Applied Corporate Finance
Chapter Exam Questions
Course Introduction
Applied Corporate Finance delves into the practical aspects of financial management within corporations, focusing on how managers and decision-makers apply financial theories to real-world problems. The course covers key topics such as capital budgeting, capital structure, cost of capital, risk management, and valuation techniques. Students will learn to analyze and interpret financial data, assess investment opportunities, and formulate strategies to maximize shareholder value while considering market constraints and corporate objectives. Case studies and hands-on exercises are integral parts of the curriculum, preparing students to effectively address complex financial issues encountered in modern business environments.
Recommended Textbook Fundamentals of Corporate Finance 10th Edition by Stephen Ross
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Chapter 1: Introduction to Corporate Finance
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Q1) Which of the following questions are addressed by financial managers?
I.How should a product be marketed?
II.Should customers be given 30 or 45 days to pay for their credit purchases?
III.Should the firm borrow more money?
IV.Should the firm acquire new equipment?
A)I and IV only
B)II and III only
C)I, II, and III only
D)II, III, and IV only
E)I, II, III, and IV
Answer: D
Q2) What concerns might a loan officer have when loaning funds to a sole proprietorship that he or she might not have when loaning funds to a corporation?
Answer: The existence and viability of a sole proprietor is dependent upon one individual.Should that individual die,the entity would cease to exist.Likewise,should the owner lose interest in the business or become ill,the business might also cease to exist.With a corporation,the company ownership could be sold in any one of those situations such that the business entity would continue to exist.
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Chapter 2: Financial Statements,Taxes,and Cash Flow
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Q1) Nielsen Auto Parts had beginning net fixed assets of $218,470 and ending net fixed assets of $209,411.During the year,assets with a combined book value of $6,943 were sold.Depreciation for the year was $42,822.What is the amount of net capital spending?
A)$33,763
B)$40,706
C)$58,218
D)$65,161
E)$67,408
Answer: A
Q2) The cash flow of a firm which is available for distribution to the firm's creditors and stockholders is called the:
A)operating cash flow.
B)net capital spending.
C)net working capital.
D)cash flow from assets.
E)cash flow to stockholders.
Answer: D
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Chapter 3: Working With Financial Statements
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Q1) A firm has total assets with a current book value of $68,700,a current market value of $74,300,and a current replacement cost of $79,200.What is the value of Tobin's Q?
A).85
B).87
C).90
D).92
E).94
Answer: E
Q2) Canine Supply has sales of $2,200,total assets of $1,400,and a debt-equity ratio of 0.5.Its return on equity is 15 percent.What is the net income?
A)$128.16
B)$131.41
C)$132.09
D)$136.67
E)$140.00
Answer: E
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Chapter 4: Long-Term Financial Planning and Growth
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Q1) Which one of the following capital intensity ratios indicates the largest need for fixed assets per dollar of sales?
A)0.70
B)0.86
C)1.00
D)1.06
E)1.15
Q2) Which of the following questions are appropriate to address during the financial planning process?
I.Should the firm merge with a competitor?
II.Should additional shares of stock be sold?
III.Should a particular division be sold?
IV.Should a new product be introduced?
A)I, II, and III only
B)I, II, and IV only
C)I, III, and IV only
D)II, III, and IV only
E)I, II, III, and IV
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Chapter 5: Introduction to Valuation: The Time Value of Money
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Q1) Theo needs $40,000 as a down payment for a house 6 years from now.He earns 2.5 percent on his savings.Theo can either deposit one lump sum today for this purpose or he can wait a year and deposit a lump sum.How much additional money must he deposit if he waits for one year rather than making the deposit today?
A)$778.98
B)$811.13
C)$862.30
D)$948.03
E)$1,020.18
Q2) You want to have $25,000 saved 6 years from now to buy a house.How much less do you have to deposit today to reach this goal if you can earn 5.5 percent rather than 5 percent on your savings? Today's deposit is the only deposit you will make to this savings account.
