Advanced Corporate Finance Practice Exam
Course Introduction
Advanced Corporate Finance delves into the complex financial strategies and analytical tools used by corporations to maximize value in dynamic and competitive markets. This course covers topics such as capital structure decisions, dividend policy, mergers and acquisitions, corporate restructuring, financial risk management, and valuation methods. Through case studies and real-world applications, students learn how to evaluate financing options, assess investment opportunities, and understand the implications of financial policy choices from a managerial perspective. The course is designed to equip students with a critical understanding of modern corporate finance practices and the quantitative skills necessary for effective decision-making in global business environments.
Recommended Textbook
Corporate Finance 2nd Edition by Jonathan Berk
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Page 2
Chapter 1: The Corporation
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Q1) Which of the following statements is most correct?
A) An advantage to incorporation is that it allows for less regulation of the business.
B) An advantage of a corporation is that it is subject to double taxation.
C) Unlike a partnership, a disadvantage of a corporation is that has limited liability.
D) Corporations face more regulations when compared to partnerships.
Answer: D
Q2) You overhear your manager saying that she plans to book an Ocean-view room on her upcoming trip to Miami for a meeting.You know that the interior rooms are much less expensive,but that your manager is traveling at the Company's expense.This use of additional funds comes about as a result of:
A) an agency problem.
B) an adverse selection problem.
C) a moral hazard.
D) a publicity problem.
Answer: A
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3
Chapter 2: Introduction to Financial Statement Analysis
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Q1) Which of the following adjustments is not correct if you are trying to calculate cash flow from financing activities?
A) Add dividends paid
B) Add any increase in long term borrowing
C) Add any increase in short-term borrowing
D) Add proceeds from the sale of stock
Answer: A
Q2) The statement of financial performance is also known as the A) balance sheet.
B) income statement.
C) statement of cash flows.
D) statement of stockholder's equity.
Answer: B
Q3) Luther's Net Profit Margin for the year ending December 31,2008 is closest to:
A) 1.8%
B) 2.7%
C) 5.4%
D) 16.7%
Answer: A
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Chapter 3: Arbitrage and Financial Decision Making
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Q1) Another oil refiner is offering to trade you 10,150 Bbls of Alaska North Slope (ANS)crude oil for 10,000 Bbls of West Texas Intermediate (WTI)crude oil.Assuming you just purchased 10,000 Bbls of WTI crude at the current market price,the total benefit (cost)to you if you take the trade is closest to:
A) $730,600
B) $770,000
C) $771,400
D) $773,908
Answer: C
Q2) If the risk-free rate of interest (r<sub>f</sub>)is 6%,then you should be indifferent between receiving $250 today or
A) $235.85 in one year.
B) $250.00 in one year.
C) $265.00 in one year.
D) None of the above
Answer: C
Q3) The price per share of the ETF in a normal market is:
Answer: Value of ETF = = 2 × 121.57 + 3 × 36.59 + 3 × 3.15 = $362.36
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Chapter 4: The Time Value of Money
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Q1) Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their child's college education.They decide to make deposits into an educational savings account on each of their daughter's birthdays,starting with her first birthday.Assume that the educational savings account will return a constant 7%.The parents deposit $2000 on their daughter's first birthday and plan to increase the size of their deposits by 5% each year.Assuming that the parents have already made the deposit for their daughter's 18th birthday,then the amount available for the daughter's college expenses on her 18th birthday is closest to:
A) $42,825
B) $97,331
C) $67,998
D) $103,063
Q2) If the current rate of interest is 8%,then the present value of an investment that pays $1000 per year and lasts 20 years is closest to:
A) $18,519
B) $45,761
C) $9,818
D) $20,000
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Chapter 5: Interest Rates
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Q1) Can the nominal interest rate ever be negative? Can the real interest rate ever be negative? Explain.
Q2) Wesley Mouch's auto loan requires monthly payments and has an effect annual rate of 6.43%.The APR on this auto loan is closest to:
A) 6.00%
B) 6.25%
C) 6.50%
D) 6.62%
Q3) The effective annual rate (EAR)for a loan with a stated APR of 8% compounded monthly is closest to:
A) 7.72%
B) 8.00%
C) 8.30%
D) 8.66%
Q4) What is the effective after-tax rate of each instrument,expressed as an EAR?
