Course Introduction
Corporate Finance
Final Exam Questions
Corporate Finance explores the fundamental principles and techniques used by organizations to make effective financial decisions. This course covers topics such as time value of money, capital budgeting, risk and return, cost of capital, capital structure, dividend policy, and working capital management. Students will learn to analyze financial statements, evaluate investment opportunities, and understand the strategic implications of financial choices within a corporate context. Through case studies and practical exercises, learners will develop the skills necessary to assess financial risks and rewards, optimize financial performance, and contribute to the long-term value creation of firms.
Recommended Textbook
Finance Applications and Theory 4th Edition by Marcia Cornett
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20 Chapters
2227 Verified Questions
2227 Flashcards
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Page 2
Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) Agency problems exist in which forms of business ownership?
A)sole proprietorship
B)S corporation
C)partnership
D)corporation
Answer: D
Q2) The increase in oil production in the United States characterizes which of the following key financial concepts presented in this book?
A)the Rule of 72
B)time value of money
C)risk and return
D)capital budgeting
Answer: D
Q3) Which of these must effectively distribute capital between investors and companies?
A)individuals
B)international investors
C)companies
D)financial institutions
Answer: D
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Chapter 2: Reviewing Financial Statements
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Sample Questions
Q1) GW Inc. had $800 million in retained earnings at the beginning of the year. During the year, the firm paid $0.75 per share dividend and generated $1.92 earnings per share. The firm has 100 million shares outstanding. At the end of year, what was the level of retained earnings for GW?
A)$725 million
B)$917 million
C)$882 million
D)$807 million
Answer: B
Q2) Which financial statement reports the amounts of cash that the firm generated and distributed during a particular time period?
A)balance sheet
B)income statement
C)statement of retained earnings
D)statement of cash flows
Answer: D
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Chapter 3: Analyzing Financial Statements
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Sample Questions
Q1) Oasis Products, Inc. has current liabilities = $10 million, current ratio = 1.5 times, inventory turnover ratio = 12 times, average collection period = 20 days, and sales = $100 million. What is the value of their cash and marketable securities?
A)$1,187,215
B)$8,333,333
C)$15,000,000
D)$17,146,188
Answer: A
Q2) A firm has EBIT of $300,000 and depreciation expense of $12,000. Fixed charges total $44,000. Interest expense totals $7,000. What is the firm's cash coverage ratio?
A)3.76 times
B)4.91 times
C)7.25 times
D)7.09 times
Answer: D
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Chapter 4: Time Value of Money 1: Analyzing Single Cash Flows
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Sample Questions
Q1) Which of the following statements is incorrect with respect to time lines?
A) A helpful tool for organizing our analysis is the time line.
B) Cash flows we receive are called inflows and denoted with a positive number.
C) Cash flows we pay out are called outflows and designated with a negative number.
D) Interest rates are not included on our time lines.
Q2) We call the process of earning interest on both the original deposit and on the earlier interest payments
A) discounting.
B) multiplying.
C) compounding.
D) computing.
Q3) At age 25 you invest $2,000 that earns 6 percent each year. At age 35 you invest $2,000 that earns 9 percent per year. In which case would you have more money at age 60?
A) At age 25 invest $2,000 at 6 percent.
B) At age 35 invest $2,000 at 9 percent.
C) Both yield the same amount at age 60.
D) There is not enough information to determine which case earns the most money at age 60.
Page 6
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Chapter 5: Time Value of Money 2: Analyzing Annuity Cash
Flows
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Sample Questions
Q1) Jane has been saving $200 in her retirement account each month for the last 20 years and plans to continue contributing $200 each month for the next 20 years. Her account has been earning an 8 percent annual interest rate and she expects to earn the same rate for the next 20 years. Her twin brother, Hal, has not saved anything for the last 20 years. Due to sibling rivalry, he wants to have as much as Jane is expected to have at the end of 20 years. If Hal expects to earn the same annual interest rate as Jane, how much must Hal save each month to achieve his goal?
