Advanced Corporate Finance
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Course Introduction
Advanced Corporate Finance explores the complex financial decisions faced by corporations, building upon foundational finance principles. The course delves into topics such as capital structure, dividend policy, corporate valuation, mergers and acquisitions, risk management, and financial restructuring. Students analyze real-world case studies to assess the impact of financial strategies on shareholder value, examine the interplay between financial markets and corporate policies, and develop advanced skills in financial modeling and decision-making. Emphasis is placed on integrating theory with practice, drawing from current research and market developments to provide a comprehensive understanding of modern corporate finance challenges.
Recommended Textbook Corporate Finance 1st European Edition by David Hillier
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Page 2
Chapter 1: Introduction to Corporate Finance
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Q1) What should be the goal of the financial manager of a corporation?
Why?
Answer: The correct goal is to maximize the current value of the outstanding shares.This goal focuses on enhancing the returns to shareholders who are the owners of the firm.Other goals,such as maximizing earnings,focus too narrowly on accounting income and ignore the importance of market values in managerial finance.
Q2) The person generally directly responsible for overseeing the cash and credit functions,financial planning,and capital expenditures is the:
A)treasurer.
B)director.
C)controller.
D)chairman of the board.
E)chief operations officer.
Answer: A
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Chapter 2: Corporate Governance
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Q1) Sole proprietorships are predominantly started because:
A)they are easily and cheaply setup.
B)the proprietorship life is limited to the business owner's life.
C)all business taxes are paid as individual tax.
D)All of the above.
E)None of the above.
Answer: D
Q2) The owners of a limited liability company prefer:
A)being taxed like a corporation.
B)having liability exposure similar to that of a sole proprietor.
C)being taxed personally on all business income.
D)having liability exposure similar to that of a general partner.
E)being taxed like a corporation with liability like a partnership.
Answer: C
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Chapter 3: Financial Statement Analysis and Long-Term Planning
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Q1) Net capital spending is equal to:
A)net additions to net working capital.
B)the net change in non-current assets.
C)net income plus depreciation.
D)total cash flow to shareholders less interest and dividends paid.
E)the change in total assets.
Answer: B
Q2) Which of the following are included in current assets?
I.Equipment
II.Inventory
III.Trade payables
IV.Cash
A)II and IV only.
B)I and III only.
C)I,II,and IV only.
D)III and IV only.
E)II,III,and IV only.
Answer: A
Page 5
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Chapter 4: Discounted Cash Flow Valuation
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Q1) An S&L provides a loan with 15 yearly repayments of £8,000 with the first payment beginning immediately.Which of the following amounts comes closest to the present value of the loan if the interest rate is 7%?
A)£ 72,863
B)£ 77,964
C)£115,648
D)£120,000
E)Not enough information is given to determine the answer.
Q2) Aunt Clarisse has promised to leave you an annuity that will pay £60 next year and grow at an annual rate of 4%.The payments are expected to go on indefinitely and the interest rate is 9%.What is the value of the growing perpetuity?
A)£667
B)£693
C)£1,200
D)£1,248
E)None of the above.
Q3) Using the example of a savings account,explain the difference between the stated rate and the annual percentage rate.
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Chapter 5: How to Value Bonds and Shares
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Q1) The Lory Company had net earnings of 127,000 this past year.Dividends were paid of 38,100 on the company's equity of 1,587,500.If Lory has 100,000 shares outstanding with a current market price of 11.625 per share,what is the required rate of return?
A)4.2%
B)6%
C)9%
D)14%
E)None of the above.
Q2) A brand with semi-annual interest payments,all else equal,would be priced _________ than one with annual interest payments.
A)higher
B)lower
C)the same
D)it is impossible to tell
E)either higher or the same
Q3) Explain whether it is easier to find the required return on a publicly traded share or a publicly traded bond,and explain why.
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Chapter 6: Net Present Value and Other Investment Rules
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Q1) The possibility that more than one discount rate will make the NPV of an investment equal to zero is called the _____ problem.
A)net present value profiling
B)operational ambiguity
C)mutually exclusive investment decision
D)issues of scale
E)multiple rates of return
Q2) When two projects both require the total use of the same limited economic resource,the projects are generally considered to be:
A)independent.
