.
C)Since Stock A's growth rate is twice that of Stock B, Stock A's future dividends will always be twice as high as Stock B's.
D)The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist.
E)Stock A's expected dividend at t = 1 is only half that of Stock B.
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Chapter 9: Corporate Valuation and Financial Planning
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Q1) North Construction had $850 million of sales last year,and it had $425 million of fixed assets that were used at only 60% of capacity.What is the maximum sales growth rate North could achieve before it had to increase its fixed assets?
A)54.30%
B)57.16%
C)60.17%
D)63.33%
E)66.67%
Q2) A company expects sales to increase during the coming year,and it is using the AFN equation to forecast the additional capital that it must raise.Which of the following conditions would cause the AFN to increase?
A)The company increases its dividend payout ratio.
B)The company begins to pay employees monthly rather than weekly.
C)The company's profit margin increases.
D)The company decides to stop taking discounts on purchased materials.
E)The company previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity.
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Chapter 10: Corporate Governance
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Q1) The CEO of D'Amico Motors has been granted some stock options that have provisions similar to most other executive stock options.If D'Amico's stock underperforms the market,these options will necessarily be worthless.
A)True
B)False
Q2) Which of the following is NOT normally regarded as being a barrier to hostile takeovers?
A)Targeted share repurchases.
B)Shareholder rights provisions.
C)Restricted voting rights.
D)Poison pills.
E)Abnormally high executive compensation.
Q3) A poison pill is also known as a corporate restructuring.
A)True
B)False
Q4) ESOPs were originally designed to help improve worker productivity,but today they are also used to help prevent hostile takeovers.
A)True
B)False
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Chapter 11: Determining the Cost of Capital
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Q1) Which of the following statements is CORRECT?
A)When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation.
B)Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock as measured by the CAPM.
C)If a company's beta increases, this will increase the cost of equity used to calculate the WACC, but only if the company does not have enough reinvested earnings to take care of its equity financing and hence must issue new stock.
D)Higher flotation costs reduce investors' expected returns, and that leads to a reduction in a company's WACC.
E)When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.
Q2) If a firm's marginal tax rate is increased,this would,other things held constant,lower the cost of debt used to calculate its WACC.
A)True
B)False
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Page 13
Chapter 12: Capital Budgeting: Decision Rules
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Q1) No conflict will exist between the NPV and IRR methods,when used to evaluate two equally risky but mutually exclusive projects,if the projects' cost of capital exceeds the rate at which the projects' NPV profiles cross.
A)True
B)False
Q2) The regular payback method is deficient in that it does not take account of cash flows beyond the payback period.The discounted payback method corrects this fault.
A)True
B)False
Q3) The IRR method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted cost of capital.
A)True
B)False
Q4) The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs)with the present value of the cash inflows.
A)True
B)False
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14
Chapter 13: Cash Flow Estimation and Risk Analysis
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Q1) Which of the following statements is CORRECT?
A)In comparing two projects using sensitivity analysis, the one with the steeper lines would be considered less risky, because a small error in estimating a variable such as unit sales would produce only a small error in the project's NPV.
B)The primary advantage of simulation analysis over scenario analysis is that scenario analysis requires a relatively powerful computer, coupled with an efficient financial planning software package, whereas simulation analysis can be done efficiently using a PC with a spreadsheet program or even with just a calculator.
C)Sensitivity analysis is a type of risk analysis that considers both the sensitivity of NPV to changes in key input variables and the probability of occurrence of these variables' values.
D)As computer technology advances, simulation analysis becomes increasingly obsolete and thus less likely to be used as compared to sensitivity analysis.
E)Sensitivity analysis as it is generally employed is incomplete in that it fails to consider the probability of occurrence of the key input variables.
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Chapter 14: Real Options
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Q1) Which of the following is NOT a real option?
A)The option to buy shares of stock if its price goes up.
B)The option to expand into a new geographic region.
C)The option to abandon a project.
D)The option to switch the type of fuel used in an industrial furnace.
E)The option to expand production if the product is successful.
Q2) Real options affect the size,but not the risk,of a project's expected cash flows.
A)True
B)False
Q3) Which of the following will NOT increase the value of a real option?
A)An increase in the volatility of the underlying source of risk.
B)An increase in the risk-free rate.
C)An increase in the cost of obtaining the real option.
D)A decrease in the probability that a competitor will enter the market of the project in question.
E)Lengthening the time in which a real option must be exercised.
Q4) Real options are most valuable when the underlying source of risk is very low.