A)$400.00
B)$1,185.36
C)$1,569.85
D)$2,909.17
Q2) To compute the present or future value of an annuity due, one computes the value of an ordinary annuity and then
A) multiplies it by (1 + i).
B)divides it by (1 + i).
C)multiplies it by (1 i).
D)divides it by (1 i).
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Chapter 6: Understanding Financial Markets and Institutions
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Sample Questions
Q1) The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 6.75 percent, on 20-year Treasury bonds is 7.25 percent, and on a 20-year corporate bond is 8.50 percent. Assume that the maturity risk premium is zero. If the default risk premium and liquidity risk premium on a 10-year corporate bond is the same as that on the 20-year corporate bond, what is the current rate on a 10-year corporate bond.
A)7.50 percent
B)8.00 percent
C)8.50 percent
D)8.75 percent
Q2) Which of these provide a forum in which demanders of funds raise funds by issuing new financial instruments, such as stocks and bonds?
A)investment banks
B)money markets
C)primary markets
D)secondary markets
Q3) Which of the following factors cause the supply of funds curve to shift?
A)total wealth risk of the financial security
B)future spending needs
C)All of these choices are correct.
Page 8
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Chapter 7: Valuing Bonds
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Sample Questions
Q1) Under which conditions will an investor demand a larger return (yield) on a bond?
A)The bond issue is upgraded from A to AA.
B)The bond issue is downgraded from A to BBB.
C)Interest rates decrease due to decline in inflation.
D)None of the conditions will cause an increase in the bond's yield.
Q2) A 6 percent corporate coupon bond is callable in 10 years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?
A)$60
B)$600
C)$1,000
D)$1,060
Q3) Which of the following is used to compute bond cash interest payments?
A)current yield
B)yield to maturity
C)coupon rate
D)None of these choices are correct.
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9
Chapter 8: Valuing Stocks
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Sample Questions
Q1) Which of the following is incorrect with respect to preferred stock?
A)Preferred stock is largely owned by other companies rather than individual investors.
B)Preferred stock takes preference over common stock in bankruptcy proceedings.
C)Preferred stock dividends do not grow.
D)All of these choices are correct.
Q2) Target Corp. (TGT) recently earned a profit of $3.57 earnings per share and has a P/E ratio of 17.3. The dividend has been growing at a 14 percent rate over the past few years. If this growth continues, what would be the stock price in five years if the P/E ratio remained unchanged? What would the price be if the P/E ratio increased to 23 in five years?
A)$118.85, $158.01 respectively
B)$137.19, $182.39 respectively
C)$173.87, $231.15 respectively
D)$308.81, $410.55 respectively
Q3) Value stocks are
A)stocks that are expected to exhibit high growth.
B)stocks that have low P/E ratios and are selling at a bargain price.
C)stocks that have high valuation ratios, such as P/E.
D)none of the options.
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Page 10
Chapter 9: Characterizing Risk and Return
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Sample Questions
Q1) The past five monthly returns for K and Company are 2.28 percent, 2.64 percent, -1.05 percent, 4.25 percent, and 9.25 percent. What is the average monthly return?
A)1.45 percent
B)1.62 percent
C)3.47 percent
D)3.89 percent
Q2) Which of the following is incorrect?
A)It is possible to combine assets that all move in the exact same fashion over time and gain the benefits of diversification.
B)Adding long-term Treasury bonds to a stock portfolio will reduce the risk of the portfolio.
C)The optimal portfolio is the one with the lowest amount of risk.
D)All of these choices are correct.
Q3) Sally wants to invest in only two stocks. Which pair of stocks should Sally select?
A)Stocks A and B move downward at the same time.
B)Stocks C and D move in opposite directions at the same time.
C)Stocks E and F move upward at the same time.
D)Stocks G and H move randomly at the same time.
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Page 11
Chapter 10: Estimating Risk and Return
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Sample Questions
Q1) You obtain beta estimates of General Electric from two different online sources and you are surprised to find that they are so different. Which of the following would NOT be a correct explanation for the difference?
A)One source used weekly data and another used monthly data.
