Applied Corporate Finance
Exam Materials
Course Introduction
Applied Corporate Finance explores the key financial decisions faced by firms and equips students with the analytical tools necessary to assess real-world business scenarios. Emphasizing the application of financial theory to practical problems, the course covers topics such as capital budgeting, risk analysis, cost of capital, capital structure, dividend policy, and valuation techniques. Students learn to evaluate investment opportunities, financing options, and value creation strategies, drawing on case studies and current issues in corporate finance. By the end of the course, students develop a comprehensive understanding of how financial principles drive corporate decision-making and overall firm performance.
Recommended Textbook Fundamentals of Corporate Finance 9th Asia Global Edition by Stephen A. Ross
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Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers?
A)articles of incorporation
B)corporate breakdown
C)agency problem
D)bylaws
E)legal liability
Answer: C
Q2) Which form of business structure is most associated with agency problems?
A)sole proprietorship
B)general partnership
C)limited partnership
D)corporation
E)limited liability company
Answer: D
Q3) Describe the key advantages associated with the corporate form of organization.
Answer: The advantages of the corporate form of organization are the ease of transferring ownership, the owners' limited liability for business debts, the ability to raise large amounts of capital, and the potential for an unlimited life for the organization.
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Page 3
Chapter 2: Financial Statements, Taxes, and Cash Flow
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Q1) Which one of the following statements concerning net working capital is correct?
A)Net working capital increases when inventory is purchased with cash.
B)Net working capital must be a positive value.
C)Total assets must increase if net working capital increases.
D)A decrease in the cash balance also decreases net working capital.
E)Net working capital is the amount of cash a firm currently has available for spending.
Answer: D
Q2) The _____ tax rate is equal to total taxes divided by total taxable income.
A)deductible
B)residual
C)total
D)average
E)marginal
Answer: D
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Chapter 3: Working With Financial Statements
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Sample Questions
Q1) High Mountain Foods has an equity multiplier of 1.55, a total asset turnover of 1.3, and a profit margin of 7.5 percent. What is the return on equity?
A)8.94 percent
B)10.87 percent
C)12.69 percent
D)14.38 percent
E)15.11 percent
Answer: E
Q2) Which of the following ratios are measures of a firm's liquidity?
I. cash coverage ratio
II. interval measure
III. debt-equity ratio
IV. quick ratio
A)I and III only
B)II and IV only
C)I, III, and IV only
D)I, II, and III only
E)I, II, III, and IV
Answer: B
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Page 5
Chapter 4: Long-Term Financial Planning and Growth
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Sample Questions
Q1) Financial planning accomplishes which of the following for a firm?
I. determination of asset requirements
II. development of plans to contend with unexpected events
III. establishment of priorities
IV. analysis of funding options
A)I and III only
B)II and IV only
C)I, III, and IV only
D)I, II, and III only
E)I, II, III, and IV
Q2) Sales can often increase without increasing which one of the following?
A)accounts receivable
B)cost of goods sold
C)accounts payable
D)fixed assets
E)inventory
Q3) Identify the four primary determinants of a firm's growth and explain how each factor could either add to or limit the growth potential of a firm.
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6
Chapter 5: Introduction to Valuation: The Time Value of Money
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Sample Questions
Q1) This morning, TL Trucking invested $80,000 to help fund a company expansion project planned for 4 years from now. How much additional money will the firm have 4 years from now if it can earn 5 percent rather than 4 percent on its savings?
A)$2,940.09
B)$3,651.82
C)$4,008.17
D)$4,219.68
E)$4,711.08
Q2) Assume the total cost of a college education will be $300,000 when your child enters college in 16 years. You presently have $75,561 to invest. What rate of interest must you earn on your investment to cover the cost of your child's college education?
A)7.75 percent
B)8.50 percent
C)9.00 percent
D)9.25 percent
E)9.50 percent
Q3) What lesson does the future value formula provide for young workers who are looking ahead to retiring some day?
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Chapter 6: Discounted Cash Flow Valuation
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Sample Questions
Q1) The Pawn Shop loans money at an annual rate of 21 percent and compounds interest weekly. What is the actual rate being charged on these loans?
