Applied Corporate Finance
Test Bank
Course Introduction
Applied Corporate Finance explores the practical application of financial principles to real-world corporate decision-making. The course covers key topics such as capital budgeting, cost of capital, capital structure, dividend policy, risk management, and valuation techniques. Emphasizing a hands-on approach, students analyze case studies, engage in financial modeling, and assess the impact of financial decisions on firm value. By integrating theory with practice, the course prepares students to address complex financial challenges faced by corporations, equipping them with the skills necessary for effective financial strategy and management in dynamic business environments.
Recommended Textbook
Corporate Finance Core Principles and Applications 4th Edition by Sheldon M. Ross
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Chapter 1: Introduction to Corporate Finance
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Q1) The division of profits and losses among the members of a partnership is formalized in the:
A)indemnity clause.
B)partnership agreement.
C)statement of purpose.
D)indenture contract.
E)group charter.
Answer: B
Q2) Insider trading is:
A)illegal.
B)impossible to have in our efficient market.
C)legal.
D)discouraged,but legal.
E)defined as the trading of stock by a corporate director based on publicly-available information.
Answer: A
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Chapter 2: Financial Statements and Cash Flow
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Sample Questions
Q1) Which one of the following accounts is generally the most liquid?
A)Patent
B)Building
C)Accounts receivable
D)Equipment
E)Inventory
Answer: C
Q2) The carrying value or book value of assets:
A)is always the best measure of a company's value to an investor.
B)represents an average market value over time.
C)is always higher than the replacement cost of the assets.
D)is determined under GAAP and is based on the cost of the assets.
E)is determined under GAPP and is based on the current market value of the assets.
Answer: D
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Chapter 3: Financial Statements Analysis and Financial Models
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Sample Questions
Q1) Southern Markets has a profit margin of 4.8 percent,a return on assets of 11.2 percent,and a debt-equity ratio of.55.What is the return on equity?
A)8.33%
B)8.49%
C)11.28%
D)17.36%
E)6.16%
Answer: D
Q2) Rosario's has sales of $114,500,total debt of $46,300,total equity of $68,400,and a profit margin of 5 percent.What is the return on assets?
A)5.21%
B)4.99%
C)7.39%
D)8.37%
E)19.97%
Answer: B
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Chapter 4: Discounted Cash Flow Valuation
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Sample Questions
Q1) Assume you start saving for retirement today.Which one of these is most apt to decrease the amount you have saved by the day you retire?
A)Delaying your retirement by one year
B)Increasing your investment's average rate of return
C)Increasing the amount you save each year
D)Selecting an investment that compounds continuously
E)Delaying any additions to your savings by one year
Q2) In which type of loan does the borrower initially receive the present value of the future lump sum loan repayment amount?
A)Pure discount loans
B)Both pure discount and interest-only loans
C)Amortized loans
D)Both interest-only and amortized loans
E)Interest-only loans
Q3) You have been awarded monthly payments of $2,800 for 15 years as an insurance settlement.ABC Finance has offered to pay you a lump sum amount today in exchange for your annuity stream.When determining the price to be paid today,will you or will ABC prefer a lower discount rate over a higher discount rate? Explain your reasoning.
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Chapter 5: Interest Rates and Bond Valuation
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Q1) A Treasury bond is quoted at a price of 101.2462 with a current yield of 3.68 percent.What is the coupon rate?
A)3.61%
B)3.68%
C)3.73%
D)3.77%
E)3.82%
Q2) All else constant,as the market price of a bond increases the current yield _____ and the yield to maturity _____
A)decreases;decreases.
B)increases;decreases.
C)increases;increases.
D)decreases;increases.
E)remains constant;increases.
Q3) Assume the term structure of interest rates is downward-sloping.Describe the shape of the three components of that curve and explain why the curve is down-sloping.
Q4) Interest rate risk is often explained by using the concept of a playground teeter-totter.Explain interest rates using this concept.
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Chapter 6: Stock Valuation
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Sample Questions
Q1) Webster preferred stock pays an annual dividend of $7.50 a share.What is the maximum price you should pay today to purchase this stock if you desire a rate of return of 12.25 percent?
A)$60.00
B)$61.22
C)$46.50
D)$91.88
E)$75.00
Q2) New Tours last annual dividend was $2 a share.The company plans to lower the dividend by $.50 each year for the next three years.In Year 5,it will pay a final liquidating dividend of $22 a share.If the required return is 16 percent,what is the current per share value of this stock?
A)$12.83
B)$13.08
C)$9.80
D)$14.13
E)$15.86
Q3) Contrast some of the features of preferred stock versus common stock.
