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Fundamentals of Corporate Finance Third Edition

Jonathan Berk Stanford University

Peter DeMarzo

Stanford University

Jarrad Harford University of Washington

Copyright © 2015 Pearson Education, Inc.


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ISBN-13: 978-0-13-350787-4 ISBN-10: 0-13-350787-4


Contents Chapter 1 Corporate Finance and the Financial Manager ............................................................... 1

Chapter 2 Introduction to Financial Statement Analysis ............................................................... 29

Chapter 3 Time Value of Money: An Introduction ......................................................................... 86

Chapter 4 Time Value of Money: Valuing Cash Flow Streams ................................................... 130

Chapter 5 Interest Rates .................................................................................................................... 158

Chapter 6 Bonds ................................................................................................................................. 201

Chapter 7 Stock Valuation ................................................................................................................ 244

Chapter 8 Investment Decision Rules ............................................................................................. 269

Chapter 9 Fundamentals of Capital Budgeting ............................................................................. 326

Chapter 10 Stock Valuation: A Second Look ................................................................................... 378

Chapter 11 Risk and Return in Capital Markets .............................................................................. 398

Chapter 12 Systematic Risk and the Equity Risk Premium ........................................................... 436

Chapter 13 The Cost of Capital .......................................................................................................... 475

Chapter 14 Raising Equity Capital .................................................................................................... 514

Chapter 15 Debt Financing ................................................................................................................. 557

Chapter 16 Capital Structure .............................................................................................................. 589

Chapter 17 Payout Policy.................................................................................................................... 626

Chapter 18 Financial Modeling and Pro Forma Analysis .............................................................. 664

Chapter 19 Working Capital Management ...................................................................................... 699

Chapter 20 Short-Term Financial Planning ...................................................................................... 736

Chapter 21 Option Applications and Corporate Finance ............................................................... 781

Chapter 22 Mergers and Acquisitions .............................................................................................. 814

Chapter 23 International Corporate Finance .................................................................................... 833

Chapter 24 Leasing .............................................................................................................................. 870

Chapter 25 Insurance and Risk Management .................................................................................. 891

Chapter 26 Corporate Governance .................................................................................................... 905


Chapter 1Corporate Finance and the Financial Manager

1.1 Why Study Finance?

1) The Valuation Principle shows how to make the costs and benefits of a decision comparable so

that we can evaluate them properly.

Answer: TRUEDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition

2) Financial decisions require that you weigh alternatives in strictly monetary terms.

Answer: FALSEDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised

3) Which of the following best describes why the Valuation Principle is a key concept in making

financial decisions?

A) It shows how to assign monetary value to intangibles such as good health and well-being.

B) It allows fixed assets and liquid assets to be valued correctly.

C) It gives a good indication of the net worth of a person, item, or company and can be used

to estimate any changes in that net worth.

D) It shows how to make the costs and benefits of a decision comparable so that we can

weigh them properly.

Answer: DDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition

1.2 The Four Types of Firms

1) Partnerships are the most common type of business firms in the world.



download instant at http://testbankinstant.com2 Berk/DeMarzo/Harford Fundamentals of Corporate Finance, 3e

2) Corporations have come to dominate the business world through their ability to raise large

amounts of capital by sale of ownership shares to anonymous outside investors.

Answer: TRUEDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised

3) Which of the following types of firms does NOT have limited liability?

A) sole proprietorships

B) limited partnerships

C) corporations

D) none of the above

Answer: ADiff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised

4) Over four-fifths of all U.S. business revenue is generated by which type of firms?


B) partnerships

C) limited partnerships

D) corporations

Answer: DDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised

5) What is the most common type of firms in the United States and the world?


B) partnerships

C) limited partnerships

D) corporations

Answer: ADiff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition


download instant at http://testbankinstant.comChapter 1 Corporate Finance and the Financial Manager 3

6) Which of the following is typically the major factor in limiting the growth of sole

proprietorships?

A) The organizational structure of such firms tends to become extremely complicated over

time.

B) It is extremely difficult to transfer control of such firms to a new owner if the present

owner dies or wishes to sell the firm.

C) The amount of money that can be raised by such firms is limited by the fact that the single

owner must make good on all debts.

D) Investors have a great deal of control over the day-to-day running of such firms, leading

to confusion when conflicts in direction arise.

Answer: CDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised

7) Joe is a general partner in a limited partnership firm, while Jane is a limited partner in the same

firm. Which of the following statements regarding their respective relationships to the firm is

correct?

A) Joe has no management authority within the partnership.

B) Jane is legally involved in the managerial decision making of the firm.

C) Janeʹs liability for the firmʹs debts consists solely of her investment in the firm.

D) Withdrawal of Jane from the partnership will dissolve the partnership.

Answer: CDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Reflective Thinking SkillsAuthor: DSQuestion Status: Revised

8) What is the major way in which the roles and obligations of the owners of a limited liability

company differ from the roles and obligations of limited partners in a limited partnership?

A) The owners of a limited liability company have personal obligation for debts incurred by

the company.

B) There is no separation between the company and its owners in a limited liability company.

C) The owners of a limited liability company can withdraw from the company without the

company being dissolved.

D) The owners of a limited liability company can take an active role in running the company.




9) In which of the following ways is a limited liability company like a corporation?

A) It was created and developed first in the United States.

B) It can choose to be considered a partnership for tax purposes.

C) Its ownersʹ liability is restricted to their investment.

D) It is directly managed by the owners.


10) Why is it possible for a corporation to enter into contracts, acquire assets, incur obligations, and

enjoy protection against the seizure of its property?

A) The number of owners, and hence the spread of risk among these owners, is not limited.

B) Its owners are liable for any obligations it enters into.