A)23.16 percent
B)23.32 percent
C)23.49 percent
D)23.56 percent
E)23.64 percent
Q2) You just won the grand prize in a national writing contest! As your prize, you will receive $2,000 a month for ten years. If you can earn 7 percent on your money, what is this prize worth to you today?
A)$172,252.71
B)$178,411.06
C)$181,338.40
D)$185,333.33
E)$190,450.25
Q3) Kristie owns a perpetuity which pays $12,000 at the end of each year. She comes to you and offers to sell you all of the payments to be received after the 10<sup>th</sup> year. Explain how you can determine the value of this offer.
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Chapter 7: Interest Rates and Bond Valuation
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Sample Questions
Q1) The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:
A)0.05/(1 - t<sup>*</sup>) = 0.07.
B)0.05 - (1 - t<sup>*</sup>) = 0.07.
C)0.07 + (1 - t<sup>*</sup>) = 0.05.
D)0.05 *(1 - t<sup>*</sup>) = 0.07.
E)0.05 F* (1 + t<sup>*</sup>) = 0.07.
Q2) A call-protected bond is a bond that:
A)is guaranteed to be called.
B)can never be called.
C)is currently being called.
D)is callable at any time.
E)cannot be called during a certain period of time.
Q3) Bonds issued by the U.S. government:
A)are considered to be free of interest rate risk.
B)generally have higher coupons than those issued by an individual state.
C)are considered to be free of default risk.
D)pay interest that is exempt from federal income taxes.
E)are called "munis".
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Page 9
Chapter 8: Stock Valuation
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Sample Questions
Q1) Boston Free Press has a dividend policy whereby the firm pays a constant annual dividend of $2.40 per share of common stock. The firm has 1,000 shares of stock outstanding. The company:
A)must always show a current liability of $2,400, ($2.40* 1,000), for dividends payable.
B)must still declare each dividend before it becomes an actual company liability.
C)is obligated to pay $2.40 per share each year in perpetuity.
D)will be declared in default if it does not pay at least $2.40 per share per year on a timely basis.
E)has a liability that must be paid at a later date should the company miss paying an annual dividend payment.
Q2) The secondary market is best defined by which one of the following?
A)market in which subordinated shares are issued and resold
B)market conducted solely by brokers
C)market dominated by dealers
D)market where outstanding shares of stock are resold
E)market where warrants are offered and sold
Q3) What are the primary differences and similarities between NASDAQ and the NYSE?
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Page 10
Chapter 9: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) You're trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $12 million, which will be depreciated straight-line to zero over its 4-year life. The plant has projected net income of $1,095,000, $902,000, $1,412,000, and $1,724,000 over these 4 years. What is the average accounting return?
A)10.70 percent
B)15.63 percent
C)18.87 percent
D)21.39 percent
E)23.05 percent
Q2) Which two methods of project analysis were the most widely used by CEO's as of 1999?
A)net present value and payback
B)internal rate of return and payback
C)net present value and average accounting return
D)internal rate of return and net present value
E)payback and average accounting return
Q3) Explain the differences and similarities between net present value (NPV) and the profitability index.
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Page 11
Chapter 10: Making Capital Investment Decisions
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Sample Questions
Q1) Which one of the following best describes pro forma financial statements?
A)financial statements expressed in a foreign currency
B)financial statements where the assets are expressed as a percentage of total assets and costs are expressed as a percentage of sales
C)financial statements showing projected values for future time periods
D)financial statements expressed in real dollars, given a stated base year
E)financial statements where all accounts are expressed as a percentage of last year's values
Q2) Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero?
A)EBIT + D
B)EBIT - T
C)NI + D
D)(Sales - Costs) *(1 - D) * (1- T)
E)(Sales - Costs) * (1 - T)
Q3) Can the initial cash flow at time zero for a project ever be a positive value?
If yes, give an example. If no, explain why not.
Q4) What is the formula for the tax-shield approach to OCF?
Explain the two key points the formula illustrates.
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Chapter 11: Project Analysis and Evaluation
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Sample Questions
Q1) Scenario analysis is defined as the:
A)determination of the initial cash outlay required to implement a project.
B)determination of changes in NPV estimates when what-if questions are posed.
C)isolation of the effect that a single variable has on the NPV of a project.
D)separation of a project's sunk costs from its opportunity costs.
E)analysis of the effects that a project's terminal cash flows has on the project's NPV.
