Corporate Finance
Exam Materials
Course Introduction
Corporate Finance explores the principles and practices involved in managing a firm's financial resources to maximize shareholder value. The course covers key topics such as capital budgeting, capital structure decisions, cost of capital, financial statement analysis, valuation techniques, and the management of working capital. Students will examine both theoretical frameworks and practical tools used in financing decisions, investment appraisal, risk analysis, and dividend policy, enabling them to critically analyze real-world corporate finance issues and make informed business decisions.
Recommended Textbook
Corporate Finance Core Principles and Applications 5th Ediiton by Stephen A. Ross
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21 Chapters
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) Which form of business structure faces the greatest agency problems?
A)Sole proprietorship
B)General partnership
C)Limited partnership
D)Limited liability company
E)Corporation
Answer: E
Q2) Who ultimately controls a corporation?
A)Stakeholders
B)Chairman of the board
C)Stockholders
D)Chief executive officer
E)Board of directors
Answer: C
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3
Chapter 2: Financial Statements and Cash Flow
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Sample Questions
Q1) ________ refers to the difference between a firm's current assets and its current liabilities.
A)Operating cash flow
B)Capital spending
C)Net working capital
D)Cash flow from assets
E)Cash flow to creditors
Answer: C
Q2) The carrying value or book value of assets
A)is always the best measure of a company's value to an investor.
B)represents an average market value over time.
C)is always higher than the replacement cost of the assets.
D)is determined under GAAP and is based on the cost of the assets.
E)is determined under GAAP and is based on the current market value of the assets.
Answer: D
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Chapter 3: Financial Statements Analysis and Financial Models
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Sample Questions
Q1) Marcel's has a debt-equity ratio of 0.32,a capital intensity ratio of 1.02,and a profit margin of 6.7 percent.What is the return on equity?
A)8.67%
B)7.89%
C)13.13%
D)14.57%
E)12.47%
Answer: A
Q2) Which ratio calculates the amount of sales generated by each $1 of debt and equity invested in the firm?
A)Total asset turnover
B)Return on equity
C)Return on assets
D)Equity multiplier
E)DuPont identity
Answer: A
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Chapter 4: Discounted Cash Flow Valuation
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Sample Questions
Q1) Today,the Corner Store borrowed $11,680 at 6.3 percent,compounded monthly.The loan payment is $195.23 a month.How many loan payments must the firm make before the loan is paid in full?
A)72 years
B)60 years
C)48 years
D)72 months
E)60 months
Q2) The growing perpetuity present value formula assumes that
A)g = r and the time periods are limited in number.
B)g < r and the time periods are regular and discrete.
C)the growth rate increases as time progresses.
D)the first cash flow occurs at Time 0.
E)g < r and the time periods are finite.
Q3) The future value of an annuity due is computed as
A)C(1 + r)<sup>T</sup>
B)C{[(1 + r)<sup>T</sup> - 1] / r}
C)C{[(1 + r)<sup>T</sup> - 1] / (1 + r)}
D)C(1 + r)<sup>T</sup> - 1 / (1 + r)
E)C{[(1 + r)<sup>T</sup> - 1] / r}(1 + r)
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Chapter 5: Interest Rates and Bond Valuation
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Sample Questions
Q1) Debt securities
A)increase a firm's cost of doing business.
B)pay tax-deductible dividends.
C)are treated the same as equity securities in a bankruptcy proceeding.
D)represent a minority ownership interest in the issuer.
E)are considered a liability only at the time payment is actually due.
Q2) A bond currently sells for $924.58,matures in 11 years,pays $27.50 every 6 months in interest,and has a face value of $1,000.What is the yield to maturity?
A)6.47%
B)5.98%
C)5.01%
D)3.23%
E)4.07%
Q3) Interest rate risk ________ as the time to maturity increases.
