Applied Corporate Finance
Exam Practice Tests
Course Introduction
Applied Corporate Finance explores the practical techniques and tools needed to make effective financial decisions in modern corporations. The course covers topics such as capital budgeting, financial risk management, corporate valuation, capital structure, dividend policy, and mergers and acquisitions. Through real-world case studies, quantitative analysis, and active discussion, students learn to apply financial theories to solve complex business problems, assess investment opportunities, and optimize firm value. Special emphasis is placed on the integration of financial strategy with overall business objectives and the ethical considerations impacting financial decision-making.
Recommended Textbook Fundamentals of Corporate Finance 3rd Australian Edition by Berk DeMarzo
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Page 2
Chapter 1: Corporate Finance and the Financial Manager
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Q1) It is generally the duty of financial managers to ensure that a firm has the cash it needs for day-to-day transactions.
A)True
B)False
Answer: True
Q2) Which of the following would be more typically the responsibility of a controller rather than a treasurer?
A)capital budgeting
B)making investment decisions
C)overseeing accounting and tax functions
D)managing credit
Answer: C
Q3) In Australia, dividend imputation may reduce the tax payable by
A)a non-resident shareholder.
B)a resident shareholder.
C)a corporation.
D)both B and C
Answer: B
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Chapter 2: Introduction to Financial Statement Analysis
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Sample Questions
Q1) Refer to the balance sheet above. What is Luther's net working capital in 2018?
A)$27 million
B)$63.6 million
C)$12 million
D)$39 million
Answer: A
Q2) Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. Calculate the gross margin for 2017 and 2018. What does the change in the gross margin between these two years imply about the company?
A)The leverage of Xenon Manufacturing fell slightly between 2017 and 2018.
B)The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them rose between 2017 and 2018.
C)The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them fell between 2017 and 2018.
D)The efficiency of Xenon Manufacturing has significantly risen between 2017 and 2018.
Answer: C
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Chapter 3: Time Value of Money: an Introduction
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Sample Questions
Q1) Cost-benefit analysis cannot be performed in cases that are occurring in different currencies.
A)True
B)False
Answer: False
Q2) Steve is offered an investment where for every $1.00 invested today, he will receive $1.10 in five years' time. Steve concludes that in five years' time he will have $1.10 for every $1.00 invested and that this investment will increase his personal value. What is Steve's major error in reasoning when making this decision?
A)There may be other investments that he can make that will offer even bigger benefits. B)The investment may have hidden costs that will reduce the amount of benefit he receives.
C)The value of the cash he has today is greater than the value of the cash he may have in the future.
D)Costs and benefits must be in the same terms to be compared.
Answer: D
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Chapter 4: Time Value of Money: Valuing Cash Flow
Streams
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Sample Questions
Q1) A business promises to pay the investor of $2 000 today with a payment of $500 in one year's time, $1 000 in two years' time and $1 000 in three years' time. What is the net present value of this business opportunity if the interest rate is 5% per year?
A)$247.06
B)$256.88
C)$253.78
D)$261.07
Q2) Since your first birthday, your grandparents have been depositing $1 000 into a savings account on every one of your birthdays. The account pays 4% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to:
A)$12 659
B)$36 465
C)$18 000
D)$25 645
Q3) Can we apply the growing perpetuity equation for negative growth as well?
Q4) Cash flows from an annuity occur every year in the future.
A)True
B)False
Page 6
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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) A small business refits its store. The builders charge them $125 000, which will be paid back in monthly instalments over three years at 6% APR. The builders will reduce this rate to 5.5% APR if they pay $2 500 up front. By approximately how much will this reduce the monthly loan repayments?
A)$104
B)$214
C)$28
D)$77
Q3) How do we decide on opportunity cost when we have several opportunities that need to be foregone?
Q4) What is the implied assumption about interest rates when using the built-in functions of a financial calculator to calculate the present value (PV)of an annuity?
Q5) What is the implied assumption about interest rates when the equation to calculate the present value (PV)of perpetuity is used?
Q6) Everything else remaining the same, under what situation will APR and EAR be equal?
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Page 7
Chapter 6: Bond Valuation
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Sample Questions
Q1) A bond is currently trading below par. Which of the following must be true about that bond?
A)The bond's yield to maturity is less than its coupon rate.
B)The bond is a zero-coupon bond.
C)The bond's yield to maturity is greater than its coupon rate.
D)B and C above
Q2) Assuming the appropriate YTM on the Sisyphean bond is 9.0%, then the price that this bond trades for will be closest to:
A)$919
B)$1 000
C)$1 086
D)$946
Q3) How much will each coupon payment be of a 30-year $10 000 bond with a 5% coupon rate and semi-annual payments?
