Applied Corporate Finance
Test Questions
Course Introduction
Applied Corporate Finance explores the practical application of financial theory to real-world corporate decision-making. This course examines key topics such as capital budgeting, capital structure, cost of capital, dividend policy, risk management, and valuation, with an emphasis on how financial managers use analytical tools and market information to optimize shareholder value. Through case studies, financial modeling, and industry examples, students develop the quantitative and strategic skills necessary to tackle complex financial challenges and contribute to effective corporate financial strategy.
Recommended Textbook
Corporate Finance The Core 3rd Edition by Jonathan Berk
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Page 2
Chapter 1: The Corporation
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Sample Questions
Q1) Explain the difference between a sub-chapter "S" corporation and a sub-chapter "C" corporation.
Answer: 11ea7e60_156d_d191_ba34_4b8ed13499d1_TB1624_00
Q2) If you buy shares of Coca-Cola on the secondary market:
A) Coca-Cola receives the money because the company has issued new shares.
B) you buy the shares from another investor who decided to sell the shares.
C) you buy the shares from the New York Stock Exchange.
D) you buy the shares from the Federal Reserve.
Answer: B
Q3) Which of the following organization forms accounts for the greatest number of firms?
A) "S" corporation
B) Limited partnership
C) Sole proprietorship
D) "C" corporation
Answer: C
Q4) Explain the benefits of incorporation.
Answer: 1.Limited liability
2.Unlimited life
3.Access to capital markets/availability of outside funding
Page 3
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Chapter 2: Introduction to Financial Statement Analysis
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Sample Questions
Q1) Which of the following is NOT a reason why cash flow may not equal net income?
A) Amortization is added in when calculating net income.
B) Changes in inventory will change cash flows but not income.
C) Capital expenditures are not recorded on the income statement.
D) Depreciation is deducted when calculating net income.
Answer: A
Q2) Suppose Novak Company experienced a reduction in its ROE over the last year.This fall could be attributed to:
A) an increase in net profit margin.
B) a decrease in asset turnover.
C) an increase in leverage.
D) a decrease in Equity.
Answer: B
Q3) The statement of financial position is also known as the:
A) balance sheet.
B) income statement.
C) statement of cash flows.
D) statement of stockholder's equity.
Answer: A
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Page 4
Chapter 3: Financial Decision Making and the Law of One
Price
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Sample Questions
Q1) By evaluating cost and benefits using competitive market prices,we can determine whether a decision will make the firm and its investors wealthier.This central concept is called:
A) the Law of One Price.
B) the Present Value.
C) the Valuation Principle.
D) the Internal Rate of Return.
Answer: C
Q2) If the interest rate is 7%,the NPV of alternative #2 is closest to:
A) $350,000
B) $357,196
C) $370,561
D) $401,121
Answer: C
Q3) Assume that the ETF is trading for $366.00,what (if any)arbitrage opportunity exists? What (if any)trades would you make?
Answer: Value of ETF = 2 × 121.57 + 3 × 36.59 + 3 × 3.15 = $362.36,so an arbitrage opportunity exists.You should sell the EFT for $366.00 and buy 2 shares of IBM,3 shares of MRK,and 3 shares of C.
Page 5
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Chapter 4: The Time Value of Money
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Sample Questions
Q1) Henry Rearden is saving for retirement and has determined that to live comfortably he must save $3 million by his 65 birthday.Henry just turned 30 today,and he has decided that starting today and continuing on every birthday up to and including his 65th birthday,he will deposit the same amount into an individual retirement account (IRA).If Henry can earn 8% on his IRA,then the amount he must set aside each year to make sure that he will have $3 million in his account on his 65th birthday is closest to:
A) $16,035
B) $17,410
C) $83,335
D) $85,715
Q2) Draw a timeline detailing Joe's cash flows from the sale of the family business.
Q3) Assuming that college costs continue to increase an average of 4% per year and that all her college savings are invested in an account paying 7% interest,then the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education is closest to:
A) $97,110
B) $107,532
C) $101,291
D) $50,000
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Page 6
Chapter 5: Interest Rates
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Sample Questions
Q1) Assuming you pay the points and borrow from the mortgage lender at 6.00%,then your monthly mortgage payment (with payments made at the end of the month)will be closest to:
A) $708
B) $1530
C) $1540
D) $1600
Q2) The present value of an investment that pays $1,000 in two years and $5,000 in ten years for certain is closest to:
A) $3,660
B) $3,687
C) $3,707
D) $4,292
Q3) Assuming that you have made all of the first 24 payments on time,then how much interest have you paid over the first two years of your loan?
Q4) What is the effective after-tax rate of each instrument,expressed as an EAR?
Q5) Should the nominal interest rate ever be negative? Can the real interest rate ever be negative? Explain.
Q6) Should you purchase the delivery truck or lease it? Why?
Page 7
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Chapter 6: Valuing Bonds
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Sample Questions
Q1) Assuming the appropriate YTM on the Sisyphean bond is 9%,then this bond will trade at
A) a premium.
B) a discount.
C) par.
D) None of the above
Q2) Which of the four bonds is the most sensitive to a one percent increase in the YTM?