Q5) What is the NPV of an investment that costs $2500 and pays $1000 certain at the end of one,three,and five years ?
Q6) Should you purchase the delivery truck or lease it? Why?
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Chapter 6: Investment Decision Rules
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Q1) The IRR for Boulderado's snowboard project is closest to:
A) 10.4%
B) 10.0%
C) 11.0%
D) 15.1%
Q2) The profitability index for this project is closest to:
A) .44
B) .26
C) 0.39
D) .34
Q3) Which of the following statements is correct?
A) You should accept project A since its IRR > 15%.
B) You should reject project B since its NPV > 0.
C) Your should accept project A since its NPV < 0.
D) You should accept project B since its IRR < 15%.
Q4) The payback period for project B is closest to:
A) 2.5 years
B) 2.0 years
C) 2.2 years
D) 2.4 years
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Chapter 7: Fundamentals of Capital Budgeting
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Q1) The free cash flow for the first year of Epiphany's project is closest to:
A) $43,000
B) $25,000
C) $38,000
D) $45,000
Q2) The free cash flow from Shepard Industries project in year one is closest to:
A) $240
B) $300
C) -$5
D) $390
Q3) Ignoring the original investment of $5 million,what is THSI's free cash flow for the first and only year of operation?
A) $5.0 million
B) $3.75 million
C) $8.0 million
D) $6.25 million
Q4) Assume that Kinston's new machine will be depreciated straight line to a salvage value of $5,000 at the end of year three.What is the after-tax salvage value of this project?
Q5) How does scenario analysis differ from sensitivity analysis?
Page 9
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Chapter 8: Valuing Bonds
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Q1) What is the relationship between a bond's price and its yield to maturity?
Q2) Which of the four bonds is the most sensitive to a one percent increase in the YTM?
A) Bond A
B) Bond B
C) Bond C
D) Bond D
Q3) Suppose a ten-year bond with semiannual coupons has a price of $1,071.06 and a yield to maturity of 7%.This bond's coupon rate is closest to:
A) 3.5%
B) 6.0%
C) 7.0%
D) 8.0%
Q4) Assuming the appropriate YTM on the Sisyphean bond is 9.0%,then the price that this bond trades for will be closest to:
A) $946
B) $919
C) $1,086
D) $1,000
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Chapter 9: Valuing Stocks
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Q1) Which of the following statements is false?
A) The long-run growth rate g<sub>FCF</sub> is typically based on the expected long-run growth rate of the firm's revenues.
B) Because the firm's free cash flow is equal to the sum of the free cash flows from the firm's current and future investments, we can interpret the firm's enterprise value as the total NPV that the firm will earn from continuing its existing projects and initiating new ones.
C) If the firm has no debt then r<sub>wacc</sub><sub> </sub>= the risk-free rate of return.
D) When using the discounted free cash flow model, we forecast the firm's free cash flow up to some horizon, together with some terminal (continuation) value of the enterprise.
Q2) If CCM has $200 million of debt and 8 million shares of stock outstanding,then the share price for CCM is closest to:
A) $49.50
B) $12.50
C) $19.35
D) $24.50
Q3) What are some common multiples used to value stocks?
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Chapter 10: Capital Markets and the Pricing of Risk
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Q1) What is the Beta for a type S firm?
A) 1.5
B) 0.0
C) 1.0
D) 0.75
Q2) The excess return if the difference between the average return on a security and the average return for A) Treasury Bonds.
B) a portfolio of securities with similar risk.
C) a broad based market portfolio like the S&P 500 index.
D) Treasury Bills.
Q3) The expected return on security with a beta of 0.8 is closest to:
A) 0.0%
B) 3.2%
C) 6.4%
D) 7.2%
Q4) Using the data provided in the table,calculate the average annual return,the variance of the annual returns,and the standard deviation of the average returns for the market from 2000 to 2009.
Q5) Which pharmaceutical company faces less risk?
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Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model
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Q1) Which of the following statements is false?
A) Margin investing is a risky investment strategy.
B) Because our return on the risk-free investments is fixed and does not move with (or against) our portfolio, the correlation between the risk-free investment and the portfolio is always equal to one.
C) Short selling the risk free investment is equivalent to borrowing money at the risk-free interest rate through a standard loan.
