Corporate Finance
Test Bank
Course Introduction
Corporate Finance explores the fundamental principles and practices involved in financial decision-making within corporations. The course covers topics such as capital budgeting, financial analysis, valuation, risk management, capital structure, dividend policy, and the allocation of financial resources with the aim of maximizing firm value. Students will learn to apply quantitative tools and analytical techniques to assess investment opportunities, determine the cost of capital, and formulate strategies for funding and growth. Through case studies and real-world examples, the course offers insights into the challenges modern corporations face in a dynamic financial environment.
Recommended Textbook
Financial Management Principles and Applications 11th Edition by Sheridan Titman
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Page 2
Chapter 1: Getting Started-Principles of Finance
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Sample Questions
Q1) The owners of a corporation are liable for the corporation's obligations up to the amount of their investment.
A)True
B)False
Answer: True
Q2) Investors choose to invest in higher risk investments because these investments offer higher:
A)expected returns.
B)inflation.
C)actual returns.
D)future consumption.
Answer: A
Q3) Which of the following is a characteristic of an efficient market?
A)Small number of individuals
B)Opportunities exist for investors to profit from publicly available information.
C)Security prices reflect fair value of the firm.
D)Immediate response occurs for new public information.
Answer: C
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Chapter 2: Firms and the Financial Market
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Sample Questions
Q1) Capital markets are markets for short term debt instruments maturing in less than one year,and money markets are markets for long term debt instruments maturing in more than one year.
A)True
B)False Answer: False
Q2) In Financial markets,borrowers and lenders most both be located in the same country.
A)True
B)False Answer: False
Q3) Preferred stock prices are solely dependent on investors' expectations of future cash flows to the corporation.
A)True
B)False Answer: False
Q4) All financial intermediaries are banks.
A)True
B)False Answer: False
Page 4
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Chapter 3: Understanding Financial Statements, taxes, and Cash Flows
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Sample Questions
Q1) Based on the information contained in Table 2,what was Bird Industries' cash balance as of December 31,1996?
A)$300
B)$400
C)$100
D)$1,100
Answer: B
Q2) Assume that A & K will receive no other sources of income during 2004.A & K's taxable income for 2004 will be:
A)$18,000,000.
B)$17,000,000.
C)$16,000,000.
D)$15,000,000.
Answer: C
Q3) Which of the following is the least liquid current asset?
A)Accruals
B)Marketable securities
C)Accounts receivable
D)Inventory
Answer: D
Page 5
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Chapter 4: Financial Analysis-Sizing up Firm Performance
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Sample Questions
Q1) Differences in accounting practices limit the use of ratio analysis.
A)True
B)False
Q2) Financial ratios comprise the principal tool of financial analysis since they can be used to answer a variety of questions regarding a firm's financial condition.
A)True
B)False
Q3) Paper Clip Office Supply had $24,000,000 in sales last year.Its total asset turnover was 6.0.Interest expense was $100,000 (10% on its $1,000,000 of debt).The company is financed entirely with debt and common equity.What is Paper Clip's debt ratio?
A)20%
B)30%
C)25%
D)60%
E)16%
Q4) Ratios are used to standardize financial information.
A)True
B)False
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Chapter 5: Time Value of Money-The Basics
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Sample Questions
Q1) You have $10,000 to invest.You do not want to take any risk,so you will put the funds in a savings account at the local bank.Of the following choices,which one will produce the largest sum at the end of 22 years?
A)An account that compounds interest annually.
B)An account that compounds interest daily.
C)An account that compounds interest quarterly.
D)An account that compounds interest monthly.
Q2) What is the annual compounded interest rate of an investment with a stated interest rate of 6% compounded quarterly for seven years (round to the nearest .1%)?
A)51.7%
B)6.7%
C)10.9%
D)6.1%
Q3) If you deposit $1,000 each year in a savings account earning 4%,compounded annually,how much will you have in 10 years?
Q4) The annual percentage yield is equal to the nominal rate of interest.