B)marginally profitable.
C)mutually exclusive.
D)acceptable.
E)internally profitable.
Q3) Explain the differences and similarities between net present value (NPV)and the profitability index (PI).
Q4) The IRR rule is said to be a special case of the NPV rule.Explain why this is so and why it has some limitations NPV does not?
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Chapter 7: Making Capital Investment Decisions
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Q1) A project will produce operating cash flows of 45,000 a year for four years.During the life of the project,inventory will be lowered by 30,000 and trade receivables will increase by 15,000.Trade payables will decrease by 10,000.The project requires the purchase of equipment at an initial cost of 120,000.The equipment will be depreciated straight-line to a zero book value over the life of the project.The equipment will be salvaged at the end of the project creating a 25,000 after-tax cash flow.At the end of the project,net working capital will return to its normal level.What is the net present value of this project given a required return of 14%?
A) 3,483.48
B) 16,117.05
C) 27,958.66
D) 32,037.86
E) 49,876.02
Q2) An increase in which one of the following will increase the operating cash flow?
A)Employee salaries.
B)Office rent.
C)Building maintenance.
D)Equipment depreciation.
E)Equipment rental.
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Page 9
Chapter 8: Risk Analysis, Real Options, and Capital Budgeting
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Q1) In order to make a decision with a decision tree:
A)one starts farthest out in time to make the first decision.
B)one must begin at time 0.
C)any path can be taken to get to the end.
D)any path can be taken to get back to the beginning.
E)None of the above.
Q2) Conducting scenario analysis helps managers see the:
A)impact of an individual variable on the outcome of a project.
B)potential range of outcomes from a proposed project.
C)changes in long-term debt over the course of a proposed project.
D)possible range of market prices for their firm's stock over the life of a project.
E)allocation distribution of funds for capital projects under conditions of hard rationing.
Q3) The market value of an investment project should be viewed as the sum of the standard NPV and the value of managerial options.Explain three different real or managerial options that management may have,what they are,and how they would influence market value.
Q4) Discuss two shortcomings in the standard decision tree analysis that a financial manager should be cognizant of?
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Chapter 9: Risk and Return: Lessons From Market History
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Q1) Little John Industries sold for £1.90 on January 1 and ended the year at a price of £2.50.In addition,the equity paid dividends of £0.20 per share.Calculate Little John's dividend yield,capital gain yield,and total rate of return for the year.
Q2) A year ago,you purchased 300 shares of IXC Technologies at a price of £9.03 per share.The shares pay an annual dividend of £.10 per share.Today,you sold all of your shares for £28.14 per share.What is your total monetary return on this investment?
A)£5,703
B)£5,733
C)£5,753
D)£5,763
E)£5,853
Q3) The variance of returns is computed by dividing the sum of the:
A)squared deviations by the number of returns minus one.
B)average returns by the number of returns minus one.
C)average returns by the number of returns plus one.
D)squared deviations by the average rate of return.
E)squared deviations by the number of returns plus one.
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Chapter 10: Return and Risk: The Capital Asset Pricing Model
Capm
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Q1) If the economy booms,RTF AB equity is expected to return 10%.If the economy goes into a recessionary period,then RTF is expected to only return 4%.The probability of a boom is 60% while the probability of a recession is 40%.What is the variance of the returns on RTF?
A).000200
B).000760
C).000864
D).001594
E).029394
Q2) The portfolio expected return considers which of the following factors?
I.the amount of money currently invested in each individual security.
II.various levels of economic activity.
III.the performance of each share given various economic scenarios.
IV.the probability of various states of the economy.
A)I and III only.
B)II and IV only.
C)I,III,and IV only.
D)II,III,and IV only.
E)I,II,III,and IV.
Q3) Explain in words what beta is and why it is important.
Page 12
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Chapter 11: Factor Models and the Arbitrage Pricing Theory
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Q1) 19.For a diversified portfolio including a large number of equitys,the:
A)weighted average expected return goes to zero.
B)weighted average of the betas goes to zero.
C)weighted average of the unsystematic risk goes to zero.
D)return of the portfolio goes to zero.
