Principles of Corporate Finance Practice Questions - 1371 Verified Questions

Principles of Corporate Finance Practice Questions

Course Introduction

Principles of Corporate Finance introduces students to the fundamental concepts and analytical tools essential for understanding how firms make investment and financing decisions. The course covers key topics such as capital budgeting, risk and return, valuation of securities, capital structure, dividend policy, and the functioning of financial markets. Emphasis is placed on how managers can maximize firm value through effective decision-making, considering real-world complexities and constraints. Through case studies, theoretical frameworks, and practical applications, students develop the skills needed to analyze financial situations and contribute to strategic financial management in corporate environments.

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NEW Corporate Finance Online 1st Edition by Stanley Eakins

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16 Chapters

1371 Verified Questions

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Page 2

Chapter 1: Overview of Finance

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Sample Questions

Q1) Which of the following statements about risk is false?

A) Risk is one of the determinants of the required return.

B) Risk requires the possibility of at least one outcome less favorable than the expected value.

C) Risk requires the possibility of more than one outcome.

D) High risk should require low return.

Answer: D

Q2) Which of the following statements best describes mutual funds?

A) They are illegal in the United States, but popular in Europe.

B) They enable investors to buy many shares of stock in a single firm at a lower cost than using a stockbroker.

C) They provide good investment returns, but insufficient diversification.

D) They enable many investors with limited funds to buy a diversified portfolio.

E) They appeal only to wealthy investors.

Answer: D

Q3) Preferred stock pays a variable dividend.

A)True

B)False

Answer: False

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Page 3

Chapter 2: Financial Statements and Ratio Analysis

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Sample Questions

Q1) When would the "return on equity" equal the "return on assets"?

A) Whenever the debt to equity ratio is one

B) Whenever the debt ratio is zero

C) Whenever a firm has positive net worth

D) Whenever the firm has positive net worth and positive net income

Answer: B

Q2) When financial ratios are compared to financial ratios from previous years,a ________ is conducted.

A) cross-time

B) SIC code

C) time series

D) cross-sectional

E) None of the above

Answer: C

Q3) All else held constant,an increase in leverage should increase the ROE.

A)True

B)False

Answer: True

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4

Chapter 3: Time Value of Money - Introduction

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Sample Questions

Q1) As the discount rate increases without limit,the present value of the future cash inflows:

A) Gets larger without limit.

B) Stays unchanged.

C) Approaches zero.

D) Gets smaller without limit, i.e. approaches minus infinity.

Answer: C

Q2) At an effective annual interest rate of 20%,how many years will it take a given amount to triple in value? (Round to the closest year.)

A) 5

B) 8

C) 6

D) 10

E) 9

Answer: C

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Chapter 4: Time Value of Money - Streams and Valuations

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Sample Questions

Q1) You are saving for your child's university education.It is her 1st birthday today.She will start university just after her 19th birthday.You are going to save $2,000 per year each year starting today and ending on her 18th birthday.If you expect to earn a rate of 5% in the savings account,then how much will you have saved by her 19^th birthday?

A) $56,264.77

B) $59,078.01

C) $61,078.01

D) $64,131,91

E) $54,264.77

Q2) A generous philanthropist plans to make a one-time endowment to a renowned heart research center which would provide the facility with $250,000 per year into perpetuity.The rate of interest is expected to be 8 percent for all future time periods.How large must the endowment be?

A) $2,314,814

B) $2,000,000

C) $3,125,000

D) $3,000,000

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Chapter 5: Risk and Return - Introduction

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Sample Questions

Q1) Frank's Franks went public and opened at $15.00 per share.One year later the stock was selling for $17.50 per share.What was the holding period return if during the year Frank sent out $1.25 per share in dividends?

A) 17%

B) 21%

C) 25%

D) 14%

E) 23%

Q2) It costs $1,000 to enter the following game of chance,which is based on the outcome of a coin toss (fair coin).If the coin comes up 'heads' then you win and walk away with $1,100,which is a 10% rate of return.If the coin comes up 'tails',then you lose and walk away with $900,which is a -10% rate of return.What is the variance of the returns?

A) 0.05

B) 0.1

C) 0.09

D) 0.01

E) 0.5

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Chapter 6: Portfolio Theory

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Sample Questions

Q1) The risk-free rate is 5%,the beta of Stock A is 1.2,the beta of Stock B is 0.8,and the expected return on Stock A is 12.2%.What is the expected return on Stock B?