A)$524.24
B)$691.18
C)$724.60
D)$745.11
E)$819.02
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Chapter 6: Discounted Cash Flow Valuation
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Q1) Your holiday ski vacation was great,but it unfortunately ran a bit over budget.All is not lost.You just received an offer in the mail to transfer your $5,000 balance from your current credit card,which charges an annual rate of 18.7 percent,to a new credit card charging a rate of 9.4 percent.You plan to make payments of $510 a month on this debt.How many less payments will you have to make to pay off this debt if you transfer the balance to the new card?
A)0.36 payments
B)0.48 payments
C)1.10 payments
D)1.23 payments
E)2.49 payments
Q2) You just won the grand prize in a national writing contest! As your prize,you will receive $2,000 a month for ten years.If you can earn 7 percent on your money,what is this prize worth to you today?
A)$172,252.71
B)$178,411.06
C)$181,338.40
D)$185,333.33
E)$190,450.25
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Chapter 7: Interest Rates and Bond Valuation
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Q1) Collingwood Homes has a bond issue outstanding that pays an 8.5 percent coupon and matures in 16.5 years.The bonds have a par value of $1,000 and a market price of $944.30.Interest is paid semiannually.What is the yield to maturity?
A)8.36 percent
B)8.42 percent
C)8.61 percent
D)8.74 percent
E)9.16 percent
Q2) A corporate bond was quoted yesterday at 102.16 while today's quote is 102.19.What is the change in the value of a bond that has a face value of $5,000?
A)$0.30
B)$1.50
C)$3.00
D)$15.00
E)$30.00
Q3) Explain the conditions that would need to exist for the Treasury yield curve to be downward sloping.
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Chapter 8: Stock Valuation
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Q1) Galloway,Inc.has an odd dividend policy.The company has just paid a dividend of $7 per share and has announced that it will increase the dividend by $2 per share for each of the next 5 years,and then never pay another dividend.How much are you willing to pay per share today to buy this stock if you require a 15 percent return?
A)$27.08
B)$34.15
C)$41.72
D)$42.60
E)$43.33
Q2) Which one of the following is a type of equity security that has a fixed dividend and a priority status over other equity securities?
A)senior bond
B)debenture
C)warrant
D)common stock
E)preferred stock
Q3) Explain why small shareholders should prefer cumulative voting over straight voting.
Q4) What are the primary differences and similarities between NASDAQ and the NYSE?
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Chapter 9: Net Present Value and Other Investment Criteria
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Q1) The length of time a firm must wait to recoup,in present value terms,the money it has in invested in a project is referred to as the:
A)net present value period.
B)internal return period.
C)payback period.
D)discounted profitability period.
E)discounted payback period.
Q2) What is the net present value of a project with the following cash flows if the required rate of return is 9 percent? Year Cash Flow
\(0 - \$ 42,398\)
\(1 \quad 18,201\)
\(2 \quad 21,219\)
\(3 \quad 17,800\)
A)-$1,574.41
B)-$1,208.19
C)$5,904.65
D)$6,029.09
E)$6,311.16
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11
Chapter 10: Making Capital Investment Decisions
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Q1) Morris Motors just purchased some MACRS 5-year property at a cost of $216,000.Which one of the following will correctly give you the book value of this equipment at the end of year 2? \[\begin{array}{l}
\text { MACRS 5-year property }\\
\begin{array} { c c }
\frac { \text { Year } } { 1 } & \frac { \text { Rate } } { 20.00 \% } \\
2 & 32.00 \% \\
3 & 19.20 \% \\
4 & 11.52 \% \\
5 & 11.52 \% \\
6 & 5.76 \%
\end{array}
\end{array}\]
A)$216,000/(1 + 0.20 + 0.32)
B)$216,000 × (1 - 0.20 - 0.32)
C)$216,000 × (0.20 + 0.32)
D)[$216,000 × (1 - 0.20)] × (1 - 0.32)
E)$216,000/[(1 + 0.20)(1 + 0.32)]
Q2) Can the initial cash flow at time zero for a project ever be a positive value? If yes,give an example.If no,explain why not.
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Chapter 11: Project Analysis and Evaluation
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Q1) Scenario analysis is best suited to accomplishing which one of the following when analyzing a project?