D) Margin investing can provide higher expected returns than investing in the efficient portfolio using only the funds we have available.
Q2) The Volatility on Stock Y's returns is closest to:
A) 35%
B) 31%
C) 42%
D) 18%
Q3) The expected return for Wyatt Oil is closest to:
A) 11.4%
B) 11.8%
C) 12.0%
D) 12.6%
13
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Chapter 12: The Capital Asset Pricing Model
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Q1) Firms should adjust for execution risk by
A) assigning a higher cost of capital to new projects.
B) ignoring execution risk since it is diversifiable.
C) capturing this risk in the expected cash flows generated by the project.
D) noticing missteps in the firm's execution of new projects.
Q2) Using the average historical excess returns for both Wyatt Oil and the Market portfolio estimate of Wyatt Oil's Beta.When using this beta,the alpha for Wyatt oil in 2007 is closest to:
A) -0.5000%
B) -0.0250%
C) -0.0125%
D) +0.0250%
Q3) The market capitalization for Wal-Mart is closest to:
A) $415 Billion
B) $276 Billion
C) $479 Billion
D) $200 Billion
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Chapter 13: Investor Behavior and Capital Market Efficiency
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Q1) Which of the following statements regarding portfolio "C" is/are correct?
1)Portfolio "C" has a negative alpha.
2)Portfolio "C" is overpriced.
3)Portfolio "C" is less risky than the market portfolio.
4)Portfolio "C" should not exist if the market portfolio is efficient.
A) 1 and 3
B) 2 and 4
C) 1, 3, and 4
D) 3 only
Q2) Assume that you are an investor with the disposition effect and you bought each of these stocks in January.Suppose that it is currently the end of March,which stocks are you most inclined to sell?
1)Taggart Transcontinental
2)Rearden Metal
3)Wyatt Oil
4)Nielson Motors
A) 1 only
B) 1 & 3 only
C) 2 only
D) 2 & 4 only
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Chapter 14: Capital Structure in a Perfect Market
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Q1) After the repurchase how many shares will Luther have outstanding?
A) 0.75 billion
B) 1.0 billion
C) 1.1 billion
D) 1.2 billion
Q2) Which of the following is not one of Modigliani and Miller's set of conditions referred to as perfect capital markets?
A) All investors hold the efficient portfolio of assets.
B) There are no taxes, transaction costs, or issuance costs associated with security trading.
C) A firm's financing decisions do not change the cash flows generated by its investments, nor do they reveal new information about them.
D) Investors and firms can trade the same set of securities at competitive market prices equal to the present value of their future cash flows.
Q3) Suppose that to raise the funds for the initial investment the firm borrows $45,000 at the risk free rate and issues new equity to cover the remainder.In this situation,calculate the value of the firm's levered equity from the project.What is the cost of capital for the firm's levered equity?
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Chapter 15: Debt and Taxes
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Q1) Assume that the corporate tax rate is 40%,the personal tax rate on income from equity is 20% the personal rate on interest income is 36%.The effective tax advantage of a corporate issuing debt would be closest to:
A) 10%
B) 15%
C) 25%
D) 28%
Q2) Assume that investors hold Google stock in retirement accounts that are free from personal taxes.Also assume that Google's current pre-tax WACC is 12%.If Google were to issue sufficient debt to give them a debt to value ratio of 0.5,then the Google's after-tax WACC would be closest to:
A) 10.4%
B) 12.8%
C) 13.0%
D) 15.0%
E) 16.0%
Q3) Raceway Products has a market debt-to-equity ratio of .60,a corporate tax rate of 40%,and pays 8% interest on its debt.The interest tax shield on Raceway's debt lowers its WACC by what amount?
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Q1) What is the expected payoff to debt holders under JR's new riskier business strategy?
A) $20 million
B) $4 million
C) $15 million
D) $11 million
Q2) Which of the following statements is false?
A) Real estate firms are likely to have low costs of financial distress, as much of their value derives from assets that can be sold relatively easily.
B) For low levels of debt, the risk of default remains low and the main effect of an increase in leverage is an increase in the interest tax shield, which has present value *D, where * is the effective tax advantage of debt.
