Corporate Finance
Practice Questions
Course Introduction
Corporate Finance explores the fundamental principles and practices involved in the financial management of corporations. The course covers key topics such as capital budgeting, financial analysis, risk assessment, cost of capital, capital structure, dividend policy, and working capital management. Students will learn how corporations make investment and financing decisions to maximize shareholder value, analyze the impact of financial decisions on firm performance, and understand the role of financial markets and institutions. Real-world case studies and financial modeling are incorporated to develop practical skills essential for careers in finance, consulting, and corporate management.
Recommended Textbook
Financial Management Theory and Practice 15th Edition by Eugene F. Brigham
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) Jane Doe,who has substantial personal wealth and income,is considering the possibility of starting a new business in the chemical waste management field.She will be the sole owner,and she has enough funds to finance the operation.The business will have a relatively high degree of risk,and it is expected that the firm will incur losses for the first few years.However,the prospects for growth and positive future income look good,and Jane plans to have the firm pay out all of its income as dividends to her once it is well established.Which of the legal forms of business organization would probably best suit her needs?
A) Proprietorship,because of ease of entry.
B) S corporation,to gain some tax advantages and also to obtain limited liability.
C) Partnership,but only if she needs additional capital.
D) Regular corporation,because of the limited liability.
E) In this situation,the various forms of organization seem equally desirable.
Answer: B
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Chapter 2: Financial Statements, Cash Flow, and Taxes
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Q1) On its 2014 balance sheet,Barngrover Books showed $510 million of retained earnings,and exactly that same amount was shown the following year in 2015.Assuming that no earnings restatements were issued,which of the following statements is CORRECT?
A) Dividends could have been paid in 2015,but they would have had to equal the earnings for the year.
B) If the company lost money in 2015,they must have paid dividends.
C) The company must have had zero net income in 2015.
D) The company must have paid out half of its earnings as dividends.
E) The company must have paid no dividends in 2015.
Answer: A
Q2) The annual report contains four basic financial statements: the income statement,balance sheet,statement of cash flows,and statement of stockholders' equity.
A)True
B)False
Answer: True
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4
Chapter 3: Analysis of Financial Statements
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Q1) Which of the following statements is CORRECT?
A) Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9,but at the same time its profit margin rises from 9% to 10%,and its debt increases from 40% of total assets to 60%.Under these conditions,the ROE will decrease.
B) Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9,but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%.Under these conditions,the ROE will increase.
C) Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9,but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%.Without additional information,we cannot tell what will happen to the ROE.
D) The modified DuPont equation provides information about how operations affect the ROE,but the equation does not include the effects of debt on the ROE.
E) Other things held constant,an increase in the debt ratio will result in an increase in the profit margin on sales.
Answer: B
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Chapter 4: Time Value of Money
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Q1) You plan to invest some money in a bank account.Which of the following banks provides you with the highest effective rate of interest?
A) Bank 1;6.1% with annual compounding.
B) Bank 2;6.0% with monthly compounding.
C) Bank 3;6.0% with annual compounding.
D) Bank 4;6.0% with quarterly compounding.
E) Bank 5;6.0% with daily (365-day)compounding.
Q2) You want to buy new kitchen appliances 2 years from now,and you plan to save $8,200 per year,beginning one year from today.You will deposit your savings in an account that pays 6.2% interest.How much will you have just after you make the 2nd deposit,2 years from now?
A) $15,260
B) $16,063
C) $16,908
D) $17,754
E) $18,642
Q3) A time line is meaningful even if all cash flows do not occur annually.
A)True
B)False
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Page 6
Chapter 5: Bonds, Bond Valuation, and Interest Rates
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Q1) Bond A has a 9% annual coupon while Bond B has a 6% annual coupon.Both bonds have a 7% yield to maturity,and the YTM is expected to remain constant.Which of the following statements is CORRECT?
A) The prices of both bonds will remain unchanged.
B) The price of Bond A will decrease over time,but the price of Bond B will increase over time.
C) The prices of both bonds will increase by 7% per year.
D) The prices of both bonds will increase over time,but the price of Bond A will increase by more.
E) The price of Bond B will decrease over time,but the price of Bond A will increase over time.
Q2) Kessen Inc.'s bonds mature in 7 years,have a par value of $1,000,and make an annual coupon payment of $70.The market interest rate for the bonds is 8.5%.What is the bond's price?