E)return on the portfolio equals the risk-free rate.
Q2) A company owning gold mines will probably have a _____ inflation beta because an ___ increase in inflation is usually associated with an increase in gold prices.
A)negative; anticipated
B)positive; anticipated
C)negative; unanticipated
D)positive; unanticipated
E)None of the above.
Q3) Three factors likely to occur in the APT model are:
A)unemployment,inflation,and current rates.
B)inflation,GNP,and interest rates.
C)current rates,inflation and change in housing prices.
D)unemployment,college tuition,and GNP.
E)This cannot be determined or even estimated.
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Page 13
Chapter 12: Risk, cost of Capital, and Capital Budgeting
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Q1) Jake's Sound Systems has 210,000 shares of ordinary equity outstanding at a market price of £36 a share.Last month,Jake's paid an annual dividend in the amount of £1.593 per share.The dividend growth rate is 4%.Jake's also has 6,000 bonds outstanding with a face value of £1,000 per bond.The bonds carry a 7 % coupon,pay interest annually,and mature in 4.89 years.The bonds are selling at 99% of face value.The company's tax rate is 34%.What is Jake's weighted average cost of capital?
A)5.3%
B)5.8%
C)6.3%
D)6.9%
E)7.2%
Q2) Neptune plc offers network communications systems to computer users.The company is planning a major investment expansion but is unsure of the correct measure of equity capital as it has no traded equity.Your job is to determine the basis of the equity cost.List and explain the steps you will need to take.
Q3) Explain the factors that determine beta and how an asset beta can differ from equity betas.
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Chapter 13: Corporate Financing Decisions and Efficient
Capital Markets
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Q1) Which of the following is not true about serial correlation?
A)It measures the correlation between the current return on a security and the current return on another security.
B)It involves only one security.
C)Positive serial correlation indicates a tendency for continuation.
D)Negative serial correlation indicates a tendency toward reversal.
E)Significant positive or negative serial correlation coefficients are indicative of market inefficiency in the weak form.
Q2) Market regulators across the world periodically charge individuals for insider trading and claim those individuals have made unfair profits.Based on this fact,you would tend to argue that the financial markets are at best _____ form efficient.
A)weak
B)semiweak
C)semistrong
D)strong
E)perfect
Q3) Why should a financial decision maker such as a corporate treasurer or CFO be concerned with market efficiency?
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Chapter 14: Long-Term Financing: An Introduction
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Q1) Based on historical experience,which of the following best describes the "pecking order" of long-term financing strategy in Europe?
A)Long-term debt first,new ordinary equity,internal financing last.
B)Long-term debt first,internal financing,new ordinary equity last.
C)Internal financing first,new ordinary equity,long-term borrowing last.
D)Internal financing first,long-term borrowing,new ordinary equity last.
E)None of the above.
Q2) If a debt issue is callable,the call price is ____ par.
A)greater than
B)less than C)equal to
D)unrelated to
E)It varies widely based on the risk of the firm.
Q3) Retained earnings are:
A)the amount of cash that the firm has saved up.
B)the difference between the net income earned and the dividends paid.
C)the difference between the market price of the equity and the book value.
D)the amount of shares repurchased.
E)None of the above.
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Page 16
Chapter 15: Capital Structure: Basic Concepts
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Q1) A manager should attempt to maximize the value of the firm by:
A)changing the capital structure if and only if the value of the firm increases.
B)changing the capital structure if and only if the value of the firm increases to the benefits to inside management.
C)changing the capital structure if and only if the value of the firm increases only to the benefits the debtholders.
D)changing the capital structure if and only if the value of the firm increases although it decreases the stockholders' value.
E)changing the capital structure if and only if the value of the firm increases and stockholder wealth is constant.
Q2) Your firm has a debt-equity ratio of .75.Your pre-tax cost of debt is 8.5% and your required return on assets is 15%.What is your cost of equity if you ignore taxes?
A)11.25%
B)12.21%
C)16.67%
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Page 17
Chapter 16: Capital Structure: Limits to the Use of Debt
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Q1) In a Miller equilibrium,what type of investments do high tax bracket investors tend to hold?
A)Bonds
B)Stocks
C)Debentures
D)Both shares and bonds.