A)increases at an increasing rate
B)increases at a decreasing rate
C)increases at a constant rate
D)decreases at an increasing rate
E)decreases at a decreasing rate
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Page 7
Chapter 6: Stock Valuation
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Sample Questions
Q1) The Extreme Reaches Corp.'s last annual dividend was $1.98 per share.The company is planning on paying $2,$2,$2.50,and $3 a share over the next 4 years,respectively.After that,the dividend will be a constant $2.50 per share per year.What is the current price of this stock if the rate of return is 13 percent?
A)$19.17
B)$21.96
C)$16.57
D)$18.70
E)$23.71
Q2) A ________ is a form of equity security that has a stated liquidating value.
A)debenture
B)bond
C)common stock
D)preferred stock
E)proxy
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Chapter 7: Net Present Value and Other Investment Rules
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Sample Questions
Q1) A firm should accept projects with positive net present values primarily because those projects will
A)produce cash inflows that exceed the cash outflows.
B)return the firm's initial cash outlay within 1 year.
C)create value for the firm's current stockholders.
D)produce only positive cash flows after the initial investment period.
E)increase the current liquidity of the firm.
Q2) A project has an initial cost of $48,900 and cash flows of $31,300,-$11,600,and $40,300 for Years 1 to 3,respectively.The discount rate is 14 percent.What is the modified IRR?
A)11.68%
B)15.59%
C)10.59%
D)12.67%
E)14.92%
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9
Chapter 8: Making Capital Investment Decisions
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Sample Questions
Q1) Which of the following are correct methods of computing the operating cash flow of a project assuming that the interest expense is equal to zero?
I.EBIT + Depreciation Taxes
II.EBIT Depreciation + Taxes
III.Net Income Depreciation
IV.[(Sales Costs)× (1 Tax rate)] + [Depreciation × Tax rate]
A)I and III only
B)II and IV only
C)II and III only
D)I and IV only
E)I,III,and IV only
Q2) Which one of these is a requirement when computing the net present value of a capital project?
A)The discount rate used must be a nominal rate.
B)The discount rate must be stated in real terms.
C)Nominal cash flows must be discounted using a real rate.
D)Real cash flows must be converted to nominal cash flows.
E)Real cash flows must be discounted using a real rate.
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Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
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Sample Questions
Q1) At a production level of 7,500 units,a project has earnings before interest and taxes of $48,310.Depreciation is $9,700,and fixed costs are $12,200.What is the variable cost per unit if the sales price per unit is $29.50?
A)$21.43
B)$24.07
C)$17.76
D)$18.92
E)$20.14
Q2) A project with a current negative net present value
A)might have a positive net present value at a later date in time.
B)should still be accepted if it can breakeven on an accounting profit basis.
C)should still be accepted if its projected sales quantity is less than the financial breakeven point.
D)should be permanently rejected.
E)will always have a higher (less negative)net present value at a later time.
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11
Chapter 10: Risk and Return: Lessons From Market History
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Sample Questions
Q1) Kurt's Toy Co.has total annual returns for the past 5 years of -8.2 percent,11.7 percent,-6.4 percent,18.7 percent,and 6.8 percent.What is the 5-year holding period return?
A)9.00%
B)17.50%
C)22.60%
D)21.67%
E)20.33%
Q2) The risk premium is computed by ________ the average rate of return for an investment.
A)subtracting the inflation rate from B)adding the inflation rate to
C)subtracting the average return on U.S.Treasury bills from D)adding the average return on U.S.Treasury bills to E)subtracting the average return on long-term government bonds from
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12
Chapter 11: Return and Risk: The Capital Asset Pricing Model
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Sample Questions
Q1) A portfolio is expected to return 18 percent in a booming economy,13 percent in a normal economy,and lose 11 percent if the economy falls into a recession.The probability of a boom is 3 percent while the probability of a recession is 25 percent.What is the overall portfolio expected return?
A)8.40%
B)6.83%
C)7.15%
D)6.05%
E)2.81%
Q2) The excess return earned by an asset that has a beta of one over that earned by a risk-free asset is referred to as the
A)market rate of return.
B)systematic return.
C)real rate of return.
D)market risk premium.
E)total return.
