Advanced Corporate Finance
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Course Introduction
Advanced Corporate Finance delves deeply into the financial decision-making processes within modern corporations, emphasizing valuation concepts, capital structure theories, and the intricacies of mergers and acquisitions. The course explores sophisticated topics such as risk management, corporate governance, derivative securities, and financial distress, integrating both theoretical frameworks and real-world applications. Through case studies and analytical models, students develop an advanced understanding of how firms maximize value, manage financial resources, and address the challenges presented by dynamic global markets. This course is designed for those seeking to excel in high-level financial roles in corporate environments, investment banking, or consulting.
Recommended Textbook
Corporate Finance A Focused Approach 6th Edition by Michael C. Ehrhardt
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Chapter 1: An Overview of Financial Management and the Financial Environment
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.
B) It is generally easier to transfer one's ownership interest in a partnership than in a corporation.
C) One of the advantages of the corporate form of organization is that it avoids double taxation.
D) One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., "one person, one vote."
E) Corporations of all types are subject to the corporate income tax.
Answer: A
Q2) One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.
A)True
B)False
Answer: True
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Chapter 3: Analysis of Financial Statements
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Q1) Companies Heidee and Leaudy are virtually identical in that they are both profitable, and they have the same total assets (TA), Sales (S), return on assets (ROA), and profit margin (PM). However, Company Heidee has the higher debt ratio. Which of the following statements is CORRECT?
A) Company Heidee has a lower operating income (EBIT) than Company LD.
B) Company Heidee has a lower total assets turnover than Company Leaudy.
C) Company Heidee has a lower equity multiplier than Company Leaudy.
D) Company Heidee has a higher fixed assets turnover than Company Leaudy.
E) Company Heidee has a higher ROE than Company Leaudy.
Answer: E
Q2) Refer to the data for Pettijohn Inc. What is the firm's equity multiplier?
A) 3.33 B) 3.50 C) 3.68 D) 3.86 E) 4.05
Answer: A
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Chapter 4: Time Value of Money
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Sample Questions
Q1) What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?
A) $11,262.88
B) $11,826.02
C) $12,417.32
D) $13,038.19
E) $13,690.10
Q2) Your uncle just won the weekly lottery, receiving $375,000, which he invested at a 7.5% annual rate. He now has decided to retire, and he wants to withdraw $35,000 at the end of each year, starting at the end of this year. What is the maximum number of whole payments that can be withdrawn before the account is exhausted, i.e., before the account balance would become negative? (Hint: Round down to the nearest whole number.)
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Chapter 5: Bonds, Bond Valuation, and Interest Rates
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Sample Questions
Q1) Sinking funds are devices used to force companies to retire bonds on a scheduled basis prior to their maturity. Many bond indentures allow the company to acquire bonds for a sinking fund by either purchasing bonds in the market or selecting the bonds to be acquired by a lottery administered by the trustee through a call at face value.
A)True
B)False
Q2) McCurdy Co.'s Class Q bonds have a 12-year maturity, $1,000 par value, and a 5.75% coupon paid semiannually (2.875% each 6 months), and those bonds sell at their par value. McCurdy's Class P bonds have the same risk, maturity, and par value, but the P bonds pay a 5.75% annual coupon. Neither bond is callable. At what price should the annual payment bond sell?
A) $943.98
B) $968.18
C) $993.01
D) $1,017.83
E) $1,043.28
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Chapter 6: Risk, Return, and the Capital Asset Pricing Model
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Q1) Stocks A and B each have an expected return of 15%, a standard deviation of 20%, and a beta of 1.2. The returns on the two stocks have a correlation coefficient of +0.6. Your portfolio consists of 50% A and 50% B. Which of the following statements is CORRECT?
A) The portfolio's expected return is 15%.
B) The portfolio's standard deviation is greater than 20%.
C) The portfolio's beta is greater than 1.2.
D) The portfolio's standard deviation is 20%.
E) The portfolio's beta is less than 1.2.
Q2) The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero, which is the risk-free rate.
A)True
B)False
Q3) The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation.
A)True
B)False
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Chapter 7: Stocks, Stock Valuation, and Stock Market
Equilibrium
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Sample Questions
Q1) Alcott's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal (not effective) annual rate of return?
A) 8.03%
B) 8.24%
C) 8.45%
D) 8.67%
E) 8.89%
Q2) Lance Inc.'s free cash flow was just $1.00 million. If the expected long-run growth rate for this company is 5.4%, if the weighted average cost of capital is 11.4%, Lance has $4 million in short-term investments and $3 million in debt, and 1 million shares outstanding, what is the intrinsic stock price?
A) $17.28
B) $17.70
C) $18.13
D) $18.57
E) $19.01
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Chapter 8: Financial Options and Applications in Corporate Finance
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Sample Questions
Q1) An option that gives the holder the right to sell a stock at a specified price at some future time is
A) a put option.
B) an out-of-the-money option.
C) a naked option.
D) a covered option.
E) a call option.
Q2) If the current price of a stock is below the strike price, then an option to buy the stock is worthless and will have a zero value.
A)True
B)False
Q3) If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy, this action could be expected to increase the value of long-term options (say 5-year options) on the firm's stock.
A)True
B)False
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) As the winner of a contest, you are now CFO for the day for Maguire Inc. and your day's job involves raising capital for expansion. Maguire's common stock currently sells for $45.00 per share, the company expects to earn $2.75 per share during the current year, its expected payout ratio is 70%, and its expected constant growth rate is 6.00%. New stock can be sold to the public at the current price, but a flotation cost of 8% would be incurred. By how much would the cost of new stock exceed the cost of common from reinvested earnings?