A)True
B)False
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Chapter 15: Distributions to Shareholders: Dividends and Repurchases
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Q1) Yesterday,Berryman Investments was selling for $90 per share.Today,the company completed a 7-for-2 stock split.If the total market value was unchanged by the split,what is the price of the stock today?
A)$23.21
B)$24.43
C)$25.71
D)$27.00
E)$28.35
Q2) United Builders wants to maintain a target capital structure with 30% debt and 70% equity.Its forecasted net income is $550,000,and because of market conditions,the company will not issue any new stock during the coming year.If the firm follows the residual dividend policy,what is the maximum capital budget that is consistent with maintaining the target capital structure?
A)$673,652
B)$709,107
C)$746,429
D)$785,714
E)$825,000
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Chapter 16: Capital Structure Decisions
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Q1) Refer to Exhibit 16.3.Now assume that BB is considering changing from its original capital structure to a new capital structure with 45% debt and 55% equity.This results in a weighted average cost of capital equal to 10.4% and a new value of operations of $576,923.Assume BB raises $259,615 in new debt and purchases T-bills to hold until it makes the stock repurchase.What is the stock price per share immediately after issuing the debt but prior to the repurchase?
A)$14.42
B)$19.36
C)$23.91
D)$28.85
E)$35.62
Q2) Based on the information below for Benson Corporation,what is the optimal capital structure?
A)Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90.
B)Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20.
C)Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40.
D)Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00.
E)Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50.
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Chapter 17: Dynamic Capital Structures and Corporate Valuation
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Q1) When a firm has risky debt,its equity can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the debt.
A)True
B)False
Q2) When a firm has risky debt,its debt can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the equity.
A)True
B)False
Q3) The market value of Firm L's debt is $200,000 and its yield is 9%.The firm's equity has a market value of $300,000,its earnings are growing at a rate of 5%,and its tax rate is 40%.A similar firm with no debt has a cost of equity of 12%.Under the MM extension with growth,what is Firm L's cost of equity?
A)11.4%
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Page 19
Chapter
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Q1) Stanovich Enterprises has 10-year,12.0% semiannual coupon bonds outstanding.Each bond is now eligible to be called at a call price of $1,060.If the bonds are called,the company must replace them with new 10-year bonds.The flotation cost of issuing new bonds is estimated to be $45 per bond.How low would the yield to maturity on the new bonds have to be in order for it to be profitable to call the bonds today,i.e.,what is the nominal annual "breakeven rate"?
A)9.29%
B)9.78%
C)10.29%
D)10.81%
E)11.35%
Q2) Refer to Exhibit 18.1.What will the after-tax annual interest savings for NWW be if the refunding takes place?
A)$664,050
B)$699,000
C)$768,900
D)$845,790
E)$930,369
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Chapter 19: Lease Financing
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Q1) Which of the following statements is most CORRECT?
A)Capitalizing a lease means that the firm issues equity capital in proportion to its current capital structure, in an amount sufficient to support the lease payment obligation.
B)The fixed charges associated with a lease can be as high as, but never greater than, the fixed payments associated with a loan.
C)Capital, or financial, leases generally provide for maintenance by the lessor.
D)A key difference between a capital lease and an operating lease is that with a capital lease, the lease payments provide the lessor with a return of the funds invested in the asset plus a return on the invested funds, whereas with an operating lease the lessor depends on the residual value to realize a full return of and on the investment.
E)Firms that use "off balance sheet" financing, such as leasing, would show lower debt ratios if the effects of their leases were reflected in their financial statements.
Q2) Many leases written today combine the features of operating and financial leases.Such leases are often called "combination leases."
A)True
B)False
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Page 21
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Q1) Which of the following statements is most CORRECT?
A)By law in most states, all preferred stock must be cumulative, meaning that the compounded total of all unpaid preferred dividends must be paid before any dividends can be paid on the firm's common stock.
B)From the issuer's point of view, preferred stock is less risky than bonds.
C)Whereas common stock has an indefinite life, preferred stocks always have a specific maturity date, generally 25 years or less.
D)Unlike bonds, preferred stock cannot have a convertible feature.
E)Preferred stock generally has a higher component cost of capital to the firm than does common stock.
Q2) Refer to Exhibit 20.1.What is the bond's conversion ratio?
A)27.14
B)28.57
C)30.00
D)31.50
E)33.08
Q3) A warrant is an option,and as such it cannot be used as a "sweetener."
