Corporate Finance
Exam Bank
Course Introduction
Corporate Finance explores the fundamental principles and practices that govern financial decision-making within corporations. The course covers key topics such as capital budgeting, risk and return, cost of capital, financial analysis, capital structure, dividend policy, and asset valuation. Through real-world case studies and analytical tools, students learn how managers assess investment opportunities, raise funds, manage financial resources, and maximize shareholder value, all while balancing risk and ethical considerations in a dynamic business environment.
Recommended Textbook
Principles of Managerial Finance 14th Edition by Lawrence J. Gitman
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3256 Verified Questions
3256 Flashcards
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Chapter 1: The Role of Managerial Finance
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Sample Questions
Q1) Which of the following is an area of career opportunities in managerial finance?
A) investment
B) real estate and insurance
C) capital expenditures management
D) personal financial planning
Answer: C
Q2) To achieve the goal of profit maximization for each alternative being considered, a financial manager would select the one that is expected to result in the highest return.
A)True
B)False
Answer: True
Q3) The ________ has/have the ultimate responsibility in guiding corporate affairs and carrying out policies.
A) board of directors
B) chief financial officer
C) stockholders
D) creditors
Answer: A
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Chapter 2: The Financial Market Environment
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Sample Questions
Q1) The Glass-Steagall Act was imposed to allow commercial and investment banks to combine and work together.
A)True
B)False
Answer: False
Q2) Money markets are markets for long-term funds such as bonds and equity.
A)True
B)False
Answer: False
Q3) Meese Paper Distributors, Inc. has before-tax earnings of $1,900,000. Calculate the amount of the total tax liability.
Range of taxable income Marginal rate
$ 0 to $ 50,000 15%
50,000 to 75,000 25
75,000 to 100,000 34
100,000 to 335,000 39
335,000 to 10,000,000 34
10,000,000 to 15,000,000 35
15,000,000 to 18,333,333 38
Answer: Meese Paper Distributors 11ea7f25_7b57_cb10_9ecd_9d3561909334_TB2929_00
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Chapter 3: Financial Statements and Ratio Analysis
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Sample Questions
Q1) Nico Corporation has cost of goods sold of $300,000 and inventory of $30,000, then the inventory turnover is ________ and the average age of inventory is ________.
A) 36.5; 10
B) 10; 36.5
C) 36.0; 10
D) 30; 36.0
Answer: B
Q2) The statement of cash flows provides insight into a firm's operating, investment, and financing cash flows and reconciles them with changes in its cash and marketable securities during the period of concern.
A)True
B)False
Answer: True
Q3) The three basic ratios used in the DuPont system of analysis are ________.
A) net profit margin, total asset turnover, and return on investment
B) net profit margin, total asset turnover, and return on equity
C) net profit margin, total asset turnover, and equity multiplier
D) net profit margin, financial leverage multiplier, and return on equity
Answer: C
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Chapter 4: Cash Flow and Financial Planning
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Sample Questions
Q1) The statement of cash flows allows the financial manager and other interested parties to analyze a firm's past and possibly future profitability.
A)True
B)False
Q2) The three categories of a firm's statement of cash flows are ________.
A) cash flow from operating activities, cash flow from investment activities, and cash flow from noncash activities
B) cash flow from operating activities, cash flow from noncash activities, and cash flow from financing activities
C) cash flow from equity activities, cash flow from investment activities, and cash flow from financing activities
D) cash flow from operating activities, cash flow from investment activities, and cash flow from financing activities
Q3) The required total financing figures in the cash budget refer to the monthly changes in borrowing.
A)True B)False
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Page 6
Chapter 5: Time Value of Money
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Sample Questions
Q1) Find the equal annual end-of-year payment on $50,000, 15 year, and 10 percent loan.
Q2) An ordinary annuity is an annuity in which cash flows occur at the beginning of each period.
A)True B)False
Q3) What effective annual rate of return (EAR) would Rayne need to earn if she deposits $1,000 per month into an account beginning one month from today in order to have a total of $1,000,000 in 30 years?
A) 5.98%
B) 6.55%
C) 4.87%
D) 6.14%
Q4) In general, with an amortized loan, the payment amount remains constant over the life of the loan, the principal portion of each payment grows over the life of the loan, and the interest portion of each payment declines over the life of the loan.
A)True B)False
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) A $1,000, 8% bond sells for 980. $1,000 is called the ________.
A) current value
B) market value
C) par value
D) auction value
Q2) The ________ feature permits the issuer to repurchase bonds at a stated price prior to maturity.
A) call
B) conversion
C) put
D) swap
Q3) Restrictive covenants are contractual clauses in long-term debt agreements that place certain operating and financial constraints on the borrower.
A)True
B)False
Q4) Longer the maturity, higher is the cost of a bond.
A)True
B)False
Q5) Explain liquidity, default risk, and maturity risk premiums.