Q4) Identify at least five features of preferred stock that are similar to bond features.
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Chapter 7: Net Present Value and Other Investment Rules
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Sample Questions
Q1) The discount rate that makes the net present value of an investment exactly equal to zero is called the:
A)profitable rate of return.
B)internal rate of return.
C)average accounting return.
D)profitability index.
E)risk-free rate.
Q2) Assume a project has normal cash flows.According to the accept/reject rules,the project should be accepted if the:
A)PI is less than 1.
B)AAR is less than the required AAR.
C)IRR exceeds the required return.
D)payback period is less than the life of the project.
E)discounted payback period is less than the life of the project.
Q3) The discounted payback period of a project will decrease whenever the:
A)initial cash outlay for the project is increased.
B)amount of each projected cash inflow is increased.
C)discount rate applied to the project is increased.
D)time period of the project is increased.
E)costs of the fixed assets utilized in the project increase.
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Chapter 8: Making Capital Investment Decisions
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Sample Questions
Q1) Outdoor Gear is purchasing equipment costing $1.2 million that will lower manufacturing costs by $280,000 a year.The equipment will be depreciated over 7 years using straight-line depreciation to a book value of zero.After 7 years,the equipment will be worthless.The discount rate is 14 percent and the tax rate is 35 percent.What is the annual net income?
A)$111,428.57
B)$70,571.43
C)$59,600.00
D)$38,000.00
E)$43,600.00
Q2) When is it appropriate to use the equivalent annual cost (EAC)methodology,and how do you make a decision using it?
Q3) Which one of the following will decrease a firm's net working capital?
A)A decrease in fixed assets
B)An increase in inventory
C)An increase in the firm's checking account balance
D)A decrease in accounts payable
E)A decrease in accounts receivable
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Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
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Sample Questions
Q1) The investment timing decision relates to:
A)how long the cash flows last once a project is implemented.
B)how frequently the cash flows of a project occur.
C)how frequently the interest on the debt incurred to finance a project is compounded.
D)the decision as to when a project should be started.
E)the decision to either finance a project over time or pay out the initial cost in cash.
Q2) Wilson's Antiques is considering a project that has an initial cost today of $10,000.The project has a 2-year life with cash inflows of $6,500 a year.Should Wilson's decide to wait two years to commence this project,the initial cost will increase by 5 percent and the cash inflows will increase to $7,500 a year.What is the value of the option to wait if the applicable discount rate is 10 percent?
A)$798.79
B)$1,235.54
C)$1,509.28
D)$1,606.76
E)$935.54
Q3) Explain the significance of the financial break-even point.
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Chapter 10: Risk and Return Lessons From Market History
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Sample Questions
Q1) Suppose a portfolio had an arithmetic average return of 8 percent for a 4-year period.Which one of these statements must be true regarding this portfolio for the period?
A)At least one of the four years produced an annual rate of return of 8 percent.
B)If the standard deviation of the portfolio is greater than zero,then the geometric average portfolio return is less than 8 percent.
C)The standard deviation of the portfolio must be lower than the standard deviation of a comparable portfolio that had an arithmetic average return of 9 percent.
D)If the standard deviation of the portfolio is zero,then the geometric average return must also be zero.
E)The holding period return must be less than 8 percent.
Q2) What are the arithmetic and geometric average returns for a stock with annual returns of 11 percent,14 percent,-2 percent and 6 percent?
A)8.25%;8.15%
B)8.25%;7.89%
C)7.25%;7.37%
D)7.25%;8.15%
E)7.25%;7.08%
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Chapter 11: Return and Risk: the Capital Asset Pricing Model
Capm
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Sample Questions
Q1) A stock with an actual return that lies above the security market line:
A)has less systematic risk than the overall market.
B)has more risk than warranted based on the realized rate of return.
C)has yielded a return equivalent to the level of risk assumed.
D)has more systematic risk than the overall market.
E)has yielded a higher return than expected for the level of risk assumed.
Q2) Unsystematic risk:
A)can be effectively eliminated through portfolio diversification.
B)is measured by beta.
C)is compensated for by the risk premium.
D)is nondiversifiable.
E)is related to the overall economy.
Q3) Assume you are looking at a security market line graph.Where would an overpriced stock with a beta of .98 plot on that graph?
A)To the right of the market and below the security market line
B)To the left of the market and below the security market line
C)To the right of the market and above the security market line
D)To the left of the market and above the security market line
E)To the right of the market on the security market line
Page 13
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Chapter 12: Risk, Cost of Capital, and Valuation
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Sample Questions
Q1) Which one of these statements is correct?