C) The state in which a corporation is incorporated provides safeguards against any

wrongdoing by the corporation.

D) It is a legally defined, artificial entity that is separate from its owners.


11) Which of the following features of a corporation is LEAST accurate?

A) The ownersʹ identity is separate from a corporation.

B) The owners of a corporation are not liable for any obligations the corporation enters into.

C) Changes in ownership do not result in the dissolution of the corporation.

D) Earnings from a corporation are taxed only once.


12) What is the major advantage corporations have over other business entities?

A) It is easier for a corporation to raise capital than other forms of businesses.

B) A corporation is treated as a separate legal entity for tax and legal purposes.

C) A corporationʹs shares can be freely traded among its shareholders.

D) All of the above are advantages that a corporation has over other business forms.




13) Helen owns 10.2% of the stock of the Median Corporation. If Median makes a dividend

payment of $25,000,000 paid proportionally to its shareholders, how much of this amount

would Helen receive, disregarding tax?

A) $3,060,000

B) $2,550,000

C) $3,570,000

D) $2,040,000

Answer: B

Explanation: B) Helen will receive 10.2% of the dividend payment proportional to her

ownership: 0.102 × 25,000,000 = $2,550,000Diff: 2 Var: 50+Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition

14) Valiant Corp. is a C corporation that earned $3.4 per share before it paid any taxes. Valiant

Corp. retained $1 of after-tax earnings for reinvestment and distributed what remained in

dividend payments. If the corporate tax rate was 35% and dividend earnings were taxed at

12.5%, what was the value of the dividend earnings received after-tax by a holder of 100,000

shares of Valiant Corp.?

A) $105,875

B) $127,050

C) $148,225

D) $84,700

Answer: A

Explanation: A) Corporate tax paid on $3.4 earnings = $3.4 × 0.35 = 1.190

earnings after-tax = 3.4 - 1.190 = $2.210

earnings distributed as dividends = $2.210 - $1 = $1.2100

taxes paid on dividends by a shareholder = 1.2100 × 0.125 = 0.1513

after-tax dividends per share = 1.2100 - 0.1513 = $1.0588

hence a holder of 100,000 shares receives 1.0588 × 100,000 = $105,875Diff: 2 Var: 22Skill: AnalyticalAACSB Objective: Reflective Thinking SkillsAuthor: DSQuestion Status: Revised

15) Which of the following is unique for an S corporation?

A) The profits and losses of an S corporation are not taxed at the corporate level, but

shareholders must include these profits and losses on their individual tax returns.

B) The shareholders of an S corporation must include the firmʹs profit and losses in their

individual income taxes even if no money is distributed to them.

C) There is a maximum limit on the number of shareholders for an S corporation.

D) None of the above statements is unique.




16) You are a shareholder in a corporation which has elected subchapter S tax treatment. The

corporation announces a profit of $6 per share, of which it retains $1 for reinvestment and

distributes the rest as dividend payments. Given that the personal tax rate is 35%, how much tax

must you pay per share?

A) $0

B) $2.10

C) $1.75

D) $2.52

Answer: C

Explanation: C) Tax paid by shareholder of S corporation = 5 × 0.35 = $1.75Diff: 2 Var: 8Skill: AnalyticalAACSB Objective: Reflective Thinking SkillsAuthor: DSQuestion Status: Revised

17) A C corporation earns $8.30 per share before taxes. The corporate tax rate is 39%, the personal

tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is

the total amount of taxes paid if the company pays a $6.00 dividend?

A) $3.31

B) $4.96

C) $4.14

D) $5.79

Answer: C

Explanation: C) Corporate tax = $8.30 × 39% = $3.24 , Personal tax = $6 × 15% = $0.90

Total = $3.24 + $0.90 = $4.14Diff: 2 Var: 50+Skill: AnalyticalAACSB Objective: Reflective Thinking SkillsAuthor: WCQuestion Status: New

18) An S corporation earns $9.10 per share before taxes. The corporate tax rate is 39%, the personal



A) $3.28

B) $3.93

C) $2.62

D) $4.59

Answer: A

Explanation: A) $9.10 × 36% = $3.28Diff: 2 Var: 50+Skill: AnalyticalAACSB Objective: Reflective Thinking SkillsAuthor: WCQuestion Status: New



19) A C corporation earns $8.30 per share before taxes and the company pays a dividend of $4.00

per share. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the

personal tax rate on non-dividend income is 36%. What is the after-tax amount an individual

would receive from the dividend?

A) $2.72

B) $4.08

C) $4.76

D) $3.40

Answer: D

Explanation: D) Personal tax = $4 × 15% = $0.60 ; Total = $4.00 - $0.60 = $3.40Diff: 2 Var: 50+Skill: AnalyticalAACSB Objective: Reflective Thinking SkillsAuthor: WCQuestion Status: Revised

20) A C corporation earns $4.30 per share before taxes. The corporate tax rate is 35%, the personal



A) $1.68

B) $2.53

C) $2.11

D) $2.95

Answer: C

Explanation: C) Corporate tax = $4.30 × 35% = $1.51 ; Personal tax = $3.00 × 20% = $0.60

Total = $1.51 + $0.60 = $2.11Diff: 2 Var: 50+Skill: AnalyticalAACSB Objective: Reflective Thinking SkillsAuthor: WCQuestion Status: New

21) An S corporation earns $6.00 per share before taxes. The corporate tax rate is 35%, the personal



A) $1.87

B) $2.81

C) $3.28

D) $2.34

Answer: D

Explanation: D) $6.00 × 39% = $2.34Diff: 2 Var: 50+Skill: AnalyticalAACSB Objective: Reflective Thinking SkillsAuthor: WCQuestion Status: New



22) Which of the following people may not manage the operations of a firm in which they are part

or full owners?