A) Bond A
B) Bond B
C) Bond C
D) Bond D
Q3) Suppose that when these bonds were issued,Luther received a price of $972.42 for each bond.What is the likely rating that Luther's bonds received?
A) AA
B) BBB
C) B
D) A
Q4) Assuming that this bond trades for $1,035.44,then the YTM for this bond is equal to:
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Page 8
Chapter 7: Investment Decision Rules
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Sample Questions
Q1) Which of the following statements is FALSE?
A) The profitability index measures the value created in terms of NPV per unit of resource consumed.
B) The profitability index is the ratio of value created to resources consumed.
C) The profitability index can can be easily adapted for determining the correct investment decisions when multiple resource constraints exist.
D) The profitability index measures the "bang for your buck."
Q2) If the discount rate for project A is 16%,then what is the NPV for project A?
Q3) The payback period for project Alpha is closest to:
A) 3.2 years
B) 2.9 years
C) 3.1 years
D) 2.6 years
Q4) If the discount rate for project B is 15%,then what is the NPV for project B?
Q5) The NPV of project B is closest to:
A) 12.6
B) 23.3
C) 12.0
D) 15.0
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Chapter 8: Fundamentals of Capital Budgeting
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Sample Questions
Q1) The incremental EBIT for Shepard Industries in year one is closest to:
A) $360
B) $750
C) $595
D) $510
Q2) The NPV for Epiphany's Project is closest to:
A) $4,825
B) $39,000
C) $11,946
D) $20,400
Q3) The required net working capital in the second year for the Sisyphean Corporation's project is closest to:
A) $3,960
B) $4,360
C) $3.190
D) $5,940
Q4) Assume that Kinston's new machine will be depreciated straight line to a salvage value of $5,000 at the end of year three.What is the after-tax salvage value of this project?
Q5) How does scenario analysis differ from sensitivity analysis?
Page 10
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Chapter 9: Valuing Stocks
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Sample Questions
Q1) Which of the following is NOT a way that a firm can increase its dividend?
A) By increasing its retention rate
B) By decreasing its shares outstanding
C) By increasing its earnings (net income)
D) By increasing its dividend payout rate
Q2) If you want to value a firm that has consistent earnings grow,but varies how it pays out these earnings to shareholders between dividends and repurchases,the simplest model for you to use is the:
A) enterprise value model.
B) dividend discount model.
C) total payout model.
D) discounted free cash flow model.
Q3) Wyatt oil presently pays no dividend.You anticipate Wyatt Oil will pay an annual dividend of $0.56 per share two years from today and you expect dividends to grow by 4% per year thereafter.In Wyatt Oil's equity cost of capital is 12%,then the value of a share of Wyatt oil today is:
A) $4.67
B) $5.00
C) $6.25
D) $7.00
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Chapter 10: Capital Markets and the Pricing of Risk
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Sample Questions
Q1) The expected return for Alpha Corporation is closest to:
A) 6.67%
B) 5.00%
C) 10%
D) 0.00%
Q2) What is the excess return for the portfolio of small stocks?
A) 10.0%
B) 15.7%
C) 18.4%
D) 17.0%
Q3) Which of the following investments offered the lowest overall return over the past eighty years?
A) Small stocks
B) Treasury Bills
C) S&P 500
D) Corporate bonds
Q4) Assume that you purchased J.P.Morgan Chase stock at the closing price on December 31,2008 and sold it at the closing price on December 30,2009.Calculate your realized annual return is for the year 2005.
Q5) What is the market portfolio?
12
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Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model
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Q1) Which of the following is NOT an assumption used in deriving the Capital Asset Pricing Model (CAPM)?
A) Investors have homogeneous expectations regarding the volatilities, correlation, and expected returns of securities.
B) Investors have homogeneous risk adverse preferences toward taking on risk.
C) Investors hold only efficient portfolios of traded securities, that is portfolios that yield the maximum expected return for the given level of volatility.
D) Investors can buy and sell all securities at competitive market prices without incurring taxes or transactions cost and can borrow and lend at the risk-free interest rate.
Q2) The Sharpe Ratio for Wyatt Oil is closest to:
A) 0.40
B) 0.48
C) 0.56
D) 0.80
Q3) Explain how having different interest rates for borrowing and lending affects the CAPM and the SML.
Q4) Will adding the precious metals fund improve your portfolio?
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Chapter 12: Estimating the Cost of Capital
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Q1) Your firm is planning to invest in a new power generation system.Galt Industries is an all equity firm that specializes in this business.Suppose Galt's equity beta is 0.75,the risk-free rate is 3%,and the market risk premium is 6%.If your firm's project is all equity financed,then your estimate of your cost of capital is closest to:
A) 5.25%
B) 6.00%
C) 6.75%
D) 7.50%
Q2) Merck's market capitalization is closest to:
A) $38.2 billion
B) $77.4 billion
C) $89.4 billion
D) $115.6 billion
Q3) The value of the gas and convenience store division is closest to:
A) $4,500
B) $6,000
C) $8,600
D) $15,000
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Chapter 13: Investor Behavior and Capital Market Efficiency
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Sample Questions
Q1) Portfolio "B":
A) is less risky than the market portfolio.