B)One source used the S&P 500 for a market proxy and the other used the Dow Jones Industrial Average.
C)One used regression analysis and the other used geometric analysis.
D)All of these choices are correct.
Q2) Which of these is the measurement of risk for a collection of stocks for an investor?
A)beta
B)efficient market
C)expected return
D)portfolio beta
Q3) Which of the following is the use of debt to increase an investment position?
A)behavioral finance
B)financial leverage
C)probability
D)stock market bubble
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Chapter 11: Calculating the Cost of Capital
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Sample Questions
Q1) The ____________ approach to computing a divisional weighted average cost of capital (WACC) requires only that WACCs for "risky" and "relatively safe" divisions be adjusted.
A)subjective
B)objective
C)firmwide
D)implicit
Q2) FarCry Industries, a maker of telecommunications equipment, has 6 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $27 per share, the preferred shares are selling for $15 per share, and the bonds are selling for 119 percent of par ($1,000), what weight should you use for debt in the computation of FarCry's WACC?
A)4.93 percent
B)5.07 percent
C)5.81 percent
D)6.30 percent
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Chapter 12: Estimating Cash Flows on Capital Budgeting Projects
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Sample Questions
Q1) Your company is considering a new project that will require $250,000 of new equipment at the start of the project. The equipment will have a depreciable life of eight years and will be depreciated to a book value of $10,000 using straight-line depreciation. The cost of capital is 12 percent, and the firm's tax rate is 34 percent. Estimate the present value of the tax benefits from depreciation.
A)$63,617.52
B)$50,669.93
C)$75,017.54
D)$86,997.13
Q2) With regard to depreciation, the time value of money concept tells us that:
A)delaying the depreciation expense is always better.
B)taking the depreciation expense sooner is always better.
C)delaying the depreciation expense is sometimes better.
D)taking the depreciation expense sooner is sometimes better.
Q3) As new capital budgeting projects arise, we must estimate:
A)the float costs for financing the project.
B)when such projects will require cash flows.
C)the cost of the loan for the specific project.
D)the cost of the stock being sold for the specific project.
Page 14
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Chapter 13: Weighing Net Present Value and Other Capital
Budgeting Criteria
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Sample Questions
Q1) Of the capital budgeting techniques discussed, which works equally well with normal and non-normal cash flows and with independent and mutually exclusive projects?
A)Payback period
B)Discounted payback period
C)Modified internal rate of return
D)Net present value
Q2) Which of these describe groups or pairs of projects where you can accept one but not all?
A)Dependent
B)Independent
C)Mutually exclusive
D)Mutually dependent
Q3) A financial asset will pay you $50,000 at the end of 20 years if you pay premiums of $975 per year at the end of each year for 20 years. What is the IRR of this financial asset?
A)8.64 percent
B)9.02 percent
C)10.51 percent
D)11.29 percent
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Chapter 14: Working Capital Management and Policies
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Sample Questions
Q1) CM Enterprises estimates that it takes, on average, seven days for their customers' payments to reach them, one day for the payments to be processed and deposited by their bookkeeping department, and three more days for the check to clear once they're deposited. What is their collection float?
A)11 days
B)10 days
C)8 days
D)7 days
Q2) Which of the following resemble checks, but differ in that they are payable by the firm issuing them rather than payable by a bank?
A)Drafts
B)Concentration banking
C)Wire transfers
D)Zero-balance account
Q3) The operating cycle will increase with all of the following changes EXCEPT:
A)the cost of goods sold increases.
B)the level of accounts receivable increases.
C)the level of inventory increases.
D)All of the options will increase the operating cycle.
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Page 16
Chapter 15: Financial Planning and Forecasting
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Sample Questions
Q1) Goldilochs Inc. reported sales of $8 million and net income of $2 million. The firm has a total asset turnover of 1.2. The firm's chief financial officer is projecting a $6 million increase in sales and that spontaneous liabilities will increase by $1 million automatically. The firm currently pays out 50 percent of its net income to shareholders. Assuming that all assets and current liabilities are expected to grow with sales, how much in additional funds will Goldilochs need from external sources to fund the expected growth?
