Advanced Corporate Finance
Study Guide Questions
Course Introduction
Advanced Corporate Finance explores the complex financial decisions faced by modern corporations, building on foundational finance principles to analyze topics such as capital structure, dividend policy, mergers and acquisitions, risk management, and corporate governance. The course integrates theoretical models with empirical evidence to evaluate how firms maximize value in dynamic and competitive markets. Students will develop their ability to assess the impact of financial strategies on firm value, apply valuation techniques to real-world scenarios, and critically analyze the role of financial markets and institutions in shaping corporate policy. Emphasis is placed on case studies, problem-solving, and the application of quantitative tools to support strategic decision-making at the executive level.
Recommended Textbook
Corporate Finance A Focused Approach 5th Edition by Michael C. Ehrhardt
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Page 2
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) Most businesses (by number and total dollar sales)are organized as partnerships or proprietorships because it is easier to set up and operate in one of these forms rather than as a corporation.However, if the business gets very large, it becomes advantageous to convert to a corporation, mainly because corporations have important tax advantages over proprietorships and partnerships.
B) Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S.businesses (in terms of number of businesses)are organized as corporations.
C) Most business (measured by dollar sales)is conducted by corporations in spite of large corporations' often less favorable tax treatment, due to legal considerations related to ownership transfers and limited liability.
D) Large corporations are taxed more favorably than sole proprietorships.
E) Corporate stockholders are exposed to unlimited liability.
Answer: C
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Chapter 2: Financial statements, cash flow, and taxes
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Q1) Which of the following statements is CORRECT?
A) The maximum federal tax rate on personal income in 2010 was 50%.
B) Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies' debt ratios to be lower than they would be if interest and dividends were both deductible.
C) Interest paid to an individual is counted as income for tax purposes and taxed at the individual's regular tax rate, which in 2010 could go up to 35%, but dividends received were taxed at a maximum rate of 15%.
D) The maximum federal tax rate on corporate income in 2010 was 50%.
E) Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings.The cost of debt capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the stock.Both of these costs are deductible from income when calculating income for tax purposes.
Answer: C
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Chapter 3: Analysis of financial statements
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Sample Questions
Q1) Emerson Inc.'s would like to undertake a policy of paying out 45% of its income.Its latest net income was $1, 250, 000, and it had 225, 000 shares outstanding.What dividend per share should it declare?
A) $2.14
B) $2.26
C) $2.38
D) $2.50
E) $2.63
Answer: D
Q2) The Cavendish Company recently issued new common stock and used the proceeds to pay off some of its short-term notes payable.This action had no effect on the company's total assets or operating income.Which of the following effects would occur as a result of this action?
A) The company's debt ratio increased.
B) The company's current ratio increased.
C) The company's times interest earned ratio decreased.
D) The company's basic earning power ratio increased.
E) The company's equity multiplier increased.
Answer: B
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Page 5
Chapter 4: Time value of money
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Sample Questions
Q1) Suppose you deposited $5, 000 in a bank account that pays 5.25% with daily compounding based on a 360-day year.How much would be in the account after 8 months, assuming each month has 30 days?
A) $5, 178.09
B) $5, 436.99
C) $5, 708.84
D) $5, 994.28
E) $6, 294.00
Q2) What's the present value of $1, 525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?
A) $969
B) $1, 020
C) $1, 074
D) $1, 131
E) $1, 187
Q3) As a result of compounding, the effective annual rate on a bank deposit (or a loan)is always equal to or less than the nominal rate on the deposit (or loan).
A)True
B)False
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Page 6
Chapter 5: Bonds, bond valuation, and interest rates
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) If a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative.
B) If a bond is selling at a discount, the yield to call is a better measure of the expected return than the yield to maturity.
C) The current yield on Bond A exceeds the current yield on Bond B.Therefore, Bond A must have a higher yield to maturity than Bond B.
D) If a coupon bond is selling at par, its current yield equals its yield to maturity.
E) If a coupon bond is selling at a premium, then the bond's current yield is zero.
Q2) As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.