B) is overpriced.
C) has a positive alpha.
D) falls above the SML.
Q2) An individual's desire for intense risk-taking experiences is known as:
A) phenomenon seeking.
B) herd seeking.
C) sensation seeking.
D) rational expectations seeking.
Q3) Which of the following statements is FALSE?
A) Portfolios with high market capitalizations must have positive alphas if the market portfolio is not efficient.
B) The book-to-market is the observation that firms with high book-to-market ratios have positive alphas.
C) If the market portfolio is not efficient, then a portfolio of high book-to-market stocks will likely have positive alphas.
D) Portfolios with low book-to-market ratios must have zero alphas if the market portfolio is efficient.
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Chapter 14: Capital Structure in a Perfect Market
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Sample Questions
Q1) The number of shares that Galt must issue is closest to:
A) 15 million
B) 25 million
C) 30 million
D) 40 million
Q2) Consider the following equation: E + D = U = A
The A in this equation represents:
A) the value of the firm's debt.
B) the market value of the firm's assets.
C) the value of the firm's equity.
D) the value of the firm's unlevered equity.
Q3) Suppose the risk-free interest rate is 4%.If Nielson borrows $150 million today at this rate and uses the proceeds to pay an immediate cash dividend,then according to MM,the market value of its equity just after the dividend is paid would be closest to:
A) $0 million
B) $150 million
C) $250 million
D) $400 million
Q4) What is the conservation of value principle?
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Chapter 15: Debt and Taxes
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Sample Questions
Q1) Assume that five years have passed since Wyatt issued this debt.While tax rates have remained at 40%,interest rates have dropped so that Wyatt's current cost of debt capital is now only 4%.Wyatt's annual interest tax shield is now closest to:
A) $2.8 million
B) $4.2 million
C) $40.0 million
D) $60.0 million
Q2) If Flagstaff currently maintains a debt to equity ratio of 1,then the value of Flagstaff as a levered firm is closest to:
A) $114 million
B) $100 million
C) $111 million
D) $140 million
Q3) MJ Enterprises has 50 million shares outstanding with a market price of $25 per share and no debt.MJ has had consistently stable earnings,and pays a 35% tax rate.Management plans to borrow $500 million on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares.Calculate MJ's share price following announcement of the recapitalization plan.
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Page 17
Chapter 16: Financial Distress, managerial Incentives, and Information
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Q1) Assume that in the event of default,20% of the value of MI's assets will be lost in bankruptcy costs.Suppose that at the start of the year,MI has no debt outstanding,but has 5.6 million shares of stock outstanding.If MI does not issue debt,its share price is closest to:
A) $5.15
B) $23.75
C) $23.90
D) $25.00
Q2) What is the expected payoff to debt holders with the speculative oil lease deal?
A) $10 million
B) $275 million
C) $85 million
D) $160 million
Q3) The value of Luther without leverage is closest to:
A) $315 million
B) $300 million
C) $205 million
D) $340 million
Q4) List five general categories of indirect costs associated with bankruptcy.
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Chapter 17: Payout Policy
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Q1) Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.The amount of the special dividend is closest to:
A) $5.00
B) $9.00
C) $4.00
D) $4.50
Q2) The effective dividend tax rate for a pension fund in 1999 is closest to:
A) 40%
B) 20%
C) 0%
D) 25%
Q3) The effective dividend tax rate for a one-year individual investor in 1999 is closest to:
A) 0%
B) 20%
C) 25%
D) 40%
Q4) Calculate the effective tax disadvantage for retaining cash in 1999,2001,and 2005.
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Chapter 18: Capital Budgeting and Valuation With Leverage
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Sample Questions
Q1) The value of Galt's equity using the APV method is closest to:
A) $150 million
B) $180 million
C) $230 million
D) $240 million
Q2) If Wyatt adjusts its debt continuously to maintain a constant debt-equity ratio of 50%,then the value of this new project is closest to:
A) $188 million
B) $188.5 million
C) $320 million
D) $340 million
Q3) Suppose that to fund this new project,Aardvark borrows $150 with the principal to be paid in three equal installments at the end each year.Calculate the present value of Aardvark's interest tax shield.
Q4) The weighted average cost of capital for "Minie" is closest to:
A) 9.50%
B) 8.75%
C) 6.75%
D) 8.25%
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Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) If the risk-free rate of interest is 6% and the market risk premium has historically averaged 5%,then the cost of capital for Luxottica is closest to:
A) 10.2%
B) 13.5%
C) 9.1%
D) 14.7%
Q2) If Ideko's future expected growth rate is 5% and its WACC is 9%,then the continuation value in 2010 is closest to:
A) 164,200
B) 278,775
C) 280,450
D) 303,425
Q3) Based upon Ideko's Sales and Operating Cost Assumptions,what production capacity will Ideko require in 2009?
A) 1,505 units
B) 1,115 units
C) 1,323 units
D) 1,702 units
Q4) What is the purpose of the sensitivity analysis?
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