Test Bank For Fundamentals of Corporate Finance 12th Edition
Ross 9781259918957 | All Chapters with Answers and
Rationals
A small business received a five-year $1,000,000 loan at a subsidized rate of 3% per year. The firm will
pay 3% annual interest payment each year and the principal at the end of five years. If market interest
rates on similar loans are 6% per year, what is the NPV of the loan? (Ignore taxes.
A. +$126,371
B. +$348,369
C. -$501,595
D. -$137,391 - ANSWER: A. +$126,371
NPV = +1,000,000 - [((30,000/1.06) + ... + (30,000/(1.06^5)) + (1,000,000/(1.06^5))] = 126,371.
A large firm received a loan guarantee from the government. Due to the guarantee, the firm can
borrow $50 million for five years at 8% interest rate per year instead of 10% per year. Calculate the
value of the guarantee to the firm. (Ignore taxes.)
A. +$53.79 million
B. +$3.79 million
C. -$3.79 million
D. $3.99 million - ANSWER: B. +$3.79 million
If capital markets are efficient, then the sale or purchase of any security at the prevailing market price
is generally:
A. a positive-NPV transaction.
B. a zero-NPV transaction.
C. a negative-NPV transaction.
D. no general trend exists for such transactions. - ANSWER: B. a zero-NPV transaction
Financing decisions differ from investment decisions for which of the following reasons?
I) you cannot use NPV to evaluate financing decisions;
II) markets for financial assets are more active than for real assets;
III) it is easier to find financing decisions with positive NPV than to find investment decisions with
positive NPV
A. I only
B. II only
C. III only
,D. I and III only - ANSWER: B. II only
Financing decisions differ from investment decisions because:
I) financing decisions are easier to reverse;
II) markets for financial assets are generally more competitive than real asset markets;
III) generally, financing decisions have NPVs very close to zero
A. I only
B. I and II only
C. I, II, and III
D. II and III only - ANSWER: C. I, II, and III
Generally, a firm is able to find positive-NPV opportunities among its:
I) financing decisions; II) capital investment decisions; III) short-term borrowing decisions
A. I only
B. I and III only
C. III only
D. II only - ANSWER: D. II only
The statement that stock prices follow a random walk implies that:
I) successive price changes are independent of each other;
II) successive price changes are positively related;
III) successive price changes are negatively related;
IV) the autocorrelation coefficient is either +1.0 or -1.0
A. I only
B. II and III only
C. IV only
D. III only - ANSWER: A. I only
A random walk process for a single stock consists of the toss of a fair coin at the end of each day. If
the outcome is heads, the stock price increases by 1.25%. If the outcome is tails, the stock price
decreases by 0.75%. What is the drift of such a process?
A. +1.25%
B. -0.75%
C. +0.25%
,D. +2.0% - ANSWER: C. +0.25%
Drift = (0.5)(1.25%) + (0.5)(-0.75%) = +0.25%.
The statement that stock prices follow a random walk implies that:
I) the correlation coefficient between successive price changes (autocorrelation) is not significantly
different from zero;
II) successive price changes are positively related;
III) successive price changes are negatively related;
IV) the autocorrelation coefficient is positive
A. I only
B. II only
C. II and III only
D. IV only - ANSWER: A. I only
Stock price cycles or patterns tend to self-destruct as soon as investors recognize them through:
A. stock market regulation by the Securities and Exchange Commission (SEC).
B. price fixing by the specialists on the New York Stock Exchange.
C. trading by investors.
D. the actions of corporate treasurers. - ANSWER: C. trading by investors
Which of the following is a statement of weak-form efficiency?
I) If markets are efficient in the weak form, then it is impossible to make consistently superior profits
by using trading rules based on past returns.
II) If markets are efficient in the weak form, then prices will adjust immediately to public information.
III) If markets are efficient in the weak form, then prices reflect all information.
A. I only
B. II only
C. II and III only
D. III only - ANSWER: A. I only
12. The different forms of market efficiency are:
I) weak form; II) semistrong form; III) strong form
A. I only
B. I and II only
C. I and III only
, D. I, II, and III - ANSWER: D. I, II, and III
Which of the following statements is(are) true if the strong-form efficient market hypothesis holds?
I) Analysts can easily forecast stock price changes.
II) Financial markets are irrational.
III) Stock returns follow a particular pattern.
IV) Stock prices reflect all available information.
A. I only
B. II only
C. I and III only
D. IV only - ANSWER: D. IV only
Strong-form market efficiency states that the market incorporates all information into stock prices.
Strong-form efficiency implies that:
I) an investor can only earn risk-free rates of return;
II) an investor can always rely on technical analysis;
III) an insider or corporate officer cannot outperform the market by trading on the inside information
A. I only
B. II only
C. III only
D. I, II, and III - ANSWER: C. III only
If the weak form of market efficiency holds, then:
I) technical analysis is useless;
II) stock prices reflect all information contained in past prices;
III) stock price returns follow a random walk
A. I only
B. I and II only
C. I, II, and III
D. I and III only - ANSWER: C. i, II, and III
Which of the following is a statement of semistrong form efficiency?
I) Stock prices will adjust immediately to public information.
II) Stock prices reflect all information.
III) Stock prices will adjust to newly published information after a long time delay.