A)True B)False
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Chapter 6: Risk and return
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Sample Questions
Q1) Assume that the risk-free rate remains constant, but the market risk premium declines.Which of the following is most likely to occur?
A) The required return on a stock with beta > 1.0 will increase.
B) The return on "the market" will remain constant.
C) The return on "the market" will increase.
D) The required return on a stock with beta < 1.0 will decline.
E) The required return on a stock with beta = 1.0 will not change.
Q2) In portfolio analysis, we often use ex post (historical)returns and standard deviations, despite the fact that we are really interested in ex ante (future)data.
A)True
B)False
Q3) Nystrand Corporation's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium.If the risk-free rate is 5.00%, what is the market risk premium?
A) 5.80%
B) 5.95%
C) 6.09%
D) 6.25%
E) 6.40%
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Chapter 7: Valuation of stocks and corporations
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Sample Questions
Q1) Gere Furniture forecasts a free cash flow of $40 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5% thereafter.If the weighted average cost of capital is 10% and the cost of equity is 15%, what is the horizon value, in millions at t = 3?
A) $840
B) $882
C) $926
D) $972
E) $1, 021
Q2) If a firm's expected growth rate increased then its required rate of return would A) decrease.
B) fluctuate less than before.
C) fluctuate more than before.
D) possibly increase, possibly decrease, or possibly remain constant.
E) increase.
Q3) The corporate valuation model cannot be used unless a company doesn't pay dividends.
A)True
B)False
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9
Chapter 8: Financial options and applications in corporate finance
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Sample Questions
Q1) Because of the time value of money, the longer before an option expires, the less valuable the option will be, other things held constant.
A)True
B)False
Q2) Suppose you believe that Basso Inc.'s stock price is going to increase from its current level of $22.50 sometime during the next 5 months.For $3.10 you can buy a 5-month call option giving you the right to buy 1 share at a price of $25 per share.If you buy this option for $3.10 and Basso's stock price actually rises to $45, what would your pre-tax net profit be?
A) -$3.10
B) $16.90
C) $17.75
D) $22.50
E) $25.60
Q3) Since investors tend to dislike risk and like certainty, the more volatile a stock, the less valuable will be an option to purchase the stock, other things held constant.
A)True
B)False
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Chapter 9: The cost of capital
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Sample Questions
Q1) When estimating the cost of equity by use of the CAPM, three potential problems are (1)whether to use long-term or short-term rates for rRF, (2)whether or not the historical beta is the beta that investors use when evaluating the stock, and (3)how to measure the market risk premium, RPM.These problems leave us unsure of the true value of rs.
A)True
B)False
Q2) Refer to Exhibit 9.1.Which of the following is the best estimate for the weight of debt for use in calculating the firm's WACC?
A) 18.67%
B) 19.60%
C) 20.58%
D) 21.61%
E) 22.69%
Q3) Refer to Exhibit 9.1.Based on the CAPM, what is the firm's cost of common stock?
A) 11.15%
B) 11.73%
C) 12.35%
D) 13.00%
E) 13.65%
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Page 11
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) One defect of the IRR method versus the NPV is that the IRR does not take account of the time value of money.
B) One defect of the IRR method versus the NPV is that the IRR does not take account of the cost of capital.
C) One defect of the IRR method versus the NPV is that the IRR values a dollar received today the same as a dollar that will not be received until sometime in the future.
D) One defect of the IRR method versus the NPV is that the IRR does not take proper account of differences in the sizes of projects.
E) One defect of the IRR method versus the NPV is that the IRR does not take account of cash flows over a project's full life.
Q2) A firm should never accept a project if its acceptance would lead to an increase in the firm's cost of capital (its WACC).
A)True B)False
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Page 12
Chapter 11: Cash flow estimation and risk analysis
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Sample Questions
Q1) Wansley Enterprises is considering a new project.The company has a beta of 1.0, and its sales and profits are positively correlated with the overall economy.The company estimates that the proposed new project would have a higher standard deviation and coefficient of variation than an average company project.Also, the new project's sales would be countercyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong.On the basis of this information, which of the following statements is CORRECT?
A) The proposed new project would increase the firm's corporate risk.
