Advanced Corporate Finance
Mock Exam
Course Introduction
Advanced Corporate Finance delves into the complex financial strategies and decisions faced by corporations in modern markets. The course covers topics such as capital structure optimization, dividend policy, advanced valuation techniques, risk management, mergers and acquisitions, and corporate restructuring. Emphasizing both theoretical frameworks and practical case studies, it equips students with the analytical tools necessary for making high-level financial decisions, addressing issues like agency conflicts, market efficiency, and incentive structures. Students will also explore the effects of global financial markets, regulatory environments, and contemporary challenges shaping today's corporate finance landscape.
Recommended Textbook Corporate Finance 9th Edition by Stephen
A. Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Q1) Which one of the following actions by a financial manager creates an agency problem?
A)refusing to borrow money when doing so will create losses for the firm
B)refusing to lower selling prices if doing so will reduce the net profits
C)agreeing to expand the company at the expense of stockholders' value
D)agreeing to pay bonuses based on the book value of the company stock
E)increasing current costs in order to increase the market value of the stockholders' equity
Answer: C
Q2) Since the implementation of Sarbanes-Oxley, the cost of going public in the United States has:
A)increased.
B)decreased.
C)remained about the same.
D)been erratic, but over time has decreased.
E)It is impossible to tell since Sarbanes-Oxley compliance does not involve direct cost to the firm.
Answer: A
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3
Chapter 2: Financial Statements and Cash Flow
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Q1) Liquidity is:
A)a measure of the use of debt in a firm's capital structure.
B)equal to current assets minus current liabilities.
C)equal to the market value of a firm's total assets minus its current liabilities.
D)valuable to a firm even though liquid assets tend to be less profitable to own.
E)generally associated with intangible assets.
Answer: D
Q2) Depreciation:
A)is a noncash expense that is recorded on the income statement.
B)increases the net fixed assets as shown on the balance sheet.
C)reduces both the net fixed assets and the costs of a firm.
D)is a non-cash expense which increases the net operating income.
E)decreases net fixed assets, net income, and operating cash flows.
Answer: A
Q3) Why is interest expense excluded from the operating cash flow calculation?
Answer: Operating cash flow is designed to represent the cash flow a firm generates from its day-to-day operating activities.Interest expense arises from a financing decision and thus should be considered as a cash flow to creditors.
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Chapter 3: Financial Statements Analysis and Long-Term Planning
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Q1) The debt-equity ratio is measured as total:
A)equity minus total debt.
B)equity divided by total debt.
C)debt divided by total equity.
D)debt plus total equity.
E)debt minus total assets, divided by total equity.
Answer: C
Q2) It is often said that anyone with a pencil can calculate financial ratios, but it takes a brain to interpret them.What kinds of things should an analyst keep in mind when evaluating the financial statements of a given firm?
Answer: This question is totally open-ended and allows students to call into play knowledge gleaned from other courses, this course, and personal experience.As a minimum, students should include some of these considerations: type of industry, accounting methods, fiscal year end, cyclical nature of the business, industry trends and the state of the economy.
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Chapter 4: Discounted Cash Flow Valuation
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Sample Questions
Q1) The McDonald Group purchased a piece of property for $1.2 million.It paid a down payment of 20% in cash and financed the balance.The loan terms require monthly payments for 15 years at an annual percentage rate of 7.75% compounded monthly.What is the amount of each mortgage payment?
A)$7,440.01
B)$8,978.26
C)$9,036.25
D)$9,399.18
E)$9,413.67
Q2) What is the effective annual rate of 9.75% compounded continuously?
A)9.99%
B)10.11%
C)10.24%
D)10.28%
E)10.30%
Q3) Using the example of a savings account, explain the difference between the effective annual rate and the annual percentage rate.
Q4) What is the different between an ordinary annuity and an annuity due? Which occurs more in practice? Give a common example of both.
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Chapter 5: Net Present Value and Other Investment Rules
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Q1) Given the goal of maximization of firm value and shareholder wealth, we have stressed the importance of net present value (NPV).And yet, many financial decision-makers at some of the most prominent firms in the world continue to use less desirable measures such as the payback period and the average accounting return (AAR).Why do you think this is the case?