A) $923.22
B) $946.30
C) $969.96
D) $994.21
E) $1,019.06
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Chapter 6: Risk and Return
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Q1) Jenna holds a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each.The portfolio's beta is 1.12.Jenna plans to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.80.What will the portfolio's new beta be?
A) 1.286
B) 1.255 C) 1.224 D) 1.194 E) 1.165
Q2) If you plotted the returns of a company against those of the market and found that the slope of your line was negative,the CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor,assuming that the observed relationship is expected to continue in the future.
A)True
B)False
Q3) A stock with a beta equal to 1.0 has zero systematic (or market)risk.
A)True
B)False
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Page 8
Chapter 7: Corporate Valuation and Stock Valuation
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Q1) Kinkead Inc.forecasts that its free cash flow in the coming year,i.e. ,at t = 1,will be $10 million,but its FCF at t = 2 will be $20 million.After Year 2,FCF is expected to grow at a constant rate of 4% forever.If the weighted average cost of capital is 14%,what is the firm's value of operations,in millions?
A) $158
B) $167
C) $175
D) $184
E) $193
Q2) Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.
A)True
B)False
Q3) Preferred stock is a hybrid a sort of cross between a common stock and a bond in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.
A)True
B)False
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Chapter 8: Financial Options and Applications in Corporate Finance
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Q1) If a stock's price is above the strike price of a call option written on the stock,then the exercise value is equal to the stock price minus the strike price.If the stock price is below the strike price,the exercise value of the call option is zero.
A)True
B)False
Q2) An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?
A) Put
B) Naked
C) Covered
D) Out-of-the-money
E) In-the-money
Q3) If the current price of a stock is below the strike price,then an option to buy the stock is worthless and will have a zero value.
A)True
B)False
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Chapter 9: The Cost of Capital
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Q1) Refer to the data for the Collins Group.What is the best estimate of the firm's WACC?
A) 10.85%
B) 11.19%
C) 11.53%
D) 11.88%
E) 12.24%
Q2) The cost of external equity capital raised by issuing new common stock (r<sub>e</sub>)is defined as follows,in words: "The cost of external equity equals the cost of equity capital from retaining earnings (r<sub>s</sub>),divided by one minus the percentage flotation cost required to sell the new stock, (1 F)."
A)True
B)False
Q3) If a firm's marginal tax rate is increased,this would,other things held constant,lower the cost of debt used to calculate its WACC.
A)True
B)False
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Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Q1) Which of the following statements is CORRECT?
A) The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
B) The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
C) The net present value method (NPV)is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
D) The modified internal rate of return method (MIRR)is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
E) The internal rate of return method (IRR)is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
Q2) The primary reason that the NPV method is conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist,and when that happens,we don't know which IRR is relevant.
A)True
B)False
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Chapter 11: Cash Flow Estimation and Risk Analysis
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Q1) The primary advantage to using accelerated rather than straight-line depreciation is that with accelerated depreciation the present value of the tax savings provided by depreciation will be higher,other things held constant.
A)True
B)False
Q2) The change in net working capital associated with new projects is always positive,because new projects mean that more working capital will be required.This situation is especially true for replacement projects.
A)True
B)False
Q3) Since the focus of capital budgeting is on cash flows rather than on net income,changes in noncash balance sheet accounts such as inventory are not included in a capital budgeting analysis.
A)True
B)False
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13
Chapter 12: Financial Planning and Applications to Corporate Valuation
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Q1) The capital intensity ratio is generally defined as follows:
A) The percentage of liabilities that increase spontaneously as a percentage of sales.
B) The ratio of sales to current assets.
C) The ratio of current assets to sales.
D) The amount of assets required per dollar of sales,or A<sub>0</sub>*/S<sub>0</sub>.
E) Sales divided by total assets,i.e. ,the total assets turnover ratio.
Q2) Operating plans sketch out broad approaches for realization of the firm's strategic vision.These plans usually are developed for a period no longer than a 1-year time horizon because detail is "lost" by extending out the time horizon by more than 1 year.
A)True
B)False
Q3) The fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.
A)True
B)False
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Chapter 13: Corporate Governance
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Q1) Which of the following is NOT normally regarded as being a barrier to hostile takeovers?
A) Targeted share repurchases.
B) Shareholder rights provisions.
C) Restricted voting rights.
D) Poison pills.
E) Abnormally high executive compensation.
Q2) A poison pill is also known as a corporate restructuring.
A)True
B)False
Q3) The CEO of D'Amico Motors has been granted some stock options that have provisions similar to most other executive stock options.If D'Amico's stock underperforms the market,these options will necessarily be worthless.