C) Firms whose value and cash flows are very volatile (for example, semiconductor firms) must have much higher levels of debt to avoid a significant risk of default.
D) The probability of financial distress depends on the likelihood that a firm will be unable to meet its debt commitments and therefore default.
Q3) List five general categories of indirect costs associated with bankruptcy.
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Chapter 17: Payout Policy
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Q1) Assume that Omicron uses the entire $50 million to repurchase shares.The number of shares that Omicron will repurchase is closest to:
A) 1.0 million
B) 1.2 million
C) 1.1 million
D) 0.9 million
Q2) Delta Products has decided to spin-off one of its subsidiaries,Gamma Technologies.Each Delta shareholder will receive 0.125 shares of Gamma for each share of Delta they own.Delta's price is $35.00 cum-dividend and immediately after the spin-off Gamma Technologies was trading for $24.00 per share.In a perfect capital market,what would Delta Product's ex-dividend share price be after this transaction?
Q3) Another to method to repurchase shares is the ________,in which the firm lists different prices at which it is prepared to buy shares,and shareholders in turn indicate how many shares they are willing to sell at each price.
A) tender offer
B) Dutch auction share repurchase
C) targeted repurchase
D) open market share repurchases
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Chapter 18: Capital Budgeting and Valuation With Leverage
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Q1) Which of the following is not a step in valuation using the flow to equity method?
A) Determine the equity cost of capital, r<sub>E</sub>.
B) Compute the equity value, E, by discounting the free cash flow to equity using the equity cost of capital.
C) Determine the free cash flow to equity of the investment.
D) Determine the before-tax cost of capital, r<sub>U</sub>.
Q2) If Wyatt adjusts its debt continuously to maintain a constant debt-equity ratio of 50%,then the value of this new project is closest to:
A) $240 million
B) $320 million
C) $340 million
D) $445 million
Q3) Suppose that to fund this new project,Aardvark borrows $150 with the principal to be paid in three equal installments at the end each year.Calculate the present value of Aardvark's interest tax shield.
Q4) Calculate the debt capacity of Omicron's new project for years 0,1,and 2.
Q5) Calculate the present value of the interest tax shield provided by Omicron's new project.
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Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) If the risk-free rate of interest is 6% and the market risk premium has historically averaged 5%,then the cost of capital for Oakley is closest to:
A) 13.5%
B) 10.2%
C) 9.1%
D) 14.7%
Q2) The free cash flow to equity in 2008 is closest to:
A) -5,005
B) -1,755
C) 5,575
D) 9,995
E) 14,995
Q3) Assuming that Ideko has a EBITDA multiple of 8.5,then the continuation levered P/E ratio of Ideko in 2010 is closest to:
A) 19.0
B) 17.2
C) 16.4
D) 14.5
Q4) What is the purpose of the sensitivity analysis?
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Chapter 20: Financial Options
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Q1) KD Industries stock is currently trading at $32 per share.Consider a put option on KD stock with a strike price of $30.The maximum value of this put option is:
A) $0
B) $32
C) $30
D) $2
Q2) Which of the following statements is false?
A) A holder would not exercise an in-the-money option.
B) The option seller, also called the option writer, sells (or writes) the option and has a short position in the contract.
C) Because the long side has the option to exercise, the short side has an obligation to fulfill the contract.
D) When the exercise price of an option is equal to the current price of the stock, the option is said to be at-the-money.
Q3) Describe the conditions when it would be optimal to exercise an American Call and an American Put option prior to their expiration.
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Chapter 21: Option Valuation
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Q1) Which of the following statements is false?
A) The option delta, , has a natural interpretation: It is the change in the price of the stock given a $1 change in the price of the option.
B) Because a leveraged position in a stock is riskier than the stock itself, this implies that call options on a positive beta stock are more risky than the underlying stock and therefore have higher returns and higher betas.
C) Only one parameter input for the Black-Scholes formula, the volatility of the stock price, is not observable directly.
D) Because a stock's volatility is much easier to measure (and forecast) than its expected return, the Black-Scholes formula can be very precise.
Q2) The risk neutral probability of a down state for KD Industries is closest to:
A) 37.5%
B) 62.5%
C) 40.0%
D) 60.0%
Q3) Using risk neutral probabilities,calculate the price of a two-year put option on Kinston stock with a strike price of $9.