A)$1,250,000
B)$1,750,000
C)$2,500,000
D)$2,250,000
Q2) Which of the following is the practice of one firm selling to another on credit terms?
A)Accounts payable
B)Accounts receivable
C)Barter transactions
D)Trade credit
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Chapter 16: Assessing Long-Term Debt, Equity, and Capital Structure
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Sample Questions
Q1) A situation that arises when a firm's equity is close to worthless, and equity holders will prefer to invest in overly risky projects with a small chance of success rather than simply paying debt holders their regularly scheduled payments is known as a(n):
A)leverage problem.
B)overinvestment problem.
C)underinvestment problem.
D)long position.
Q2) An all-equity financed firm has $450 in assets and the stock price is $45. If the firm restructures with 20 percent debt which creates interest expense of $10 per year and the firm's tax rate is 40 percent, what is the break-even EBIT?
A)$30
B)$35
C)$45
D)$50
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Chapter 17: Sharing Firm Wealth: Dividends, Share
Repurchases, and Other Payouts
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Sample Questions
Q1) Choc Hut, Inc. normally pays a quarterly dividend. The last such dividend paid was $1.50, all future quarterly dividends are expected to grow at 6 percent, and the firm faces a required rate of return on equity of 18 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $5.00 per share that is not expected to affect any other future dividends, what should the stock price be?
A)$8.83
B)$12.50
C)$13.25
D)$16.14
Q2) Which of the following is the primary goal of a firm?
A)Maximize sales
B)Maximize net income
C)Maximize earnings per share
D)Maximize shareholder wealth
Q3) When does a dividend become a firm obligation?
A)When the firm declares them
B)When the firm pays them
C)When the firm records them
D)On the ex-dividend date
Page 19
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Chapter 18: Issuing Capital and the Investment Banking Process
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Sample Questions
Q1) Kelly Girl's Golf Games, Inc., with the help of its investment bank recently issued 1.5 million shares of new stock. The offer price on the stock was $36.25 per share and Kelly Girl's Golf Games received a total of $50,000,000 through this stock offering. Calculate the net proceeds and the underwriter's spread on the stock offering. What percentage of the gross price is the investment bank charging Kelly Girl's Golf Games for underwriting the stock issue?
A)7.39 percent
B)7.64 percent
C)7.12 percent
D)8.05 percent
Q2) Which of these is a contractual commitment to loan the firm a certain maximum amount at a given interest rate?
A)Loan commitment agreements
B)Spot loans
C)Take-down loans
D)Back-end loans
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Chapter 19: International Corporate Finance
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Sample Questions
Q1) Which of these is the trade agreement between South American countries to create their own free trade zone?
A)South American Union
B)South American Free Trade Agreement (SAFTA)
C)South American Monetary Fund (SAMF)
D)Mercosur
Q2) In the late 1990s, many East Asian currencies suddenly and dramatically devalued. What is the percentage change in the value of a $75 million investment in Indonesia when the exchange rate changes from $1 = 1,000 rupiah to $1 = 7,000 rupiah?
A)14.29 percent
B)85.71 percent
C)12.5 percent
D)87.5 percent
Q3) Compute the number of dollars that can be bought with 1 million of foreign currency units: $1 = 3.8249 Saudi Arabian riyal
A)$261,444.7437
B)$4,824,900.00
C)$382,490.00
D)$1,000,000
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Page 21
Chapter 20: Mergers and Acquisitions and Financial
Distress
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Sample Questions
Q1) Which of the following is a type of merger in which two firms that sell the same products in different market areas are combined?
A)Vertical
B)Conglomerate
C)Product extension
D)Market extension
Q2) Which of the following is a combination of a firm with a supplier or distributor?
A)Vertical merger
B)Conglomerate merger
C)Product extension merger
D)Market extension merger
Q3) Which of these terms is defined as the value of the combined firms being greater than the sum of the value of the two firms individually?
A)Composition
B)Synergy
C)Consolidation
D)Conglomerate
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Page 22