A) stockholders in S corporations

B) stockholders in C corporations

C) limited partners in a limited partnership

D) general partners in a limited partnership

Answer: CDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition

23) What is the process of double taxation for the stockholders in a C corporation?

A) Their shares are taxed when they are both bought and sold.

B) The corporation is taxed on the profits it makes, and the owners are taxed when this profit

is distributed to them.

C) The owners of a corporation are taxed when they receive dividend payments and when

they make a profit from the sale of shares.

D) The corporation must pay taxes on any profits it makes, and the capital raised by the sale

of shares is also subject to taxation.

Answer: BDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition

24) A sole proprietorship is owned by ________.

A) one person

B) two or more persons

C) shareholders

D) bankers

Answer: ADiff: 1 Var: 1Skill: DefinitionAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Revised

25) Which of the following organization forms has the most revenue?

A) S corporation

B) limited partnership

C) C corporation

D) limited liability company

Answer: CDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Previous Edition



26) Which of the following is NOT an advantage of a sole proprietorship?

A) single taxation

B) ease of setup

C) unlimited liability

D) no separation of ownership and control

Answer: CDiff: 2 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Revised

27) A limited liability company is essentially ________.

A) a limited partnership without limited partners

B) a limited partnership without a general partner

C) just another name for a limited partnership

D) just another name for a corporation

Answer: BDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Revised

28) What are the main differences between a partnership and a sole proprietorship?

Answer: While a sole proprietor has the same identity as its single owner, a partnership of general

partners has the same identity as its partners. Each general partner is responsible for the

decisions taken by that partner as well as any other general partner.Diff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: SSQuestion Status: Revised

29) What are the main differences between a limited partnership and a limited liability corporation?

Answer: A limited partnership is required to have at least one general partner. A limited liability

corporation is similar to a limited partnership but without the general partner.Diff: 2 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: SSQuestion Status: Revised



30) How is a corporation different from most of the other forms of business organizations?

Answer: A corporation has a separate legal identity from those of its owners. This separation gives

the owners limited liability for the actions of the corporation. The down side is the

process of double taxation for each dollar earned by the corporation, once when it is

earned by the corporation and subsequently when it is passed on to the owners.Diff: 2 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: SSQuestion Status: Revised

1.3 The Financial Manager

1) The principal goal of a financial manager is to maximize the wealth of the stockholders.

Answer: TRUEDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised

2) It is generally not the duty of financial managers to ensure that a firm has the cash it needs for

day-to-day transactions.

Answer: FALSEDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition

3) Which of the following is a major duty of a financial manager?

I. To make investment decisions

II. To make financing decisions

III. To manage cash flow from operating activities

A) I only

B) I and II only

C) I and III only

D) all of the above




4) Why in general do financial managers make financial decisions in a corporation, rather than the

owners making these decisions themselves?

A) It is best for the control of the finances of a corporation to be in the hands of a disinterested

third party.

B) The interests of the various owners may conflict with each other.

C) The owners may not be U.S. citizens or residents.

D) There are often many owners, and they can often change as they buy and sell stock.


5) What is the most important duty of a firmʹs financial officer?

A) to ensure that the firm has enough cash on hand to meet its commitments at any given

time

B) to decide how to pay for investments

C) to manage working capital

D) to make investment decisions


6) The financial manager of a well-regarded book publishing firm wishes to buy a small Internet

publishing company to provide an avenue for sale of its materials online. In order to raise the

funds to make this purchase, the financial manager decides to sell more stock in the company.

How is the financial manager raising funds in this case?

A) by increasing the debt burden carried by the company

B) by raising the companyʹs equity by encouraging new owners to take a stake in the

company

C) by decreasing the ratio of equity to debt held by the company

D) by increasing the value of shares held by the existing owners of the company

Answer: BDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Reflective Thinking SkillsAuthor: DSQuestion Status: Previous Edition



7) Which of the following is NOT a reason why a firmʹs financial managers must take great care

when making investment decisions?

A) These investment decisions determine whether the firm will add value for its owners.

B) These investments determine the long-term directions in which the company may move.

C) These investment decisions determine the corporationʹs mix of debt and equity.

D) These investment decisions typically involve substantial costs which must be carefully

weighed against their potential benefits.


8) A company that produces racing motorbikes has several models that sell well within the

motorcycle racing community and which are very profitable for the company. Despite having a

profitable product, why must this company take care to ensure that it has sufficient cash on

hand to meet its obligations?

A) Profits from the sales of popular models will be lost when returned to the shareholders in

the form of dividends.

B) New models will require a lot of money to develop and bring to market before they

generate any revenue.

C) The company will have built up debts which must be repaid in order to bring the current

models to market.

D) Equity must be raised to finance the development of new models to replace the existing

models.

Answer: BDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Reflective Thinking SkillsAuthor: DSQuestion Status: Previous Edition

9) A typical company has many types of shareholders, from individuals holding a few shares, to

large institutions that hold very large numbers of shares. How does a financial manager ensure

that the priorities and concerns of such disparate stockholders are met?

A) The financial manager should seek to make investments that do not harm the interests of

the stockholders.

B) The decisions taken by the financial manager should be solely influenced by the benefit to

the company since, by maximizing its fitness, he or she will also maximize the benefits of

that company to the shareholders.

C) The financial manager should consider the interests and concerns of large shareholders a

priority so the needs of those who hold a controlling interest in the company are met.

D) In general, all shareholders will agree that they are better off if the financial manager

works to maximize the value of their investment.

Answer: DDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Reflective Thinking SkillsAuthor: DSQuestion Status: Previous Edition



10) Whose interests should a financial manager consider paramount when making a decision?