A)$450
B)$350
C)$500
D)$250
Q4) Under what situation can a zero-coupon bond be selling at par to its face value?
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Chapter 7: Share Valuation: the Dividend-Discount Model
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Sample Questions
Q1) On 15 June 2016, shares in CliffCo were trading at $15. Later that day, the company announced that its profits for the six months to 30 June 2016 would be 5% lower than the corresponding period the year before. At the close of trading on 16 June 2016, the price of CliffCo shares had fallen to $12.71 per share, and by 19 June 2016, the price was $11.80 per share. On 3 November 2016, the price was $9.40 per share. How might an investor decide whether to buy or sell a share of CliffCo at this price?
Q2) A firm must pay its earnings out to its investors. A)True
B)False
Q3) Avril Synchronistics will pay a dividend of $1.30 per share this year. It is expected that this dividend will grow by 5% each year in the future. What will be the current value of a single Avril share if the firm's equity cost of capital is 14%?
A)$9.28
B)$9.23
C)$15.16
D)$14.44
Q4) What is the relationship between the growth rate and the cost of equity implied in the dividend-discount model?
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Chapter 8: Investment Decision Rules
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Sample Questions
Q1) When using equivalent annual annuities to compare the costs of projects with different lives, you should not consider any changes in the expected replacement cost of equipment.
A)True
B)False
Q2) Two mutually exclusive investment opportunities require an initial investment of $5 million. Investment A then generates $1.5 million per year in perpetuity, while investment B pays $1 million in the first year, with cash flows increasing by 3% per year after that. At what cost of capital would an investor regard both opportunities as being equivalent?
A)3%
B)9%
C)6%
D)10%
Q3) The y-intercept of a net present value (NPV)profile is the algebraic sum of the project cash flows, since the discount rate is zero at that point.
A)True
B)False
Q4) What is a safe method to use when confronted with mutually exclusive projects?
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Chapter 9: Fundamentals of Capital Budgeting
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Sample Questions
Q1) The cash flow effect from a change in Net Working Capital is always equal in size and opposite in sign to the changes in Net Working Capital.
A)True
B)False
Q2) Which of the following statements is FALSE?
A)We can use scenario analysis to evaluate alternative pricing strategies for our project.
B)Scenario analysis breaks the net present value (NPV)calculation into its component assumptions and shows how the net present value (NPV)varies as each one of the underlying assumptions changes.
C)Scenario analysis considers the effect on net present value (NPV)of changing multiple project parameters.
D)The difference between the internal rate of return (IRR)of a project and the cost of capital tells you how much error in the cost of capital it would take to change the investment decision.
Q3) What is the most important function of 'sensitivity analysis'?
Q4) What is 'break-even analysis'?
Q5) What are 'project externalities'?
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Page 11
Chapter 10: Share Valuation: a Second Look
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Sample Questions
Q1) The Dividend-Discount Model is the simplest model to use if you want to value a firm that consistently pays out its earnings as dividends.
A)True
B)False
Q2) A study of trading behaviour of individual investors at a discount brokerage found that individual investors
A)trade very actively, partly because their performance is better than the professionals' due to low trading costs.
B)trade very conservatively, partly because their performance is better than the professionals' due to low trading costs.
C)trade very conservatively, despite the fact that their performance is actually worse because of trading costs.
D)trade very actively, despite the fact that their performance is actually worse because of trading costs.
Q3) Which is the best valuation technique when using comparables?
Q4) What additional adjustments are required to find the share price, in case we are using the discounted cash flow model?
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Chapter 11: Risk and Return in Capital Markets
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Sample Questions
Q1) Assume that you purchased Cockatoo shares at the closing price on 31 December 2015 and sold it after the dividend had been paid at the closing price on 26 January 2016. Your total return rate (yield)for this period is closest to:
A)0.70%
B)-8.80%
C)0.75%
D)-8.13%
Q2) Investors should earn a risk premium for bearing unsystematic risk.
A)True
B)False
Q3) Suppose you bought a $100 share a month ago. It paid a dividend of $1 today and then you sold it for $100. What was your dividend yield and capital gains yield on the investment?
A)3%, 1%
B)2%, 1%
C)0%, 1%
D)1%, 0%
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Chapter 12: Systematic Risk and the Equity Risk Premium
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Sample Questions
Q1) A portfolio has shares in three firms-300 shares of Commonwealth Bank (CBA), 300 shares of Woolworths (WOW), and 100 shares of Rio Tinto (RIO). If the price of CBA is $20, the price of WOW is $30, and the price of RIO is $150, calculate the portfolio weight of CBA and WOW.