Q2) Which of the following variables will be at their highest expected level under a worst case scenario?
I. fixed cost
II. sales price
III. variable cost
IV. sales quantity
A)I only
B)III only
C)II and III only
D)I and III only
E)I, III, and IV only
Q3) What is operating leverage and why is it important in the analysis of capital expenditure projects?
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Chapter 12: Some Lessons From Capital Market History
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Sample Questions
Q1) Which one of the following time periods is associated with high rates of inflation?
A)1929-1933
B)1957-1961
C)1978-1981
D)1992-1996
E)2001-2005
Q2) According to theory, studying historical stock price movements to identify mispriced stocks:
A)is effective as long as the market is only semistrong form efficient.
B)is effective provided the market is only weak form efficient.
C)is ineffective even when the market is only weak form efficient.
D)becomes ineffective as soon as the market gains semistrong form efficiency.
E)is ineffective only in strong form efficient markets.
Q3) Which one of the following is defined by its mean and its standard deviation?
A)arithmetic nominal return
B)geometric real return
C)normal distribution
D)variance
E)risk premium
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Page 14
Chapter 13: Return, Risk, and the Security Market Line
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Sample Questions
Q1) Explain the difference between systematic and unsystematic risk. Also explain why one of these types of risks is rewarded with a risk premium while the other type is not.
Q2) Which one of the following risks is irrelevant to a well-diversified investor?
A)systematic risk
B)unsystematic risk
C)market risk
D)nondiversifiable risk
E)systematic portion of a surprise
Q3) Which of the following statements concerning risk are correct?
I. Nondiversifiable risk is measured by beta.
II. The risk premium increases as diversifiable risk increases.
III. Systematic risk is another name for nondiversifiable risk.
IV. Diversifiable risks are market risks you cannot avoid.
A)I and III only
B)II and IV only
C)I and II only
D)III and IV only
E)I, II, and III only
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Chapter 14: Cost of Capital
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Sample Questions
Q1) All else constant, which one of the following will increase a firm's cost of equity if the firm computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2.
A)a reduction in the dividend amount
B)an increase in the dividend amount
C)a reduction in the market rate of return
D)a reduction in the firm's beta
E)a reduction in the risk-free rate
Q2) Justice, Inc. has a capital structure which is based on 30 percent debt, 5 percent preferred stock, and 65 percent common stock. The flotation costs are 11 percent for common stock, 10 percent for preferred stock, and 7 percent for debt. The corporate tax rate is 37 percent. What is the weighted average flotation cost?
A)8.97 percent
B)9.48 percent
C)9.62 percent
D)9.75 percent
E)10.00 percent
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Chapter 15: Raising Capital
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Q1) What is an issue of securities that is offered for sale to the general public on a direct cash basis called?
A)best efforts underwriting
B)firm commitment underwriting
C)general cash offer
D)rights offer
E)herring offer
Q2) Mountain Teas wants to raise $11.6 million to open a new production center. The company estimates the issue costs including the legal and accounting fees will be $440,000. The underwriters have set the stock price at $17.50 a share and the underwriting spread at 9 percent. How many shares of stock does Mountain Teas have to sell to meet its cash need?
A)728,414 shares
B)756,044 shares
C)769,315 shares
D)772,200 shares
E)781,909 shares
Q3) It can be argued that the decision to accept venture capital is one of the most critical decisions an entrepreneur must make. Explain why.
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Page 17
Chapter 16: Financial Leverage and Capital Structure Policy
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Q1) Which one of the following statements is correct concerning the relationship between a levered and an unlevered capital structure? Assume there are no taxes.
A)At the break-even point, there is no advantage to debt.
B)The earnings per share will equal zero when EBIT is zero for a levered firm.
C)The advantages of leverage are inversely related to the level of EBIT.
D)The use of leverage at any level of EBIT increases the EPS.
E)EPS are more sensitive to changes in EBIT when a firm is unlevered.
Q2) Which one of the following is the equity risk that is most related to the daily operations of a firm?
A)market risk
B)systematic risk
C)extrinsic risk
D)business risk
E)financial risk
Q3) Pete is the CFO of Dexter International. He would like to increase the debt-equity ratio of the firm but is concerned that the firm's shareholders may not be willing to accept additional financial leverage. Pete has come to you for advice. What is your recommendation?