A) the stockholders who have risked their money to become owners of the company

B) the employees and associated stakeholders who are employed by the company

C) the public who consume the companyʹs goods and services

D) the senior management and associated colleagues at the executive level within the

company

Answer: ADiff: 1 Var: 1Skill: ConceptualAACSB Objective: Ethical Understanding and Reasoning AbilitiesAuthor: DSQuestion Status: Previous Edition

11) What is the principal guiding factor for the financial manager of a firm?

Answer: Maximizing stockholder wealth is the paramount guiding factor for a firmʹs financial

manager.Diff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: SSQuestion Status: Previous Edition

1.4 The Financial Managerʹs Place in the Corporation

1) In most corporations, the owners exercise direct control of a corporation.


2) The fact that corporationsʹ shares are easily traded within the market has a net effect of acting as

a disincentive for managers to favor the interests of shareholders over their own interests.


3) How do the shareholders of most corporations exercise their control of that corporation?

A) by voting on issues that concern them

B) by electing members of a board of directors

C) by vetting the decisions of the board of directors

D) by providing oversight of the day-to-day running of the corporation

Answer: BDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised



4) Which of the following is NOT a function of the board of directors?

A) determining how top executives should be compensated

B) monitoring the performance of the company

C) answering to shareholders of the company

D) day-to-day running of the company


5) In most corporations, to whom does the chief financial officer report?

A) shareholders

B) the board of directors

C) the chief executive officer

D) the controller


6) Which of the following would be more typically the responsibility of a controller rather than a

treasurer?

A) overseeing accounting and tax functions

B) capital budgeting

C) managing credit

D) making investment decisions




7) Which of the following would be best considered to be an agency conflict problem in the

behavior of the following financial managers?

A) Bill chooses to pursue a risky investment for the companyʹs funds because his

compensation will substantially rise if it succeeds.

B) Sue instructs her staff to skip safety inspections in one of the companyʹs factories, knowing

that it will likely fail the inspection and incur significant costs to fix.

C) James ignores an opportunity for his company to invest in a new drug to fight Alzheimerʹs

disease, judging the drugʹs chances of succeeding as low.

D) Michael chooses to enhance his firmʹs reputation at some cost to its shareholders by

sponsoring a team of athletes for the Olympics.

Answer: ADiff: 3 Var: 1Skill: ConceptualAACSB Objective: Ethical Understanding and Reasoning AbilitiesAuthor: DSQuestion Status: Revised

8) A factory owner wants his workers to produce as many widgets as they can so he pays his

workers based on how many widgets they produce. However, in order to make sure that the

workers do not rush and produce a large number of poorly made widgets, he checks the

widgets at random at various stages of their manufacture. If a defect is found in a widget, the

pay of the entire section of the factory responsible for that defect is docked. How is this factory

owner seeking to solve the agency conflict problem in this case?

A) by supplying incentives so the agents act in the way principal desires

B) by ensuring that all workers co-operate to maximize the gains of their section

C) by making the agents into principals themselves

D) by maximizing the information that the principal obtains about the behavior of the agents


9) In which of the following relationships is an agency conflict problem LEAST likely to arise?

A) the relationship between a hire-car company and the persons who hire that companyʹs

cars regarding the treatment of those cars

B) the relationship between high-level military officers and the soldiers who serve under

them regarding the willingness of the soldiery to take risks

C) the relationship between a restaurateur and the suppliers of produce to that restaurant

regarding the freshness of the produce supplied

D) the relationship between a driver and the passengers in a car regarding the safe driving of

that car

Answer: DDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Ethical Understanding and Reasoning AbilitiesAuthor: DSQuestion Status: Revised



10) What is the most common way that agency conflict problems are addressed in most

corporations?

A) by minimizing the number of decisions that a manager makes where there is a conflict

between the managers interests and those of the shareholders

B) by terminating the employment of employees who are found to have put their own

interests above those of the company

C) by using disinterested outside bodies to adjudicate between managers and shareholders

when such conflicts arise

D) by prosecuting managers who have been found to have illegally used company moneys

for their own benefit


11) A companyʹs board of directors chooses to provide a comprehensive health care plan for the

families of all employees, despite the large cost. They argue that this will not only increase the

number of employees who stay with the firm, and thus reduce some costs involved in employee

turnover, but also increase the employeesʹ diligence and industry. What general principle is

being argued by the board of directors?

A) In a conflict between stakeholders in a company, the most important stakeholder is not

always the stockholders.

B) Some activities that decrease shareholdersʹ wealth may have intangible benefits which

increase the strength of the company overall.

C) When a conflict of interest arises between shareholders and other stakeholders, in general,

the correct solution is the one that creates the greatest good for the greatest number of

stakeholders.

D) Ethical decisions should be assessed on their moral value, not on their value in dollars and

cents.

Answer: BDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Ethical Understanding and Reasoning AbilitiesAuthor: DSQuestion Status: Previous Edition



12) Why is the stock price of a company an indication of the performance of the companyʹs senior

managers?

A) Well-run companies are invariably highly profitable, which leads to a higher share price.

B) In general, people want to invest in a well-managed corporation, which will drive up the

price of shares.

C) Investors who can see that a company is well-run will hold on to their shares, even if the

company faces setbacks, since they know that the stock price will likely rise again.

D) Larger companies tend to be better run and so have higher stock prices.

Answer: BDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Reflective Thinking SkillsAuthor: DSQuestion Status: Revised

13) A corporate raider gains a controlling fraction of the shares of a poorly managed company and

replaces the board of directors. How does the corporate raider hope to make a profit in this

case?