A)True
B)False
Page 22
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Chapter 21: Supply Chains and Working Capital Management
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Q1) Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e.,after the fact)sense even though it is possible to match maturities on an ex ante (expected)basis.
A)True
B)False
Q2) Shorter-term cash budgets say a daily cash budget for the next month are generally used for actual cash control while longer-term cash budgets say monthly cash budgets for the next year are generally used for planning purposes.
A)True
B)False
Q3) Other things held constant,which of the following would tend to reduce the cash conversion cycle?
A)Place larger orders for raw materials to take advantage of price breaks.
B)Take all discounts that are offered.
C)Continue to take all discounts that are offered and pay on the net date.
D)Offer longer payment terms to customers.
E)Carry a constant amount of receivables as sales decline.
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Chapter 22: Providing and Obtaining Credit
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Q1) A firm's credit policy consists of which of the following items?
A)Credit period, cash discounts, credit standards, collection policy.
B)Credit period, cash discounts, receivables monitoring, collection policy.
C)Cash discounts, credit standards, receivables monitoring, collection policy.
D)Credit period, receivables monitoring, credit standards, collection policy.
E)Credit period, cash discounts, credit standards, receivables monitoring.
Q2) Which of the following is not correct?
A)A more aggressive collection policy will reduce bad debt expenses, but may also decrease sales.
B)Collection policy usually has little impact on sales since collecting past-due accounts occurs only after the customer has already purchased.
C)Typically a firm will turn over an account to a collection agency only after it has tried several times on its own to collect the account.
D)A lax collection policy will frequently lead to an increase in accounts receivable.
E)Collection policy is how a firm goes about collecting past-due accounts.
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24
Chapter 23: Advanced Issues in Cash Management and Inventory Control
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Q1) Which of the following is true of the Baumol model? Note that the optimal cash transfer amount is C*.
A)If the total amount of cash needed during the year increases by 20%, then C* will increase by 20%.
B)If the average cash balance increases by 20%, then the total holding costs will increase by 20%.
C)If the average cash balance increases by 20% the total transactions costs will increase by 20%.
D)The optimal transfer amount is the same for all companies.
E)If the fixed costs of selling securities or obtaining a loan (cost per transaction) increase by 20%, then C* will increase by 20%.
Q2) Refer to Exhibit 23.2.If Cartwright holds a safety stock equal to a 30-day supply of chips,what is Cartwright's minimum cost of ordering and carrying inventory?
A)$28,500
B)$15,950
C)$68,440
D)$34,220
E)$47,693
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Chapter 24: Enterprise Risk Management
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Q1) Suppose the December CBOT Treasury bond futures contract has a quoted price of 80'07.What is the implied annual interest rate inherent in the futures contract?
A)6.86%
B)7.22%
C)7.60%
D)8.00%
E)8.40%
Q2) A swap is a method used to reduce financial risk.Which of the following statements about swaps,if any,is NOT CORRECT?
A)The earliest swaps were currency swaps, in which companies traded debt denominated in different currencies, say dollars and pounds.
B)Swaps are very often arranged by a financial intermediary, who may or may not take the position of one of the counterparties.
C)A problem with swaps is that no standardized contracts exist, which has prevented the development of a secondary market.
D)A company can swap fixed interest payments for floating interest payments.
E)A swap involves the exchange of cash payment obligations.
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Chapter 25: Bankruptcy, reorganization, and Liquidation
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Q1) What would be the priority of the claims as to the distribution of assets in a liquidation under Chapter 7 of the Bankruptcy Act? 1 is the highest claim,5 is the lowest.
(1)Trustees' costs to administer and operate the firm.
(2)Common stockholders.
(3)General,or unsecured,creditors.
(4)Secured creditors,who have a claim to the proceeds from the sale of specific property pledged to secure a loan.
(5)Taxes due to federal and state governments.
A)5, 4, 1, 3, 2
B)4, 1, 5, 3, 2
C)5, 1, 4, 2, 3
D)1, 5, 4, 3, 2
E)1, 4, 3, 5, 2
Q2) Even if a firm's cash flow projections indicate that it will soon be unable to meet its interest payments,a bankruptcy case cannot begin until the firm actually defaults on a scheduled payment.
A)True
B)False
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Chapter 26: Mergers and Corporate Control
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Q1) If the capital structure is stable,and free cash flows are expected to be growing at a constant rate at the horizon date,then the horizon value is calculated by discounting the free cash flows plus the expected future tax shields at the weighted average cost of capital.
