Advanced Corporate Finance
Midterm Exam
Course Introduction
Advanced Corporate Finance builds upon foundational corporate finance concepts, delving deeply into topics such as capital structure, dividend policy, mergers and acquisitions, corporate governance, and financial risk management. The course emphasizes strategic decision-making and analytical techniques used by financial managers to optimize firm value in complex and dynamic markets. Through case studies, quantitative models, and real-world applications, students gain insights into the roles of financial instruments, market imperfections, and global factors in shaping corporate financial strategy. The course is designed for those seeking a comprehensive understanding of high-level financial decision-making within modern corporations.
Recommended Textbook Corporate Finance Linking Theory to What Companies Do 3rd Edition by John Graham
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Chapter 1: The Scope of Corporate Finance
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Q1) Which form of business organization allows shareholders to be taxed as partners while still retaining their limited liability status?
A) Corporation
B) Partnership
C) S Corporation
D) Sole Proprietorship
Answer: C
Q2) What of the following is FALSE regarding debt capital?
A) Debt holders receive interest payments at fixed intervals.
B) Debt holders receive the amount of their loan (called principal) at the debt's maturity date.
C) Debt holders can force the firm into bankruptcy if interest payments are not made.
D) Debt holders have voting rights for the firm's board of directors.
Answer: D
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Chapter 2: Financial Statement and Cash Flow Analysis
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Q1) Refer to Tax Table.Bavarian Sausage,Inc.has a pretax income of $325,000.What is the company's marginal tax rate?
A) 34%
B) 39%
C) 35%
D) 25%
Answer: B
Q2) Titans Electronics is applying for a new line of credit from their banking partner.To issue the credit,the bank requires the following cutoffs for certain financial ratios: TIE ratio of 4.25 Current Ratio of 1.50 ROA of 5%.
What is a likely response from the bank to the application?
A) The bank will have reservations, as the TIE ratio does not meet requirements.
B) The bank will have concerns, as the current ratio does not meet requirements.
C) The bank will have concerns, as the ROA is not high enough.
D) The bank will have concerns, as two or more of the requirements are not met.
Answer: B
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Chapter 3: The Time Value of Money
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Q1) What is the present value of $25 to be received at the end of each year for the next 6 years if the discount rate is 12%?
A) $125.00
B) $113.06
C) $102.79
D) none of the above
Answer: C
Q2) If you can earn 5% (compounded annually)on an investment,how long does it take for your money to triple?
A) 14.40 years
B) 22.52 years
C) 19.48 years
D) 29.29 years
Answer: B
Q3) Discounting is:
A) calculating the future value of present cash flows.
B) calculating the present value of future cash flows.
C) is necessary in order to pull present values to the future.
D) none of the above
Answer: B
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Chapter 4: Valuing Bonds
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Q1) You just bought a 5-year zero coupon bond with a $1,000 face value for $735.67.What is the taxable capital gain on this bond next year?
A) $274.33
B) $68.51
C) $169.47
D) $46.64
Q2) The greater the uncertainty about an asset's future benefits,
A) the lower the discount rate investors will apply when discounting those benefits to the present.
B) the higher the discount rate investors will apply when discounting those benefits to the present.
C) the greater is the present value of those benefits.
D) none of the above.
Q3) Bonds issued by US states or local governments are called:
A) Treasury bonds.
B) Municipal bonds.
C) Corporate bonds.
D) Yankee bonds.
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Chapter 5: Valuing Stocks
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Q1) DDP Enterprises currently does not pay a dividend but plans to makes its first dividend payment of $1 in 3 years,if the expected growth rate is 10% per year once dividends commence,and the appropriate is discount rate is 18%,what is the current stock price today?
A) $ 8.98
B) $ 8.37
C) $ 13.75
D) $ 14.75
Q2) When valuing a preferred stock,the type of security that we treat the preferred stock like,for valuation purposes,is
A) a bond.
B) a perpetuity.
C) a common stock.
D) none of the above.
Q3) One of the most time-consuming aspects of preparing for an equity offering is:
A) preparing the necessary documents for filing with regulators.
B) putting on the road show so that managers can pitch their business plan to prospective investors.
C) oversubscribing the offering.