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Chapter 7: Stock Valuation
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Sample Questions
Q1) In an inefficient market, securities are typically in equilibrium, which means that they are fairly priced and that their expected returns equal their required returns.
A)True
B)False
Q2) An 8 percent preferred stock with a market price of $110 per share and a $100 par value pays a cash dividend of ________.
A) $4.00
B) $8.00
C) $8.80
D) $80.00
Q3) A firm issued 10,000 shares of $2 par-value common stock, receiving proceeds of $40 per share. The amount recorded for the paid-in capital in excess of par account is ________.
A) $420,000
B) $380,000
C) $400,000
D) $800,000
Q4) Calculate the estimated dividend for 2015. (See Table 7.1)
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Chapter 8: Risk and Return
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Sample Questions
Q1) The portfolio with a standard deviation of zero ________. (See Table 8.1)
A) is comprised of Assets A and B
B) is comprised of Assets A and C
C) is not possible
D) cannot be determined
Q2) For a risk-averse manager, required return would decrease for an increase in risk.
A)True
B)False
Q3) Combining two assets having perfectly negatively correlated returns will result in the creation of a portfolio with an overall risk that ________.
A) remains unchanged
B) decreases to a level below that of either asset
C) increases to a level above that of either asset
D) stabilizes to a level between the asset with the higher risk and the asset with the lower risk
Q4) Asset A was purchased six months ago for $25,000 and has generated $1,500 cash flow during that period. What is the asset's rate of return if it can be sold for $26,750 today?
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Page 10
Chapter 9: The Cost of Capital
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Sample Questions
Q1) The firm's before-tax cost of debt is ________. (See Table 9.2)
A) 7.7 percent
B) 10.6 percent
C) 11.2 percent
D) 12.7 percent
Q2) The marginal cost of capital is a relevant cost of capital for evaluating a firm's future investment opportunities.
A)True
B)False
Q3) A firm has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The cost of the preferred stock is ________.
A) 7.2 percent
B) 12 percent
C) 12.4 percent
D) 15 percent
Q4) Since preferred stock is a form of ownership, it has no maturity date.
A)True
B)False
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Chapter 10: Capital Budgeting Techniques
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Sample Questions
Q1) Which of the following is a disadvantage of payback period approach?
A) It does not examine the size of the initial outlay.
B) It does not use net profits as a measure of return.
C) It does not explicitly consider the time value of money.
D) It does not take into account an unconventional cash flow pattern.
Q2) Which of the following is a reason that makes NPV a better approach to capital budgeting on a purely theoretical basis?
A) It measures the benefits relative to the relative amount invested.
B) The reinvestment rate assumed by this method is reasonable.
C) Financial decision makers are inclined to higher rates of return.
D) Interest rates are expressed as annual rates of return.
Q3) The payback period of a project that costs $1,000 initially and promises after-tax cash inflows of $300 each year for the next three years is 0.333 years.
A)True
B)False
Q4) For conventional projects, both NPV and IRR techniques will always generate the same accept-reject decision.
A)True
B)False
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Chapter 11: Capital Budgeting Cash Flows
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Sample Questions
Q1) Which of the following basic variables must be considered in determining the initial investment associated with a capital expenditure?
A) incremental annual savings produced by the new asset
B) cash flows generated by the new investment
C) proceeds from the sale of an existing asset
D) profits on the sale of an existing asset
Q2) A corporation is selling an existing asset for $1,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is ________.
A) $0 tax liability
B) $1,100 tax liability
C) $3,600 tax liability
D) $280 tax benefit
Q3) In evaluating the initial investment for a capital budgeting project, ________.
A) an increase in net working capital is considered a cash inflow
B) a decrease in net working capital is considered a cash outflow
C) an increase in net working capital is considered a cash outflow
D) net working capital does not have to be considered
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Chapter 12: Risk and Refinements in Capital Budgeting
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Sample Questions
Q1) The shares traded publicly in an efficient market are ________.
A) generally positively affected by diversification, because of the reduction in risk
B) generally negatively affected by diversification, because of the increase in risk
C) generally not affected by diversification, unless greater returns are expected
D) generally negatively affected by diversification, because of the increase in the required rate of return
Q2) The break even cash inflow is the minimum level of cash inflow necessary for a project to be acceptable.
A)True
B)False
Q3) Which project should be chosen on the basis of the normal NPV approach? (See Table 12.6)
A) Project A because its NPV is higher
B) Project B because its NPV is higher
C) Project A because its IRR is higher
D) Project B because its IRR is higher
Q4) Evaluate the projects using risk-adjusted discount rates. (See Table 12.4)
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14
Chapter 13: Leverage and Capital Structure
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Q1) The reason why maximizing share value and maximizing EPS do not give the same optimal capital structure is because ________.