A) by the sale of the assets held by the company that hold most of its value

B) by the rise in the value of the stock held by the raider when the new board of directors is

judged to be superior to the ousted board of directors

C) by motivating the board of directors and other stakeholders in the company to make

difficult short-term decisions that will increase the long-term viability of the company

D) by removing the employees expectations of the continued poor performance of the

company


14) A ________ is when a rich individual or organization purchases a large fraction of the stock of a

poorly performing firm and in doing so gets enough votes to replace the board of directors and

the CEO.

A) shareholder proposal

B) leveraged buyout

C) shareholder action

D) hostile takeover

Answer: DDiff: 2 Var: 1Skill: DefinitionAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Revised



15) Briefly discuss the issues in the agency conflict problem.

Answer: The agency conflict problem arises out of the principal-agent relationship existing

between the shareholders and managers of a corporation. Although managers are

required to put the shareholders interest ahead of their own, in practice they tend to put

their own interest ahead of the shareholdersʹ interests.Diff: 2 Var: 1Skill: ConceptualAACSB Objective: Ethical Understanding and Reasoning AbilitiesAuthor: SSQuestion Status: Revised

16) Explain some of the measures taken to reduce the agency conflict problem.

Answer: The agency conflict problem can be reduced by taking measures that align the managers

interests with those of the shareholders. For example, incentive-based compensation,

such as employee stock options, helps align the interests of these two constituents.Diff: 2 Var: 1Skill: AnalyticalAACSB Objective: Ethical Understanding and Reasoning AbilitiesAuthor: SSQuestion Status: Revised

1.5 The Stock Market

1) The shares of private corporations are traded on a stock market.


2) Stock markets provide liquidity for a firmʹs shares.


3) If broker will buy a share of stock from you at $3.85 and sell it to you at $3.87, the ask price

would be $3.85.

Answer: FALSEDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: WCQuestion Status: New



4) Which of the following should be true for an asset to be considered liquid?

A) It pays regular dividends.

B) It can be bought and sold at an organized stock market or bourse.

C) It is offered for sale on both primary and secondary markets.

D) It can be easily bought and sold and the selling price is very close to the buying price at a

given point in time.


5) Why is it difficult to determine the market price of a private corporationʹs shares at any point in

time?

A) It is difficult to obtain enough information to accurately value such a company.

B) The price of its shares is fixed by the owners.

C) It has a limited number of owners.

D) There is no organized market for its shares.


6) Which of the stock markets listed below is the smallest, as judged by trading volume?

A) Deutsche Börse

B) London Stock Exchange

C) NASDAQ

D) NYSE Euronext (US)


7) Why is a stock exchange like NASDAQ considered a secondary market?

A) It trades the second largest volume of shares in the world.

B) Shares sold on it are exchanged between investors without any involvement of the issuing

corporation.

C) The exchange has rules that attempt to ensure that bid and ask prices do not get too far

apart.

D) NASDAQ is called a secondary market because NYSE is considered a primary market.




8) On August 19, 2004 Google IPO offered 19,605,052 shares at a price of U.S. $85 per share, which

were sold in an online auction in a bid to make the shares more widely available. Which of the

following statements best describes why these are considered a primary market transaction?

A) The transaction was between the corporation and investors.

B) Shares of Google from this time onward could be traded between investors on a stock

exchange.

C) The shares were the first to be privately issued by Google.

D) Google was at the time a recently founded company seeking capital with which to expand.

Answer: ADiff: 1 Var: 1Skill: ConceptualAACSB Objective: Reflective Thinking SkillsAuthor: DSQuestion Status: Revised

9) What is the bid-ask spread?

A) the difference in price available for an immediate sale of a stock and the immediate

purchase of the stock

B) all of the costs and fees that a stock exchange charges in order to process a transaction

C) the rise or fall in the value of a stock between the time it is acquired by an investor and

sold by that investor

D) the difference in the selling price of a stock between different exchanges


10) Stella places a market order with her broker to buy 1,000 shares of OneWorld Corp. The broker

buys 1,000 shares at $15.80 each, and sells them to Stella at $15.95 each. He also charges a

commission of $12.00. What is bid-ask spread in this case?

A) $162

B) $120

C) $210.00

D) $150

Answer: D

Explanation: D) (15.95 - 15.80 ) × 1,000 = $150Diff: 2 Var: 33Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised



11) Which of the following is a measure of the aggregate price level of collections of pre-selected

stocks?

A) NASDAQ

B) S&P 500

C) NYSE

D) Euronext


Use the figure for the question(s) below.

12) Using the above information, how much would you pay for a share of BHP Billiton stock?

A) $41.91

B) $41.93

C) $41.65

D) $41.59

Answer: BDiff: 1 Var: 1Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition




13) Using the above information, how much would you receive if you sold a share of Washington

Post stock?

A) $683.00

B) $677.62

C) $678.50

D) $677.64





14) Based on the information shown above, what would it cost to buy 1,000 shares of the above

stock?

A) $91,110

B) $91,300

C) $91,320

D) $91,650

Answer: DDiff: 1 Var: 1Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition




15) Based on the information shown above, how much would you receive from selling 2,000 shares

of the above stock?

A) €40,840

B) €40,740

C) €41,000

D) €42,560

Answer: BDiff: 1 Var: 1Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised




16) What is the bid-ask spread on the stock shown above?

A) 1 cent

B) 3 cents

C) 6 cents

D) 12 cents





17) How much money would a stock exchange make from buying and selling 500 shares of the

stock under the conditions shown above?

A) $250

B) $3,000

C) $5,875

D) $210,375

Answer: A

Explanation: A) (421.25 - 420.75) × 500 = $250Diff: 2 Var: 1Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised

18) What are the terms for the two types of prices quoted for a stock on an exchange?