D) none of the above
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Chapter 6: The Trade-Off Between Risk and Return
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Q1) You have it on good account that the probability of good returns on energy investments is equal to that of poor returns.If we define good returns as 100% while that of poor returns is 50%,then what is the probability of getting an exact return of 75% in the next year?
A) 50%
B) 25%
C) 0%
D) there is not enough information to solve the problem.
Q2) If you were to plot the return of asset classes on a graph with the standard deviation of returns on the horizontal axis and expected returns on the vertical axis,then which security class is most likely to be in the farthest upper right hand corner of the graph?
A) Treasury Bills
B) Treasury Bonds
C) Corporate Bonds
D) Stocks
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Chapter 7: Risk, return, and the Capital Asset Pricing Model
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Q1) The slope of the security market line is:
A) E(R<sub>m</sub>) - R<sub>f</sub>
B) 1/(E(R<sub>m</sub>) - R<sub>f</sub>)
C) R<sub>f </sub>- E(R<sub>m</sub>)
D) R<sub>f </sub>
Q2) Portfolio weights must sum to ____.
A) 1
B) 0.99
C) 0
D) Portfolio weights do not need to sum to a particular value.
Q3) A buy-and-hold strategy:
A) typically earns higher returns, after expenses, than an active stock picking strategy.
B) always earns the lowest returns.
C) always have the lowest risk.
D) typically outperforms most market indexes.
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Chapter 8: Capital Budgeting Process and Decision Criteria
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Q1) Refer to Exhibit 8-3.If the two projects are independent,which project should the firm choose based on the IRR rule?
A) project 1
B) project 2
C) both projects
D) cannot decide because the hurdle rate is unknown
Q2) The hurdle rate used in IRR analysis should be:
A) the risk-free rate.
B) the current corporate bond rate.
C) the prime rate.
D) the discount rate used in NPV analysis.
Q3) Refer to Tompson Manufacturing.Suppose the hurdle rate of the firm is 10%.Calculate the cash flows of the "incremental project" by subtracting the cash flows of the second project from the cash flows of the first project.What is the IRR of the incremental project?
A) 20.7%
B) 23.1%
C) 17.9%
D) 10.0%
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Chapter 9: Cash Flow and Capital Budgeting
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Q1) When a firm operates at less than full capacity
A) managers should charge the cost of accelerating new capacity development against the current proposal for using excess capacity.
B) treating that excess capacity as a free asset is a good idea in both the long- and short-run.
C) treating that excess capacity as a free asset may accelerate the need for more capacity in the future.
D) All of the above are true.
E) Both (a) and (c) are true.
Q2) Gamma Electronics is considering the purchase of testing equipment that will cost $500,000.The equipment has a 5-year lifetime with no salvage value.Assume the new machine will generate after-tax savings of $100,000 per year for the five years.
If the firm has a 15% cost of capital,what is the equivalent annual cost of the equipment?
A) $32,924
B) $42,746
C) $49,158
D) $37,863
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Chapter 10: Risk and Capital Budgeting
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Q1) You are a gold producer and have noticed that the value of your business may increase even though the price of gold falls.Your explanation for this phenomenon is A) that the relationship between the value of future cash flows and interest rates is positive.
B) that increased risk may increase the real option value of the firm.
C) that cheaper gold prices are good for the economy and that must be good for the firm.
D) none of the above
Q2) What is the Never-crash Airline's cost of equity?
A) 33.00%
B) 7.05%
C) 24.45%
D) 28.50%
Q3) What is Bavarian Brewhouse's cost of preferred stock?
A) 8.00%
B) 15.5%
C) 10.7%
D) 12.6%
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Chapter 11: Raising Long-Term Financing
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Q1) An institution that raises capital by issuing liabilities against itself is a
A) financial intermediary.
B) financial broker.
C) financial agent.
D) none of the above.
Q2) What is the initial return earned by investors on this Bavarian Brewhouse IPO?
A) 20%
B) 15%
C) 17%
D) 22%
Q3) Refer to Brooks Corporation.For ABC Investments to make a profit on this offering,what is the minimum price they must sell the stock for on the secondary market?
A) $5.00
B) $5.04
C) $5.10
D) $5.15
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Chapter 12: Capital Structure
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Q1) Which statement correctly describes proposition I of Modigliani and Miller?
A) The value of the firm is independent of its capital structure.