A)True
B)False
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Page 7
Chapter 6: The Time Value of Money-Annuities and Other Topics
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Sample Questions
Q1) A retirement plan guarantees to pay you or your estate a fixed amount for 20 years.At the time of retirement,you will have $31,360 to your credit in the plan.The plan anticipates earning 8% interest annually over the period you receive benefits.How much will your annual benefits be,assuming the first payment occurs one year from your retirement date?
A)$682
B)$6,272
C)$2,000
D)$3,194
Q2) What is a series of equal payments to be received at the end of each period,for a finite period of time,called?
A)A perpetuity
B)An annuity due
C)A cash cow
D)A deferred annuity
Q3) You have borrowed $70,000 to buy a speed boat.You plan to make monthly payments over a 15-year period.The bank has offered you a 9% interest rate,compounded monthly.Create an amortization schedule for the first two months of the loan.
Page 8
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Chapter 7: An Introduction to Risk and Return-History of Financial
Market Returns
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Sample Questions
Q1) What is the standard deviation of an investment that has the following expected scenario? 18% probability of a recession,2.0% return;65% probability of a moderate economy,9.5% return;17% probability of a strong economy,14.2% return.
A)3.68%
B)1.23%
C)8.47%
D)6.66%
Q2) Why do the arithmetic average return and the geometric return differ?
Q3) If a market has weak form efficiency,an investor can make higher than expected profits by studying the past price patterns of a stock.
A)True
B)False
Q4) Expected return and realized return are the same thing. A)True
B)False
Q5) Are markets moving toward being more efficient or toward being less efficient?
Q6) Treasury Bills have less default risk than do Government Bonds.
A)True
B)False
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Chapter 8: Risk and Return-Capital Market Theory
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Sample Questions
Q1) A stock's beta is a measure of its:
A)systematic risk.
B)unsystematic risk.
C)company-specific risk.
D)diversifiable risk.
Q2) Total risk equals unique security risk times systematic risk.
A)True
B)False
Q3) A stock with a beta greater than 1.0 has returns that are ________ volatile than the market,and a stock with a beta of less than 1.0 exhibits returns which are ________ volatile than those of the market portfolio.
A)more,more
B)more,less
C)less,more
D)less,less
Q4) Betas for individual stocks tend to be stable.
A)True
B)False
Q5) Provide an intuitive discussion of beta and its importance for measuring risk.
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Chapter 9: Debt Valuation and Interest Rates
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Sample Questions
Q1) Dry Seal plans to issue bonds to expand operations.The bonds will have a par value of $1,000,a 10-year maturity,and a coupon interest rate of 9%,paid semiannually.Current market conditions are such that the bonds will be sold to net $937.79.What is the yield-to-maturity of these bonds?
A)11%
B)10%
C)9%
D)8%
E)7%
Q2) Davis & Davis issued $1,000 par value bonds at 102.The bonds pay 12% interest annually and mature in 30 years.The market rate of interest is (round to the nearest hundredth of a percent):
A)12.00%.
B)11.76%.
C)10.12%.
D)11.29%.
Q3) Bonds with a longer time to maturity have less interest rate risk.
A)True
B)False
Q4) Compare and contrast current yield and yield to maturity.
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Chapter 10: Stock Valuation
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Sample Questions
Q1) Determine the rate of return on a preferred stock that costs $50 and pays a $6 per share dividend.
Q2) Common stockholders are essentially creditors of the firm.
A)True
B)False
Q3) Which of the following companies is most likely to trade on the New York Stock Exchange?
A)Dell
B)Genzyme Transgenics
C)Coca Cola
D)Tata Motors
Q4) The expected rate of return on a share of common stock whose dividends are growing at a constant rate (g)is which of the following?
A)(D<sub>1</sub> + g)/Vc
B)D<sub>1</sub>/Vc + g
C)D<sub>1</sub>/g
D)D<sub>1</sub>/Vc
Q5) Common stock represents a claim on residual income.
A)True
B)False
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Chapter 11: Investment Decision Criteria
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Sample Questions
Q1) Project January has a NPV of $50,000,project December has a NPV of $40,000.Which of the following circumstances could make it possible to choose December over January?