A)True
B)False
Q4) ESOPs were originally designed to help improve worker productivity,but today they are also used to help prevent hostile takeovers.
A)True
B)False
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Chapter 14: Distributions to Shareholders: Dividends and Repurchases
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Q1) Getler Inc.'s projected capital budget is $2,000,000,its target capital structure is 40% debt and 60% equity,and its forecasted net income is $1,000,000.If the company follows a residual dividend policy,how much dividends will it pay or,alternatively,how much new stock must it issue?
Dividends Stock Issued
A) $514,425 $162,901
B) $541,500 $171,475
C) $570,000 $180,500
D) $600,000 $190,000
E) $ 0 $200,000
Q2) The dividend irrelevance theory,proposed by Miller and Modigliani,says that provided a firm pays at least some dividends,how much it pays does not affect either its cost of capital or its stock price.
A)True
B)False
Q3) MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value,it can affect the cost of capital.
A)True
B)False
Page 16
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Chapter 15: Capital Structure Decisions
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Q1) It is possible that two firms could have identical financial and operating leverage,yet have different degrees of risk as measured by the variability of EPS.
A)True
B)False
Q2) Different borrowers have different risks of bankruptcy,and bankruptcy is costly to lenders.Therefore,lenders charge higher rates to borrowers judged to be more at risk of going bankrupt.
A)True
B)False
Q3) The Miller model begins with the MM model with corporate taxes and then adds personal taxes.
A)True
B)False
Q4) Whenever a firm borrows money,it is using financial leverage.
A)True
B)False
Q5) The MM model is the same as the Miller model,but with zero corporate taxes. A)True
B)False
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Chapter 16: Supply Chains and Working Capital Management
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Q1) Blueroot Inc.is considering a change in its financing policy.Currently,it uses maximum trade credit by not taking discounts on its purchases.The standard industry credit terms offered by all its suppliers are 2/10 net 30 days,and the firm pays on time.The new CFO is considering borrowing from its bank,using short-term notes payable,and then taking discounts.The firm wants to determine the effect of this policy change on its net income.Its net purchases are $11,760 per day,using a 365-day year.The interest rate on the notes payable is 10%,and the tax rate is 40%.If the firm implements the plan,what is the expected change in net income?
A) $32,964
B) $34,699
C) $36,526
D) $38,448
E) $40,370
Q2) Cash is often referred to as a "non-earning" asset.Thus,one goal of cash management is to minimize the amount of cash necessary for conducting a firm's normal business activities.
A)True B)False
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Chapter 17: Multinational Financial Management
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Q1) Because political risk is seldom negotiable,it cannot be explicitly addressed in multinational corporate financial analysis.
A)True
B)False
Q2) Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day)return.In the U.S. ,90-day investments of similar risk have a 4% annualized return and a 1% quarterly (90-day)return.In the 90-day forward market,1 British pound equals $1.65.If interest rate parity holds,what is the spot exchange rate?
A) 1 pound = $1.8000
B) 1 pound = $1.6582
C) 1 pound = $1.0000
D) 1 pound = $0.8500
E) 1 pound = $0.6031
Q3) The cost of capital may be different for a foreign project than for an equivalent domestic project because foreign projects may be more or less risky.
A)True
B)False
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Page 19
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Q1) If its managers make a tender offer and buy all shares that were not held by the management team,this is called a private placement.
A)True
B)False
Q2) Which of the following statements about listing on a stock exchange is most CORRECT?
A) Any firm can be listed on the NYSE as long as it pays the listing fee.
B) Listing provides a company with some "free" advertising,and it may enhance the firm's prestige and help it do more business.
C) Listing reduces the reporting requirements for firms,because listed firms file reports with the exchange rather than with the SEC.
D) The OTC is the second largest market for listed stock,and it is exceeded only by the NYSE.
E) Listing is a decision of more significance to a firm than going public.
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Chapter 19: Lease Financing
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Q1) Many leases written today combine the features of operating and financial leases.Such leases are often called "combination leases."
A)True
B)False
Q2) The full amount of a lease payment is tax deductible provided the contract qualifies as a true lease under IRS guidelines.
A)True
B)False
Q3) Heavy use of off-balance sheet lease financing will tend to
A) make a company appear less risky than it actually is because its stated debt ratio will appear lower.
B) affect a company's cash flows but not its degree of risk.