Q2) The present value of an investment's future cash flows divided by the initial cost of the investment is called the:
A)net present value.
B)internal rate of return.
C)average accounting return.
D)profitability index.
E)profile period.
Q3) When two projects both require the total use of the same limited economic resource, the projects are generally considered to be:
A)independent.
B)marginally profitable.
C)mutually exclusive.
D)acceptable.
E)internally profitable.
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Chapter 6: Making Capital Investment Decisions
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Q1) Which of the following should be included in the analysis of a project?
I.sunk costs
II.opportunity costs
III.erosion costs
IV.incremental costs
A)I and II only
B)III and IV only
C)II and IV only
D)II, III, and IV only
E)I, II, and IV only
Q2) The cash flows of a project should:
A)be computed on a pre-tax basis.
B)include all sunk costs and opportunity costs.
C)include all incremental costs, including opportunity costs.
D)be applied to the year when the related expense or income is recognized by GAAP.
E)include all financing costs related to new debt acquired to finance the project.
Q3) Explain the use of real and nominal discount rates in discounting cash flows.Which is used more often and why?
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8
Chapter 7: Risk Analysis, Real Options, and Capital Budgeting
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Q1) To ascertain whether the accuracy of the variable cost estimate for a project will have much effect on the final outcome of the project, you should probably conduct _____ analysis.
A)leverage
B)scenario
C)break-even
D)sensitivity
E)cash flow
Q2) An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis.
A)forecasting
B)scenario
C)sensitivity
D)simulation
E)break-even
Q3) Sensitivity analysis is a method which allows for evaluation of the NPV given a series of changes to the underlying assumptions.Discuss why and how scenario analysis is used in addition to sensitivity analysis.
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Chapter 8: Interest Rates and Bond Valuation
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Q1) The Fisher formula is expressed as _____ where R is the nominal rate, r is the real rate, and h is the inflation rate.
A)1 + r = (1 + R) / (1 + h)
B)1 + r = (1 + R) * (1 + h)
C)1 + h = (1 + r) / (1 + R)
D)1 + R = (1 + r) / (1 + h)
E)1 + R = (1 + r) * (1 + h)
Q2) Zeta Corporation has issued a $1,000 face value zero-coupon bond.Which of the following values is closest to the correct price for the bond if the appropriate discount rate is 4% and the bond matures in 8 years?
A)$730.69
B)$968.00
C)$1,000.00
D)$1,032.00
E)This problem cannot be worked without the annual interest payments provided
Q3) Define what is meant by interest rate risk.Assume you are the manager of a $100 million portfolio of corporate bonds and you believe interest rates will fall.What adjustments should you make to your portfolio based on your beliefs?
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Chapter 9: Stock Valuation
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Q1) The Red Bud Co.just paid a dividend of $1.20 a share.The company announced today that it will continue to pay this constant dividend for the next 3 years after which time it will discontinue paying dividends permanently.What is one share of this stock worth today if the required rate of return is 7%?
A)$2.94
B)$3.15
C)$3.23
D)$3.44
E)$3.60
Q2) The common stock of Grady Co.had an 11.25% rate of return last year.The dividend amount was $.70 a share which equated to a dividend yield of 1.5%.What was the rate of price appreciation on the stock?
A)1.50%
B)8.00%
C)9.75%
D)11.25%
E)12.75%
Q3) Explain whether it is easier to find the required return on a publicly traded stock or a publicly traded bond, and explain why.
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Page 11
Chapter 10: Risk and Return: Lessons From Market History
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Q1) The average compound return earned per year over a multi-year period is called the _____ average return.
A)arithmetic
B)standard
C)variant
D)geometric
E)real
Q2) A stock had returns of 8%, 39%, 11%, and -24% for the past four years.Which one of the following best describes the probability that this stock will NOT lose more than 43% in any one given year?
A)84.0%
B)95.0%
C)97.5%
D)99.0%
E)99.5%
Q3) What are the lessons learned from capital market history? What evidence is there to suggest these lessons are correct?
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12
Chapter 11: Return and Risk: the Capital Asset Pricing Model
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Q1) Diversification can effectively reduce risk.Once a portfolio is diversified, the type of risk remaining is:
A)individual security risk.