A)determining how fixed costs affect NPV
B)estimating the residual value of fixed assets
C)identifying the potential range of reasonable outcomes
D)determining the minimal level of sales required to break-even on an accounting basis
E)determining the minimal level of sales required to break-even on a financial basis
Q2) A proposed project has fixed costs of $36,000 per year.The operating cash flow at 18,000 units is $58,000.What will be the new degree of operating leverage if the number of units sold rises to 18,500?
A)1.46
B)1.59
C)1.67
D)2.08
E)2.14
Q3) What is operating leverage and why is it important in the analysis of capital expenditure projects?
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Chapter 12: Some Lessons From Capital Market History
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Q1) Estimates of the rate of return on a security based on a historical arithmetic average will probably tend to _____ the expected return for the long-term and estimates using the historical geometric average will probably tend to _____ the expected return for the short-term.
A)overestimate; overestimate
B)overestimate; underestimate
C)underestimate; overestimate
D)underestimate; underestimate
E)accurately; accurately
Q2) Over a 30-year period an asset had an arithmetic return of 13 percent and a geometric return of 10.5 percent.Using Blume's formula,what is your best estimate of the future annual returns over the next 5 years?
A)11.18 percent
B)12.27 percent
C)11.84 percent
D)12.66 percent
E)12.46 percent
Q3) Define and explain the three forms of market efficiency.
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Chapter 13: Return,Risk,and the Security Market Line
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Q1) A news flash just appeared that caused about a dozen stocks to suddenly drop in value by about 20 percent.What type of risk does this news flash represent?
A)portfolio
B)nondiversifiable
C)market
D)unsystematic
E)total
Q2) Thayer Farms stock has a beta of 1.12.The risk-free rate of return is 4.34 percent and the market risk premium is 7.92 percent.What is the expected rate of return on this stock?
A)8.35 percent
B)9.01 percent
C)10.23 percent
D)13.21 percent
E)13.73 percent
Q3) Explain the difference between systematic and unsystematic risk.Also explain why one of these types of risks is rewarded with a risk premium while the other type is not.
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15
Chapter 14: Cost of Capital
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Q1) The common stock of Metal Molds has a negative growth rate of 1.5 percent and a required return of 18 percent.The current stock price is $11.40.What was the amount of the last dividend paid?
A)$2.07
B)$2.11
C)$2.19
D)$2.22
E)$2.26
Q2) Justice,Inc.has a capital structure which is based on 30 percent debt,5 percent preferred stock,and 65 percent common stock.The flotation costs are 11 percent for common stock,10 percent for preferred stock,and 7 percent for debt.The corporate tax rate is 37 percent.What is the weighted average flotation cost?
A)8.97 percent
B)9.48 percent
C)9.62 percent
D)9.75 percent
E)10.00 percent
Q3) What are some advantages of the subjective approach to determining the cost of capital and why do you think that approach is utilized?
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Chapter 15: Raising Capital
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Q1) The Metallica Heavy Metal Mining (MHMM)Corporation wants to diversify its operations.Some recent financial information for the company is shown here: \[\begin{array} { l r }
\text { Number of shares outstanding } & 24,000 \\
\text { Book value } & \$ 320,000 \\
\text { Market value } & \$ 457,600 \\
\text { Net income } & \$ 18,000 \end{array}\] MHMM is considering an investment that has the same P/E ratio as the firm.The cost of the investment is $800,000,and it will be financed with a new equity issue.What would the ROE on the investment have to be if we wanted the price after the offering to be $115 per share? Assume the PE ratio remains constant.
A)18.28 percent
B)21.41 percent
C)27.63 percent
D)37.27 percent
E)40.03 percent
Q2) Explain why there is a tendency for IPOs to be underpriced.
Q3) It can be argued that the decision to accept venture capital is one of the most critical decisions an entrepreneur must make.Explain why.
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Chapter 16: Financial Leverage and Capital Structure Policy
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Q1) Exports Unlimited is an unlevered firm with an aftertax net income of $52,300.The unlevered cost of capital is 14.1 percent and the tax rate is 36 percent.What is the value of this firm?
