Advanced Corporate Finance
Exam Solutions
Course Introduction
Advanced Corporate Finance explores the complex financial decisions faced by corporations, building on foundational knowledge of financial principles. The course examines advanced topics such as capital structure, dividend policy, corporate valuation, risk management, mergers and acquisitions, and financial restructuring. Emphasis is given to the analytical frameworks and quantitative tools used in real-world decision making, with a focus on maximizing firm value while managing financial risk. Case studies and empirical research are incorporated to illustrate practical applications, enabling students to critically evaluate strategic financial options in dynamic market environments.
Recommended Textbook
Corporate Finance A Focused Approach 5th Edition by Michael C. Ehrhardt
Available Study Resources on Quizplus
17 Chapters
1391 Verified Questions
1391 Flashcards
Source URL: https://quizplus.com/study-set/446
Page 2
Chapter 1: An overview of financial management and the financial environment
Available Study Resources on Quizplus for this Chatper
46 Verified Questions
46 Flashcards
Source URL: https://quizplus.com/quiz/7913
Sample Questions
Q1) Which of the following statements is CORRECT?
A) If General Electric were to issue new stock this year it would be considered a secondary market transaction since the company already has stock outstanding. B) Capital market transactions only include preferred stock and common stock transactions.
C) The distinguishing feature between spot markets versus futures markets transactions is the maturity of the investments.That is, spot market transactions involve securities that have maturities of less than one year, whereas futures markets transactions involve securities with maturities greater than one year.
D) Both Nasdaq "dealers" and NYSE "specialists" hold inventories of stocks.
E) An electronic communications network (ECN)is a physical location exchange.
Answer: D
Q2) If a firm's goal is to maximize its earnings per share, this is the best way to maximize the price of the common stock and thus shareholders' wealth.
A)True
B)False
Answer: False
To view all questions and flashcards with answers, click on the resource link above.
Page 3
Chapter 2: Financial statements, cash flow, and taxes
Available Study Resources on Quizplus for this Chatper
77 Verified Questions
77 Flashcards
Source URL: https://quizplus.com/quiz/7914
Sample Questions
Q1) Meric Mining Inc.recently reported $15, 000 of sales, $7, 500 of operating costs other than depreciation, and $1, 200 of depreciation.The company had no amortization charges, it had outstanding $6, 500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%.How much was the firm's net income after taxes? Meric uses the same depreciation expense for tax and stockholder reporting purposes.
A) $3, 284.55
B) $3, 457.42
C) $3, 639.39
D) $3, 830.94
E) $4, 022.48
Answer: D
Q2) The current cash flow from existing assets is highly relevant to the investor.However, since the value of the firm depends primarily upon its growth opportunities, profit projections from those opportunities are the only relevant future flows with which investors are concerned.
A)True
B)False
Answer: False
To view all questions and flashcards with answers, click on the resource link above.
Page 4
Chapter 3: Analysis of financial statements
Available Study Resources on Quizplus for this Chatper
104 Verified Questions
104 Flashcards
Source URL: https://quizplus.com/quiz/7915
Sample Questions
Q1) Refer to Exhibit 3.1.What is the firm's profit margin?
A) 1.40%
B) 1.56%
C) 1.73%
D) 1.93%
E) 2.12%
Answer: D
Q2) A firm wants to strengthen its financial position.Which of the following actions would increase its quick ratio?
A) Issue new common stock and use the proceeds to acquire additional fixed assets.
B) Offer price reductions along with generous credit terms that would (1)enable the firm to sell some of its excess inventory and (2)lead to an increase in accounts receivable.
C) Issue new common stock and use the proceeds to increase inventories.
D) Speed up the collection of receivables and use the cash generated to increase inventories.
E) Use some of its cash to purchase additional inventories.
Answer: B
To view all questions and flashcards with answers, click on the resource link above. Page 5
Chapter 4: Time value of money
Available Study Resources on Quizplus for this Chatper
168 Verified Questions
168 Flashcards
Source URL: https://quizplus.com/quiz/7916
Sample Questions
Q1) Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?
A) Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually.Deposits in Bank B will provide the higher future value if you leave your funds on deposit.
B) The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.
C) A 30-year, $150, 000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.
D) A bank loan's nominal interest rate will always be equal to or less than its effective annual rate.
E) If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.
Q2) If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 6
Chapter 5: Bonds, bond valuation, and interest rates
Available Study Resources on Quizplus for this Chatper
100 Verified Questions
100 Flashcards
Source URL: https://quizplus.com/quiz/7917
Sample Questions
Q1) Bonds A and B are 15-year, $1, 000 face value bonds.Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon.Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 15 years.Which of the following statements is CORRECT?
A) One year from now, Bond A's price will be higher than it is today.
B) Bond A's current yield is greater than 8%.
C) Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price.
D) Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.
E) Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.
Q2) Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?
A) 20-year, 10% coupon bond.
B) 20-year, 5% coupon bond.
C) 1-year, 10% coupon bond.
D) 20-year, zero coupon bond.
E) 10-year, zero coupon bond.
To view all questions and flashcards with answers, click on the resource link above.
Page 7
Chapter 6: Risk and return
Available Study Resources on Quizplus for this Chatper
146 Verified Questions
146 Flashcards
Source URL: https://quizplus.com/quiz/7918
Sample Questions
Q1) It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm is negative.
A)True
B)False
Q2) Since the market return represents the expected return on an average stock, the market return reflects a certain amount of risk.As a result, there exists a market risk premium, which is the amount over and above the risk-free rate, that is required to compensate stock investors for assuming an average amount of risk.
A)True
B)False
Q3) Freedman Flowers' stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a -28% return.What is the firm's expected rate of return?
A) 9.41%
B) 9.65%
C) 9.90%
D) 10.15%
E) 10.40%
To view all questions and flashcards with answers, click on the resource link above.
Chapter 7: Valuation of stocks and corporations
Available Study Resources on Quizplus for this Chatper
80 Verified Questions
80 Flashcards
Source URL: https://quizplus.com/quiz/7919
Sample Questions
Q1) From an investor's perspective, a firm's preferred stock is generally considered to be less risky than its common stock but more risky than its bonds.However, from a corporate issuer's standpoint, these risk relationships are reversed: Bonds are the most risky for the firm, preferred is next, and common is least risky.
A)True
B)False
Q2) Which of the following statements is CORRECT?
A) The preferred stock of a given firm is generally less risky to investors than the same firm's common stock.
B) Corporations cannot buy the preferred stocks of other corporations.
C) Preferred dividends are not generally cumulative.
D) A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation.
E) Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation.
To view all questions and flashcards with answers, click on the resource link above.
9
Chapter 8: Financial options and applications in corporate finance
Available Study Resources on Quizplus for this Chatper
28 Verified Questions
28 Flashcards
Source URL: https://quizplus.com/quiz/7920
Sample Questions
Q1) The exercise value is the positive difference between the current price of the stock and the strike price.The exercise value is zero if the stock's price is below the strike price.
A)True
B)False
Q2) Suppose you believe that Florio Company's stock price is going to decline from its current level of $82.50 sometime during the next 5 months.For $5.10 you could buy a 5-month put option giving you the right to sell 1 share at a price of $85 per share.If you bought this option for $5.10 and Florio's stock price actually dropped to $60, what would your pre-tax net profit be?
A) -$5.10
B) $19.90
C) $20.90
D) $22.50
E) $27.60
Q3) The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 10
Chapter 9: The cost of capital
Available Study Resources on Quizplus for this Chatper
92 Verified Questions
92 Flashcards
Source URL: https://quizplus.com/quiz/7921
Sample Questions
Q1) Which of the following statements is CORRECT?
A) The after-tax cost of debt that should be used as the component cost when calculating the WACC is the average after-tax cost of all the firm's outstanding debt.