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Page 18
Chapter 17: Dividends and Dividend Policy
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Sample Questions
Q1) An investor is more likely to prefer a high dividend payout if a firm:
A)has high flotation costs.
B)has few, if any, positive net present value projects.
C)has lower tax rates than the investor.
D)has a stock price that is increasing rapidly.
E)offers substantial gains on its equities, which are taxed at a favorable rate.
Q2) The Peace River Corporation has 67,000 shares of stock outstanding at a market price of $48 a share. The company has just announced a 3-for-2 stock split. How many shares of stock will be outstanding after the split?
A)44,667 shares
B)54,333 shares
C)89,333 shares
D)100,500 shares
E)108,666 shares
Q3) Which one of the following is a result of a stock repurchase?
A)increase in the number of shares outstanding
B)increase in the market price per share
C)increase in the total equity of the repurchasing firm
D)decrease in EPS
E)PE ratio equal to that resulting from a comparable cash dividend
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Chapter 18: Short-Term Finance and Planning
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Sample Questions
Q1) Fancy Footwear has a line of credit with a local bank in the amount of $80,000. The loan agreement calls for interest of 7 percent with a compensating balance of 5 percent, which is based on the total amount borrowed. The compensating balance will be deposited into an interest-free account. What is the effective interest rate on the loan if the firm needs to borrow $75,000 for one year to cover operating expenses?
A)7.37 percent
B)7.43 percent
C)7.56 percent
D)8.17 percent
E)8.33 percent
Q2) Compensating balances are frequently a part of revolving lending arrangements with banks, yet they add to the cost of financing for the borrower. Why, then, would borrowers agree to such terms? What other types of alternative financing are available?
Q3) List and describe the three basic types of secured inventory loans. Compare the advantages and disadvantages of these loans.
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Chapter 19: Cash and Liquidity Management
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Q1) On an average day, Goose Down Feathers receives $2,400 in checks from customers. These checks clear the bank in an average of 1.7 days. The applicable daily interest rate is 0.04 percent. What is the present value of the float? Assume each month has 30 days.
A)$115.20
B)$618.40
C)$2,400.00
D)$4,080.00
E)$4,256.50
Q2) On an average day, your firm receives $11,800 in checks from customers. These checks clear the bank in an average of 2.1 days. The applicable daily interest rate is 0.015 percent. What is the highest daily fee your firm should pay to completely eliminate the collection float? Assume each month has 30 days.
A)$3.42
B)$3.72
C)$17.78
D)$34.18
E)$37.20
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Chapter 20: Credit and Inventory Management
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Q1) Scott purchased a shovel, a rake, and a wheelbarrow from The Local Hardware Store yesterday. Today, the store issued a bill for these items and mailed it to Scott. What is the name given to this bill?
A)ledger statement
B)warranty
C)indenture
D)receipt
E)invoice
Q2) Inventory needs under a derived-demand inventory system are:
A)primarily dependent upon the competitive demands placed on a firm's suppliers.
B)based on the anticipated demand for the finished product.
C)based on minimizing the cost of restocking inventory.
D)held constant over time.
E)determined by a kanban system.
Q3) Which one of the five Cs of credit refers to a firm's financial reserves?
A)character
B)capacity
C)collateral
D)conditions
E)capital
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Chapter 21: International Corporate Finance
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Q1) Which one of the following types of operations would be subject to the most political risk if the operation were conducted outside of a firm's home country?
A)accounting and payroll functions
B)partial assembly of components manufactured in the firm's home country
C)military weapons manufacturing
D)packing materials manufacturing for use by the home country firm
E)production of minor parts, such as nuts and bolts, for use by the home country firm
Q2) Suppose your company imports computer motherboards from Singapore. The exchange rate is currently 1.5803S$/US$. You have just placed an order for 30,000 motherboards at a cost to you of 170.90 Singapore dollars each. You will pay for the shipment when it arrives in 120 days. You can sell the motherboards for $148 each. What will your profit be if the exchange rate goes up by 8 percent over the next 120 days?
A)$913,564
B)$1,008,121
C)$1,216,407
D)$1,435,999
E)$1,502,400
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Page 23
Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) You recently overheard your boss telling someone that if he'd actually crunched some numbers and done some analysis instead of just going with his instincts that he never would have opened the new store in Centre City. Which one of the following caused your boss to make a bad decision?