Answer: The two quotes associated with a stock quoted on the exchange are bid price and ask

price.Diff: 2 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: SSQuestion Status: Previous Edition

19) What is the general relation of the two types of prices quoted for a stock on a exchange?

Answer: The two prices are bid price and ask price. The ask price is higher than the bid price to

deter a buyer from buying a stock and selling it back immediately, assuming everything

else remains unchanged.Diff: 2 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: SSQuestion Status: Revised



20) What is the term for the applicable price that I will pay, if I have to buy a stock?

Answer: The buyer of a stock pays the ask price when he buys the stock.Diff: 2 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: SSQuestion Status: Previous Edition

21) What is the term for the applicable price that the seller gets when he sells a stock on the

exchange?

Answer: The seller gets the bid price when he sells a stock on the exchange.Diff: 2 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: SSQuestion Status: Previous Edition

22) What are the main differences between the NYSE and NASDAQ stock markets?

Answer: The NYSE has a physical location, a geographical address where traders gather to trade,

but NASDAQ is an electronic market. Moreover, while the NYSE has one specialist in

each stock, NASDAQ has multiple market makers serving the functions of both matching

buyers and sellers and trading on their own account.Diff: 2 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: SSQuestion Status: Previous Edition

1.6 Financial Institutions

1) Raising new capital by issuing bonds is an example of a commercial banking activity.

Answer: FALSEDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: WCQuestion Status: New

2) Put the following steps of the financial cycle in the correct order.

I. Money flows to companies who use it to fund growth through new products.

II. People invest and save their money.

III. Money flows back to savers and investors.

A) I, II, and III

B) II, I, and III

C) III, II, and I

D) II, III, and I

Answer: BDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Reflective Thinking SkillsAuthor: WCQuestion Status: Revised



3) Investments by wealthy individuals and endowments is a major source of money for each of the

following EXCEPT ________.

A) private equity funds

B) hedge funds

C) venture capital funds

D) mutual funds

Answer: DDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: WCQuestion Status: New

4) Which of the following is NOT a role of financial institutions?

A) moving funds from savers to borrowers

B) spreading out risk-bearing

C) printing money for borrowers

D) moving funds though time

Answer: CDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: WCQuestion Status: Revised



Chapter 2Introduction to Financial Statement Analysis

2.1 Firmsʹ Disclosure of Financial Information

1) In the United States, publicly traded companies can choose whether or not they wish to release

periodic financial statements.


2) Financial statements are optional accounting reports issued periodically by a firm which present

information on the past performance of the firm, a summary of the firmʹs assets and the

financing of those assets, and a prediction of the firmʹs future performance.


3) International Financial Reporting Standards are taking root throughout the world. However, it

is unlikely that the U.S. will report according to IFRS before the second half of the twenty-first

century.

Answer: FALSEDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: JPQuestion Status: New

4) What is the main reason that it is necessary for public companies to follow the rules and format

set out in the Generally Accepted Accounting Principles (GAAP) when creating financial

statements?

A) It ensures that the market value of assets and debt are reported accurately.

B) It ensures that information on the performance of public companies is reported on

cash-basis accounting.

C) It ensures that important budgetary information is not omitted.

D) It makes it easier to compare the financial results of different firms.




5) Which of the following best describes why a firm produces financial statements?

A) to use as a tool when planning future investments within a firm

B) to increase the intrinsic value of a firm

C) to provide a means for interested outside parties such as creditors to obtain information

about a firm, with an overview of the short- and long-term financial condition of a

business

D) to show the daily activities a firm has undertaken in the previous financial year, and what

activities are planned for the near future


6) The exchanges in which of the following countries or regions do NOT accept the International

Financial Reporting Standards set out by the International Accounting Standards Board?

A) Germany

B) France

C) United States

D) United Kingdom


7) Which of the following is NOT one of the financial statements that must be produced by a

public company?

A) the balance sheet

B) the income statement

C) the statement of cash flows

D) the statement of activities



download instant at http://testbankinstant.comChapter 2 Introduction to Financial Statement Analysis 31

8) U.S. public companies are required to file their annual financial statements with the U.S.

Securities and Exchange Commission on which form?

A) 10-A

B) 10-K

C) 10-Q

D) 10-SEC

Answer: BDiff: 1 Var: 1Skill: DefinitionAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Previous Edition

9) Which of the following is NOT a financial statement that every public company is required to

produce?

A) income statement

B) statement of sources and uses of cash

C) balance sheet

D) statement of stockholdersʹ equity

Answer: BDiff: 2 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Previous Edition

10) The third party who checks annual financial statements to ensure that they are prepared

according to Generally Accepted Accounting Principles (GAAP) and verifies that the

information reported is reliable is the ________.

A) NYSE Enforcement Board

B) Accounting Standards Board

C) Securities and Exchange Commission (SEC)

D) auditor




11) What is the role of an auditor in financial statement analysis?

Answer: Key points:

1. to ensure that the annual financial statements are prepared accurately

2. to ensure that the annual financial statements are prepared according to Generally

Accepted Accounting Principles (GAAP)

3. to verify that the information used in preparing the annual financial statements is

reliableDiff: 2 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Previous Edition

12) What are the four financial statements that all public companies must produce?

Answer: 1. balance sheet

2. income statement

3. statement of cash flows

4. statement of stockholdersʹ equityDiff: 2 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Previous Edition

2.2 The Balance Sheet

1) The balance sheet shows the assets, liabilities, and stockholdersʹ equity of a firm over a given

length of time.


2) Stockholdersʹ equity is the difference between a firmʹs assets and liabilities, as shown on the

balance sheet.




3) Which of the following amounts would be included on the right side of a balance sheet?