A. I only
Ross 9781259918957 | All Chapters with Answers and
Rationals
A small business received a five-year $1,000,000 loan at a subsidized rate of 3% per year. The firm will
pay 3% annual interest payment each year and the principal at the end of five years. If market interest
rates on similar loans are 6% per year, what is the NPV of the loan? (Ignore taxes.
A. +$126,371
B. +$348,369
C. -$501,595
D. -$137,391 - ANSWER: A. +$126,371
NPV = +1,000,000 - [((30,000/1.06) + ... + (30,000/(1.06^5)) + (1,000,000/(1.06^5))] = 126,371.
A large firm received a loan guarantee from the government. Due to the guarantee, the firm can
borrow $50 million for five years at 8% interest rate per year instead of 10% per year. Calculate the
value of the guarantee to the firm. (Ignore taxes.)
A. +$53.79 million
B. +$3.79 million
C. -$3.79 million
D. $3.99 million - ANSWER: B. +$3.79 million
If capital markets are efficient, then the sale or purchase of any security at the prevailing market price
is generally:
A. a positive-NPV transaction.
B. a zero-NPV transaction.
C. a negative-NPV transaction.
D. no general trend exists for such transactions. - ANSWER: B. a zero-NPV transaction
Financing decisions differ from investment decisions for which of the following reasons?
I) you cannot use NPV to evaluate financing decisions;
II) markets for financial assets are more active than for real assets;
III) it is easier to find financing decisions with positive NPV than to find investment decisions with
positive NPV
A. I only
B. II only
C. III only
,D. I and III only - ANSWER: B. II only
Financing decisions differ from investment decisions because:
I) financing decisions are easier to reverse;
II) markets for financial assets are generally more competitive than real asset markets;
III) generally, financing decisions have NPVs very close to zero
A. I only
B. I and II only
C. I, II, and III
D. II and III only - ANSWER: C. I, II, and III
Generally, a firm is able to find positive-NPV opportunities among its:
I) financing decisions; II) capital investment decisions; III) short-term borrowing decisions
A. I only
B. I and III only
C. III only
D. II only - ANSWER: D. II only
The statement that stock prices follow a random walk implies that:
I) successive price changes are independent of each other;
II) successive price changes are positively related;
III) successive price changes are negatively related;
IV) the autocorrelation coefficient is either +1.0 or -1.0
A. I only
B. II and III only
C. IV only
D. III only - ANSWER: A. I only
A random walk process for a single stock consists of the toss of a fair coin at the end of each day. If
the outcome is heads, the stock price increases by 1.25%. If the outcome is tails, the stock price
decreases by 0.75%. What is the drift of such a process?
A. +1.25%
B. -0.75%
C. +0.25%
,D. +2.0% - ANSWER: C. +0.25%
Drift = (0.5)(1.25%) + (0.5)(-0.75%) = +0.25%.
The statement that stock prices follow a random walk implies that:
I) the correlation coefficient between successive price changes (autocorrelation) is not significantly
different from zero;
II) successive price changes are positively related;
III) successive price changes are negatively related;
IV) the autocorrelation coefficient is positive
A. I only
B. II only
C. II and III only
D. IV only - ANSWER: A. I only
Stock price cycles or patterns tend to self-destruct as soon as investors recognize them through:
A. stock market regulation by the Securities and Exchange Commission (SEC).
B. price fixing by the specialists on the New York Stock Exchange.
C. trading by investors.
D. the actions of corporate treasurers. - ANSWER: C. trading by investors
Which of the following is a statement of weak-form efficiency?
I) If markets are efficient in the weak form, then it is impossible to make consistently superior profits
by using trading rules based on past returns.
II) If markets are efficient in the weak form, then prices will adjust immediately to public information.
III) If markets are efficient in the weak form, then prices reflect all information.
A. I only
B. II only
C. II and III only
D. III only - ANSWER: A. I only
12. The different forms of market efficiency are:
I) weak form; II) semistrong form; III) strong form
A. I only
B. I and II only
C. I and III only
, D. I, II, and III - ANSWER: D. I, II, and III
Which of the following statements is(are) true if the strong-form efficient market hypothesis holds?
I) Analysts can easily forecast stock price changes.
II) Financial markets are irrational.
III) Stock returns follow a particular pattern.
IV) Stock prices reflect all available information.
A. I only
B. II only
C. I and III only
D. IV only - ANSWER: D. IV only
Strong-form market efficiency states that the market incorporates all information into stock prices.
Strong-form efficiency implies that:
I) an investor can only earn risk-free rates of return;
II) an investor can always rely on technical analysis;
III) an insider or corporate officer cannot outperform the market by trading on the inside information
A. I only
B. II only
C. III only
D. I, II, and III - ANSWER: C. III only
If the weak form of market efficiency holds, then:
I) technical analysis is useless;
II) stock prices reflect all information contained in past prices;
III) stock price returns follow a random walk
A. I only
B. I and II only
C. I, II, and III
D. I and III only - ANSWER: C. i, II, and III
Which of the following is a statement of semistrong form efficiency?
I) Stock prices will adjust immediately to public information.
II) Stock prices reflect all information.
III) Stock prices will adjust to newly published information after a long time delay.
A. I only