E)Neither shares nor bonds.
Q2) When graphing firm value against debt levels,the debt level that maximizes the value of the firm is the level where:
A)the increase in the present value of distress costs from an additional pound of debt is greater than the increase in the present value of the debt tax shield.
B)the increase in the present value of distress costs from an additional pound of debt is equal to the increase in the present value of the debt tax shield.
C)the increase in the present value of distress costs from an additional pound of debt is less than the increase of the present value of the debt tax shield.
D)distress costs as well as debt tax shields are zero.
E)distress costs as well as debt tax shields are maximized.
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Page 18
Chapter 17: Valuation and Capital Budgeting for the Levered Firm
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Q1) The flow-to-equity approach has been used by the firm to value their capital budgeting projects.The total investment cost at time 0 is 640,000.The company uses the flow-to-equity approach because they maintain a target debt to value ratio over project lives.The company has a debt to equity ratio of 0.5.The present value of the project including debt financing is 810,994.What is the relevant initial investment cost to use in determining the value of the project?
A) 170,994
B) 267,628
C) 372,372
D) 543,366
E) 640,000
Q2) A key difference between the APV,WACC,and FTE approaches to valuation is:
A)how the unlevered cash flows are calculated.
B)how the ratio of equity to debt is determined.
C)how the initial investment is treated.
D)whether terminal values are included or not.
E)how debt effects are considered; i.e.the target debt to value ratio and the level of debt.
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Page 19
Chapter 18: Dividend and Other Payouts
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Q1) Which of the following tend to increase the appeal of a firm's stock to the average investor?
I.a cessation of dividends by a firm which has a long history of increasing dividends
II.the distribution of a special dividend by a dividend-paying firm
III.a reverse stock split for a low-priced equity
IV.the declaration of a stock dividend by a growth firm
A)I and III only.
B)II and IV only.
C)I,II,and IV only.
D)II,III,and IV only.
E)I,II,III,and IV.
Q2) On the date of record the share price drop is:
A)a full adjustment for the dividend payment.
B)a partial adjustment for the dividend payment because of the tax effect.
C)zero because it happens on ex-dividend date.
D)zero because it happens on payment date.
E)None of the above.
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Page 20
Chapter 19: Equity Financing
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Q1) Which of the following is not one of the four main functions that underwriters provide?
A)Risk bearing.
B)Marketing.
C)Auditing the financial statements.
D)Certification.
E)Monitoring.
Q2) The six components that make up the total costs of a new issues are:
A)the spread; other direct expenses such as filing fees; indirect expenses such as management time; economies of scale; abnormal returns and the Green Shoe option.
B)the discount; other direct expenses such as filing fees; indirect expenses such as management time; due diligence costs; abnormal returns and the Green Shoe option.
C)the spread; other direct expenses such as filing fees; indirect expenses such as management time; abnormal returns; underpricing and the Green Shoe option.
D)the spread; other direct expenses such as filing fees; economies of scale; due diligence costs; abnormal returns and underpricing.
E)None of the above.
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Chapter 20: Debt Financing
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Q1) Floating rate bonds are bonds with:
A)floating par values tied to the stock par value.
B)floating maturities tied to the expected corporate life.
C)floating call provisions indexed by relative interest rates.
D)floating coupon rates tied to an interest rate index.
E)All of the above.
Q2) The written agreement between a corporation and its bondholders contains a limitation on the dividends that the corporation can pay.This limitation is:
A)a nonrecourse covenant.
B)a recourse covenant.
C)a negative covenant.
D)a positive covenant.
E)more than one of the above.
Q3) Long-term debt is sometimes called:
A)funded debt.
B)hybrid debt.
C)unfunded debt.
D)preference shares.
E)None of the above.
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Page 22
Chapter 21: Leasing and Off-Balance-Sheet Financing
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Q1) Your firm is considering leasing a new robotic milling control system.The lease lasts for 5 years.The lease calls for 6 payments of £300,000 per year with the first payment occurring at lease inception.The black box would cost £1,050,000 to buy and would be straight-line depreciated to a zero salvage.The actual salvage value is zero.The firm can borrow at 8%,and the corporate tax rate is 34%. What is the after-tax cash flow from leasing in year 0?