A) EPS maximization does not consider risk
B) share value maximization does not consider risk
C) EPS maximization considers cash flows
D) EPS maximization does consider risk
Q2) Fixed financial charges include ________.
A) common stock dividends and bond interest expense
B) common stock dividends and preferred stock dividends
C) bond interest expense and preferred stock dividends
D) stock repurchase expense
Q3) The EBIT-EPS approach to capital structure proposes that an optimal capital structure be selected which ________.
A) maximizes the weighted average cost of capital
B) minimizes the cost of debt
C) maximizes the EPS
D) minimizes dividends
Q4) Assuming a 40 percent tax rate, what is the financial breakeven point for each plan?
(See Table 13.1)
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Chapter 14: Payout Policy
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Sample Questions
Q1) The payment date is five days after the date of record, on which the company will mail the dividend payment to the holders of record.
A)True
B)False
Q2) Modigliani and Miller argue that when a firm has no acceptable investment opportunities, it should ________.
A) preserve the funds and not declare dividends
B) distribute the surplus funds to the owners
C) lower its cost of capital
D) retain the funds until an acceptable project arises
Q3) The payment of cash dividends to corporate stockholders is decided by the ________.
A) creditors
B) stockholders
C) SEC
D) board of directors
Q4) A stock split commonly increases the stock's per share par value.
A)True
B)False
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Chapter 15: Working Capital and Current Assets Management
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Sample Questions
Q1) If the firm's current liabilities in December were $40,000, the net working capital was ________. (See Table 15.1)
A) $140,000
B) $60,000
C) $10,000
D) -$10,000
Q2) Credit analysts usually analyze an applicant's creditworthiness by using the dimensions of credit such as character, capacity, capital, collateral, and conditions.
A)True
B)False
Q3) ________ are established to evaluate a customer's creditworthiness and to determine the minimum requirements for extending credit to a customer.
A) Lines of credit
B) Credit limits
C) Collection agencies
D) Credit standards
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Chapter 16: Current Liabilities Management
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Sample Questions
Q1) As sales increase, a company needs more inventory and more employees resulting in ________.
A) more accounts payable and accruals, and therefore increasing its spontaneous liabilities
B) less accounts payable and accruals, and therefore decreasing its spontaneous liabilities
C) more accounts payable and accruals, and therefore decreasing its spontaneous liabilities
D) less accounts payable and accruals, and therefore increasing its spontaneous liabilities
Q2) ________ are liabilities for services received for which payment has yet to be made.
A) Notes payable
B) Accruals
C) Accounts payable
D) Accounts receivable
Q3) If a firm anticipates stretching accounts payable, its cost of giving up a cash discount is reduced.
A)True
B)False
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Chapter 17: Hybrid and Derivative Securities
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Sample Questions
Q1) Both warrants and rights result in new capital equity. However, warrants are issued at an exercise price below the prevailing market price of the stock, whereas rights are issued at a subscription price above the prevailing market price.
A)True
B)False
Q2) In a financial statement of the firm, put and call options ________.
A) determine cash management policy
B) influence the capital structure decision
C) affect bond financing
D) have no influence
Q3) A firm has an outstanding bond with a $1,000 par value that is convertible at $40 per share of common stock. If the current market value of common stock per share is $45, the conversion value of the bond is ________.
A) $880
B) $1,000
C) $1,125
D) $1,200
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Chapter 18: Mergers, Lbos, Divestitures, and Business Failure
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Sample Questions
Q1) A merger occurs when two or more firms are combined to form a completely new corporation.
A)True
B)False
Q2) The use of a large amount of debt to finance the acquisition of other firms is a
A) conglomerate merger
B) leveraged buyout
C) hostile merger
D) congeneric buyout
Q3) A ________ occurs when the operations of the acquiring and target firms are combined in order to achieve economies and thereby cause the performance of the merged firm to exceed that of the pre-merged firm.
A) financial merger
B) hostile takeover
C) operating merger
D) strategic merger
Q4) In an LBO, 90 percent or more of the purchase price is financed with debt.
A)True
B)False
Page 20
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Chapter 19: International Managerial Finance
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Sample Questions
Q1) The risk resulting from the effects of changes in foreign exchange rates on the firm's value is ________.
A) economic exposure
B) macro political risk
C) accounting exposure
D) micro political risk
Q2) If the exchange rate between the U.S. dollar and the Euro is $1.20 per Euro and the annual rate of inflation is 5 percent in the United States and 10 percent in Europe, what will be U.S. dollar per Euro exchange rate in one year?
A) 1.050
B) 0.8730
C) 1.257
D) 0.7955
Q3) Recent years have seen the emergence of a third path to political risk that encompasses "global" events such as terrorism, antiglobalization movements and protests, Internet-based risks, and concerns over poverty, AIDS, and the environment all affect various MNCs' operations worldwide.
A)True
B)False
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