A)True
B)False
Q2) Firms use defensive tactics to fight off undesired mergers.These tactics do not include
A)getting a white squire to purchase stock in the firm.
B)getting white knights to bid for the firm.
C)repurchasing their own stock.
D)changing the bylaws to eliminate supermajority voting requirements.
E)raising antitrust issues.
Q3) The three main advantages of holding companies are (1)control with fractional ownership, (2)taxation benefits,and (3)isolation of operating risks.
A)True
B)False
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28
Chapter 27: Multinational Financial Management
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Sample Questions
Q1) The cost of capital may be different for a foreign project than for an equivalent domestic project because foreign projects may be more or less risky.
A)True
B)False
Q2) The United States and most other major industrialized nations currently operate under a system of floating exchange rates.
A)True
B)False
Q3) Exchange rate quotations consist solely of direct quotations.
A)True
B)False
Q4) Which of the following is NOT a reason why companies move into international operations?
A)To develop new markets for the firm's products.
B)To better serve their primary customers.
C)Because important raw materials are located abroad.
D)To increase their inventory levels.
E)To take advantage of lower production costs in regions where labor costs are relatively low.
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Chapter 28: Time Value of Money
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Sample Questions
Q1) Billy Thornton borrowed $20,000 at a rate of 7.25%,simple interest,with interest paid at the end of each month.The bank uses a 360-day year.How much interest would Billy have to pay in a 30-day month?
A)$120.83
B)$126.88
C)$133.22
D)$139.88
E)$146.87
Q2) Which of the following bank accounts has the highest effective annual return?
A)An account that pays 8% nominal interest with daily (365-day) compounding.
B)An account that pays 8% nominal interest with monthly compounding.
C)An account that pays 8% nominal interest with annual compounding.
D)An account that pays 7% nominal interest with daily (365-day) compounding.
E)An account that pays 7% nominal interest with monthly compounding.
Q3) Disregarding risk,if money has time value,it is impossible for the future value of a given sum to exceed its present value.
A)True
B)False
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Chapter 29: Basic Financial Tools: a Review
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Q1) What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?
A)$16,806
B)$17,690
C)$18,621
D)$19,601
E)$20,633
Q2) The payment made each period on an amortized loan is constant,and it consists of some interest and some principal.The closer we are to the end of the loan's life,the greater the percentage of the payment that will be a repayment of principal.
A)True
B)False
Q3) The coefficient of variation,calculated as the standard deviation of expected returns divided by the expected return,is a standardized measure of the risk per unit of expected return.
A)True B)False
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Chapter 30: Pension Plan Management
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Q1) Arnold Rossiter is a 40-year-old employee of the Barrington Company who will retire at age 60 and expects to live to age 75.The firm has promised a retirement income of $20,000 at the end of each year following retirement until death.The firm's pension fund is expected to earn 7 percent annually on its assets and the firm uses 7% to discount pension benefits.What is Barrington's annual pension contribution to the nearest dollar for Mr.Rossiter? (Assume certainty and end-of-year cash flows.)
A)$2,756
B)$3,642
C)$4,443
D)$4,967
E)$5,491
Q2) If employees have a right to receive pension benefits even if they leave the company prior to retirement,their pension rights are said to be vested.
A)True
B)False
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32
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Sample Questions
Q1) Which of the following statements about a not-for-profit firm's sources of capital is most correct?
A)Fund capital is obtained by retaining earnings if all earnings are paid out as dividends, no fund capital is created.
B)Preferred stock is never used by not-for-profit firms.
C)Not-for-profit firms are not allowed to raise capital by borrowing.
D)Not-for-profit firms usually have high dividend payouts.
E)Since not-for-profit firms are tax exempt, there is no tax advantage to debt capital.
Q2) The primary goal of investor-owned firms is shareholder wealth maximization,while the primary goal of not-for-profit firms is typically stated in terms of some mission; for example,to provide health care services to the communities served.
A)True
B)False
Q3) Since not-for-profit firms do not pay taxes,they receive no tax benefits whatsoever from using debt financing.
A)True
B)False
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Page 33
Chapter 32: a Values of the Areas Under the Standard
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Sample Questions
Q1) To finance the construction of a new plant,Pietersen Corporation must raise an additional $10,000,000 of equity capital through the sale of common stock.The firm currently has an EPS of $5.40 and a P/E ratio of 10,with 1,200,000 shares outstanding.If the firm wants its ex-rights price to be $50,what subscription price must it set on the new shares?
A)$29.55
B)$33.78
C)$39.28
D)$41.80
E)$50.00
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