A)£300,000
B)£495,000
C)£852,000
D)£948,000
E)None of the above.
Q2) An advantage of leasing is that the lessor does not own the asset and can cancel:
A)only financial leases.
B)only operating leases.
C)only capital leases.
D)any kind of leases anytime.
E)None of the above.
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Chapter 22: Options and Corporate Finance
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Q1) You own five put option contracts on XYZ with an exercise price of 25.What is the total intrinsic value of these contracts if XYZ is currently selling for 24.50 a share?
A)- 250
B)- 50
C) 0
D) 50
E) 250
Q2) The maximum value of a call option is equal to:
A)the strike price minus the initial cost of the option.
B)the exercise price plus the price of the underlying share.
C)the strike price.
D)the price of the underlying share.
E)the purchase price.
Q3) If a call has a positive intrinsic value at expiration the call is said to be:
A)funded.
B)unfunded.
C)at the money.
D)in the money.
E)out of the money.
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Chapter 23: Options and Corporate Finance: Extensions and Applications
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Q1) Ima Greedy,the CFO of Financial Saving Techniques has been granted options on 200,000 shares.The equity is currently trading at £22 a share and the options are at the money.The volatility of the equity has been about .20 on an annual basis over the last several years.The option mature in 3 years and the risk free rate is 4%. Calculate N(d<sub>2</sub>).
A).5130
B).5578
C).6085
D).7085
E).7142
Q2) The executive janitor of NuValue was granted 1,000,000 options.The equity price at the time of the granting of the options was £25 and the options are at the money.The risk free rate was 3% and the options expire in 3 years.The variance on the equity is .04.What is the value of the options contract?
Q3) Why would the company pay the executive in options as opposed to salary?
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Chapter 24: Warrants and Convertibles
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Q1) From the shareholder's point of view,the optimum time to call a convertible bond is when the bond's conversion value is:
A)less than the call price,but greater than the face value.
B)greater than the call price,but less than straight debt's value.
C)equal to the face value.
D)less than straight debt's value,but greater than the call price.
E)None of the above.
Q2) A convertible preference share is similar to a convertible bond except:
A)the conversion ratio is fixed (given).
B)the conversion price is fixed (given).
C)the time to maturity is infinite.
D)All of the above.
E)None of the above.
Q3) A convertible bond has an option value which is equal to:
A)the market value of the convertible bond minus the straight bond value.
B)The market value of the convertible bond minus the conversion value.
C)the market value of the convertible bond minus the conversion premium.
D)the market value of the convertible bond minus the maximum of the straight bond value or conversion value.
E)None of the above.
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Chapter 25: Financial Risk Management With Derivatives
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Q1) Futures contracts contrast with forward contracts by:
A)trading on an organized exchange.
B)marking to the market on a daily basis.
C)allowing the seller to deliver any day over the delivery month.
D)All of the above.
E)None of the above.
Q2) Firm A is paying £750,000 in interest payments a year while Firm B is paying LIBOR plus 75 basis points on £10,000,000 loans.The current LIBOR rate is 6.5%.Firm A and B have agreed to swap interest payments.What is the net payment this year?
A)Firm A pays £750,000 to Firm B
B)Firm B pays £725,000 to Firm A
C)Firm B pays £25,000 to Firm A
D)Firm A pays £25,000 to Firm B
E)None of the above.
Q3) Duration is defined as the weighted average time to maturity of a financial instrument.Explain how this knowledge can help protect against interest rate risk.
Q4) The futures markets are labeled as pure speculation and even gambling.Why is this an inaccurate portrayal of the markets function?
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Chapter 26: Short-Term Finance and Planning
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Q1) Bilt Rite has sales of £610,000.The cost of goods sold is equal to 70% of sales.The beginning trade receivables balance is £21,000 and the ending trade receivables balance is £25,000.How long on average does it take the firm to collect its receivables?
A)13.76 days.
B)14.09 days.
C)21.07 days.
D)25.98 days.
E)26.52 days.
Q2) A restrictive short-term financial policy,as compared to a more flexible policy,tends to:
I.cause a firm to lose sales due to a lack of inventory on hand.