A) 8.4%

B) 9.2%

C) 9.8%

D) 11.0%

E) 12.2%

Q2) Consider a 2 asset portfolio with 60% in Google Inc.(GOOG)and 40% in John Deere (DE).Google has a standard deviation of 60%,John Deere has a standard deviation of 45% and their correlation is 0.2.What is the standard deviation of returns of the portfolio?

A) 38.33%

B) 43.35%

C) 45.25%

D) 50.00%

E) 52.50%

Q3) The slope of the characteristic line is beta. A)True B)False

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Chapter 7: Interest Rates and Bond Valuation

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Sample Questions

Q1) Schlitz Brewery Inc.bonds are trading today for a price of $961.29.The bond currently has 10 years until maturity and has a yield to maturity of 5%.The bond pays annual coupons and the next coupon is due in one year.What is the coupon rate of the bond?

A) 3.0%

B) 3.5%

C) 4.0%

D) 4.5%

E) 5.0%

Q2) A semi-annual coupon matures in one year.It has a face value of $1,000,a coupon rate of 4%,and the next semi-annual coupon is due in six months.The bond trades for $971.50.What is the yield to maturity of the bond?

A) 3.50%

B) 3.56%

C) 4.00%

D) 7.00%

E) 7.12%

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Chapter 8: Stock Valuation and Market Efficiency

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Sample Questions

Q1) Economically rational buyers and sellers use their assessment of an asset's risk and return to determine its value.Relative to this concept,which of the following is true?

A) To a buyer the asset's value represents the minimum price that he or she would pay.

B) To a seller the asset's value represents the maximum sale price.

C) To a buyer the asset's value represents the maximum price that he or she would pay.

D) The interaction of buyers and sellers can result in a value that differs from the price of the asset.

Q2) Cherry Auto Sales just opened and does not expect to pay a dividend during its first year.At the end of its second year,Cherry's owners expect to pay a $2.00 dividend and plan to increase it 7% annually.If the required return is 20%,what should Cherry's stock price be?

A) $11.42

B) $10.92

C) $13.06

D) $12.82

E) $15.48

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Chapter 9: Capital Budgeting Techniques

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Sample Questions

Q1) Going Postal Service Inc.is considering an upgrade of its sorting machines.The cost of the project is $10,000 per machine and the improvement is expected to save $5,000 each year,beginning one year after the adoption of the project and continuing for a total of 5 years.If Going's cost of capital is 10%,is the project acceptable? Round answer to the nearest whole dollar.

A) Yes, the NPV = $15,000

B) Yes, the NPV = 15%

C) No, the NPV = -$8,954

D) Yes, the NPV = +$8,954

E) No, the NPV = 8%

Q2) What is the internal rate of return for a project that requires a current cash outlay of $15,187 and is expected to generate cash inflows of $5,000 at the end of each of the next four years?

A) 12.0%

B) 11.5%

C) 12.3%

D) 14.1%

E) 13.0%

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Chapter 10: Capital Budgeting - Cash Flows

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Sample Questions

Q1) A corporation has decided to replace an existing machine with a newer model.The old machine had an initial purchase price of $35,000,and has $20,000 in accumulated depreciation.If the 40% tax rate applies to the corporation and the old asset can be sold for $10,000,what will be the tax effect of the replacement?

A) No effect

B) Loss of $2,000

C) Refund of $2,000

D) Loss of $4,000

Q2) The initial purchase price of a new stamp press is $6,000.The firm will spend $5,000 on shipping and installation.Training of new employees will cost $2,000.As a result of the purchase,inventory must increase $1,300.What is the net initial cash flow? Round your answer to the nearest dollar.Sign your cash flows negative for outflows and positive for inflows.

A) $13,000

B) -$13,000

C) $14,300

D) -$14,300

E) $11,000

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Page 12

Chapter 11: Cost of Capital

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Sample Questions

Q1) Use the data provided on Cadbury to answer the question below.The risk free rate is 4.25%.The expected return on the market portfolio is 9.75%.The corporate tax rate is 40%.The face value of Cadbury's outstanding bonds is 2.450 billion pounds sterling.The coupon rate on Cadbury's bonds is 4.5%.Assume that the bonds pay annual coupons.The yield to maturity on Cadbury's bonds is 4.5%.Cadbury's bonds mature in 7 years.Cadbury has 1.650 billion common shares outstanding.The market price of Cadbury's common shares as of Dec 31,2008 is 6.25 pounds sterling.Cadbury's Beta is 0.8.Cadbury's cost of debt (after-tax)is 2.7%.Cadbury's cost of equity is 8.65%.What is Cadbury's WACC?