B)riskless security risk.
C)risk related to the market portfolio.
D)total standard deviations.
E)None of the above.
Q2) The elements along the diagonal of the variance/covariance matrix are:
A)covariances.
B)security weights.
C)security selections.
D)variances.
E)None of the above.
Q3) The slope of an asset's security market line is the:
A)reward-to-risk ratio.
B)portfolio weight.
C)beta coefficient.
D)risk-free interest rate.
E)market risk premium.
Q4) Explain in words what beta is and why it is important.
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Chapter 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory
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Q1) Calculate the stock's total return if the company announces that they had an industrial accident and the operating facilities will close down for some time thus resulting in a loss by the company of 7% in return.
A)-4.05%
B)-2.05%
C)4.55%
D)0.40%
E)1.85%
Q2) Assume that the single factor APT model applies and a portfolio exists such that 2/3 of the funds are invested in Security Q and the rest in the risk-free asset.Security Q has a beta of 1.5.The portfolio has a beta of:
A)0.00
B)0.50
C)0.75
D)1.00
E)1.50
Q3) Discuss the Fama-French three factor model; both what it means and the factors of the model.
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Chapter 13: Risk, Cost of Capital, and Capital Budgeting
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Q1) Comparing two otherwise equal firms, the beta of the common stock of a levered firm is ____________ than the beta of the common stock of an unlevered firm.
A)equal to B)significantly less
C)slightly less
D)greater
E)None of the above.
Q2) The use of WACC to select investments is acceptable when the: A)correlation of all new projects are equal.
B)NPV is positive when discounted by the WACC.
C)risk of the projects are equal to the risk of the firm.
D)firm is well diversified and the unsystematic risk is negligible.
E)None of the above.
Q3) Given the sample of returns of the Top Black Asphalt Company and the S&P 500 index, calculate Top Black's covariance and beta.
Q4) Explain the factors that determine beta and how an asset beta can differ from equity betas.
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15
Chapter 14: Efficient Capital Markets and Behavioral Challenges
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Q1) Event studies have been used to examine:
A)IPOs, SEOs, and other equity issuances.
B)changes in earnings.
C)mergers and acquisitions.
D)most financial events.
E)All of the above.
Q2) If the securities market is efficient, an investor need only throw darts at the stock pages to pick securities and be just as well off.
A)This is true because there are no differences in risk and return.
B)This is true because in an efficient stock market prices do not fluctuate.
C)This is false because professional portfolio managers prefer to generate commissions by active trading.
D)This is false because investors may not hold a desirable risk-return combination in their portfolio.
E)This is false because the markets are controlled by the institutional investors.
Q3) Explain why it is that in an efficient market, investments have an expected NPV of zero.
Q4) Define the three forms of market efficiency.
Page 16
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Chapter 15: Long-Term Financing: an Introduction
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Q1) Michael's Motor Scooters has 1,000 shares outstanding each with a par value of $0.05.If they are sold to shareholders at $5 each, what would the capital surplus be?
A)$4,400
B)$4,500
C)$4,750
D)$4,950
E)$5,000
Q2) Calhoun Computech used internal financing as a source of long-term financing for 80% of its total needs in 2008.The company borrowed an additional 15% of its total needs in the long-term debt markets in 2008.What were Calhoun's net new stock issues, in percentage terms, for 2008?
A)-10%
B)-5%
C)5%
D)10%
E)15%
Q3) From this information, calculate Eaton's book value per share.
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Chapter 16: Capital Structure: Basic Concepts
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Q1) An unlevered firm has a cost of capital of 14% and earnings before interest and taxes of $150,000.A levered firm with the same operations and assets has both a book value and a face value of debt of $700,000 with a 7% annual coupon.The applicable tax rate is 35%.What is the value of the levered firm?
A)$696,429
B)$907,679
C)$941,429
D)$1,184,929
E)$1,396,429
Q2) MM Proposition II with taxes:
A)has the same general implications as MM Proposition II without taxes.
B)reveals how the interest tax shield relates to the value of a firm.
C)supports the argument that business risk is determined by the capital structure employed by a firm.
D)supports the argument that the cost of equity decreases as the debt-equity ratio increases.