II.increase the sales of a firm due to the firm's credit availability and terms.
III.increase the probability that a firm will face a cash-out situation.
IV.increase the ability of a firm to charge premium prices.
A)I and III only.
B)II and IV only.
C)I and IV only.
D)II and III only.
E)I and II only.
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Chapter 27: Cash Management
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Q1) Examples of cash disbursements do not include:
A)wages.
B)payment for raw materials.
C)taxes.
D)dividends.
E)sales of assets.
Q2) The Baumol model determines the optimal cash balance by:
A)balancing total costs against opportunity costs.
B)minimizing total costs of holding cash against trading securities costs.
C)balancing trading securities costs against total costs.
D)minimizing total costs less trading costs.
E)None of the above.
Q3) Fly-By-Night Airlines currently has 2.4 million on deposit with its bank.Fly-By-Night pays its fuel bill by writing a cheque for 1.1 million.Calculate the company's book cash and bank cash after it writes the cheque.
Q4) The net float of a firm is made up of disbursement float and collection float.Discuss the three components of collection float and how they would work against the firm.
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Chapter 28: Credit Management
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Q1) When analyzing the decision to change the cash discount policy,the firm should:
A)choose the policy with the highest order size.
B)choose the policy with the lowest variable cost.
C)choose the policy with the lowest NPV.
D)choose the policy with the highest NPV.
E)choose the policy offering the lowest cash discount.
Q2) Lengthening the credit period _____ the price paid by the customer.Generally,this acts to _____ sales.
A)increases; increase
B)increases; decrease
C)decreases; decrease D)decreases; increase
E)increases; have no effect on
Q3) The credit period offered is influenced by:
A)the size of the account to receive credit.
B)the collateral value of the goods sold.
C)the probability that the customer will not pay.
D)All of the above.
E)None of the above.
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Chapter 29: Mergers and Acquisitions
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Q1) The distribution of shares in a subsidiary to existing parent company equityholders is called a(n):
A)lockup transaction.
B)bear hug.
C)equity carve-out.
D)spin-off.
E)split-up.
Q2) A financial device designed to make unfriendly takeover attempts financially unappealing,if not impossible,is called:
A)a golden parachute.
B)a standstill agreement.
C)greenmail.
D)a poison pill.
E)a white knight.
Q3) Defensive merger tactics are designed to thwart unwanted takeovers and mergers.Do such activities work to the advantage of equityholders all of the time? Are these types of activities ethical? Who do you think benefits most from these activities?
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Chapter 30: Financial Distress
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Q1) Magic Mobile Homes is to be liquidated.All creditors,both secured and unsecured,are owed 2 million.Administrative costs of liquidation and wages payments are expected to be 500,000.A sale of assets is expected to bring 1.8 million after all costs and taxes.Secured creditors have a mortgage lien for 1,200,000 on the factory which will be liquidated for 900,000 out of the sale proceeds.The corporate tax rate is 34%.How much and what percentage of their claim will the secured creditors receive,in total?
A) 900,000; 75%
B) 981,818; 81.82%
C) 1,009,091; 84.1%
D) 1,200,000; 100%
E)Not enough information to answer.
Q2) Equityholders may prefer a formal bankruptcy filing because:
A)the firm can issue debtor in possession debt.
B)they can delay pre-bankruptcy interest payments.
C)the lack of information about the length and magnitude of the cash flow problem favors equityholders.
D)All of the above.
E)None of the above.
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Chapter 31: International Corporate Finance
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Q1) Which of the following statements are correct concerning the foreign exchange market?
I.The trading floor of the foreign exchange market is located in London,England.
II.The foreign exchange market is the world's largest financial market.
III.The four primary currencies that are traded in the foreign exchange market are the U.S.dollar,the British pound,the Canadian dollar,and the euro.
IV.Importers and exporters are key players in the foreign exchange market.
A)I and III only.
B)II and IV only.
C)I and II only.
D)III and IV only.
E)I and IV only.
Q2) An agreement to trade currencies based on the exchange rate today for settlement within two business days is called a(n)_____ trade.
A)swap
B)option
C)futures
D)forward
E)spot
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