A) the value of government bonds held by the company

B) the cash held by the company

C) the amount of deferred tax liability held by the company

D) the amount of money owed to the company by customers who have not yet paid for goods

and services they have received


4) Which of the following best describes why the left and right sides of a balance sheet are equal?

A) In a properly run business, the value of liabilities will not exceed the assets held by the

company.

B) By definition, the assets plus the liabilities will be the same as the stockholdersʹ equity.

C) The assets must equal liabilities plus stockholdersʹ equity because stockholdersʹ equity is

the difference between the assets and the liabilities.

D) By accounting convention, the assets of a company must be equal to the liabilities of that

company.


5) A company that produces drugs is preparing a balance sheet. Which of the following would be

most likely to be considered a long-term asset on this balance sheet?

A) commercial paper held by the company

B) the inventory of chemicals used to produce the drugs made by the company

C) a patent for a drug held by the company

D) the cash reserves of the company




6) A delivery company is creating a balance sheet. Which of the following would most likely be

considered a short-term liability on this balance sheet?

A) the depreciation over the last year in the value of the vehicles owned by the company

B) revenue received for the delivery of items that have not yet been delivered

C) a loan which must paid back in two years

D) prepaid rent on the offices occupied by the company

Answer: BDiff: 1 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised

7) A small company has current assets of $112,000 and current liabilities of $117,000. Which of the

following statements about that company is most likely to be true?

A) Since net working capital is negative, the company will not have enough funds to meet its

obligations.

B) Since net working capital is high, the company will likely have little difficulty meeting its

obligations.

C) Since net working capital is very high, the company will have ample money to invest after

it meets its obligations.

D) Since net working capital is nearly zero, the company is well run and will have little

difficulty attracting investors.


8) What is the main problem in using a balance sheet to provide an accurate assessment of the

value of a companyʹs equity?

A) Valuable assets such as the companyʹs reputation, the quality of its work force, and the

strength of its management are not captured on the balance sheet.

B) The balance sheet does not accurately represent the book value of assets held by the

company.

C) The equity shown on the balance sheet does not reflect the market capitalization of the

company.

D) Knowing at a single point in time what assets a firm possesses and the liabilities a firm

owes does not give any indication of what those assets can produce in the future.

Answer: ADiff: 2 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition



9) The major components of stockholdersʹ equity are ________.

A) cash, common stock, and paid-in surplus

B) common stock, paid-in surplus, and net income

C) common stock, paid-in surplus, and retained earnings

D) common stock, liabilities, and retained earnings

Answer: CDiff: 2 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: JPQuestion Status: Revised

10) Balance Sheet

Assets Liabilities

Current Assets Current Liabilities

Cash 46 Accounts payable 39

Accounts receivable 23 Notes payable/short-term debt 5

Inventories 20

Total current assets 89 Total current liabilities 44

Long-Term Assets Long-Term Liabilities

Net property, plant,

and equipment 121 Long-term debt 133

Total long-term assets 121 Total long-term liabilities 133

Total Liabilities 177

Stockholdersʹ Equity 33

Total Assets 210 Total Liabilities and 210

Stockholdersʹ Equity

The above diagram shows a balance sheet for a certain company. All quantities shown are in

millions of dollars. What is the companyʹs net working capital?

A) $133 million

B) $2 million

C) $89 million

D) $45 million

Answer: D

Explanation: D) Net working capital = total current assets - total current liabilities,

which = $89 - $44 = $45 million , as all quantities are expressed in millions of

dollars on the table.Diff: 1 Var: 50+Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised



11) Balance Sheet

Assets Liabilities




Inventories 18










The above diagram shows a balance sheet for a certain company. If the company pays back all

of its accounts payable today using cash, what will its net working capital be?

A) $131 million

B) $6 million

C) $88 million

D) $45 million

Answer: D

Explanation: D) Both cash and accounts payable would fall by the same amount, leaving net

working capital the same: $88 - $43 = $45Diff: 1 Var: 50+Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: JPQuestion Status: Revised



12) Balance Sheet

Assets Liabilities




Inventories 16










The above diagram shows a balance sheet for a certain company. If the company buys new

property, plant and equipment today using its entire cash balance, what will its net working

capital be?

A) -$12 million

B) $12 million

C) -$24 million

D) $24 million

Answer: A

Explanation: A) Current assets would fall by $54 , with no change in current liabilities.

$(20 + 16) - $48 = -$12 .Diff: 1 Var: 50+Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: JPQuestion Status: Revised



13) Balance Sheet

Assets Liabilities




Inventories 16











millions of dollars. How would the balance sheet change if the companyʹs long-term assets

were judged to depreciate at an extra $5 million per year?

A) Net property, plant, and equipment would rise to $126 million, and total assets and

stockholdersʹ equity would be adjusted accordingly.

B) Net property, plant, and equipment would fall to $116 million, and total assets and

stockholdersʹ equity would be adjusted accordingly.

C) Long-term liabilities would rise to $131 million, and total liabilities and stockholdersʹ

equity would be adjusted accordingly.

D) Long-term liabilities would fall to $111 million, and total liabilities and stockholdersʹ

equity would be adjusted accordingly.

Answer: BDiff: 1 Var: 50+Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Revised



14) Balance Sheet

Assets Liabilities




Inventories 17











millions of dollars. If the company has 5 million shares outstanding, and these shares are

trading at a price of $6.39 per share, what does this tell you about how investors view this firmʹs

book value?

A) Investors consider that the firmʹs market value is worth very much less than its book

value.

B) Investors consider that the firmʹs market value is worth less than its book value.

C) Investors consider that the firmʹs market value and its book value are roughly equivalent.