B) Suppose some of a publicly-traded firm's stockholders are not diversified; they hold only the one firm's stock.In this case, the CAPM approach will result in an estimated cost of equity that is too low in the sense that if it is used in capital budgeting, projects will be accepted that will reduce the firm's intrinsic value.
C) The cost of equity is generally harder to measure than the cost of debt because there is no stated, contractual cost number on which to base the cost of equity.
D) The bond-yield-plus-risk-premium approach is the most sophisticated and objective method for estimating a firm's cost of equity capital.
E) The cost of capital used to evaluate a project should be the cost of the specific type of financing used to fund that project, i.e., it is the after-tax cost of debt if debt is to be used to finance the project or the cost of equity if the project will be financed with equity.
To view all questions and flashcards with answers, click on the resource link above.
11
Chapter 10: The basics of capital budgeting: evaluating cash flows
Available Study Resources on Quizplus for this Chatper
108 Verified Questions
108 Flashcards
Source URL: https://quizplus.com/quiz/7922
Sample Questions
Q1) Which of the following statements is CORRECT?
A) One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at the WACC, whereas IRR assumes that cash flows are reinvested at the IRR.The NPV assumption is generally more appropriate.
B) One advantage of the NPV over the MIRR method is that NPV takes account of cash flows over a project's full life whereas MIRR does not.
C) One advantage of the NPV over the MIRR method is that NPV discounts cash flows whereas the MIRR is based on undiscounted cash flows.
D) Since cash flows under the IRR and MIRR are both discounted at the same rate (the WACC), these two methods always rank mutually exclusive projects in the same order.
E) One advantage of the NPV over the IRR is that NPV takes account of cash flows over a project's full life whereas IRR does not.
Q2) Both the regular and the modified IRR (MIRR)methods have wide appeal to professors, but most business executives prefer the NPV method to either of the IRR methods.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 12
Chapter 11: Cash flow estimation and risk analysis
Available Study Resources on Quizplus for this Chatper
78 Verified Questions
78 Flashcards
Source URL: https://quizplus.com/quiz/7923
Sample Questions
Q1) Changes in net working capital should not be reflected in a capital budgeting cash flow analysis because capital budgeting relates to fixed assets, not working capital.
A)True
B)False
Q2) The primary advantage to using accelerated rather than straight-line depreciation is that with accelerated depreciation the total amount of depreciation that can be taken, assuming the asset is used for its full tax life, is greater.
A)True
B)False
Q3) Typically, a project will have a higher NPV if the firm uses accelerated rather than straight-line depreciation.This is because the total cash flows over the project's life will be higher if accelerated depreciation is used, other things held constant.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 13
Chapter 12: Corporate valuation and financial planning
Available Study Resources on Quizplus for this Chatper
41 Verified Questions
41 Flashcards
Source URL: https://quizplus.com/quiz/7924
Sample Questions
Q1) Weber Interstate Paving Co.had $450 million of sales and $225 million of fixed assets last year, so its FA/Sales ratio was 50%.However, its fixed assets were used at only 65% of capacity.If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity, with sales held constant at $450 million, how much cash (in millions)would it have generated?
A) $74.81
B) $78.75
C) $82.69
D) $86.82
E) $91.16
Q2) Last year Baron Enterprises had $350 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity last year.In millions, by how much could Baron's sales increase before it is required to increase its fixed assets?
A) $170.09
B) $179.04
C) $188.46
D) $197.88
E) $207.78
To view all questions and flashcards with answers, click on the resource link above. Page 14
Chapter 13: Agency conflicts and corporate governance
Available Study Resources on Quizplus for this Chatper
6 Verified Questions
6 Flashcards
Source URL: https://quizplus.com/quiz/7925
Sample Questions
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) Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
A) To enable the firm to borrow at a below-market interest rate.
B) To make it easier to grant stock options to employees.
C) To help prevent a hostile takeover.
D) To help retain valued employees.
E) To increase worker productivity.
