Applied Corporate Finance
Exam Questions
Course Introduction
Applied Corporate Finance focuses on the practical aspects of financial decision-making within corporations. The course covers topics such as capital budgeting, capital structure, dividend policy, risk management, and valuation techniques, emphasizing how financial principles are applied to real-world business scenarios. Students will analyze case studies, financial statements, and market data to develop critical skills in evaluating investment opportunities, optimizing capital allocation, and understanding the financial strategies that drive corporate value. Emphasis is placed on bridging the gap between financial theory and the challenges faced by finance professionals in dynamic business environments.
Recommended Textbook Fundamentals of Corporate Finance 3rd Australian Edition by Berk DeMarzo
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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) In which of the following relationships is an agency problem LEAST likely to arise?
A)the relationship between a driver and the passengers in a car regarding the safe driving of that car
B)the relationship between high-level military officers and the soldiers who serve under them regarding the willingness of the soldiery to take risks
C)the relationship between a restaurateur and the suppliers of produce to that restaurant regarding the freshness of the produce supplied
D)the relationship between a hire-car company and the persons who hire that company's cars regarding the treatment of those cars
Answer: A
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Chapter 2: Introduction to Financial Statement Analysis
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Sample Questions
Q1) How does a firm select the date for preparation of its balance sheet?
Answer: The balance sheet is prepared on the fiscal closing date for the accounts of a firm. In Australia, the balance date is generally 30 June each year; however some companies - particularly companies that have overseas parents - may select a different balance date.
Q2) Consider the above Income Statement for CharmCorp. All values are in millions of dollars. If CharmCorp has 6 million shares outstanding, and its managers and employees have stock options for 1 million shares, what is its diluted EPS in 2018?
A)$2.33
B)$2.00
C)$1.67
D)$1.42
Answer: B
Q3) Accounts payable is a
A)Long-term Liability.
B)Current Liability.
C)Long-term Asset.
D)Current Asset.
Answer: B
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Page 4
Chapter 3: Time Value of Money: an Introduction
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Sample Questions
Q1) A mining company is offering to trade you 7 250 tonnes of low-grade copper ore for 5 000 tonnes of high-grade copper ore. Assuming you currently have 5 000 tonnes of high-grade ore, what should you do?
Answer: Don't trade. Colooma should keep the high-grade ore and refine it.
See below:
Total Benefits
No trade and refine high-grade ore (base case)
5 000 tonnes × $940 of copper/tonne = $4 700 000
Trade high-grade for low-grade
7 250 tonnes × $640 of copper/tonne = $4 640 000
Q2) If the risk-free rate of interest (r<sub>f</sub>)is 5%, then you should be indifferent between receiving $300 today or
A)$315.00 in one year.
B)$350.00 in one year.
C)$285.00 in one year.
D)none of the above.
Answer: A
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Page 5
Chapter 4: Time Value of Money: Valuing Cash Flow
Streams
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Q1) You are given two choices of investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of 4%, and Investment B has a discount rate of 5%. Which of the following is true?
A)The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B.
B)The present value of cash flows in Investment A is equal to the present value of cash flows in Investment B.
C)The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B.
D)No comparison can be made - we need to know the cash flows to calculate the present value.
Q2) An investment pays you $20 000 at the end of this year, and $10 000 at the end of each of the four following years. What is the present value (PV)of this investment, given that the interest rate is 4% per year?
A)$54 134
B)$42 150
C)$58 614
D)$45 913
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Chapter 5: Interest Rates
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Q1) How do we decide on opportunity cost when we have several opportunities that need to be foregone?
Q2) Which of the following best describes the annual percentage rate?
A)the discount rate when compounded more than once a year or less than once a year
B)the quoted interest rate which considered with the compounding period gives the effective interest rate
C)the discount rate when it is divided by the number of times it is compounded in a year D)the effective annual rate after compounding is taken into account
Q3) The real interest rate is the rate of growth of one's purchasing power due to money invested.
A)True
B)False
Q4) The effective annual rate on your firm's borrowings is closest to:
A)5.13%
B)5.09%
C)5.06%
D)5.12%
Q5) How are interest and return of principal handled in an amortising loan payment?
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Chapter 6: Bond Valuation
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Q1) What is the yield to maturity of a one-year, risk-free, zero-coupon bond with a $10 000 face value and a price of $9 250 when released?