A)January has a shorter payback period.
B)The projects are mutually exclusive.
C)The projects have unequal lives.
D)The projects are mandated.
Q2) Project Full Moon has an initial outlay of $30,000,followed by positive cash flows of $10,000 in year 1,$15,000 in year 2,and $15,000 in year 3.The project should be accepted if the required rate of return is:
A)greater than 0.
B)<sup>less than 14.6%</sup>.
C)<sup>less than 16.25%</sup>.
D)<sup>greater </sup><sup>than 12%.</sup>
Q3) One drawback of the payback method is that it focuses primarily on the length of time in which the cost of the investment is recovered in nominal terms versus measuring total value the project will add to the firm.
A)True
B)False
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Page 13
Chapter 12: Analyzing Project Cash Flows
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Sample Questions
Q1) The machine's NPV is:
A)$1,556.56.
B)$2,556.56.
C)$1,123.99.
D)$2,123.99.
Q2) ABC already spent $85,000 on a feasibility study for a machine that will produce a new product.The machine will cost $2,575,000.Required modifications will cost $375,000.ABC will need to invest $75,000 for additional inventory.The machine has an IRS approved useful life of 7 years;it is presumed to have no salvage value.It will only be operated for 3 years,after which it will be sold for $600,000.What is the depreciable cost basis of the machine?
A)$3,025,000
B)$2,950,000
C)$2,575,000
D)$2,350,000
Q3) Working capital for a project includes investment in fixed assets.
A)True
B)False
Q4) What is the advantage,if any,to using MACRS rather than straight line depreciation?
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Chapter 13: Risk Analysis and Project Evaluation
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Sample Questions
Q1) What is the expected free cash flow if the most likely estimates are used?
A)$156,750
B)$266,750
C)$237,500
D)$383,240
Q2) Which of the following are usually known with a high level of confidence at the beginning of a project?
A)The number of units that will be sold.
B)The price per unit that will result in the desired number of units sold.
C)Tax rates and depreciation rates.
D)None of the above.
Q3) Variable cost for Light.com's fluorescent tubes is $12.50,the tubes are sold over the internet to businesses and organizations for $20.00 each.Fixed costs are $7,500,000.What is the break-even quantity for the fluorescent tubes?
A)600,000
B)1,000,000
C)375,000
D)7,500,000
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15
Chapter 14: The Cost of Capital
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Sample Questions
Q1) Tantasqua Paper Products is composed of 3 divisions: industrial paper products,commercial paper products,and a forestry division which grows trees for wood pulp used in the paper-making process.Each of these divisions takes on a large number of projects with differing risk characteristics.Tantasqua now uses a single discount rate based on the company's WACC to evaluate all capital budgeting proposals.Discuss the advantages and disadvantages of this approach.
Q2) A firm's capital structure consists of which of the following?
A)Common stock
B)Preferred stock
C)Bonds
D)All of the above
Q3) When calculating the weighted average cost of capital,which of the following has to be adjusted for taxes?
A)Common stock
B)Retained earnings
C)Debt
D)Preferred stock
Q4) Discuss the primary advantages of the CAPM approach in determining the cost of common equity.
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Chapter 15: Capital Structure Policy
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Sample Questions
Q1) Weaknesses of the EBIT-EPS analysis include:
A)that it disregards the implicit costs of debt financing.
B)that it ignores the effect of the specific financing decision on the firm's cost of common equity capital.
C)that it considers only the level of the earnings stream and ignores the variability inherent in it.
D)all of the above.
Q2) Which of the following is consistent with the Tradeoff theory of capital structure?
A)The cost of capital continuously decreases as the firm's debt ratio increases.
B)The cost of capital remains constant as the firm's debt ratio increases.
C)The cost of capital continuously increases as the firm's debt ratio increases.
D)There is an optimal level of debt financing.
E)Capital structure does not affect a firm's cost of capital.
Q3) The EBIT-EPS indifference point,sometimes called the break-even point,identifies the optimal range of financial leverage regardless of the financing plan chosen by the financial manager.
