Advanced Corporate Finance
Test Preparation
Course Introduction
Advanced Corporate Finance delves into the complex financial decisions faced by corporations, focusing on topics such as capital structure, risk management, mergers and acquisitions, corporate restructuring, and advanced valuation methods. The course emphasizes the analytical frameworks and quantitative tools used by financial managers to maximize firm value while managing risk in dynamic markets. Students will engage with contemporary case studies, explore current research, and apply financial theories to real-world scenarios, preparing them for strategic roles in investment banking, corporate finance, and consulting.
Recommended Textbook
Corporate Finance Asia 1st Global Edition by Stephen Ross
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16 Chapters
1174 Verified Questions
1174 Flashcards
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Page 2
Chapter 1: Introduction to Corporate Finance
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61 Flashcards
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Sample Questions
Q1) Which form of business structure faces the greatest agency problems?
A)sole proprietorship
B)general partnership
C)limited partnership
D)corporation
E)limited liability company
Answer: D
Q2) Which one of the following statements concerning a sole proprietorship is correct?
A)The life of the firm is limited to the life span of the owner.
B)The owner can generally raise large sums of capital quite easily.
C)The ownership of the firm is easy to transfer to another individual.
D)The company must pay separate taxes from those paid by the owner.
E)The legal costs to form a sole proprietorship are quite substantial.
Answer: A
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Chapter 2: Financial Statements and Cash Flow
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Sample Questions
Q1) What is the change in the net working capital from 2010 to 2011?
A)$1,235
B)$1,035
C)$1,335
D)$3,405
E)$4,740
Answer: C
Q2) A firm has $450 in inventory,$700 in fixed assets,$210 in accounts receivable,$50 in accounts payable,and $60 in cash.What is the amount of the current assets?
A)$510
B)$560
C)$600
D)$660
E)$720
Answer: E
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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Page 4
Chapter 3: Financial Statements Analysis and Long-Term Planning
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117 Flashcards
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Sample Questions
Q1) Rosita's Resources paid $250 in interest and $130 in dividends last year.The times interest earned ratio is 3.8 and the depreciation expense is $80.What is the value of the cash coverage ratio?
A)2.71
B)3.64
C)4.12
D)5.78
E)6.10
Answer: C
Q2) Katelyn's Kites has net income of $240 and total equity of $2,000.The debt-equity ratio is 1.0 and the plowback ratio is 40%.What is the internal growth rate?
A)2.46%
B)3.00%
C)4.92%
D)5.88%
E)6.00%
Answer: A
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Chapter 5: Net Present Value and Other Investment Rules
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Sample Questions
Q1) The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the:
A)net present value.
B)internal rate of return.
C)payback period.
D)profitability index.
E)discounted cash period.
Q2) A project has an initial cost of $2,100.The cash inflows are $0,$500,$900,and $700 over the next four years,respectively.What is the payback period?
A)1 years
B)2 years
C)3 years
D)4 years
E)never
Q3) The IRR rule is said to be a special case of the NPV rule.Explain why this is so and why it has some limitations NPV does not?
Q4) List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR)rule.
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Chapter 8: Interest Rates and Bond Valuation
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67 Flashcards
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Sample Questions
Q1) All else constant,a coupon bond that is selling at a premium,must have:
A)a coupon rate that is equal to the yield to maturity.
B)a market price that is less than par value.
C)semi-annual interest payments.
D)a yield to maturity that is less than the coupon rate.
E)a coupon rate that is less than the yield to maturity.
Q2) The market price of a bond is equal to the present value of the:
A)face value minus the present value of the annuity payments.
B)annuity payments plus the future value of the face amount.
C)face value plus the present value of the annuity payments.
D)face value plus the future value of the annuity payments.
E)annuity payments minus the face value of the bond.
Q3) The relationship between nominal interest rates on default-free,pure discount securities and the time to maturity is called the:
A)liquidity effect.
B)Fisher effect.
C)term structure of interest rates.
D)inflation premium.
E)interest rate risk premium.
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Page 7
Chapter 10: Risk and Return: Lessons From Market History
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Sample Questions
Q1) The average annual return on small company stocks was about _____ percentage points greater than the average annual return on large-company stocks over the period of 1926 to 2012.
A)3
B)5
C)7
D)9
E)11
Q2) Over the past five years,a stock produced returns of 14%,22%,-16%,2%,and 10%.What is the probability that an investor in this stock will NOT lose more than 8% nor earn more than 21% in any one given year?