E)reaches the final conclusion that the capital structure decision is irrelevant to the value of a firm.
Q3) Explain homemade leverage and why it matters.
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Page 18
Chapter 17: Capital Structure: Limits to the Use of Debt
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Q1) The TrunkLine Company debtholders are promised payments of $35 if the firm does well, but will receive only $20 if the firm does poorly.Bondholders are willing to pay $25.The promised return to the bondholders is approximately:
A)2.9%
B)16.9%
C)27.3%
D)40.0%
E)100%
Q2) The TrunkLine Company will earn $60 in one year if it does well.The debtholders are promised payments of $35 in one year if the firm does well.If the firm does poorly, expected earnings in one year will be $30 and the repayment will be $20 because of the dead weight cost of bankruptcy.The probability of the firm performing poorly or well is 50%.If bondholders are fully aware of these costs what will they pay for the debt? The interest rate on the bonds is 10%.
A)$25.00
B)$27.50
C)$29.55
D)$32.50
E)$35.00
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Page 19
Chapter 18: Valuation and Capital Budgeting for the Levered Firm
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Q1) The all equity cost of capital for flat Rock Grinding is 15% and the company has set a target debt to value ratio of 50%.The current cost of debt for a firm of this risk is 10% and the corporate tax rate is 34%.Calculate the WACC for the Flat Rock Grinding Corporation.
Q2) The non-market rate financing impact on the APV is:
A)calculated by Tc B because the tax shield depends only on the amount of financing. B)calculated by subtracting the all equity NPV from the FTE NPV.
C)irrelevant because it is always less than the market financing rate.
D)calculated by the NPV of the loan using both debt rates.
E)None of the above.
Q3) Brad's Boat Company, a company in the 40% tax bracket, has riskless debt in its capital structure which makes up 30% of the total capital structure, and equity is the other 70%.The beta of the assets for this business is .9 and the equity beta is:
A)0.54
B)0.90
C)1.13
D)1.20
E)1.49
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Page 20
Chapter 19: Dividends and Other Payouts
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Q1) A one-for-four reverse stock split will:
A)increase the par value by 25%.
B)increase the number of shares outstanding by 400%.
C)increase the market value but not affect the par value per share.
D)increase a $1 par value to $4.
E)increase a $1 par value by $4.
Q2) The date on which the firm mails out its declared dividends is called the:
A)ex-rights date.
B)ex-dividend date.
C)date of record.
D)date of payment.
E)declaration date.
Q3) Ignoring capital gains as an alternative, the tax law changes in 2003 tend to favor a: A)lower dividend policy.
B)constant dividend policy.
C)zero-dividend policy.
D)higher dividend policy.
E)restrictive dividend policy.
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Chapter 20: Issuing Securities to the Public
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Q1) The market for venture capital refers to the:
A)private financial marketplace for servicing small, young firms.
B)bond markets.
C)market for selling rights to individuals who already own shares.
D)market for selling equity securities for firms with equity already outstanding.
E)None of the above.
Q2) An equity issue sold directly to the public is called:
A)a rights offer.
B)a general cash offer.
C)a restricted placement.
D)a fully funded sales.
E)a standard call issue.
Q3) Underpricing can possibly be explained by:
A)oversubscription of an issue.
B)strong demand by investors.
C)undersubscription of an issue.
D)Both B and C.
E)Both A and B.
Q4) Discuss what a Dutch auction is and how it works.
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Chapter 21: Leasing
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Q1) If a lease is for 35 years, it is regarded as a:
A)financial lease.
B)operating lease.
C)capital lease.
D)conditional sale.
E)sale and leaseback.
Q2) The WACC is not used in the lease versus purchase decision because:
A)the WACC was used in the decision to acquire the asset, this is only a financing decision.
B)the WACC is used only when a lease alone is considered and not a lease versus purchase.
C)the WACC does not include the lease cost of capital and therefore should not be used.
D)tax rates of the lessor may be different than the lessee and therefore the WACC is incorrect.
E)when a bank arranges a lease they do not consider the lessee's cost of capital.
Q3) What are some of the advantages and disadvantages of leasing?
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23
Chapter 22: Options and Corporate Finance
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Q1) The last day on which an owner of an option can elect to exercise is the _____ date.