A)$270,867
B)$339,007
C)$370,922
D)$378,444
E)$447,489
Q2) A firm has debt of $12,000,a leveraged value of $26,400,a pre-tax cost of debt of 9.20 percent,a cost of equity of 17.6 percent,and a tax rate of 37 percent.What is the firm's weighted average cost of capital?
A)11.47 percent
B)11.52 percent
C)11.69 percent
D)12.23 percent
E)12.48 percent
Q3) Explain how a firm loses value during the bankruptcy process from both a creditors and a shareholders perspective.
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18
Chapter 17: Dividends and Payout Policy
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Q1) Which one of the following refers to the ability of shareholders to undo a firm's dividend policy and create an alternative dividend policy by reinvesting dividends or selling shares of stock?
A)perfect foresight model
B)personalization
C)recapitalization
D)offsetting leverage
E)homemade dividend policy
Q2) The ex-dividend date is defined as _____ business day(s)before the date of record.
Q3) Identify some real-world factors which might make it more difficult for an individual to effectively create a homemade dividend policy.
Q4) Explain how cash dividends affect individual shareholders differently than an equal amount of funds spent on a repurchase.
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Chapter 18: Short-Term Finance and Planning
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Q1) Costs that increase as a firm acquires additional current assets are called _____ costs.
A)carrying
B)shortage
C)order
D)safety
E)trading
Q2) The primary difference between a line of credit and a revolving credit arrangement is the:
A)type of collateral used to secure the loan.
B)length of the credit period.
C)fact that the line of credit is a secured loan and the revolving credit arrangement is unsecured.
D)fact that the line of credit is an unsecured loan and the revolving credit arrangement is secured.
E)classification as either a committed or a noncommitted loan.
Q3) List and describe the three basic types of secured inventory loans.Compare the advantages and disadvantages of these loans.
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Chapter 19: Cash and Liquidity Management
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Q1) Rosie O'Grady's spends $115,000 a week to pay bills and maintains a lower cash balance limit of $95,000.The standard deviation of the disbursements is $14,600.The applicable interest rate is 4.8 percent and the fixed cost of transferring funds is $50.What is this firm's total cost of holding cash based on the BAT model?
A)$1,431
B)$2,862
C)$3,034
D)$4,912
E)$5,358
Q2) A firm has $16,718 in outstanding checks that have not cleared the bank.The firm also has $13,450 in deposits that have been recorded by the firm but not by the bank.The current available balance is $11,407.What is the status of the net float?
A)net collection float of $8,138
B)net collection float of $2,043
C)net collection float of $13,450
D)net disbursement float of $3,268
E)net disbursement float of $5,311
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Chapter 20: Credit and Inventory Management
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Q1) The Green Hornet sells earnings forecasts for international securities.Its credit terms are 2/10,net 30.Based on experience,55 percent of all customers will take the discount.The firm sells 2,700 forecasts every month at a price of $1,100 each.What is the firm's average balance sheet amount in accounts receivable?
A)$940,274
B)$1,408,272
C)$1,855,233
D)$1,867,012
E)$1,915,387
Q2) A firm sells 4,500 units of an item each year.The carrying cost per unit is $2.15 and the fixed costs per order are $69.What is the economic order quantity?
A)374 units
B)421 units
C)497 units
D)537 units
E)623 units
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Chapter 21: International Corporate Finance
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Q1) Assume the spot exchange rate for the Hungarian forint is HUF 215.Also assume the inflation rate in the United States is 4 percent per year while it is 9.5 percent in Hungary.What is the expected exchange rate 5 years from now?
A)269
B)276
C)281
D)294
E)299
Q2) A trader has just agreed to exchange $2 million U.S.dollars for $1.55 million Euros six months from today.This exchange is an example of a:
A)spot trade.
B)forward trade.
C)currency swap.
D)floating swap.
E)triangle arbitrage.
Q3) What conditions are necessary for absolute purchasing power parity (PPP)to exist? Is it realistic to believe PPP can exist within a country let alone across national borders?
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Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) Most people would tend to agree that technology stocks were highly overvalued in the late 1990's.This time period is best described as a technology:
A)crash.