B) If there is no default risk, firms should exclusively use debt to finance projects.
C) If there is no default risk, firms should exclusively use equity to finance projects.
D) The value of the firm's tax shields depends solely on the amount of debt issued.
Q2) Which statement is FALSE concerning capital structure?
A) Firms with large amounts of tangible assets tend to use a lot of debt in their capital structures.
B) When corporate profits are taxed at the corporate and personal level, the benefits of leverage are greatly reduced.
C) Modern trade off theory predicts that a firm's optimal debt level is set by trading off the tax benefits of leverage against the agency costs of increased debt.
D) Debt is used more frequently abroad (such as Germany and England) as international laws tend to favor debtors.
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Chapter 13: Long-Term Debt and Leasing
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Q1) Refer to Bavarian Brew Bond.What is the call premium per bond?
A) $110
B) $100
C) $90
D) $125
Q2) An unsecured bond that only creditworthy firms can issue is called a
A) mortgage bond
B) collateral trust bond
C) debentures
D) junk bond
Q3) When one firm sells an asset to another for cash and then leases the asset from its new owner,it is known as a:
A) direct lease
B) sale-leaseback arrangement
C) leveraged lease
D) none of the above
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Chapter 14: Payout Policy
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Q1) Smith Enterprises just paid a 10% stock dividend.If the market price of the stock was $18 per share before the stock dividend,what do you expect it to be afterwards?
A) $18.00
B) $16.36
C) $19.80
D) $17.20
Q2) Place the following dates related to dividend payments in proper order:
A) record date, announcement date, payment date, ex-dividend date
B) announcement date, ex-dividend date, record date, payment date
C) announcement date, record date, ex-dividend date, payment date
D) record date, announcement date, ex-dividend date, payment date
Q3) A company that seeks to pay a fixed dollar amount in dividends each period
A) will likely experience a decrease in its payout ratio over time.
B) will likely experience an increase in its payout ratio over time.
C) will likely experience stable additions to retained earnings over time.
D) will likely violate capital impairment restrictions frequently.
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Chapter 15: Financial Planning
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Q1) The short-term financing strategy where a company relies heavily on short term borrowing to finance a portion of their long term growth is called a(n)
A) conservative strategy
B) aggressive strategy
C) matching strategy
D) growth strategy
Q2) Due to a change in economic conditions Bavarian Brew will only be able to collect 40% of its March sales in April.What is company's cash net cash flow in April as a result of this change?
A) $528
B) $1229.63
C) -$701.63
D) $701.63
Q3) What is the value of Bavarian Brew's receivables account at the end of February?
A) $1074
B) $306
C) $204
D) $348
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Chapter 16: Cash Conversion, inventory, and Receivables Management
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Q1) A firm that moves from traditional inventory stocking methods to a just-in-time (JIT)system should expect to see
A) its inventory turnover decrease and its average age of inventory increase.
B) its inventory turnover decrease and its average age of inventory decrease.
C) its inventory turnover increase and its average age of inventory increase.
D) its inventory turnover increase and its average age of inventory decrease.
Q2) What is Bavarian Brew's total variable cost of annual sales under the new credit policy?
A) $3,150,000
B) $3,000,000
C) $2,500,000
D) $3,750,000
Q3) What can a company do to shorten its cash conversion cycle?
A) turn inventory over as quickly as possible
B) collect accounts receivables as quickly as possible
C) pay accounts as slowly as possible
D) all of the above
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Chapter 17: Cash, payables, and Liquidity Management
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Q1) Bavarian Brew is contemplating implementing a collection system that would decrease the collection float by 2.5 days.What would be the annual benefit of that system?
A) $481,250
B) $48,125
C) $96,250
D) $75,480
Q2) Roxy is evaluating a lock-box system that will reduce float by 6 days.The firm has annual sales of $180 million and an opportunity cost of 12%.If the lock-box system is adopted,what is the value of funds released?
A) $ 493,150.68
B) $ 355,068.49
C) $ 59,178.08
D) $ 2,958,904.11
Q3) Near-cash assets in the form of short-term investments are often called
A) marketable securities.
B) corporate bonds.
C) treasury notes.
D) treasury bonds.
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Chapter 18: International Financial Management
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Q1) You checked the /$ exchange rate today and you found that one Dollar cost you 0.8214.When you checked the one year /$ forward exchange rate one dollar was trading at 0.8026.What is the forward premium (discount)for the dollar?