A)8.212%
B)8.810%
C)7.500%
D)8.108%
Q2) Which of the following bonds is trading at a premium?
A)a 2-year bond with a $50 000 face value whose yield to maturity is 5.2% and coupon rate is 5.2% APR paid monthly
B)a 10-year bond with a $4 000 face value whose yield to maturity is 6.0% and coupon rate is 5.9% APR paid semi-annually
C)a 5-year bond with a $2 000 face value whose yield to maturity is 7.0% and coupon rate is 7.2% APR paid semi-annually
D)a 15-year bond with a $10 000 face value whose yield to maturity is 8.0% and coupon rate is 7.8% APR paid semi-annually
Q3) Under what situation can a zero-coupon bond be selling at a premium?
Q4) Under what situation can a zero-coupon bond be selling at par to its face value?
Q5) How are the cash flows of a coupon bond different from an amortising loan?
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Chapter 7: Share Valuation: the Dividend-Discount Model
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Sample Questions
Q1) The below screen shot from Google Finance shows the basic stock information for the Commonwealth Bank of Australia after the close of business on 11 September 2017. How many shares of CBA had been traded on the ASX on this date?
A)4 billion
B)4.83 billion
C)4.83 million
D)5.9 billion
Q2) You expect KT Industries (KTI)will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 15% and their equity cost of capital is 12%. The expected growth rate for KTI's dividends is closest to:
A)3.0%
B)6.0%
C)7.5%
D)4.5%
Q3) What is a major assumption about the 'growth rate' in the dividend-discount model?
Q4) How can the dividend-discount model handle changing growth rates?
Q5) Can the dividend-discount model handle negative growth rates?
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Chapter 8: Investment Decision Rules
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Sample Questions
Q1) A garage is comparing the cost of buying two different car hoists. Hoist A will cost $20 000, will require servicing of $1 000 every two years, and last ten years. Hoist B will cost $15 000, require servicing of $800 per year, and last eight years. If the cost of capital is 7%, which is the better option, given that the firm has an ongoing requirement for a hoist?
A)Hoist B, since it has a greater present value (PV).
B)Hoist B, since it has a greater equivalent annual annuity.
C)Hoist A, since it has a greater equivalent annual annuity.
D)Hoist A, since it has a greater present value (PV).
Q2) You are opening up a brand new shopping centre. You presently have more potential retail outlets wanting to locate in your centre than you have space available. What is the most appropriate tool to use if you are trying to determine the optimal allocation of your retail space?
A)internal rate of return (IRR)
B)payback period
C)profitability index
D)net present value (NPV)
Q3) How do you apply the Net Present Value rule when multiple projects are available and you have the added constraint of accepting only one project?
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Page 10
Chapter 9: Fundamentals of Capital Budgeting
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Sample Questions
Q1) Which of the following adjustments should NOT be made when computing free cash flow from incremental earnings?
A)subtracting all non-cash expenses
B)adding depreciation
C)subtracting depreciation expenses from taxable earnings
D)subtracting increases in Net Working Capital
Q2) The balance sheet for a small firm is shown above. All amounts are in thousands of dollars. What is this firm's Net Working Capital?
A)$30 000
B)$47 000
C)$40 000
D)$89 000
Q3) An announcement by the government that they will decrease corporate marginal tax rates in the future would increase the attractiveness of the diminishing value method of depreciation.
A)True
B)False
Q4) If a business owner is using the extra space at home for his business, does it imply a zero 'opportunity cost' for the space?
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Chapter 10: Share Valuation: a Second Look
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Q1) Which of the following is the appropriate way to calculate the price of a share of a given company using the free cash flow valuation model?
A)P<sub>0</sub> = [Div<sub>1</sub>/(r<sub>E</sub> - g)]/(Shares Outstanding<sub>0</sub>)
B)P<sub>0</sub> = (V<sub>0</sub> + Cash<sub>0</sub> - Debt<sub>0</sub>)/(Shares Outstanding<sub>0</sub>)
C)P<sub>0</sub> = Div<sub>1</sub>/(r<sub>E</sub> - g)
D)P<sub>0</sub> = PV(Future Free Cash Flow of Firm)/(Shares Outstanding<sub>0</sub>)
Q2) The implications of the efficient markets hypothesis for corporate managers regarding accounting earnings are that managers should not focus on accounting earnings but instead focus on maximising cash flows.
