Applied Corporate Finance
Final Exam Questions
Course Introduction
Applied Corporate Finance focuses on the practical application of financial theories and tools to real-world business decisions within corporations. The course explores key topics such as capital budgeting, cost of capital, capital structure, dividend policy, valuation techniques, and risk management. By integrating case studies and financial modeling exercises, students learn how to analyze investment opportunities, assess financing alternatives, and develop strategies to maximize firm value. Emphasis is placed on applying quantitative methods and critical thinking to solve complex corporate finance challenges faced by managers and financial professionals.
Recommended Textbook Essentials of Corporate Finance 8th Edition by Stephen A. Ross
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Page 2
Chapter 1: Introduction to Financial Management
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Q1) Corporate shareholders:
A)are proportionately liable for the firm's debts.
B)are protected from all losses.
C)have the ability to change the corporation's bylaws.
D)receive tax-free distributions since all profits are taxed at the corporate level.
E)have basically no control over the actual corporation.
Answer: C
Q2) Limited liability companies are primarily designed to:
A)allow a portion of their owners to enjoy limited liability while granting the other portion of their owners control over the entity.
B)provide the benefits of the corporate structure to foreign-based entities.
C)spin off a wholly owned subsidiary.
D)allow companies to reorganize themselves through the bankruptcy process.
E)provide limited liability while avoiding double taxation.
Answer: E
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Chapter 2: Financial Statements, Taxes, and Cash Flow
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Q1) The market value of a firm's fixed assets:
A)must exceed the book value of those assets.
B)is more predictable than the book value of those assets.
C)in addition to the firm's net working capital reflects the true value of a firm.
D)is decreased annually by the depreciation expense.
E)is equal to the estimated current cash value of those assets.
Answer: E
Q2) For the past year,LP Gas,Inc.had cash flow from assets of $38,100 of which $21,500 flowed to the firm's stockholders.The interest paid was $2,300.What is the amount of the net new borrowing?
A)-$14,300
B)-$9,700
C)$12,300
D)$14,300
E)$18,900
Answer: A
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4
Chapter 3: Working With Financial Statements
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Q1) The Veggie Hut has net income of $26,400,total equity of $102,700,and total assets of $189,500.The dividend payout ratio is 0.30.What is the internal growth rate?
A)7.99 percent
B)8.57 percent
C)10.81 percent
D)16.87 percent
E)21.94 percent
Answer: C
Q2) Friendly Skies Airline has earnings before interest and taxes of $21,680 and net income of $12,542.The tax rate is 35 percent.What is the times interest earned ratio?
A)0.88
B)1.73
C)3.09
D)5.59
E)9.09
Answer: E
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Chapter 4: Introduction to Valuation: The Time Value of Money
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Sample Questions
Q1) Given an interest rate of zero percent,the future value of a lump sum invested today will always:
A)remain constant, regardless of the investment time period.
B)decrease if the investment time period is shortened.
C)decrease if the investment time period is lengthened.
D)be equal to $0.
E)be infinite in value.
Q2) Explain the Rule of 72.
Q3) You have just made your first $5,000 contribution to your individual retirement account.Assuming you earn a 5 percent rate of return and make no additional contributions,what will your account be worth when you retire in 35 years? What if you wait for 5 years before contributing?
A)$26,335.37; $23,011.60
B)$27,311.20; $29,803.04
C)$27,311.20; $22,614.08
D)$27,580.08; 21,609.71
E)$31,241.90; $32,614.08
Q4) Draw a graph that illustrates the relationship between interest rates and the present value of $1,000 to be received in one year.
Page 6
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Chapter 5: Discounted Cash Flow Valuation
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Q1) Sticks and Stuff Furniture is offering a bedroom suite for $3,000.The credit terms are 60 months at $50 per month.What is the interest rate on this offer?
A)0.00 percent
B)1.50 percent
C)1.65 percent
D)1.15 percent
E)1.30 percent
Q2) Kristina started setting aside funds three years ago to save for a down payment on a house.She has saved $900 each quarter and earned an average rate of return of 4.8 percent.How much money does she currently have saved for her down payment?
A)$11,542.10
B)$12,388.19
C)$15,209.80
D)$15,366.67
E)$16,023.13
Q3) What does it mean when a loan is amortized?
Explain how amortization methods can vary from one loan to another.
Q4) Identify four ways that you can use annuity computations in your everyday life.
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Chapter 6: Interest Rates and Bond Valuation
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Q1) One year ago,you purchased a 7.5 percent annual coupon bond for a clean price of $980.The bond now has seven years remaining until maturity.Today,the yield to maturity on this bond is 6.87 percent.How does today's clean price of this bond compare to your purchase price?
A)4.24 percent lower
B)4.70 percent lower
C)5.48 percent lower
D)5.52 percent higher
E)6.61 percent higher
Q2) What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early?
A)Registered account
B)Bearer account
C)Call account
D)Sinking fund
E)Premium fund
Q3) Explain what a mortgage-backed security (MBS)is and how it functions.Also,explain why these securities were such a problem during 2008.