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Chapter 22: Real Options
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Q1) Which of the following statements is false?
A) Abandonment options can add value to a project because a firm can drop a project if it turns out to be unsuccessful.
B) Corporate bonds often contain embedded abandonment options: The issuing firm sometimes has the option to convert the bond that is, to repay it.
C) An abandonment option is the option to walk away.
D) An important abandonment option that most people encounter at some point in their lives is the option to abandon their mortgage.
Q2) Describe the two factors that affect the value of an investment timing option?
Q3) Assuming that Kinston has the ability to sell the prototype in year one for $300,000,the NPV of the Kinston Industries Mountain Bike Project is closest to:
A) $90,000
B) $590,000
C) $455,000
D) -$45,000
Q4) Assuming you are able to see the plant,draw a decision tree detailing this problem.
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Chapter 23: The Mechanics of Raising Equity Capital
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Q1) Which of the following statements is false?
A) The preferred stock issued by young companies typically does not pay regular cash dividends.
B) The preferred stock issued by young companies usually gives the owner an option to convert it into common stock on some future date, so it is often called callable preferred stock.
C) If the company runs into financial difficulties, the preferred stockholders have a senior claim on the assets of the firm relative to any common stockholders.
D) Preferred stock issued by mature companies such as banks usually has a preferential dividend and seniority in any liquidation and sometimes special voting rights.
Q2) The proceeds from the IPO be if Luther is selling 1.25 million shares is closest to:
A) $20.6 million
B) $21.6 million
C) $21.1 million
D) $20.9 million
Q3) Based upon the price/revenue ratio,what would be a reasonable value for KD?
Q4) What will the proceeds from the IPO be if Luther is selling 1.1 million shares?
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Chapter 24: Debt Financing
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Q1) Which of the following statements is false?
A) Mortgage-backed securities, such as GNMAs, are pass-through securities. That is, each security is backed by an underlying portfolio or pool of mortgages.
B) The Government National Mortgage Association (GNMA, or "Ginnie Mae") is an example of an enterprise; the Student Loan Marketing Association ("Sallie Mae") is an example of a government-sponsored agency.
C) Sovereign debt is debt issued by national governments.
D) Agency securities are issued by agencies of the U.S. government or by U.S. government sponsored enterprises.
Q2) What is the Yield to Call (YTC)on this bond?
Q3) In January 2010,the U.S.Treasury issued a $1000 par.ten-year,inflation-indexed note with a coupon of 4%.On the date of issue,the consumer price index (CPI)was 200.By January 2020, the CPI had increased to 300.The coupon payment that was made in January 2020 is closest to:
A) $20
B) $30
C) $40
D) $50
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Chapter 25: Leasing
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Q1) Assuming that Rearden's annual lease payments are $1.2 million,then use the direct method,the NPV of leasing is closest to:
A) ($165,000)
B) ($95,000)
C) $0
D) $95,000
Q2) A lease will be treated as a non-tax lease if it satisfies any of the following conditions except:
A) The property may be acquired the fair market value of the asset at the time when the option may be exercised.
B) Some portion of the lease payments is specifically designated as interest or its equivalent.
C) The lessee receives ownership of the asset on completion of all lease payments.
D) The total amount that the lessee is required to pay for a relatively short period of use constitutes an inordinately large proportion of the total value of the asset.
Q3) What will Luther's balance sheet look like if they acquire the new fleet of delivery trucks using an operating lease?
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Chapter 26: Working Capital Management
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Q1) Which of the following statements is false?
A) The Check Clearing for the 21st Century Act (Check 21), which became effective on October 28, 2004, eliminated the disbursement float due to the check-clearing process.
B) Trade credit is, in essence, a loan from the selling firm to its customer.
C) The accounts receivable balance represents the amount that a firm owes its suppliers for goods that it has received but for which it has not yet paid.
D) Providing financing at below-market rates is an indirect way to lower prices for only certain customers.
Q2) Wyatt Oil purchases goods from its suppliers on terms 3/20 net 40.The effective annual cost to Wyatt if they do not take the discount and pay on day 50 is closest to: A) 18%
B) 45%
C) 75%
D) 82%
Q3) What is a compensating balance?
Q4) Calculate the number of days in Luther's Operating Cycle.