A)ROE as used in the estimation of g is defined as a firm's earnings divided by the market value of its equity.
B)The DDM requires a short-term estimate of dividend growth.
C)Academics generally prefer the DDM over the CAPM.
D)The DDM seems to have more estimation error than the CAPM.
E)Measurement error in the estimate of the growth rate of dividends increases as you move from a single security to the overall market.
Q2) A project has an internal rate of return of 11.76 percent and a beta of 1.22.The market rate of return is 9.8 percent,the tax rate is 35 percent,and the risk-free rate is 3.4 percent.Should this project be accepted according to the CAPM if the firm is all-equity financed? Why or why not?
A)No;The CAPM rate is 11.21 percent.
B)No;The CAPM rate is 15.36 percent.
C)No;The CAPM rate is 11.96 percent.
D)Yes;The CAPM rate is 11.21 percent.
E)Yes;The CAPM rate is 15.36 percent
Q3) Explain how leverage affects the relationship between the asset beta and the equity beta.
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Chapter 13: Efficient Capital Markets and Behavioral Challenges
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Sample Questions
Q1) What key item should managers look for when considering an acquisition?
Q2) What does weak form efficiency imply?
A)Portfolio diversification is ineffective as all prices are interrelated.
B)Past price movement is unrelated to the movement of future prices.
C)Abnormal returns will disappear within a trading day.
D)Price patterns that existed in the past will reappear in the future.
E)A stock with a highly positive serial correlation in the past will maintain that correlation in the future.
Q3) Which one of the following statements is correct concerning market efficiency?
A)New information will gradually be reflected in a stock's price to avoid any sudden change in the price of the stock in an efficient market.
B)In an efficient market,some market participants will have an advantage over others.
C)If a market is efficient,arbitrage opportunities should be common.
D)Real asset markets are more efficient than financial markets.
E)A firm will generally receive a fair price when it sells shares of stock in an efficient market.
Q4) Why do you think it is difficult for researchers to agree on principles related to behavioral finance?
Page 15
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Chapter 14: Capital Structure: Basic Concepts
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Q1) Consider the pie models of corporate structure.What is the difference between the all-equity pie and the levered pie for a firm in the presence of taxes?
A)The size of the levered pie is smaller than the all-equity pie.
B)Taxes eat a slice of the levered pie but pass by the all-equity pie.
C)Both pies are the same size and are sliced identically.
D)Taxes eat a slice of both pies but take a larger slice of the all-equity pie.
E)The all-equity pie is smaller in size than the levered pie.
Q2) In an EPS-EBI graphical relationship,why does the debt line have a lower vertical intercept point than the no debt line?
A)The debt line has a negative slope while the no debt line has a positive slope.
B)The break-even point is higher with debt.
C)The debt line is horizontal while the no debt line has a positive slope.
D)With debt,a fixed interest charge is paid out of earnings.
E)The debt line has less of a slope than the no debt line.
Q3) Explain the basic principle of MM Proposition I without taxes along with the assumptions upon which the proposition is based.
Q4) Explain homemade leverage and why it matters.
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Chapter 15: Capital Structure: Limits to the Use of Debt
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Q1) Bart's Mart will have a value of $41,000 if the economy does well this next year and a value of $32,000 if the economy does poorly.The probability of a good economy is 65 percent.The firm owes its bondholders $12,000.What is the market value of the firm if it only operates for one more year?
A)$24,500
B)$14,650
C)$37,850
D)$36,500
E)$25,850
Q2) Which one of these statements is correct?
A)Only the nonmarketed claims of a firm can be bought and sold.
B)An increase in a firm's marketed claims will increase the total value of a firm.
C)The total value of a firm is independent of the firm's cash flows.
D)Managers try to maximize both marketed and nonmarketed claims in order to maximize total firm value.
E)The value of a firm's marketed claims can change with changes in the firm's capital structure.
Q3) How might business risk affect the capital structure of a firm?
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Chapter 16: Dividends and Other Payouts
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Q1) Jensen's has 22,000 shares of stock outstanding with a par value of $1 per share and a market price of $20.60 a share.The balance sheet shows $22,000 in the common stock account,$325,000 in the capital in excess of par value account,and $189,000 in the retained earnings account.The firm just announced a 5-for-2 stock split.What will be the balance in the capital in excess of par value account after the split?
A)$126,000
B)$210,000
C)$283,500
D)$325,000
E)$472,500
Q2) The observed empirical fact that stocks attract particular investors based on the firm's dividend policy and the resulting tax impact on investors is called the:
A)clientele effect.