A)15%, 25%
B)20%, 30%
C)20%, 40%
D)10%, 20%
Q2) Assume that the ETF you invested in returns -10%. Then the realised return on your investment is closest to: A)-26%.
B)-10%.
C)-20%.
D)-24%.
Q3) If you build a large enough portfolio, you can diversify away all the risks of a portfolio.
A)True
B)False
Q4) Is it possible for a share to have high total risk but low systematic risk?
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Page 14
Chapter 13: The Cost of Capital
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Sample Questions
Q1) Which of the following is NOT a step in the WACC valuation method?
A)Compute the weighted average cost of capital.
B)Discount the incremental free cash flows of the investment using the weighted average cost of capital.
C)Determine the mean weighted average cost of capital for the firm's industry.
D)Determine the incremental free cash flows of the investment.
Q2) Firms that have many divisions with different lines of business should still use a companywide WACC to evaluate projects.
A)True
B)False
Q3) Massive Inc shares have a market capitalisation of $55 billion. The company just paid a dividend of $0.35 per share and each share trades for $35. The growth rate in dividends is expected to be 6.5% per year. Also, Massive has $20 billion of debt that trades with a yield to maturity of 7%. If the firm's tax rate is 30%, compute the WACC.
A)7.93%
B)7.45%
C)6.81%
D)6.85%
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Page 15
Chapter 14: Raising Capital
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Sample Questions
Q1) Which of the following statements is FALSE?
A)A "road trip" is where senior management and the lead underwriters travel around the country (and sometimes around the world)promoting the company and explaining their rationale for the offer price to the underwriters' largest customers-mainly institutional investors such as mutual funds and pension funds.
B)Before an IPO, the company prepares the final registration statement and final prospectus containing all the details of the IPO, including the number of shares offered and the offer price.
C)Before the offer price is set, the underwriters work closely with the company to come up with a price range that they believe provides a reasonable valuation for the firm.
D)Once the issue price (or offer price)is set, underwriters may invoke another mechanism to protect themselves against a loss-the over-allotment allocation.
Q2) Equity investors in a private company usually plan to realise a return on their investment by selling their shares when that company is acquired by another firm or sold to the public in a public offering.
A)True
B)False
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Page 16
Chapter 15: Debt Financing
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Sample Questions
Q1) A firm issues $160 million in straight bonds at an original issue discount of 0.5% and a coupon rate of 7.5%. The firm pays fees of 1.75% on the face value of the bonds. The net amount of funds that the debt issue will provide for the firm is closest to which of the following?
A)$161 million
B)$150 million
C)$125 million
D)$156 million
Q2) Which of the following statements is FALSE?
A)The trust company represents the bondholders and makes sure that the terms of the indenture are enforced.
B)In the case of default, the trust company represents the bondholders' interests.
C)Almost all bonds that are issued today are registered bonds.
D)For private placements, the prospectus must include an indenture, a formal contract between the bond issuer and a trust company.
Q3) Private debt can be in the form of bonds.
A)True
B)False
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Chapter 16: Capital Structure
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Sample Questions
Q1) The presence of a large amount of debt can encourage shareholders to take excessive risk because
A)equity holders are risk seeking by nature.
B)firm value increases with risk taking.
C)the costs of failure are borne largely by debt holders.
D)debt holders are risk seeking.
Q2) The trade-off theory suggests:
A)the firm should choose a debt level where the tax savings from increasing leverage are just offset by the increased probability of incurring the costs of financial distress.
B)with higher costs of financial distress, it is optimal for the firm to choose higher leverage.
C)there is no rational explanation for why firms choose debt levels that are too low to fully exploit the debt tax shield.
D)differences in the magnitude of financial distress costs and the volatility of cash flows cannot explain the differences in the use of leverage across industries.
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18
Chapter 17: Payout Policy
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Q1) 'Dividend imputation' allows the tax paid by the company issuing the dividends to offset personal taxes payable on the dividends.
A)True
B)False
Q2) The system under which Australian companies pass on to their shareholders credit for corporate income taxes paid is called a
A)double tax system.
B)classical tax system.
C)dividend imputation system.
D)franking credit.
Q3) The firm mails dividend cheques to the registered shareholders on the A)ex-dividend date.
B)distribution date.
C)declaration date.
D)record date.
Q4) In a dividend reinvestment plan, the company issues additional shares rather than cash to its shareholders.