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8
Chapter 7: Equity Markets and Stock Valuation
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Sample Questions
Q1) Classic Pickles is a mature manufacturing firm.The company just paid a $4 annual dividend,but management expects to reduce the payout by 4 percent per year,indefinitely.If you require a 12 percent return on this stock,what will you pay for a share today?
A)$21.42
B)$24.00
C)$25.24
D)$28.56
E)$30.02
Q2) An individual who executes buy and sell orders on the floor of an exchange for a fee is called a:
A)floor broker.
B)DMM.
C)floor trader.
D)proxy.
E)flow specialist.
Q3) Explain how staggering offsets some of the benefits associated with cumulative voting.
Q4) Explain the differences between a broker market and a dealer market.
Q5) How is the stated value of a preferred stock utilized?
Page 9
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Chapter 8: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) EKG,Inc.is considering a new project that will require an initial cash investment of $398,000.The project will produce no cash flows for the first two years.The projected cash flows for years 3 through 7 are $79,000,$88,000,$102,000,$140,000,and $160,000,respectively.How long will it take the firm to recover its initial investment in this project?
A)3.81 years
B)3.98 years
C)5.57years
D)5.92 years
E)The project never pays back.
Q2) Which one of the following statements is correct?
A)A longer payback period is preferred over a shorter payback period.
B)The payback rule states that you should accept a project if the payback period is less than one year.
C)The payback period ignores the time value of money.
D)The payback rule is biased in favor of long-term projects.
E)The payback period considers the timing and amount of all of a project's cash flows.
Q3) In words,explain how the crossover rate is computed and why the net present value profile is useful.
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Page 10
Chapter 9: Making Capital Investment Decisions
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Q1) Which one of the following refers to a method of increasing the rate at which an asset is depreciated?
A)Noncash expense
B)Straight-line depreciation
C)Depreciation tax shield
D)Accelerated cost recovery system
E)Market-based depreciation
Q2) Sensitivity analysis:
A)looks at the most reasonably optimistic and pessimistic results for a project.
B)helps identify the variable within a project that presents the greatest forecasting risk.
C)is used for projects that cannot be analyzed by scenario analysis because the cash flows are unconventional.
D)is generally conducted prior to scenario analysis just to determine if the range of potential outcomes is acceptable.
E)illustrates how an increase in operating cash flow caused by changing both the revenue and the costs simultaneously will change the net present value for a project.
Q3) Explain the concept of incremental cash flow analysis and its purpose.
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11
Chapter 10: Some Lessons From Capital Market History
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Q1) The rate of return on which one of the following is used as the risk-free rate?
A)Long-term government bonds
B)Long-term corporate bonds
C)Inflation, as measured by the Consumer Price Index
D)U.S. Treasury bill
E)Large-company stocks
Q2) Five years ago,you purchased 600 shares of stock.The annual returns have been 7.2 percent,-19.4 percent,3.8 percent,14.2 percent,and 27.9 percent,respectively.What is the variance of these returns?
A)0.029889
B)0.030021
C)0.030068
D)0.030133
E)0.030284
Q3) Over the period of 1926-2011:
A)long-term government bonds underperformed long-term corporate bonds.
B)small-company stocks underperformed large-company stocks.
C)inflation exceeded the rate of return on U.S. Treasury bills.
D)U.S. Treasury bills outperformed long-term government bonds.
E)large-company stocks outperformed all other investment categories.
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Chapter 11: Risk and Return
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Q1) Which one of the following best describes a portfolio?
A)Risky security
B)Security equally as risky as the overall market
C)New issue of stock
D)Group of assets held by an investor
E)Investment in a risk-free security
Q2) A portfolio has an expected return of 12.3 percent.This portfolio contains two stocks and one risk-free security.The expected return on Stock X is 9.7 percent and on Stock Y it is 17.7 percent.The risk-free rate is 3.8 percent.The portfolio value is $78,000 of which
$18,000 is the risk-free security.How much is invested in Stock X?
A)$18,600
B)$19,667
C)$21,375
D)$22,204
E)$24,800
Q3) What is the significance of the slope of the security market line?
Should investors prefer a steeper slope or a flatter slope?
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Chapter 12: Cost of Capital
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Sample Questions
Q1) Assume the federal government decides to permanently eliminate corporate income taxes as a means of encouraging economic development and job growth.What effect,if any,would this change have on the evaluation of a proposed project?
Q2) Lawler's is considering a new project.The company has a debt-equity ratio of 0.72.The company's cost of equity is 15.1 percent,and the aftertax cost of debt is 7.2 percent.The firm feels that the project is riskier than the company as a whole and that it should use an adjustment factor of +3 percent.What is the WACC it should use for the project?
A)12.53 percent
B)12.98 percent
C)14.79 percent
D)15.14 percent
E)15.68 percent
Q3) Explain the concept of the subjective approach to assigning a required return to a project.
Q4) Assume a firm follows a policy of using its weighted average cost of capital as the required return for all of its proposed projects.Evaluate this policy.How will this policy affect the overall risk level of the firm over time?