A)ex-payment
B)ex-option
C)opening
D)expiration
E)intrinsic
Q2) The current market value of the assets of Bigelow, Inc.is $86 million, with a standard deviation of 15% per year.The firm has zero-coupon bonds outstanding with a total face value of $45 million.These bonds mature in 2 years.The risk-free rate is 4% per year compounded continuously.What is the value of d<sub>1</sub>?
A)3.54
B)3.62
C)3.68
D)3.71
E)3.75
Q3) How do options apply to capital budgeting? Explain and give an example.
Q4) What are the upper and lower bounds for an American call option? Explain what would happen in each case if the bound was violated.
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Chapter 23: Options and Corporate Finance: Extensions and Applications
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Q1) Which of the following is not part of the Black Scholes option pricing model?
A)Standard deviation
B)Time to maturity
C)Exercise price
D)Par value of the company's stock
E)Interest rate
Q2) The Nu-Tech Company has a new project available to it at a cost of $6,000,000.If the project is accepted, the company will be able to sell 13,000 personal organizers at $172 in net cash flow for each of the next five years.Nu-Tech's discount rate is 15%.What is the NPV of the investment? The executives of Nu-Tech are concerned about the potential of future competition and a subsequent drop in sales and price.If after two years you can dispose of the asset for $1,000,000 at what price would it make sense to abandon the project?
Q3) Why would the company pay the executive in options as opposed to salary?
Q4) The option to abandon is:
A)a real option.
B)usually of little value because of the cost associated with abandonment.
C)irrelevant in capital budgeting analysis.
D)nearly always less relevant the option to expand.
E)All of the above.
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Chapter 24: Warrants and Convertibles
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Q1) Warrants are similar to traded options except:
A)only warrants have exercise prices.
B)only warrants depend on changes in the underlying stock to determine value.
C)warrants affect the number of shares outstanding.
D)Both A and C.
E)Both A and B.
Q2) A firm has 100 shares of stock and 40 warrants outstanding.The warrants are about to expire, and all of them will be exercised.The market value of the firm's assets is $2,000, and the firm has no debt.Each warrant gives the owner the right to buy 2 shares at $15 per share.What is the price per share of the stock?
A)$11.11
B)$15.00
C)$17.78
D)$20.00
E)None of the above.
Q3) Explain why there is neither a "Free" nor "Expensive Lunch" when convertible bonds are issued?
Q4) Why are warrants and convertibles issued?
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Chapter 25: Derivatives and Hedging Risk
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Q1) Comparing long-term bonds with short-term bonds, long-term bonds are _____ volatile and therefore experience _____ price change than short-term bonds for the same interest rate shift.
A)less; less B)less; more C)more; more D)more; less E)more; the same
Q2) You have taken a short position in a futures contract on corn at $2.60 per bushel.Over the next 5 days the contract settled at 2.52, 2.57, 2.62, 2.68, 2.70.Before you can reverse your position in the futures market on the fifth day you are notified to complete delivery.What will you receive on delivery and what is the net amount you receive in total?
A)$2.60; $-0.10
B)$2.60; $0.10
C)$2.60; $2.70
D)$2.70; $-0.10
E)$2.70; $2.60
Q3) What new asset duration will immunize the balance sheet?
Q4) Calculate the duration of Tiger State Bank's assets and liabilities.
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Chapter 26: Short-Term Finance and Planning
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Q1) Refer to the above tables.StarrKnight Corporation's payables period 2008 is (use average payables) _________.
A)35.13 days
B)40.46 days
C)42.82 days
D)45.85 days
E)47.10 days
Q2) Your firm sells $2,000 worth of goods in December, $1,700 worth in January, $1,500 in February and $1,600 in March.Your cost is 60% of the retail price.You have a receivables period of 30 days and a payables period of 45 days.You buy your products one month prior to selling them.Which one of the following statements is correct given this information?
A)The accounts payable balance at the end of February is $750.
B)Your January disbursements to your suppliers are $960.
C)Your February disbursements to your suppliers are $900.
D)Your March disbursements to your suppliers are $930.
E)Your beginning accounts payable balance as of January 1<sup>st</sup> is $450.