Q5) Describe "just-in-time" inventory management.
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Chapter 27: Short-Term Financial Planning
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Q1) Which of the following statements is false?
A) With a discount loan, the borrower is required to pay the interest at the end of the loan period.
B) Bridge loans are often quoted as discount loans with fixed interest rates.
C) A bridge loan is another type of short-term bank loan that is often used to "bridge the gap" until a firm can arrange for long-term financing.
D) After a natural disaster, lenders may provide businesses with short-term loans to serve as bridges until they receive insurance payments or long-term disaster relief.
Q2) Which of the following is not a specific financing option for temporary working capital?
A) Secured financing
B) Commercial paper
C) Bank loans
D) Repurchase agreements
Q3) Kinston Industries issued $4,000,000 in commercial paper which matures in six months and received $3,876,000.Calculate the effective annual rate that Kinston is paying.
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Chapter 28: Mergers and Acquisitions
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Q1) A situation where every director serves a three-year term and the terms are staggered so that only one-third of the directors are up for election each year is called a
A) white knight.
B) classified board.
C) poison pill.
D) golden parachute.
Q2) This period is known for hostile,"bust-up" takeovers,in which the acquirer purchased a poorly performing conglomerate and sold off its individual business units for more than the purchase price:
A) 1960s
B) 1970s
C) 1980s
D) 1990s
Q3) If Microsoft merged with the Coca-Cola Company,this would be an example of a ________ merger.
A) conglomerate
B) vertical
C) horizontal
D) diagonal
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Chapter 29: Corporate Governance
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Q1) Which of the following statements is false?
A) The incentives come from owning stock in the company and from compensation that is sensitive to performance.
B) The role of the corporate governance system is to mitigate the conflict of interest that results from the combination of ownership and control without unduly burdening managers with the risk of the firm.
C) Punishment comes when a board fires a manager for poor performance or fraud, or when, upon failure of the board to act, shareholders or raiders launch control contests to replace the board and management.
D) The corporate governance system attempts to align interests by providing incentives for taking the right action and punishments for taking the wrong action.
Q2) What is the role of takeovers in corporate governance?
Q3) Directors who are employees,former employees,or family members of employees are called
A) managing directors.
B) independent directors.
C) inside directors.
D) gray directors.
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Chapter 30: Risk Management
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Q1) Luther Industries needs to borrow $50 million in cash.Currently long-term AAA rates are 9%.Luther can borrow at 9.75% given its current credit rating.Luther is expecting interest rates to fall over the next few years,so it would prefer to borrow at the short-term rates and refinance after rates have dropped.Luther management is afraid,however,that its credit rating may fall which could greatly increase the spread the firm must pay on new borrowings.How can Luther benefit from the expected decline in future interest rates without exposure to the risk of the potential future changes to its credit ratings bring?
Q2) Suppose the current exchange rate is $1.62/£,the interest rate in the united states is 5.25%,the interest rate in the United Kingdom is 4%,and the volatility of the $/£ exchange rate is 18%.Using the Black-Scholes formula,the price of a six-month European call option on the British pound with a strike price of $1.60/£ will be closest to:
A) $0.040/£
B) $0.059/£
C) $0.078/£
D) $0.097/£
Q3) What is the actuarially fair cost of full insurance?
Q4) What are some of the disadvantages of long-term supply contracts?
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Chapter 31: International Corporate Finance
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Q1) The present value of the £5 million cash inflow computed by first discounting the £s and then converting into dollars is closest to:
A) $8,961,420
B) $8,950,495
C) $8,954,615
D) $8,943,695
Q2) What conditions cause the cash flows of a foreign project to be affected by exchange rate risk?
Q3) Luther Industries,a U.S.firm,is considering an investment in Japan.The dollar cost of equity for Luther is 12%.The risk-free interest rates on dollars and yen are r<sub>$</sub> = 5.5% and r<sub>¥</sub> = 1.5% respectively.Luther industries is willing to assume that capital markets are internationally integrated.Luther Industries needs to know the comparable cost of equity in Japanese yen for a project with free cash flows that are uncorrelated with spot exchange rates.The yen cost of equity for Luther Industries is closest to:
A) 14.0%
B) 12.3%
C) 7.8%
D) 18.5%
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