A)34%
B)68%
C)95%
D)99%
E)100%
Q3) What are the lessons learned from capital market history? What evidence is there to suggest these lessons are correct?
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8
Chapter 11: Return and Risk: the Capital Asset Pricing Model
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125 Flashcards
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Sample Questions
Q1) When a security is added to a portfolio the appropriate return and risk contributions are:
A)the expected return of the asset and its standard deviation.
B)the expected return and the variance.
C)the expected return and the beta.
D)the historical return and the beta.
E)these both cannot be measured.
Q2) The standard deviation of a portfolio will tend to increase when:
A)a risky asset in the portfolio is replaced with U.S.Treasury bills.
B)one of two stocks related to the airline industry is replaced with a third stock that is unrelated to the airline industry.
C)the portfolio concentration in a single cyclical industry increases.
D)the weights of the various diverse securities become more evenly distributed.
E)short-term bonds are replaced with Treasury Bills.
Q3) A typical investor is assumed to be:
A)a fair gambler.
B)a gambler.
C)a single security holder.
D)risk averse.
E)risk neutral.
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Chapter 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory
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Sample Questions
Q1) If company A,a medical research company,makes a new product discovery and their stock rises 5%,this will have:
A)no effect on Company B's,a newspaper,stock price because it is a systematic risk element.
B)no effect on Company B's,a newspaper,stock price because it is an unsystematic risk element.
C)a large effect on Company B's,a newspaper,stock price because it is a systematic risk element.
D)a large effect on Company B's,a newspaper,stock price because it is an unsystematic risk element.
E)None of the above.
Q2) A security that has a beta of zero will have an expected return of: A)zero.
B)the market risk premium.
C)the risk free rate.
D)less than the risk free rate but not negative.
E)less than the risk free rate which can be negative.
Q3) Explain the conceptual differences in the theoretical development of the CAPM and APT.
Page 10
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Chapter 14: Efficient Capital Markets and Behavioral Challenges
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Sample Questions
Q1) According to the efficient market hypothesis,financial markets fluctuate daily because they:
A)are inefficient.
B)slowly react to new information.
C)are continually reacting to new information.
D)offer tremendous arbitrage opportunities.
E)only reflect historical information.
Q2) The hypothesis that market prices reflect all publicly available information is called _____ form efficiency.
A)open
B)strong
C)semistrong
D)weak
E)stable
Q3) In the five years after the offering,___ underperform matched control groups.
A)initial public offerings
B)seasoned equity offerings
C)bond offerings
D)A and B
E)A,B,and C
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Chapter 15: Long-Term Financing: an Introduction
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Sample Questions
Q1) Calhoun Computech used internal financing as a source of long-term financing for 80% of its total needs in 2013.The company borrowed an additional 15% of its total needs in the long-term debt markets in 2013.What were Calhoun's net new stock issues,in percentage terms,for 2013?
A)-10%
B)-5%
C)5%
D)10%
E)15%
Q2) If a firm retires or extinguishes a debt issue before maturity,the specific amount they pay is:
A)the amortization amount.
B)the call price.
C)the sinking fund amount.
D)the spread premium.
E)None of the above.
Q3) Preferred Stock,as a hybrid security,presents somewhat of a puzzle as to why they are issued.What elements give rise to the puzzle and how is it explained?
Q4) From this information,calculate Eaton's book value per share.
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Chapter 20: Raising Capital
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Sample Questions
Q1) The reputational capital of investment bankers is based on their roles as intermediaries with more in-depth knowledge of the issuer.Investment bankers maintain their reputation by:
A)certifying the issue.
B)monitoring the issuing firm's management and performance.
C)pricing issues fairly.
D)All of the above.
E)None of the above.
Q2) Rule 144A provides the framework for the issuance of private securities to qualified institutional investors.To buy private securities,institutional investors:
A)must be willing to hold a less liquid security and manage a fund.
B)must be willing to make a market in the security and be a primary market dealer.
C)must be a limited partner in the issue and willing to reduce the illiquidity of the security.
D)must be willing to hold a less liquid security and have $100 million under management.
E)None of the above.
Q3) Discuss the stages of venture capital financing,defining each in detail.
