TEST BANK and SOLUTION MANUAL for Fundamentals
of Corporate Finance, 5th Edition by Robert Parrino,
David Kidwell
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.
of Corporate Finance, 5th Edition by Robert Parrino,
David Kidwell
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.