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Page 13
Chapter 12: Risk, Cost of Capital, and Valuation
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Sample Questions
Q1) The terminal value of a company is based on which one of these assumptions?
A)The growth rate of the future cash flows will exceed the company's WACC.
B)All future cash flows will be constant.
C)The cash flows after Time T will diminish on an annual basis.
D)The cash flows will increase in the future at a constant perpetual rate.
E)The company will be sold at Time T for the stated terminal value.
Q2) If you assume beta is greater than 1,then which of these will increase the cost of equity capital according to CAPM?
I.Increase in the risk-free rate
II.Decrease in the risk-free rate
III.Increase in the market rate of return
IV.Decrease in the market rate of return
A)III only
B)I and III only
C)I and IV only
D)II and IV only
E)II and III only
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Chapter 13: Efficient Capital Markets and Behavioral Challenges
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Sample Questions
Q1) The hypothesis that market prices reflect all available information of every kind is called ________ form efficiency.
A)stable
B)weak
C)semistrong
D)strong
E)open
Q2) Researchers have found that over long periods of time
A)the difference between the returns on large company and small company stocks is due solely to the difference in their risks.
B)strong form market efficiency exists,without argument.
C)large company stocks tend to outperform small company stocks.
D)arbitrage has no effect on market efficiency.
E)value stocks may outperform growth stocks on a risk-adjusted basis but no firm conclusion can be drawn.
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Chapter 14: Capital Structure: Basic Concepts
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Sample Questions
Q1) An all-equity firm has expected earnings of $14,200 and a market value of $82,271.The firm is planning to issue $15,000 of debt at 6.3 percent interest and use the proceeds to repurchase shares at their current market value.Ignore taxes.What will be the cost of equity after the repurchase?
A)17.99%
B)18.08%
C)19.70%
D)18.97%
E)19.55%
Q2) Delta Mills and Franklin Mill are identical firms except for their capital structures.Delta is an unlevered firm with $680,000 of equity.Franklin is a levered firm with $425,000 of equity and $255,000 of debt at an interest rate of 6.2 percent.Both Delta and Franklin have an expected EBIT of $84,000.Ignore taxes.Delta has a WACC of ________ percent and Franklin's WACC is ________ percent.
A)12.35; 11.05
B)12.35; 14.10
C)12.35; 12.35
D)14.10; 14.10
E)16.10; 14.10
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Page 16
Chapter 15: Capital Structure: Limits to the Use of Debt
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Sample Questions
Q1) Which one of these is a payment of a nonmarketed claim on a firm's cash flows?
A)Dividend payment
B)Principal repayment of a bond
C)Repurchase of stock
D)Payment of a customer's liability claim
E)Payment of interest due on a bond
Q2) Corporations in the U.S.tend to
A)have extremely high debt-equity ratios.
B)rely less on equity financing than they should.
C)minimize taxes.
D)underutilize debt.
E)rely more heavily on bonds than stocks as the major source of financing.
Q3) The optimal capital structure has been achieved when the
A)weight of equity is equal to the weight of debt.
B)debt-equity ratio selected results in the lowest possible weighted average cost of capital.
C)firm is totally financed with debt.
D)debt-equity ratio is such that the cost of debt exceeds the cost of equity.
E)cost of equity is maximized.
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Page 17
Chapter 16: Dividends and Other Payouts
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Sample Questions
Q1) Of the following factors,which one is considered to be the primary factor affecting a firm's dividend decision?
A)The personal taxes company stockholders incur on dividend distributions
B)Maintaining consistency with the historical dividend policy
C)Attracting retail investors
D)Attracting institutional investors
E)Sustainable changes in earnings
Q2) A reverse stock split associated with a cash buyout is sometimes used as a means of
A)decreasing the liquidity of a stock.
B)decreasing the market value per share of stock.
C)increasing the number of stockholders.
D)raising cash from current stockholders.
E)eliminating small stockholders.
Q3) The information content of a regular dividend increase generally signals that
A)management believes the future earnings of the firm will be strong.
B)the firm has recently sold a subsidiary.