C) have no effect on either cash flows or risk because the cash flows are already reflected in the income statement.
D) affect the lessee's cash flows but only due to tax effects.
E) make a company appear more risky than it actually is because its stated debt ratio will be increased.
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Chapter 20: Hybrid Financing: Preferred Stock, Warrants, and Convertibles
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Q1) Preferred stock can provide a financing alternative for some firms when market conditions are such that they cannot issue either pure debt or common stock at any reasonable cost.
A)True
B)False
Q2) Mariano Manufacturing can issue a 25-year,8.1% annual payment bond at par.Its investment bankers also stated that the company can sell an issue of annual payment preferred stock to corporate investors who are in the 40% tax bracket.The corporate investors require an after-tax return on the preferred that exceeds their after-tax return on the bonds by 1.0%,which would represent an after-tax risk premium.What coupon rate must be set on the preferred in order to issue it at par?
A) 6.66%
B) 6.99%
C) 7.34%
D) 7.71%
E) 8.09%
Q3) The owner of a convertible bond owns,in effect,both a bond and a call option.
A)True
B)False
Page 22
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Chapter 21: Dynamic Capital Structures and Corporate Valuation
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Q1) Refer to data for Glassmaker Corporation.Using the compressed adjusted present value model,what will Glassmaker's value of equity be if it successfully implements its planned changes in operations and capital structure? (Round your answer to the closest thousand dollars. )
A) $16,019,000
B) $17,111,000
C) $18,916,000
D) $22,111,000
E) $22,916,000
Q2) In a world with no taxes,MM show that a firm's capital structure does not affect the firm's value.However,when taxes are considered,MM show a positive relationship between debt and value,i.e. ,its value rises as its debt is increased.
A)True
B)False
Q3) MM showed that in a world without taxes,a firm's value is not affected by its capital structure.
A)True
B)False
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Chapter 22: Mergers and Corporate Control
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Q1) Currently (2012),mergers can be accounted for using either the purchase method or the pooling method.
A)True
B)False
Q2) Which of the following statements is most CORRECT?
A) Regulations in the United States prohibit acquiring firms from using common stock to purchase another firm.
B) Defensive mergers are designed to make a company less vulnerable to a takeover.
C) Hostile mergers always create value for the acquiring firm.
D) In a tender offer,the target firm's management always remain after the merger is completed.
E) A conglomerate merger is one where a firm combines with another firm in the same industry.
Q3) Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.
A)True
B)False
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Chapter 23: Enterprise Risk Management
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Q1) Interest rate swaps allow a firm to exchange fixed for floating-rate payments,but a swap cannot reduce actual net interest expenses.
A)True
B)False
Q2) Company A can issue floating-rate debt at LIBOR + 1% and can issue fixed rate debt at 9%.Company B can issue floating-rate debt at LIBOR + 1.5% and can issue fixed-rate debt at 9.4%.Suppose A issues floating-rate debt and B issues fixed-rate debt,after which they engage in the following swap: A will make a fixed 7.95% payment to B,and B will make a floating-rate payment equal to LIBOR to A.What are the resulting net payments of A and B?
A) A pays a fixed rate of 9%,B pays LIBOR + 1.5%.
B) A pays a fixed rate of 8.95%,B pays LIBOR + 1.45%.
C) A pays LIBOR plus 1%,B pays a fixed rate of 9.4%.
D) A pays a fixed rate of 7.95%,B pays LIBOR.
E) None of the above answers is correct.
Q3) In theory,reducing the volatility of its cash flows will always increase a company's value.
A)True
B)False
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Page 25
Chapter 24: Bankruptcy, Reorganization, and Liquidation
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Q1) Even if a firm's cash flow projections indicate that it will soon be unable to meet its interest payments,a bankruptcy case cannot begin until the firm actually defaults on a scheduled payment.
A)True
B)False
Q2) One of the actions that can be taken in bankruptcy under the standard of feasibility is to replace existing management with a new team if the quality of management is judged to have been substandard.
A)True
B)False
Q3) The basic doctrine of fairness under bankruptcy provisions states that claims must be recognized in the order of their legal and contractual priority.
A)True
B)False
Q4) Bankruptcy plays no role in settling labor disputes and product liability suits.Such issues are outside the bounds of bankruptcy law and are covered by other statutes.
A)True
B)False
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26
Chapter 25: Portfolio Theory and Asset Pricing Models
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Q1) Which of the following is NOT a potential problem with beta and its estimation?