A)True B)False
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Chapter 18: Financial Modelling and Pro-Forma Analysis
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Q1) Compute the value of a firm with free cash flows of $1 000, $2 500 and $3 000 over the next three years, a terminal firm value of $40 000 after three years, and the unlevered cost of capital is 15%. Assume that the interest rate tax shield is zero.
A)$31 033
B)$27 234
C)$39 343
D)$26 191
Q2) One of the shortcomings of the 'per cent of sales method' is that it does not account for the fact that capacity changes are lumpy and not incremental.
A)True
B)False
Q3) Long-term financial planning allows a financial manager to understand the business by ________ between sales, costs, capital investments and financing.
A)increasing the spread between
B)decreasing the spread between
C)identifying wastage
D)identifying linkages
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Chapter 19: Working Capital Management
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Q1) Which of the following statements is FALSE?
A)The lower the discount percentage offered, the greater the cost of forgoing the discount and using trade credit.
B)A firm should always pay on the latest day allowed.
C)A firm should strive to keep its money working for it as long as possible without developing a bad relationship with its suppliers or engaging in unethical practices.
D)A firm should choose to borrow using accounts payable only if trade credit is the cheapest source of funding.
Q2) The cash conversion cycle (CCC)is defined as
A)Inventory Days + Accounts Receivable Days + Accounts Payable Days.
B)Inventory Days + Accounts Payable Days - Accounts Receivable Days.
C)Inventory Days - Accounts Receivable Days - Accounts Payable Days.
D)Inventory Days + Accounts Receivable Days - Accounts Payable Days.
Q3) Luther's 'Inventory' days figure is closest to:
A)72 days.
B)79 days.
C)62 days.
D)82 days.
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Chapter 20: Option Applications and Corporate Finance
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Q1) KD Industries is currently trading at $32 per share. Consider a put option on KD with an exercise price of $30. The maximum value of this put option is
A)$30.
B)$32.
C)$0.
D)$2.
Q2) Suppose you are looking to exploit opportunities in the options markets. The price of a call option on Massive Industries with a maturity of one year and an exercise price of $150 is $15, and the share price is $140. What should the price of a put option be to preclude profitable opportunities? The risk-free rate of interest is 5%.
A)$17.86
B)$21.45
C)$25.00
D)$19.63
Q3) The value of an option decreases with the volatility of the underlying share.
A)True
B)False
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22
Chapter 21: Mergers and Acquisitions
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Q1) Merger activity is greater during economic contractions than during expansions.
A)True
B)False
Q2) The 1990s era was known for 'strategic' or 'global' deals that were more likely to be friendly and to involve companies in related businesses; these mergers often were designed to create strong firms on a scale that would allow them to compete globally.
A)True
B)False
Q3) If Martin pays no premium to acquire Luther, what will the earnings per share be after the merger? Show your calculations.
Q4) Any acquirer shares received in full or partial exchange for target shares triggers an immediate tax liability for target shareholders.
A)True
B)False
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Page 23
Chapter 22: International Corporate Finance
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Q1) The spot exchange rate for Indian Rupees is Rs 44/$. The one-year forward exchange rate is Rs 46/$ and the one-year Australian interest rate is 5%. What is the implied one-year interest rate in India?
A)8.56%
B)9.77%
C)9.24%
D)10.24%
Q2) What is a 'currency forward contract'?
Q3) Consider the following equation: The term S in this equation is
A)the forward exchange rate.
B)the amount of foreign currency.
C)the current spot exchange rate.
D)the future spot exchange rate.
Q4) Currency options give a firm an obligation to exchange currency at a given rate.
A)True
B)False
Page 24
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Chapter 23: Insurance and Risk Management
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Q1) Which of the following statements is FALSE?
A)In a perfect market without other frictions, insurance companies should compete until they are just earning a fair return and the NPV from selling insurance is zero. The NPV is zero if the price of insurance equals the present value of the expected payment; in that case, we say the price is 'actuarially fair'.
B)Because insurance reduces the risk of financial distress, it can relax this trade-off and allow the firm to increase its use of debt financing.
C)When a firm is subject to graduated income tax rates, insurance can produce a tax saving if the firm is in a higher tax bracket when it pays the premium than the tax bracket it is in when it receives the insurance payment in the event of a loss.
D)By lowering the volatility of the shares, insurance discourages concentrated ownership by an outside director or investor who will monitor the firm and its management.
Q2) 'Liquidity risk' is the risk that the firm will not have, or be able to raise, the cash required to meet the margin calls on its hedges.
A)True
B)False
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