B) The proposed new project would increase the firm's market risk.
C) The proposed new project would not affect the firm's risk at all.
D) The proposed new project would have less stand-alone risk than the firm's typical project.
E) The proposed new project would have more stand-alone risk than the firm's typical project.
Q2) Any cash flows that can be classified as incremental to a particular project¾i.e., results directly from the decision to undertake the project¾should be reflected in the capital budgeting analysis.
A)True
B)False
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Page 13
Chapter 12: Corporate valuation and financial planning
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Sample Questions
Q1) A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset.
A)True
B)False
Q2) The capital intensity ratio is generally defined as follows:
A) The percentage of liabilities that increase spontaneously as a percentage of sales.
B) The ratio of sales to current assets.
C) The ratio of current assets to sales.
D) The amount of assets required per dollar of sales, or A0*/S0.
E) Sales divided by total assets, i.e., the total assets turnover ratio.
Q3) The capital intensity ratio is the amount of assets required per dollar of sales and it has a major impact on a firm's capital requirements.
A)True B)False
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Chapter 13: Agency conflicts and corporate governance
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Sample Questions
Q1) 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.
Q2) A poison pill is also known as a corporate restructuring.
A)True
B)False
Q3) ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent hostile takeovers.
A)True
B)False
Q4) The CEO of D'Amico Motors has been granted some stock options that have provisions similar to most other executive stock options.If D'Amico's stock underperforms the market, these options will necessarily be worthless.
A)True
B)False
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Chapter 14: Distributions to shareholders: dividends and repurchases
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Sample Questions
Q1) Downie Foods recently completed a 4-for-1 stock split.Prior to the split, its stock sold for $120 per share.If the firm's total market value increased by 5% as a result of increased liquidity caused by the split, what was the stock price following the split?
A) $28.43
B) $29.93
C) $31.50
D) $33.08
E) $34.73
Q2) Even if a stock split has no information content, and even if the dividend per share adjusted for the split is not increased, there can still be a real benefit (i.e., a higher value for shareholders)from such a split, but any such benefit is probably small.
A)True
B)False
Q3) The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock.
A)True
B)False
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Page 16
Chapter 15: Capital structure decisions
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Sample Questions
Q1) Refer to Exhibit 15.4.Now assume that AJC is considering changing from its original capital structure to a new capital structure that results in a stock price of $64 per share.The resulting capital structure would have a $336, 000 total market value of equity and a $504, 000 market value of debt.How many shares would AJC repurchase in the recapitalization?
A) 4, 250
B) 4, 500
C) 4, 750
D) 5, 000
E) 5, 250
Q2) Refer to Exhibit 15.2.What would the stock price be if VF issued the new debt and immediately used the proceeds to repurchase stock?
A) $49.43
B) $50.70
C) $52.00
D) $53.33
E) $56.00
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Chapter 16: Supply chains and working capital management
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Sample Questions
Q1) Noddings Inc.needs to raise more capital because its business is booming.The company purchases supplies on terms of 1/10 net 20, and it currently takes the discount.One way of getting the needed funds would be to forgo the discount, and the firm's owner believes she could delay payment to 40 days without adverse effects.What would be the effective annual percentage cost of funds raised by this action? (Assume a 365-day year.)
A) 10.59%
B) 11.15%
C) 11.74%
D) 12.36%
E) 13.01%
Q2) Krackle Korn Inc.had credit sales of $3, 500, 000 last year and its days sales outstanding was DSO = 35 days.What was its average receivables balance, based on a 365-day year?
A) $335, 616
B) $352, 397
C) $370, 017
D) $388, 518
E) $407, 944
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Chapter 17: Multinational financial management
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Q1) A foreign currency will, on average, depreciate against the U.S.dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.
A)True
B)False
Q2) If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.97 shekels per dollar, then the forward rate for the Israeli shekel is selling at a ____ to the spot rate.
A) premium of 8%
B) premium of 18%
C) discount of 18%
D) discount of 8%
E) premium of 16%
Q3) If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market, then the forward currency is said to be selling at a discount to the spot rate.
A)True
B)False
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