A)True
B)False
Q3) 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
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Chapter 11: Risk and Return in Capital Markets
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Sample Questions
Q1) Suppose you bought a $100 share a month ago. It paid a dividend of $2 today and then you sold it for $99. What was your dividend yield and capital gains yield on the investment?
A)-2%, 1%
B)2%, 1%
C)2%, -1%
D)1%, 2%
Q2) If asset A's return is exactly two times asset B's return, then following risk return trade-off, the standard deviation of asset A should be ________ times the standard deviation of asset B.
A)1
B)3
C)2
D)4
Q3) The total realised return earned from a stock investment comprises two components: dividend yield and capital gains yield.
A)True
B)False
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13
Chapter 12: Systematic Risk and the Equity Risk Premium
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Sample Questions
Q1) The weight of ANZ in your portfolio is:
A)40%.
B)30%.
C)50%.
D)20%.
Q2) The expected return on your investment is closest to:
A)12%.
B)20%.
C)18%.
D)24%.
Q3) The correlation of the two assets does not play any role in computation of the expected return of the two-asset portfolio.
A)True
B)False
Q4) Is it possible for a share to have high total risk but low systematic risk?
Q5) The Capital Asset Pricing Model (CAPM)says that the excess return on an investment is equal to its beta times the market risk premium.
A)True
B)False
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Chapter 13: The Cost of Capital
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Q1) Is it incorrect to use the coupon rate of debt toward cost of debt?
Q2) When calculating the WACC, it is standard practice to subtract ________ to compute the net debt outstanding.
A)dividends
B)coupons
C)equity
D)cash and risk-free securities
Q3) The 'cost of debt' is the before-tax cost of debt while the effective cost of debt is the after-tax cost of debt, which is lower for a profitable tax-paying firm.
A)True
B)False
Q4) The WACC depends on the risk of a company's line of business.
A)True
B)False
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Page 15
Chapter 14: Raising Capital
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Q1) Parafoil Avionics sells 50 million shares in an SEO - 40 million being primary shares issued by the company and 10 million being secondary shares sold by investors in the company. At the time of the sale, Parafoil's shares were selling at $12.50 per share. If the underwriter charges 5% of the gross proceeds as a fee, how much money was raised in the sale?
A)$475 million
B)$594 million
C)$500 million
D)$625 million
Q2) Which of the following is NOT one of the four characteristics of IPOs that puzzle financial economists?
A)The costs of the IPO are very high, and it is unclear why firms willingly incur such high costs.
B)The long-run performance of a newly public company (three to five years from the date of issue)is superior to the overall market return.
C)On average, IPOs appear to be underpriced.
D)The number of issues is highly cyclical.
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Page 16
Chapter 15: Debt Financing
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Q1) Which of the following statements regarding the private debt market is FALSE?
A)The public debt market is larger than the private debt market.
B)Private debt has the disadvantage of being illiquid.
C)Private debt has the advantage that it avoids the cost of registration.
D)Bank loans are an example of private debt-debt that is not publicly traded.
Q2) Which of the following statements concerning the use of sinking funds to repurchase a bond issue is NOT true?
A)The firm can reduce the amount of outstanding debt without affecting the cash flows of the remaining bonds.
B)Payments from the sinking fund are used to repurchase bonds.
C)The firm makes regular payments into a sinking fund administered by a trustee over the life of the bond.
D)Bonds can be issued with a sinking fund provision or a call provision, but not both.
Q3) A bond that makes payments in a certain currency contains the risk of holding that currency and so is priced according to the yields of similar bonds in that currency.
A)True
B)False
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Page 17
Chapter 16: Capital Structure
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Q1) A firm has a market value of assets of $50 000. It borrows $10 000 at 3%. If the unlevered cost of equity is 15%, what is the firm's cost of equity capital?
A)16%
B)18%
C)19%
D)17%
Q2) The A in the equation above represents
A)the value of the firm's unlevered equity.
B)the value of the firm's equity.
C)the value of the firm's debt.
D)the market value of the firm's assets.
Q3) Suppose Blank Company has only one project, as forecast above, and an unlevered cost of equity of 8%. If the company borrows $10 000 at 5% to make the investment, what is the return to equity holders if demand is weak?
A)-37.5%
B)-35.3%
C)-58.6%
D)8.0%
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Chapter 17: Payout Policy
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Q1) What other (non-tax)factors should be considered when analysing shareholders' preferences to dividends over share repurchases?