A)regret aversion
B)endowment effect
C)money illusion
D)affect heuristic
E)representativeness heuristic
Q2) Explain 1) the concept of house money, 2) why the house money concept is such a common behavior for so many individuals and 3) why house money is an irrational behavior.
Q3) A sudden and severe decline in market prices is best described as a market:
A)crash.
B)revolver.
C)bubble.
D)limit.
E)mispricing.
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Chapter 23: Risk Management: An Introduction to Financial Engineering
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Q1) A call option contract:
A)obligates both the buyer and the seller.
B)obligates the buyer but not the seller.
C)grants rights to the buyer and obligates the seller.
D)grants rights to the seller and obligates the buyer.
E)grants rights to both the buyer and the seller but does not obligate either party.
Q2) Futures contracts:
A)are identical to forward contracts except for the size of the contract.
B)provides an option to purchase an asset at a specified price on the settlement date.
C)are marked to the market on a daily basis.
D)cannot be resold.
E)are limited to contracts on financial assets.
Q3) A payoff profile:
A)determines the price of an option contract.
B)determines whether a forward or a futures contract is needed.
C)applies only to contract sellers.
D)determines the price of a collar.
E)illustrates potential gains and losses.
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Chapter 24: Options and Corporate Finance
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Q1) You purchased six call option contracts on ABC stock with a strike price of $32.50 when the option was quoted at $1.80. The option expires today when the value of ABC stock is $34.60. Ignoring trading costs and taxes, what is the net profit or loss on this investment?
A)$0
B)$180
C)$210
D)$840
E)$1,260
Q2) You own a convertible bond with a face value of $1,000 and a market value of $1,034. The bond can be converted into 14 shares of stock. What is the conversion price?
A)$71.43
B)$72.00
C)$72.67
D)$73.86
E)$74.33
Q3) 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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26
Chapter 25: Option Valuation
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Q1) Which of the following variables are included in the Black-Scholes call option pricing formula?
I. put premium
II. N(d<sub>1</sub>)
III. exercise price
IV. stock price
A)III and IV only
B)I, II, and IV only
C)II, III, and IV only
D)I, III, and IV only
E)I, II, III, and IV
Q2) Amy just purchased a right to buy 100 shares of LKL stock for $35 a share on June 20, 2009. Which one of the following did Amy purchase?
A)American delta
B)American call
C)American put
D)European put
E)European call
Q3) Give an example of a protective put and explain how this strategy reduces investor risk.
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Chapter 26: Mergers and Acquisitions
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Q1) Melvin was attempting to gain control of Western Wood Products until he realized that the existing shareholders in the firm had the right to purchase additional shares at a below-market price given his hostile takeover attempt. Thus, Melvin decided to forego investing in this firm. What term applies to the tactic used by Western Wood Products to stave off this takeover attempt?
A)pac-man defense
B)shark repellent plan
C)golden parachute provision
D)greenmail provision
E)share rights plan
Q2) Empirical evidence indicates that the returns to shareholders of the target firm vary significantly from the returns to the shareholders of the acquiring firm. Identify the shareholders that tend to realize the smaller return and provide some possible explanation for these low returns.
Q3) Firms can frequently create synergy by merging and sharing complementary resources with another firm. Give two examples of situations where this would most likely occur.
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Chapter 27: Leasing
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Sample Questions
Q1) Jane's Floor Care is contemplating the acquisition of some new equipment for refinishing wood floors. The purchase price is $74,000. The firm uses MACRS depreciation which allows for 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent depreciation over years 1 to 4, respectively. The equipment can be leased for $24,600 a year. The firm can borrow money at 9.5 percent and has a 34 percent tax rate. What is the amount of the depreciation tax shield in year 4?
A)$1,758.09
B)$1,864.36
C)$1,940.80
D)$2,011.67
E)$2,221.08
Q2) Brentwood Industries is selling its tool and die equipment to Upward Financial and then leasing that equipment from Upward for a period of ten years, which is the useful remaining life of the equipment. Which type of lease arrangement is this?
A)leveraged lease
B)sale and leaseback
C)operating lease
D)tax-oriented lease
E)straight lease
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