C)the firm has a one-time surplus of cash.
D)the firm has more cash than it needs due to declining sales.
E)future dividends will be lower.
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Chapter 17: Options and Corporate Finance
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Sample Questions
Q1) The $17.50 put option on ALF stock is priced at $.75.What is the total intrinsic value of one option contract if the underlying stock is currently selling for $18 a share?
A) $50
B) $25
C)$0
D)$25
E)$50
Q2) The maximum payoff to the seller of a call is A)zero.
B)equal to the stock price.
C)equal to the exercise price.
D)not quantifiable.
E)unlimited.
Q3) If you express a firm in terms of put options,the A)current value of the firm is the exercise price.
B)option will always be in the money.
C)stockholders will be considered as the firm's owners.
D)bondholders determine whether or not the option will be exercised.
E)bondholders are the buyers of the put.
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Chapter 18: Short-Term Finance and Planning
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Sample Questions
Q1) Buster's had a beginning cash balance of $2,780 for the quarter.During the quarter,the firm had cash collections of $41,309,wages and other cash expenses of $18,800,payments on account of $21,308,and dividends paid of $1,200.The beginning short-term debt is $6,800 with a quarterly interest rate of 2 percent.The firm just adopted a new policy which sets the minimum cash balance at $600.At quarter end,the cumulative surplus (deficit)is ________ and the ending short-term debt is ________.
A)$0; $6,800
B)$0; $4,755
C)$0; $4,891
D)$1,892; $4,891
E)$2,045; $4,755
Q2) A firm has an inventory turnover rate of 15.2,a receivables turnover rate of 16.8,and a payables turnover rate of 12.7.How long is the operating cycle?
A)39.19 days
B)45.74 days
C)42.87 days
D)33.08 days
E)53.37 days
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Page 20
Chapter 19: Raising Capital
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Sample Questions
Q1) Spring Aire is attempting to sell 600 shares of stock via a Dutch auction.The bids received were Bidder A,200 shares at $47; Bidder B,300 shares at $46; Bidder C,600 shares at $45; and Bidder D,500 shares at $43.How many shares will Bidder A be able to purchase?
A)0 shares
B)50 shares
C)140 shares
D)109 shares
E)200 shares
Q2) The specified period of time following an IPO when insiders are prevented from selling their shares is called the:
A)lockup period.
B)quiet period.
C)comment period.
D)Green Shoe period.
E)waiting period.
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Chapter 20: International Corporate Finance
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Sample Questions
Q1) The foreign currency approach to capital budgeting analysis
A)is computationally harder to use than the home currency approach.
B)produces different results than the home currency approach.
C)computes the NPV of a project in both the foreign and the domestic currency.
D)relies on the international Fisher effect for the exchange rate.
E)relies on the uncovered interest rate parity to project multiple exchange rates.
Q2) Assume the spot exchange rate is A$.8629.The expected inflation rate is 2.8 percent in Australia and 3.4 percent in the United States.What is the expected exchange rate one year from now if relative purchasing power parity exists?
A)A$.8681
B)A$.8618
C)A$.8523
D)A$.8577
E)A$.8669
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Chapter 21: Mergers and Acquisitions Web Only
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Sample Questions
Q1) The sale of all,or any part of,Firm A's assets to Firm B is referred to as
A)a reversal.
B)a divestiture.
C)an equity carve-out.
D)a spin-off.
E)a split-up.
Q2) Under the purchase accounting method,
A)goodwill must be amortized straight-line over the target firm's estimated life.
B)acquired assets are recorded based on their target firms' book values.
C)goodwill always remains on the acquirer's books at its original value.
D)goodwill will generally be a long-term liability on the acquirer's books.
E)acquired assets are recorded at fair market value.
Q3) A tender offer is often contingent upon the
A)approval of the target firm's board of directors.
B)approval of both the acquirer's and bidder's shareholders during their respective shareholder meetings.
C)acquisition being friendly in nature.
D)bidder obtaining its desired percentage of voting shares in the target firm.
E)approval of the target firm's officers.
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Page 23