A) Sometimes,during a period when the company is undergoing a change such as toward more leverage or riskier assets,the calculated beta will be drastically different than the "true" or "expected future" beta.
B) The beta of "the market," can change over time,sometimes drastically.
C) Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.
D) There is a wide confidence interval around a typical stock's estimated beta.
E) Sometimes a security or project does not have a past history which can be used as a basis for calculating beta.
Q2) In portfolio analysis,we often use ex post (historical)returns and standard deviations,despite the fact that we are interested in ex ante (future)data.
A)True
B)False
Q3) The slope of the SML is determined by the value of beta.
A)True
B)False
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Page 27
Chapter 26: Real Options
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Q1) Refer to data for Steppingstone Incorporated.Based on the above information,what is the Z 90's expected net present value?
A) $6,678
B) $3,251
C) $15,303
D) $20,004
E) $45,965
Q2) Refer to the data for Drilling Experts.Calculate the project's coefficient of variation.(Hint: Use the expected NPV. )
A) 5.87
B) 6.52
C) 7.25
D) 7.97
E) 8.77
Q3) Real options affect the size,but not the risk,of a project's expected cash flows.
A)True
B)False
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Chapter 27: Providing and Obtaining Credit
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Q1) When deciding whether to offer a discount for cash payment,a firm must balance the profits from additional sales with the lost revenues from the discount.
A)True
B)False
Q2) Which of the following is not correct?
A) A more aggressive collection policy will reduce bad debt expenses,but may also decrease sales.
B) Collection policy usually has little impact on sales since collecting past-due accounts occurs only after the customer has already purchased.
C) Typically a firm will turn over an account to a collection agency only after it has tried several times on its own to collect the account.
D) A lax collection policy will frequently lead to an increase in accounts receivable.
E) Collection policy is how a firm goes about collecting past-due accounts.
Q3) The credit period is the amount of time it takes to do a credit search on a potential customer.
A)True B)False
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Chapter 28: Advanced Issues in Cash Management and Inventory Control
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Source URL: https://quizplus.com/quiz/65478
Sample Questions
Q1) Refer to Exhibit 28.1.According to the Baumol model,what is the optimal transaction size for transfers from marketable securities to cash?
A) $7,071
B) $38,357
C) $70,711
D) $102,956
E) $87,000
Q2) The cash balances of most firms consist of transactions,compensating,precautionary,and speculative balances.We can produce a total desired cash balance by calculating the amount needed for each purpose and then summing them together.
A)True
B)False
Q3) A just-in-time system is designed to stretch accounts payable as long as possible. A)True B)False
Q4) If a company increases its safety stock,then its average inventory will go up. A)True
B)False
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Chapter 29: Pension Plan Management
Available Study Resources on Quizplus for this Chatper
10 Verified Questions
10 Flashcards
Source URL: https://quizplus.com/quiz/65479
Sample Questions
Q1) Which of the following statements about pension plans if any,is incorrect?
A) Under a defined benefit plan,the employer agrees to give retirees a specifically defined benefit,such as $500 per month or 50 percent of the employee's final salary.
B) A portable pension plan is one that an employee can carry from one employer to another.
C) An employer's obligation is satisfied under a defined contribution plan when it makes the required contributions to the plan.The risk of inadequate investment returns is borne by the employee.
D) If assets exceed the present value of benefits,the pension plan is fully funded.
E) A defined contribution plan is,in effect,a savings plan that is funded by employers,although many plans also permit additional contributions by employees.
Q2) Under a defined contribution plan,employees agree to contribute some percentage of their salaries,up to 20 percent,to the firm's pension fund.
A)True
B)False
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Source URL: https://quizplus.com/quiz/65480
Sample Questions
Q1) Which of the following statements about a not-for-profit firm's sources of capital is most correct?
A) Fund capital is obtained by retaining earnings if all earnings are paid out as dividends,no fund capital is created.
B) Preferred stock is never used by not-for-profit firms.
C) Not-for-profit firms are not allowed to raise capital by borrowing.
D) Not-for-profit firms usually have high dividend payouts.
E) Since not-for-profit firms are tax exempt,there is no tax advantage to debt capital.
Q2) The primary goal of investor-owned firms is shareholder wealth maximization,while the primary goal of not-for-profit firms is typically stated in terms of some mission;for example,to provide health care services to the communities served.
A)True
B)False
Q3) Since not-for-profit firms do not pay taxes,they receive no tax benefits whatsoever from using debt financing.
A)True
B)False
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