A)True
B)False
Q4) What is meant by the terms "favorable" and "unfavorable" leverage?
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Chapter 16: Dividend Policy
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Sample Questions
Q1) Which of the following considerations would be expected to influence a firm's decision regarding the payment of dividends?
A)Earnings predictability
B)Legal restrictions
C)Liquidity position
D)All of the above
Q2) The problem with the residual dividend policy ratio is:
A)investors might come to expect a specified amount.
B)the dollar amount of the dividend fluctuates from year to year.
C)management is reluctant to cut the dividend even if there are low profits in a year.
D)all of the above are possible problems.
Q3) The final approval of a dividend payment comes from the:
A)controller.
B)president of the company.
C)board of directors.
D)Chief Financial Officer.
Q4) The ex-dividend date occurs prior to the declaration date.
A)True
B)False
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Chapter 17: Financial Forecasting and Planning
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Sample Questions
Q1) Which of the following is NOT a basic function of a budget?
A)Budgets indicate the need for future short-term financing.
B)Budgets provide the basis for corrective action when actual figures differ from the budgeted figures.
C)Budgets compare historical costs of the firm with its current cost performance.
D)Budgets allow for performance evaluation.
Q2) The primary purpose of a cash budget is to:
A)determine the level of investment in current and fixed assets.
B)determine accounts payable.
C)provide a detailed plan of future cash flows.
D)determine the estimated income tax for the year.
Q3) Because accounts payable and accrued expenses increase with sales,they represent sources of spontaneous financing.
A)True
B)False
Q4) The projected change in retained earnings equals projected net income less any dividends to be paid.
A)True
B)False
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Chapter 18: Working Capital Management
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Sample Questions
Q1) A firm will borrow $1 million for six months on a discount basis.The annual interest rate on the loan is 12%.What is the annual percentage cost of the loan?
A)11.00%
B)12.77%
C)13.00%
D)14.23%
Q2) T-bills and Treasury bonds are guaranteed by the full faith and credit of the United States and are therefore default-free.
A)True
B)False
Q3) Which of the following will reduce the liquidity of a firm? An increase in:
A)short-term notes payable.
B)accounts payable.
C)current assets.
D)both A and B.
Q4) L.Stevens Inc.uses long-term to cover its peak level of current assets.When it does not need the money to finance inventories and accounts receivable,it invests the excess funds in short-term certificates of deposit.What are the advantages and disadvantages of this policy?
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Chapter 19: International Business Finance
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Sample Questions
Q1) The efficiency of foreign currency markets is ensured,in large measure,by the process of arbitrageurs.
A)True
B)False
Q2) Which of the following statements is true?
A)The forward rate is the same as the spot rate that will prevail in the future.
B)Only the forward rate is known.
C)An indirect quote is the exchange rate that indicates the number of units of the home currency required to buy one unit of foreign currency.
D)Both B and C.
Q3) If a currency's forward price in U.S.dollars is lower than the spot price,interest rates are higher in the foreign country than they are in the U.S.
A)True
B)False
Q4) Spot transactions are made immediately in the market place at the market price. A)True
B)False
Q5) What is meant by interest rate parity?
Q6) What is the role of arbitrage in the foreign exchange markets?
Page 21
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Chapter 20: Corporate Risk Management
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Sample Questions
Q1) As the volatility of a stock's price increases,the value of call and put options on the stock decreases.
A)True
B)False
Q2) Jorge has purchased call options on 1000 shares of Amazon stock with a striking price of $170 per share.The option premium was $4.00 per share.
a.Compute Jorge's profit or loss if the market value of Amazon's stock is $180 at expiration.
b.Compute Jorge's profit or loss if the market value of Amazon's stock is $160 at expiration.
c.Compute Jorge's profit or loss if the market value of Amazon's stock is $172 at expiration.
Q3) A commodity such as diesel fuel for which there is no available futures contract might be satisfactorily hedged with:
A)stock index futures.
B)interest rate futures.
C)heating oil futures.
D)electricity futures.
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