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
To view all questions and flashcards with answers, click on the resource link above. Page 15
Chapter 14: Distributions to shareholders: dividends and repurchases
Available Study Resources on Quizplus for this Chatper
58 Verified Questions
58 Flashcards
Source URL: https://quizplus.com/quiz/7926
Sample Questions
Q1) Brinkley Resources stock has increased significantly over the last five years, selling now for $175 per share.Management feels this price is too high for the average investor and wants to get the price down to a more typical level, which it thinks is $25 per share.What stock split would be required to get to this price, assuming the transaction has no effect on the total market value? Put another way, how many new shares should be given per one old share?
A) 6.65
B) 6.98
C) 7.00
D) 7.35
E) 7.72
Q2) If a firm adheres strictly to the residual dividend policy, then if its optimal capital budget requires the use of all earnings for a given year (along with new debt according to the optimal debt/total assets ratio), then the firm should pay
A) no dividends to common stockholders.
B) dividends only out of funds raised by the sale of new common stock.
C) dividends only out of funds raised by borrowing money (i.e., issue debt).
D) dividends only out of funds raised by selling off fixed assets.
E) no dividends except out of past retained earnings.
To view all questions and flashcards with answers, click on the resource link above. Page 16
Chapter 15: Capital structure decisions
Available Study Resources on Quizplus for this Chatper
72 Verified Questions
72 Flashcards
Source URL: https://quizplus.com/quiz/7927
Sample Questions
Q1) Which of the following would increase the likelihood that a company would increase its debt ratio, other things held constant?
A) An increase in the corporate tax rate.
B) An increase in the personal tax rate.
C) The Federal Reserve tightens interest rates in an effort to fight inflation.
D) The company's stock price hits a new low.
E) An increase in costs incurred when filing for bankruptcy.
Q2) Cartwright Communications is considering making a change to its capital structure to reduce its cost of capital and increase firm value.Right now, Cartwright has a capital structure that consists of 20% debt and 80% equity, based on market values.(Its D/S ratio is 0.25.)The risk-free rate is 6% and the market risk premium, rM - rRF, is 5%.Currently the company's cost of equity, which is based on the CAPM, is 12% and its tax rate is 40%.What would be Cartwright's estimated cost of equity if it were to change its capital structure to 50% debt and 50% equity?
A) 13.00%
B) 13.64%
C) 14.35%
D) 14.72%
E) 15.60%
To view all questions and flashcards with answers, click on the resource link above.
Page 17
Chapter 16: Supply chains and working capital management
Available Study Resources on Quizplus for this Chatper
138 Verified Questions
138 Flashcards
Source URL: https://quizplus.com/quiz/7928
Sample Questions
Q1) Andrews Corporation buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days.What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year.)
A) 14.34%
B) 15.10%
C) 15.89%
D) 16.69%
E) 17.52%
Q2) The overriding goal of inventory management is to ensure that the firm never suffers a stock-out, i.e., never runs out of an inventory item.
A)True B)False
Q3) Firms hold cash balances in order to complete transactions (both routine and precautionary)that are necessary in business operations and as compensation to banks for providing loans and services.
A)True B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 18
Chapter 17: Multinational financial management
Available Study Resources on Quizplus for this Chatper
49 Verified Questions
49 Flashcards
Source URL: https://quizplus.com/quiz/7929
Sample Questions
Q1) Tashakori Trucking, a U.S.-based company, is considering expanding its operations into a foreign country.The required investment at Time = 0 is $10 million.The firm forecasts total cash inflows of $4 million per year for 2 years, $6 million for the next 2 years, and then a possible terminal value of $8 million.In addition, due to political risk factors, Tashakori believes that there is a 50% chance that the gross terminal value will be only $2 million and a 50% chance that it will be $8 million.However, the government of the host country will block 20% of all cash flows.Thus, cash flows that can be repatriated are 80% of those projected.Tashakori's cost of capital is 15%, but it adds one percentage point to all foreign projects to account for exchange rate risk.Under these conditions, what is the project's NPV?
A) $1.01 million
B) $2.77 million
C) $3.09 million
D) $5.96 million
E) $7.39 million
Q2) Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 19