Q3) List and describe the three basic types of secured inventory loans.What are the advantages and disadvantages of each type of loan?
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Page 28
Chapter 27: Cash Management
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Q1) During the month you receive 4 checks, one for $100, two for $200, and one for $500.They are delayed for 2 days, 4 days, and 8 days respectively.What is your average daily collection float (a month has 30 days)?
Q2) Even though the dividend rate on an Adjustable-Rate Preferred Stock (ARPS) is floating to keep in line with interest rates, the instrument still suffers from risk such as:
A)a thin market causing potential principal risk and liquidity concerns.
B)the risk of downgrades from the narrow range of issuers.
C)the impact of tax law changes, which may reduce the after-tax value of the instrument.
D)All of the above.
E)None of the above.
Q3) A sensible cash management policy would be to:
A)have enough cash on hand to meet ordinary course of business and some excess cash to invest in marketable securities as a precautionary measure.
B)have nearly enough cash on hand to meet ordinary course of business.
C)have enough cash on hand to meet any potential demand for cash.
D)have a zero cash balance and charge all expenditures.
E)None of the above.
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Chapter 28: Credit and Inventory Management
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Q1) Cash discounts:
A)conveniently separate the pricing of credit and cash customers.
B)lower profit margins on sales.
C)speed the collection of receivables.
D)All of the above.
E)Both A and B.
Q2) Risk should be incorporated into the decision to grant credit by:
A)decreasing the discount rate.
B)increasing the credit period to allow for customers in financial distress to reorganize.
C)decreasing the cash inflows, or the numerator of the NPV formula.
D)increasing the cash inflows, or the numerator of the NPV formula.
E)increasing costs per unit.
Q3) If a firm refuses to offer credit, the net present value of the transaction is:
A)the cash revenues received minus the cost paid in time period 0.
B)the discounted value of the revenues from time period 0.
C)the net cash flow from the future payments to be received.
D)determined by all of the above.
E)always equal to zero.
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Chapter 29: Mergers and Acquisitions
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Q1) Principal, Inc.is acquiring Secondary Companies for $29,000 in cash.Principal has 2,500 shares of stock outstanding at a market price of $30 a share.Secondary has 1,600 shares of stock outstanding at a market price of $15 a share.Neither firm has any debt.The net present value of the acquisition is $4,500.What is the price per share of Principal after the acquisition?
A)$30.00
B)$30.70
C)$31.80
D)$32.10
E)$32.50
Q2) The acquisition of a firm whose business is not related to that of the bidder is called a _____ acquisition.
A)conglomerate
B)forward
C)backward
D)horizontal
E)vertical
Q3) Describe the three basic legal procedures that one firm can use to acquire another and briefly discuss the advantages and disadvantages of each.
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Chapter 30: Financial Distress
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Q1) The net payoff to creditors in formal bankruptcy may be low in present value terms because:
A)the financial structure may be complicated with several groups and types of creditors.
B)indirect costs of bankruptcy may have been costly in lost revenues and poor maintenance.
C)administrative costs are high and increase with the complexity and length of time in the formal bankruptcy process.
D)All of the above.
E)None of the above.
Q2) A large negative equity position will lead a firm to be more likely to try to:
A)not file bankruptcy.
B)liquidate.
C)reorganize.
D)consolidate.
E)None of the above.
Q3) When choosing between liquidation and reorganization, what are some of the empirical factors that lead a firm toward one choice or the other?
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Chapter 31: International Corporate Finance
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Q1) The foreign currency approach to capital budgeting analysis: I.is computationally easier to use than the home currency approach. II.produces the same results as the home currency approach. III.utilizes the uncovered interest parity relationship.
IV.computes the net present value of a project in both the foreign and in the domestic currency.
A)I and III only
B)II and IV only
C)I, II, and IV only
D)II, III, and IV only
E)I, II, III, and IV
Q2) Suppose that the spot rate on the Canadian dollar is C$1.40.The risk-free nominal rate in the U.S.is 8 percent while it is only 4 percent in Canada.Which one of the following one-year forward rates best establishes the approximate interest rate parity condition?
A)C$1.278
B)C$1.344
C)C$1.355
D)C$1.456
E)C$1.512
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