A) 0.09%
B) 0.19%
C) 0.37%
D) 0.56%
E) 0.84%
Q2) Adams Inc. has the following data: r<sub>RF</sub> = 5.00%; RP<sub>M</sub> = 6.00%; and b = 1.05. What is the firm's cost of common from reinvested earnings based on the CAPM?
A) 11.30%
B) 11.64%
C) 11.99%
D) 12.35%
E) 12.72%
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Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) For mutually exclusive projects with normal cash flows, the NPV and MIRR methods can never conflict, but their results could conflict with the discounted payback and the regular IRR methods.
B) Multiple IRRs can exist, but not multiple MIRRs. This is one reason some people favor the MIRR over the regular IRR.
C) If a firm uses the discounted payback method with a required payback of 4 years, then it will accept more projects than if it used a regular payback of 4 years.
D) The percentage difference between the MIRR and the IRR is equal to the project's cost of capital.
E) The NPV, IRR, MIRR, and discounted payback (using a payback requirement of 3 years or less) methods always lead to the same accept/reject decisions for independent projects.
Q2) The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs) with the present value of the cash inflows.
A)True
B)False
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Chapter 11: Cash Flow Estimation and Risk Analysis
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Q1) If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land.
A)True
B)False
Q2) It is extremely difficult to estimate the revenues and costs associated with large, complex projects that take several years to develop. This is why subjective judgment is often used for such projects along with discounted cash flow analysis.
A)True
B)False
Q3) We can identify the cash costs and cash inflows to a company that will result from a project. These could be called "direct inflows and outflows," and the net difference is the direct net cash flow. If there are other costs and benefits that do not flow from or to the firm, but to other parties, these are called externalities, and they need not be considered as a part of the capital budgeting analysis.
A)True
B)False
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Chapter 12: Financial Planning and Forecasting Financial Statements
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Q1) Refer to the Judd Enterprises financial statements. If Judd does not plan on issuing new stock or additional long-term debt, then what is the additional net financing needed for the projected year?
A) $30
B) $33
C) $37
D) $339
E) $396
Q2) The term "additional funds needed (AFN)" is generally defined as follows:
A) Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock to support operations.
B) The amount of assets required per dollar of sales.
C) The amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth.
D) A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.
E) Funds that are obtained automatically from routine business transactions.
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Chapter 13: Corporate Valuation, Value-Based
and Corporate Governance
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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) Two important issues in corporate governance are (1) the rules that cover the board's ability to fire the CEO and (2) the rules that cover the CEO's ability to remove members of the board.
A)True
B)False
Q3) 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.
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Chapter 14: Distributions to Shareholders: Dividends and Repurchases
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Q1) Which of the following statements about dividend policies is correct?
A) One reason that companies tend to avoid stock repurchases is that dividend payments are taxed at a lower rate than gains on stock repurchases.
B) One advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest.
C) One key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy.
D) The clientele effect suggests that companies should follow a stable dividend policy.
E) Modigliani and Miller argue that investors prefer dividends to capital gains because dividends are more certain than capital gains. They call this the "bird-in-the hand" effect.
Q2) If the signaling, hypothesis (which is also called the information content hypothesis) is correct, then changes in dividend policy can have an important effect on the firm's value and capital costs.
A)True
B)False
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Chapter 15: Capital Structure Decisions
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Sample Questions
Q1) Which of the following is NOT associated with (or does not contribute to) business risk? Recall that business risk is affected by a firm's operations.
A) Sales price variability.
B) The extent to which operating costs are fixed.
C) The extent to which interest rates on the firm's debt fluctuate.
D) Input price variability.
E) Demand variability.
Q2) Which of the following events is likely to encourage a company to raise its target debt ratio, other things held constant?
A) An increase in the personal tax rate.
B) An increase in the company's operating leverage.
C) The Federal Reserve tightens interest rates in an effort to fight inflation.
D) The company's stock price hits a new high.
E) An increase in the corporate tax rate.
Q3) The trade-off theory states that the capital structure decision involves a tradeoff between the costs and benefits of debt financing.
A)True
B)False
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Chapter 16: Working Capital Management
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Q1) A conservative current operating asset financing approach will result in permanent current assets and some seasonal current assets being financed using long-term securities.
A)True
B)False
Q2) An increase in any current asset must be accompanied by an equal increase in some current liability.
A)True
B)False
Q3) Accruals are "spontaneous," but unfortunately, due to law and economic forces, firms have little control over the level of these accounts.
A)True
B)False
Q4) For a firm that makes heavy use of net float, being able to forecast collections and disbursement check clearings is essential.
A)True
B)False
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Chapter 17: Multinational Financial Management
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Q1) Suppose Stackpool Inc. had inventory in Britain valued at 240,000 pounds one year ago. The exchange rate for dollars to pounds was 1£ = 2 U.S. dollars. This year the exchange rate is 1£ = 1.82 U.S. dollars. The inventory in Britain is still valued at 240,000 pounds. What is the gain or loss in inventory value in U.S. dollars as a result of the change in exchange rates?
A) $240,000
B) $43,200
C) $0
D) $43,200
E) $47,473
Q2) Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate financial analysis.
A)True
B)False
Q3) Legal and economic differences among countries, although important, do NOT pose significant problems for most multinational corporations when they coordinate and control worldwide operations of subsidiaries.
A)True
B)False
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