A) 2.29%
B) -2.29%
C) 3.67%
D) -3.67%
Q2) A coffee table in Canada sells for C$134.The same coffee table sells for $92 in the United States.The expected inflation rate for the next year in Canada is 10% and the expected one year inflation rate for the United States is 8%.What must the exchange rate be currently for Purchasing Power Parity to hold now,and what must the exchange rate change to in order for Purchasing Power Parity to hold in one year.
A) $0.6866/C$ and $0.6741/C$
B) C$0.6866/$ and C$0.6741/$
C) $1.4565/C$ and $1.484/C$
D) none of the above
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Chapter 19: Options
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Q1) You currently own a put option on Stock X with a strike price of $25.If the current price of Stock X is $30,then what is the in-the-money amount of the option?
A) -$5
B) $0
C) $5
D) none of the above
Q2) You need to find the price of a European call option on a stock that does not pay dividends.The current price of the shares are $100 and the strike price on the option is $80.The expiration date is 9 months from now and the risk-free rate applicable is 8% per annum.If the standard deviation on the returns on the stock is 50%,what is the price of a single call option?
A) $19.71
B) $27.20
C) $30.39
D) $36.65
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Chapter 20: Entrepreneurial Finance and Venture Capital
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Q1) Which type of venture capital fund has the ability to borrow from the U.S.Treasury?
A) financial venture capital funds
B) corporate venture capital funds
C) small business investment companies
D) venture capital limited partnerships
Q2) Agreements between venture capital investors and portfolio-company management allocating ownership stakes and voting rights to venture capitalists.
A) Ownership right agreements
B) Ratchet provisions
C) Demand registration rights
D) Participation rights
Q3) Suppose the venture capital investor's share of the equity in IGBB is 25%,and that in four years at the IPO the firm is valued at $120 million.What annual (compounded)return did the venture capital investor earn?
A) 46%
B) 39%
C) 30%
D) 26%
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Chapter 21: Mergers, acquisitions, and Corporate Control
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Q1) Refer to Bavarian Merger.If you owned 250 shares of Bavarian Sausage what would be the value of your stock holdings after the merger?
A) $3,600
B) $4,500
C) $7,000
D) $8,750
Q2) One benefit of external expansion is:
A) Acquirers are able to purchase the firm at a substantial discount from market value.
B) It slows down the expansion compared to a Greenfield entry and allows the firm more time to evaluate the potential of the expansion.
C) that it may help reduce potential problems associated with greenfield entry.
D) All of the above are benefits of external expansion.
E) Only (a) and (c) are benefits of external expansion.
Q3) What is the net value of the acquisition to Smith if cash is used?
A) $245,000
B) -$5,000
C) -$250,000
D) $5,000
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Chapter 22: Bankruptcy and Financial Distress
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Q1) If the company has $578,000 in funds to distribute to unsecured creditors,what percentage of their claims are going to be satisfied if Case III occurs?
A) 24.86%
B) 75.14%
C) 100%
D) 56.35%
Q2) Suppose a firm's creditors decide that replacing current management is a requirement in a voluntary reorganization.This is called
A) an extension reorganization.
B) a composition reorganization.
C) a creditor control reorganization.
D) a cram-down reorganization.
Q3) For multinational situation,applies to U.S.assets of firms that file primary bankruptcy in another country
A) Chapter 9
B) Chapter 12
C) Chapter 13
D) Chapter 15
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Chapter 23: Risk Management
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Q1) You plan to buy a 2 year zero coupon bond one year from today.If the risk free rate is 5.6% and a three year zero-coupon bond currently sells for $843.25,what should be the forward price?
A) $890.47
B) $943.25
C) $925.89
D) $1045.72
Q2) You notice that the spot price of beef loin is $30 per pound and the 9-month forward rate is $33.00 per pound.The annualized 9-month risk free rate of interest is 12%.What amount of arbitrage profits are available to you?
A) $.60
B) $.34
C) -$.34
D) -$.60
Q3) If the managers of a firm have a greater aversion to risk,then
A) they are less likely to hedge.
B) they are more likely to hedge.
C) they are more likely to use derivatives to speculate.
D) none of the above.
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