A) 6.37%

B) 7.51%

C) 7.76%

D) 8.02%

E) 8.16%

Q2) Which method is best to compute a firm's cost of equity?

A) CAPM

B) Bond yield plus risk premium

C) Constant growth model

D) All of these methods

E) None of these methods; use the current market price per share.

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Chapter 12: Capital Structure

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Sample Questions

Q1) As a firm increases its use of debt,bondholders will

A) force managers to accept protective covenants.

B) monitor managers less.

C) accept a lower interest rate on their bonds.

D) discourage managers from pursuing risky projects.

E) be indifferent about firm risk.

Q2) What type of firm should have the least amount of operating leverage?

A) Airlines

B) Ship building

C) Accounting and consulting

D) Auto manufacturing

E) Electric utilities

Q3) According to Modigliani and Miller,altering a firm's capital structure will not change a firm's value because

A) taxes have no effect on capital structure decisions.

B) the value of a firm is based on the earnings power of its assets.

C) markets are not efficient and shareholders can be fooled by capital structure changes.

D) bankruptcy costs rise when debt levels increase.

E) the cost of equity falls as more debt is issued.

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Chapter 13: Dividends, repurchases, and Splits

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Sample Questions

Q1) Climax Motors Corp.is an all equity company with 40M shares outstanding.Climax's stock trades for $25.Climax has too much cash.The CEO,Trudy Ryder,wants to distribute the excess cash with an open market stock repurchase.She is contemplating buying back $10.9M worth of shares at a price of $25.Ricky Bobby owns 4 million shares of Climax.He purchased his shares before the repurchase for $25.If Ricky does not sell any shares during the repurchase,then what is his change in wealth from before to after the repurchase?

A) -$2.50 million

B) $0

C) $2.00 million

D) $2.50 million

E) $5.00 million

Q2) On Friday,January 4,Oceanic Airlines declared a $0.75 per share dividend to be paid on Monday,March 11; the date of record will be Friday,February 15.What is Oceanic's ex-dividend date?

A) Monday

B) Tuesday

C) Wednesday

D) Thursday

E) Friday

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Chapter 14: Financial Planning

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Sample Questions

Q1) Referring to Schwety,what are total cash inflows in January?

A) $11.30

B) $11.72

C) $12.44

D) $12.80

E) $13.28

Q2) Referring to Gerald's Produce,what are Gerald's total cash outflows (disbursements)in February?

A) $2,500

B) $3,100

C) $7,500

D) $8,100

E) $10,600

Q3) Referring to Schwety,what are Schwety's raw materials purchases in January?

A) $5.09

B) $5.22

C) $5.76

D) $6.12

E) $6.50

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Page 16

Chapter 15: The Management of Working Capital

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Sample Questions

Q1) What is the percentage holding cost per period for a credit with the terms of 2/30 net 60?

A) 0.0101

B) 0.2787

C) 0.0667

D) 0.0204

E) 0.0352

Q2) What does a self-liquidating bank loan mean?

A) The loan pays of itself.

B) The loan is received in cash only.

C) The loan is used to purchase assets that are worth more than the loan.

D) The loan is used to finance an asset that will pay off the loans.

Q3) If a firm uses the EOQ model to manage its inventory and its managers decide to hold safety stock,its

A) reorder costs will fall.

B) processing costs will fall.

C) orders will be less frequent.

D) shortage costs will rise.

E) first order is increased to include the extra number of units sold.

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Page 17

Chapter 16: International Finance

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Sample Questions

Q1) All of the following are sources of political risk EXCEPT

A) tax holidays.

B) change in government.

C) tariff increases.

D) labor law changes.

Q2) Traders take advantage of deviations from purchasing power parity by buying cheap goods and selling expensive ones.This trading causes the price of goods to ________ and exchange rates to ________.

A) fall; fall

B) rise; rise

C) fall; rise

D) rise; fall

Q3) Understanding interest rate parity requires that we first understand:

A) Purchasing power parity

B) Interest rate arbitrage

C) Spot Rates

D) Purchasing power arbitrage

Q4) It is more difficult to deal with political risk than exchange rate risk.

A)True

B)False

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