B)circle.
C)bubble.
D)limit.
E)arbitrage.
Q2) Kate is attempting to sell her house for $260,000.Fred lives across the street in an identical house.Fred recently stated to his wife that Kate's house is probably worth only $250,000 but that once she sells her house,he would like to put their house on the market at $285,000 and then move into a condominium.Which one of the following behaviors applies to Fred?
A)myopic loss aversion
B)house money effect
C)money illusion
D)self-attribution bias
E)endowment effect
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Chapter 23: Enterprise Risk Management
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Q1) An option contract:
I.can be used to hedge risk.
II.can be used to speculate in the market.
III.can be based on a futures contract to create a futures option.
IV.cannot be based on a foreign currency.
A)II and III only
B)I and II only
C)I, II, and III only
D)II, III, and IV only
E)I, II, III, and IV
Q2) You believe the price of a stock is going to decline within the next three months.Which one of the following option payoff profiles will reflect a profit if your belief is correct?
A)buying a call
B)selling a call
C)buying a put
D)selling a put
Q3) Explain why a swap is effectively a series of forward contracts.
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25
Chapter 24: Options and Corporate Finance
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Q1) Which one of the following considers all of the options implicit in a project?
A)expansion planning
B)contingency planning
C)asset management review
D)prospective evaluation
E)strategic evaluation
Q2) Three months ago,Central Supply stock was selling for $51.40 a share.At that time,you purchased five put options on the stock with a strike price of $52 per share and an option price of $0.60 per share.The option expires today when the value of the stock is $42.70 per share.What is your net profit or loss on this investment? Ignore trading costs and taxes.
A)-$1,300
B)-$1,000
C)-$300
D)$4,350
E)$4,650
Q3) What are the basic similarities and basic differences between warrants and call options?
Q4) What are the upper and lower bounds for an American call option? Explain what would happen in each case if the bound was violated.
Page 26
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Chapter 25: Option Valuation
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Questions
Q1) Wesleyville Markets stock is selling for $36 a share.The 9-month $40 call on this stock is selling for $2.23 while the 9-month $40 put is priced at $5.63.What is the continuously compounded risk-free rate of return?
A)0.87 percent
B)1.11 percent
C)1.38 percent
D)1.56 percent
E)2.02 percent
Q2) The delta of a call option on a firm's assets is 0.727.This means that a $195,000 project will increase the value of equity by:
A)$141,765.
B)$180,219.
C)$211,481.
D)$264,909.
E)$268,226.
Q3) Identify the five variables that affect the value of an American put option and indicate how an increase in each of the variables will affect the value of the put.Also indicate the common name,if any,given to each variable.
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Chapter 26: Mergers and Acquisitions
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Q1) Outdoor Living has agreed to be acquired by New Adventures for $48,000 worth of New Adventures stock.New Adventures currently has 8,000 shares of stock outstanding at a price of $32 a share.Outdoor Living has 1,700 shares outstanding at a price of $43 a share.The incremental value of the acquisition is $21,000.What is the value of the merged firm?
A)$85,500
B)$256,000
C)$277,000
D)$320,500
E)$350,100
Q2) Which one of the following generally has a flip-in provision that significantly increases the cost to a shareholder who is attempting to gain control over a firm?
A)golden parachute
B)standstill agreement
C)greenmail
D)poison pill
E)white knight
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Chapter 27: Leasing
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Q1) You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive,high-tech equipment).The scanner costs $2 million and it would be depreciated straight-line to zero over 4 years.Because of radiation contamination,it will actually be completely valueless in 4 years.Assume the tax rate is 33 percent.You can borrow at 6 percent before taxes.How much would the lease payment have to be in order for both the lessor and the lessee to be indifferent about the lease?
A)$500,000
B)$521,909
C)$552,200
D)$563,333
E)$576,477
Q2) Which one of the following is most likely the primary reason why a lessee opts to lease an asset on a short-term basis rather than buy that asset?
A)keep the asset off the balance sheet
B)tax avoidance
C)lower total cost
D)increased collateral
E)nonrecourse protection
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