B)efficient markets hypothesis.
C)information content effect.
D)MM Proposition I.
E)MM Proposition II.
Q3) Identify at least four pros of paying dividends.
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18
Chapter 17: Options and Corporate Finance
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Sample Questions
Q1) The $22.50 put option on ALF stock is priced at $1.12.What is the total intrinsic value of one option contract if the underlying stock is currently selling for $23.10 a share?
A)-$60
B)-$52
C)$0
D)$60
E)$52
Q2) Shareholders in a leveraged firm might wish to accept a negative net present value project if it:
A)lowers the risk level of the firm.
B)lowers the variance of the returns on the firm's assets.
C)increases the standard deviation of the returns on the firm's assets.
D)decreases the risk that a firm will default on its debt.
E)diversifies the cash flows of the firm.
Q3) Assume you purchased a stock for $42 a share.The stock is currently worth $48 a share.You just wrote a $50 call option on the stock with an option price of $.50.What value are you placing on this stock?
Q4) What is a protective put and what does it protect?
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Chapter 18: Short-Term Finance and Planning
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Q1) It has been argued that if one could perfectly synchronize a firm's cash inflows and outflows,short-term financial planning would be unnecessary.Do you agree? What actions can the firm's financial decision-makers take to reduce the degree of asynchronization? Why should this be a concern?
Q2) Super Mart has sales of $626,000.The cost of goods sold is equal to 68 percent of sales.The beginning accounts receivable balance is $75,534 and the ending accounts receivable balance is $76,209.How long on average does it take the firm to collect its receivables?
A)44.24 days
B)36.18 days
C)30.08 days
D)65.06 days
E)66.52 days
Q3) Which one of the following will decrease the operating cycle?
A)Decreasing the speed at which inventory is sold
B)Decreasing the accounts receivable turnover rate
C)Decreasing the cash cycle by increasing the accounts payable period
D)Decreasing the accounts payable period
E)Decreasing the days' sales in inventory
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Chapter 19: Raising Capital
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Sample Questions
Q1) Which of the following have been offered as justification for stock price declines following an SEO announcement?
I.Investors assume managers issue stock when shares are overvalued.
II.Corporate taxes imposed on stock offerings lower the value of the issuer's cash flows.
III.Issuing debt may be considered a signal that the issuer has too much debt.
IV.Issue costs reduce the value of the issuing firm.
A)I and III only
B)II and IV only
C)I,III,and IV only
D)II,III,and IV only
E)I,II,III,and IV
Q2) Given an efficient market,a rights offer:
A)provides a means for current shareholders to sell their shares for more than their actual worth.
B)increases the wealth of the firm's current shareholders.
C)neither creates nor destroys shareholder value.
D)provides a means of obtaining shares for less than market value.
E)imposes losses on the firm's current shareholders.
Q3) Why might an eligible firm choose a Rule 415 registration of securities?
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Page 21
Chapter 20: International Corporate Finance
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Q1) Assume the spot exchange rate is 6.22 Chinese yuan per U.S.dollar.If the inflation rate in China is expected to be double that in the U.S.for the next two years,then the:
A)exchange rate will decrease.
B)exchange rate will double.
C)yuan will appreciate relative to the dollar.
D)yuan will become more valuable.
E)dollar will strengthen against the yuan.
Q2) Do you feel the various forms of parity will be more or less likely to exist in the markets five years from now? Explain the logic behind your "more" or "less" answer.
Q3) International bonds issued in a single country and denominated in that country's currency are called:
A)Treasury bonds.
B)Eurobonds.
C)foreign bonds.
D)Brady bonds.
E)gilts.
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22
Chapter 21: Mergers and Acquisitions Web Only
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Q1) The Glass Works has a market value of $311,000.Creative Pottery has 25,000 shares of stock outstanding at a price per share of $40.Creative Pottery is acquiring The Glass Works in exchange for 8,000 shares of Creative Pottery stock.The merger is expected to create $25,000 of synergy.What will be value received by The Glass Works shareholders?
A)$320,000
B)$324,608
C)$323,879
D)$319,600
E)$325,701
Q2) Does diversification achieved through a merger create value? Why or why not?
A)Yes;Diversification lowers the volatility of a firm's earnings which increases the firm's value to shareholders.
B)Yes;Diversification lowers the total risk of a firm which provides a compensable benefit.
C)Yes;Diversification increases a firm's earnings which creates value for the firm.
D)No;Diversification lowers unsystematic risk but has no real value to shareholders.
E)No;Diversification lowers a firm's earnings and thus destroys value.
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