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Chapter 22: Options and Corporate Finance
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Sample Questions
Q1) The market price of ABC stock has been very volatile and you think this volatility will continue for a few weeks.Thus,you decide to purchase a one-month call option contract on ABC stock with a strike price of $25 and an option price of $1.30.You also purchase a one-month put option on ABC stock with a strike price of $25 and an option price of $.50.What will be your total profit or loss on these option positions if the stock price is $24.60 on the day the options expire?
A)-$180
B)-$140
C)-$100
D)$0
E)$180
Q2) Shareholders in a leveraged firm might wish to accept a negative net present value project if:
A)it increases the standard deviation of the returns on the firm's assets.
B)it lowers the variance of the returns on the firm's assets.
C)it lowers the risk level of the firm.
D)it diversifies the cash flows of the firm.
E)it decreases the risk that a firm will default on its debt.
Q3) How do options apply to capital budgeting? Explain and give an example.
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Page 14
Chapter 23: Options and Corporate Finance: Extensions and Applications
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Sample Questions
Q1) The executive janitor of NuValue was granted 1,000,000 options.The stock price at the time of the granting of the options was $25 and the options are at the money.The risk free rate was 3% and the options expire in 3 years.The variance on the stock is .04.What is the value of the options contract?
Q2) Why would the company pay the executive in options as opposed to salary?
Q3) The call option on a dividend paying stock compared to a non-dividend paying stock is:
A)more valuable because of the extra dividend payment.
B)equal in value because cash dividends are paid on stock only.
C)less valuable because cash dividends are paid on stock only.
D)less valuable if the dividend paying stock is in-the-money while the non-dividend paying stock if out-of-the-money.
E)None of the above.
Q4) In what instances is the binomial option pricing model superior to the Black Scholes option pricing model?
Q5) If real options were not included in calculations of value,would the valuation be under or over-valued and why?
Q6) What is the value of Mr.Maxim's options?
Page 15
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Chapter 24: Warrants and Convertibles
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Sample Questions
Q1) A firm has 500 shares of stock and 100 warrants outstanding.The warrants are about to expire,and all of them will be exercised.The market value of the firm's assets is $25,000,and the market value of the debt is $8,000.Each warrant gives the owner the right to buy 5 shares at $25 per share.What is the value of a warrant?
Q2) A convertible bond has an option value which is equal to:
A)the market value of the convertible bond minus the straight bond value.
B)The market value of the convertible bond minus the conversion value.
C)the market value of the convertible bond minus the conversion premium.
D)the market value of the convertible bond minus the maximum of the straight bond value or conversion value.
E)None of the above.
Q3) What is the conversion value of the bond?
A)$25
B)$40
C)$750
D)$1,000
E)No conversion premium is given.
Q4) Explain why there is neither a "Free" nor "Expensive Lunch" when convertible bonds are issued?
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Chapter 25: Derivatives and Hedging Risk
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Sample Questions
Q1) Duration of a coupon paying bond is:
A)equal to its number of payments.
B)less than a zero coupon bond.
C)equal to the zero coupon bond.
D)equal to its maturity.
E)None of the above.
Q2) What new asset duration will immunize the balance sheet?
Q3) On March 1,you contract to take delivery of 1 ounce of gold for $495.The agreement is good for any day up to April 1.Throughout March,the price of gold hit a low of $425 and hit a high of $535.The price settled on March 31 at $505,and on April 1<sup>st</sup> you settle your futures agreement at that price.Your net cash flow is:
A)-$30.
B)-$20.
C)-$15.
D)$10.
E)$20.
Q4) Duration is defined as the weighted average time to maturity of a financial instrument.Explain how this knowledge can help protect against interest rate risk.
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Page 17
Chapter 31: International Corporate Finance
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Sample Questions
Q1) The foreign exchange market is where:
A)one country's stocks are exchanged for another's.
B)one country's bonds are exchanged for another's.
C)one country's currency is traded for another's.
D)international banks make loans to one another.
E)international businesses finalize import/export relationships with one another.
Q2) A security issued in the United States that represents shares of a foreign stock and allows that stock to be traded in the United States is called a(n):
A)American Depository Receipt.
B)Yankee bond.
C)Yankee stock.
D)Eurostock.
E)foreign obligation trust certificate.
Q3) The law of one price is also known as:
A)relative purchasing power parity.
B)absolute purchasing power parity.
C)complete purchasing power parity.
D)interest rate parity.
E)the international Fisher Effect.
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Page 18