D) Investors consider that the firmʹs market value is worth more than its book value.

Answer: CDiff: 1 Var: 50+Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: DSQuestion Status: Previous Edition

15) Which of the following balance sheet equations is INCORRECT?

A) Assets - Liabilities = Shareholdersʹ equity

B) Assets = Liabilities + Shareholdersʹ equity

C) Assets - Current liabilities = Long-term liabilities

D) Assets - Current liabilities = Long-term liabilities + Shareholdersʹ equity

Answer: CDiff: 2 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Revised



16) Cash is a ________.

A) long-term asset

B) current asset

C) current liability

D) long-term liability

Answer: BDiff: 1 Var: 1Skill: DefinitionAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Revised

17) Accounts payable is a ________.

A) long-term liability

B) current asset

C) long-term asset

D) current liability


18) A 30-year mortgage loan is a ________.

A) long-term liability

B) current liability

C) current asset

D) long-term asset

Answer: ADiff: 1 Var: 1Skill: DefinitionAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Revised

19) Which of the following statements regarding the balance sheet is INCORRECT?

A) The balance sheet provides a snapshot of a firmʹs financial position at a given point in

time.

B) The balance sheet lists a firmʹs assets and liabilities.

C) The balance sheet reports stockholdersʹ equity on the right-hand side.

D) The balance sheet reports liabilities on the left-hand side.

Answer: DDiff: 2 Var: 1Skill: ConceptualAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Revised



20) Luther Corporation

Consolidated Balance Sheet

December 31, 2006 and 2005 (in $ millions)

Assets 2006 2005

Liabilities and

Stockholdersʹ Equity 2006 2005


Cash 50.7 58.5 Accounts payable 84.4 73.5

Accounts receivable 54.9 39.6

Notes payable / short-term

debt 9.4 9.6

Inventories 44.7 42.9

Current maturities of

long-term debt 39.8 36.9

Other current assets 6.1 3.0 Other current liabilities 6.0 12.0

Total current assets 156.4 144.0 Total current liabilities 139.6 132.0


Land 66.8 62.1 Long-term debt 222.3 168.9

Buildings 106.2 91.5 Capital lease obligations

Equipment 115.7 99.6

Less accumulated

depreciation (56.5) (52.5) Deferred taxes 22.8 22.2

Net property, plant, and

equipment 232.2 200.7 Other long-term liabilities --- ---

Goodwill 60.0 -- Total long-term liabilities 245.1 191.1

Other long-term assets 63.0 42.0 Total liabilities 384.7 323.1

Total long-term assets 355.2 242.7 Stockholdersʹ Equity 126.9 63.6

Total Assets 511.6 386.7

Total liabilities and

Stockholdersʹ Equity 511.6 386.7

Refer to the balance sheet above. What is Lutherʹs net working capital in 2006?

A) $16.8 million

B) $296.0 million

C) $33.6 million

D) $8.4 million

Answer: A

Explanation: A) NWC = Current assets - Current liabilities = $156.4 - $139.6 = $16.8 millionDiff: 2 Var: 50+Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Revised



2.3 Balance Sheet Analysis

1) In general, a successful firm will have a market-to-book ratio that is substantially greater than

1.







Assets 2006 2005

Liabilities and






debt 10.4 9.6







Land 66.1 62.1 Long-term debt 236 168.9



Less accumulated










Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these

shares are trading at $16 per share, then Lutherʹs market-to-book ratio would be closest to

________.

A) 2.58

B) 0.64

C) 1.29

D) 1.80

Answer: C

Explanation: C) MTB = Market Value of Equity / Book Value of Equity

= (10.2 million × 16) / 126.7 = 163.2 / 126.7 = 1.288Diff: 2 Var: 50+Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Revised






Assets 2006 2005

Liabilities and






debt 10.7 9.6










Less accumulated










Refer to the balance sheet above. When using the book value of equity, the debt-equity ratio for

Luther in 2006 is closest to ________.

A) 4.51

B) 2.25

C) 1.13

D) 3.16

Answer: B

Explanation: B) D / E = Total debt / Total equity

Total debt = Notes payable (10.7) + Current maturities of long-term debt (38.7)

+ Long-term debt (234.4 ) = 283.8 million

Total equity = 125.9 , so D / E = 283.8 /125.9 = 2.25Diff: 2 Var: 50+Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Revised






Assets 2006 2005

Liabilities and






debt 10.5 9.6










Less accumulated











shares are trading at $16 per share, then using the market value of equity, the debt -equity ratio

for Luther in 2006 is closest to ________.

A) 3.45

B) 1.72

C) 0.86

D) 2.41

Answer: B

Explanation: B) D / E = Total debt / Total equity

Total Debt = Notes payable (10.5) + Current maturities of long-term debt (39.6)

+ Long-term debt (231.3 ) = 281.4 million

Total equity = 10.2 × $16 = $163.2, so D / E = $281.4 / $163.2 = 1.72Diff: 2 Var: 50+Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Revised






Assets 2006 2005

Liabilities and






debt 10.9 9.6







Land 66.8 62.1 Long-term debt 227 168.9



Less accumulated



equipment 238 200.7 Other long-term liabilities --- ---



Total long-term assets 361 242.7 Stockholdersʹ Equity 125.9 63.6





shares are trading at $16 per share, then what is Lutherʹs enterprise value?

A) -$540.0 million

B) $771.4 million

C) $385.7 million

D) $521.4 million

Answer: C

Explanation: C) Enterprise value = Market Value of Equity + Debt - Cash

= (10.2 × $16) + $278.6 - $56.1 = $385.7Diff: 2 Var: 50+Skill: AnalyticalAACSB Objective: Analytic SkillsAuthor: JNQuestion Status: Revised


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