Q2) Assume that Vezuvo uses the entire $75 million to repurchase shares. The number of shares that Vezuvo will repurchase is closest to:
A)1.2 million.
B)1.9 million.
C)1.3 million.
D)1.1 million.
Q3) Are franking credits irrelevant to foreign shareholders investing in Australian companies?
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Page 19
Chapter 18: Financial Modelling and Pro-Forma Analysis
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Q1) Based upon the average EV/Sales ratio of the comparable firms, if Loop holds $6.5 million of cash in excess of its working capital needs, then Loop's target market value of equity is closest to:
A)$155 million
B)$193 million
C)$157 million
D)$165 million
E)$191 million
Q2) The market size for Loppins is 50 million units. If SPI Ltd has a market share of 30% and the average sales price is $4 per Loppin, what is the dollar amount of sales of SPI?
A)$62 million
B)$58 million
C)$52 million
D)$60 million
Q3) For valuing a planned expansion, in addition to forecasting cash flows, we need to estimate the firm's continuation value.
A)True
B)False
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Chapter 19: Working Capital Management
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Q1) What should a firm do after establishing a credit policy?
A)Determine what percent of monthly sales are collected in the month after that sale.
B)Decide on the length of the period before payment must be made.
C)Monitor its accounts receivable to analyse whether its credit policy is effective.
D)Decide what should be done for those customers who do not pay their accounts on time.
Q2) Trade credit should always be used when it is offered.
A)True
B)False
Q3) Evertz Metals buys and stockpiles dolomite to use in its smelting processes. Before all this dolomite is used, however, it alters the smelting process so that calcite limestone is used instead. How is the inventory cost of the unused dolomite best categorised?
A)an acquisition cost
B)a holding cost
C)an order cost
D)a carrying cost
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Chapter 20: Option Applications and Corporate Finance
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Q1) Using an option to reduce the risk of a portfolio is called ________, while using options to bet on the direction of the market or an asset is called ________.
A)verification, hedging
B)speculation, hedging
C)hedging, verification
D)hedging, speculation
Q2) Consider the following equation: C = P + S - PV(K)- PV(Div)
In this equation, what does the term S represent?
A)the current share price
B)the exercise price of the option
C)the payoff of a zero-coupon bond
D)the value of the call option
Q3) When is an option 'out-of-the-money'?
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22
Chapter 21: Mergers and Acquisitions
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Q1) Consider two firms, Bob Company and Cat Enterprises, both with earnings of $10 per share and 5 million shares outstanding. Cat is a mature company with few growth opportunities and a stock price of $25 per share. Bob is a new firm with much higher growth opportunities and a share price of $40 per share. Assume Bob acquires Cat using its own shares and the takeover adds no value. In a perfect capital market, how many shares must Bob offer Cat's shareholders in exchange for their shares?
A)0.625 shares of BobCat company for each share of Cat Enterprises
B)1 share of BobCat for each share of Cat Enterprises
C)0.3846 shares of BobCat company for each share of Cat Enterprises
D)1.6 shares of BobCat company for each share of Cat Enterprises
Q2) A situation where every director serves a three-year term and the terms are staggered so that only one-third of the directors are up for election each year is called a A)poison pill.
B)golden parachute.
C)white knight.
D)classified board.
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Page 23
Chapter 22: International Corporate Finance
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Q1) What is 'cash-and-carry'?
Q2) The amount of taxes paid by a foreign subsidiary does not depend on the amount repatriated back to the home country.
A)True
B)False
Q3) Hedging with currency options involves a commitment by a firm to buy currency at a fixed rate.
A)True
B)False
Q4) A segmented capital market is one where all investors do not have access to all the financial securities in the various markets.
A)True
B)False
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Page 24
Chapter 23: Insurance and Risk Management
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Q1) The value of insurance comes from its ability to reduce the cost of ________ for the firm.
A)market imperfections
B)overhead
C)adverse selection
D)vertical integration
Q2) Which of the following statements regarding long-term supply contracts is FALSE?
A)Long-term supply contracts are designed to eliminate credit risk.
B)Long-term supply contracts insulate the firms from commodity price risk.
C)Long-term supply contracts are bilateral contracts negotiated by a buyer and a seller.
D)The market value of the contract at any point in time may not be easy to determine, making it difficult to track gains and losses.
Q3) What are some of the disadvantages of long-term supply contracts?
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