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Page 14
Chapter 13: Leverage and Capital Structure
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Sample Questions
Q1) The static theory of capital structure assumes a firm:
A)maintains a constant debt-equity ratio.
B)has an all-equity structure.
C)is fixed in terms of its assets.
D)pays no taxes.
E)is operating at the point where financial distress costs are eliminated.
Q2) Which one of the following is a direct bankruptcy cost?
A)Loss of customer goodwill resulting from a bankruptcy filing
B)Legal and accounting fees related to a bankruptcy proceeding
C)Management time spent on a bankruptcy proceeding
D)Any financial distress cost
E)Costs a firm spends trying to avoid bankruptcy
Q3) Debbie's Cookies has a return on assets of 15.3 percent and a cost of equity of 16.9 percent.What is the pretax cost of debt if the debt-equity ratio is 0.54? Ignore taxes.
A)8.87 percent
B)9.29 percent
C)9.64 percent
D)11.31 percent
E)12.33 percent
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Page 15
Chapter 14: Dividends and Dividend Policy
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Q1) Explain how the process of dividend smoothing affects the dividend growth rate as compared to the earnings growth rate.
Q2) Which one of the following would tend to favor a low-dividend payout?
A)Higher tax rates on capital gains than on dividend income
B)High flotation cost for equity issues
C)Endowment fund investors who cannot spend principal
D)Investors' desire for a high-dividend yield
E)Elimination of the tax deferral on capital gains
Q3) Which one of the following is a payment by a firm to its shareholders from any source other than current or accumulated retained earnings?
A)Interest
B)Distribution
C)Retained earnings
D)Dividend
E)Stock repurchase
Q4) Explain why a firm might prefer a stock repurchase rather than an increase in the firm's regular dividend.
Q5) What is the difference between a tender offer and a targeted repurchase?
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Chapter 15: Raising Capital
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Q1) When issuing securities,which of the following can occur prior to receiving the approval by the SEC of a registration statement?
I.Oral offer to buy shares
II.Written offer to buy shares
III.Final determination of the offer price
IV.Distribution of a preliminary prospectus
A)I only
B)III only
C)III and IV only
D)I and IV only
E)None of the listed activities can occur until after the SEC approval is received.
Q2) Gee Whiz Underwriters retains the difference between its buying price and its offering price on new securities.What is this amount called?
A)Markup
B)Commission
C)Rights price
D)Spread
E)Offer
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Chapter 16: Short-Term Financial Planning
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Q1) Which one of the following statements is correct?
A)If a firm decreases its inventory period, its accounts receivable period will also decrease.
B)The longer the cash cycle, the more cash a firm typically has available to invest.
C)A firm would prefer a negative cash cycle over a positive cash cycle.
D)Decreasing the inventory period will also decrease the payables period.
E)Both the operating cycle and the cash cycle must be positive values.
Q2) Which one of the following defines the cash cycle?
A)Inventory period plus the accounts receivable period
B)Inventory period plus the accounts payable period
C)Operating cycle minus the inventory period
D)Operating cycle minus the accounts payable period
E)Operating cycle minus the accounts receivable period
Q3) Which one of the following will increase the operating cycle?
A)Decreasing the accounts payable period
B)Increasing the accounts payable turnover rate
C)Increasing the cash cycle
D)Decreasing the accounts receivable turnover rate
E)Decreasing the inventory period
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Page 18
Chapter 17: Working Capital Management
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Q1) Check kiting has been a means,although neither an ethical nor legal means,of allowing a firm to use its uncollected cash.How did the Check Clearing Act for the 21<sup>st</sup> Century (Check 21)affect this practice?
Q2) Which one of the following is a primary benefit of implementing zero-balance accounts into a cash management system?
A)Increased disbursements float
B)Total elimination of all safety stocks
C)Additional cash availability
D)Decreased collection float
E)Elimination of all float
Q3) What is the key difference between an ordinary preferred stock and a money market preferred stock?
A)Issuer
B)Maturity
C)Fixed versus floating dividend
D)Voting rights
E)Absence of any dividend
Q4) Identify some of the specific costs firms incur if their current asset levels are either too high or too low.
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Chapter 18: International Aspects of Financial Management
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Q1) Assume a canned soft drink costs $1 in the U.S.and $1.30 in Canada.At the same time,the currency per U.S.dollar is Can$1.30.Which one of the following conditions exists in this situation?
A)Absolute purchasing power parity
B)Interest rate parity
C)Relative purchasing power parity
D)Translation exposure
E)Equal spot and forward rates
Q2) Which one of the following best describes an agreement you make today to exchange U.S.dollars for British pounds three months from now?
A)Forward trade
B)Spot trade
C)Arbitrage transaction
D)Cross-rate exchange
E)Eurocurrency transaction
Q3) Identify four parties that have a demand for U.S.dollars and explain why they wish to obtain those dollars.
Q4) What is LIBOR and what role does it play in international finance?
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