Applied Corporate Finance
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Course Introduction
Applied Corporate Finance focuses on the practical application of finance principles and analytical tools in real-world corporate settings. The course covers topics such as capital budgeting, cost of capital, capital structure, dividend policy, risk management, and valuation techniques. Students learn how financial managers make strategic decisions to maximize firm value, manage financial risks, and analyze investment opportunities, using both case studies and real business scenarios. Emphasis is placed on integrating theoretical frameworks with practical implementation, preparing students to tackle complex financial challenges within modern organizations.
Recommended Textbook
Fundamentals of Corporate Finance 4th Edition Jonathan Berk
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Page 2
Chapter 1: Corporate Finance and the Financial Manager
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Q1) Joe is a general partner in a limited partnership firm, while Jane is a limited partner in the same firm. Which of the following statements regarding their respective relationships to the firm is correct?
A) Joe has no management authority within the partnership.
B) Jane is legally involved in the managerial decision making of the firm.
C) Jane's liability for the firm's debts consists solely of her investment in the firm.
D) Withdrawal of Jane from the partnership will dissolve the partnership.
Answer: C
Q2) If broker will buy a share of stock from you at $3.85 and sell it to you at $3.87, the ask price would be $3.85.
A)True
B)False
Answer: False
Q3) It is generally not 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: False
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3
Chapter 2: Introduction to Financial Statement Analysis
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Q1) What will be the effect on the balance sheet if a firm buys a new processing plant through a new loan?
Answer: The Assets side will increase under Net property, plant, and equipment with the net effect of the new processing plant, while the Liabilities side will correspondingly show the new debt that was incurred in paying for the plant.
Q2) Use of Generally Accepted Accounting Principles (GAAP) and auditors have eliminated the danger of inadvertent or deliberate fraud in financial statements.
A)True
B)False
Answer: False
Q3) A company that produces drugs is preparing a balance sheet. Which of the following would be most likely to be considered a long-term asset on this balance sheet?
A) commercial paper held by the company
B) the inventory of chemicals used to produce the drugs made by the company
C) a patent for a drug held by the company
D) the cash reserves of the company
Answer: C
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4
Chapter 3: Time Value of Money: an Introduction
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Q1) What is the future value (FV) of $50,000 in thirty years, assuming the interest rate is 12% per year?
A) $32,500.00
B) $1,273,296.69
C) $1,348,196.50
D) $1,497,996.11
Answer: D
Q2) Which of the following statements is INCORRECT based on the time value of money?
A) In general, money today is worth more than money in one year.
B) We define the risk-free interest rate (r<sub>f</sub>) for a given period as the interest rate at which money can be borrowed or lent without risk over that period.
C) We refer to (1 - r<sub>f</sub>) as the interest rate factor for risk-free cash flows.
D) For most financial decisions, costs and benefits occur at different points in time. Answer: C
Q3) How does arbitrage help the Law of One Price?
Answer: Any arbitrage opportunity will exploit any mispricing to restore the Law of One Price.
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Chapter 4: Time Value of Money: Valuing Cash Flow
Streams
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Q1) Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest. That bequest will provide $4000 in the first year, and will grow by 7% per year, forever. If the interest rate is 9%, how much must Martin provide to fund this bequest?
A) $100,000.00
B) $160,000.00
C) $200,000.00
D) $240,000.00
Q2) A perpetuity has a PV of $20,000. If the interest rate is 6%, how much will the perpetuity pay every year?
A) $600
B) $960
C) $1200
D) $720
Q3) The present value (PV) of a stream of cash flows is just the sum of the present values of each individual cash flow.
A)True
B)False
Q4) Can we apply the growing perpetuity equation for negative growth as well?
Page 6
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Chapter 5: Interest Rates
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Q1) After examining the yield curve, what predictions do you have about interest rates in the future? About future economic growth and the overall state of the economy?
Q2) An investor buys a property for $608,000 with a 25-year mortgage and monthly payments at 8.10% APR. After 18 months the investor resells the property for $667,525. How much cash will the investor have from the sale, once the mortgage is paid off?
A) $57,216
B) $100,129
C) $71,521
D) $143,041
Q3) What care, if any, should be taken when cash flows occur in periodicities that are shorter than a year (e.g., quarterly or monthly cash flows)?
Q4) When computing a present value, which of the following is TRUE?
A) You should adjust the discount rate to match the interval between cash flows.
B) You should adjust the future value to match the present value.
C) You should adjust the time period to match the present value.
D) You should adjust the cash flows to match the time period of the discount rate.
Q5) Everything else remaining same, under what situation will APR and EAR be equal?
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Page 7
Chapter 6: Bonds
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Q1) Before it matures, the price of any bond is always less than its face value.
A)True
B)False
Q2) Shown above is information from FINRA regarding one of Bank of America's bonds. How much would the holder of such a bond earn each coupon payment for each $100 in face value if coupons are paid semiannually?
A) $1.49
B) $2.15
C) $2.32
D) $4.30
Q3) A $1000 bond with a coupon rate of 6.2% paid semiannually has eight years to maturity and a yield to maturity of 8.3%. If interest rates rise and the yield to maturity increases to 8.6%, what will happen to the price of the bond?
A) The price of the bond will fall by $18.93.
B) The price of the bond will fall by $15.78.
C) The price of the bond will rise by $15.78.
D) The price of the bond will not change.
Q4) Assuming that this bond trades for $1,035.44, then the YTM for this bond is equal to ________.
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Chapter 7: Stock Valuation
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Q1) Sunnyfax Publishing pays out all its earnings and has a share price of $37. In order to expand, Sunnyfax Publishing decides to cut its dividend from $3.00 to $2.00 per share and reinvest the retained funds. Once the funds are reinvested, they are expected to grow at a rate of 13%. If the reinvestment does not affect Sunnyfax's equity cost of capital and earnings before the dividend cut were expected to be constant, what is the expected share price as a consequence of this decision?
A) $36.67
B) $41.90
C) $52.38
D) $62.86
Q2) What role do dividends play in stock investing?
Q3) Rylan Industries is expected to pay a dividend of $5.70 year for the next four years. If the current price of Rylan stock is $31.27, and Rylan's equity cost of capital is 12%, what price would you expect Rylan's stock to sell for at the end of the four years?
A) $21.96
B) $39.53
C) $17.57
D) $61.49
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Chapter 8: Investment Decision Rules
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Q1) Is there a unique way for calculating the MIRR to resolve the multiple IRR situation?
Q2) Internal rate of return (IRR) can reliably be used to choose between mutually exclusive projects.
A)True
B)False
Q3) Assume that your capital is constrained, so that you only have $600,000 available to invest in projects. If you invest in the optimal combination of projects given your capital constraint, then the total net present value (NPV) for all the projects you invest in will be closest to ________.
A) $65,000
B) $80,000
C) $69,000
D) $111,000
Q4) Trial and error is the only way to compute the internal rate of return (IRR) when interest is calculated over five or more periods.
A)True
B)False
Q5) What is the decision criterion using the Net Present Value rule?
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Chapter 9: Fundamentals of Capital Budgeting
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Q1) The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2500 canes in year 1. Sales are estimated to grow by 9% each year through year 3. The price per cane that Sisyphean will charge its customers is $16 each and is to remain constant. The canes have a cost per unit to manufacture of $10 each.
Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 3% of its annual sales in cash, 5% of its annual sales in accounts receivable, 10% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 35% tax bracket and has a cost of capital of 9%.
The required net working capital in the first year for the Sisyphean Corporation's project is closest to ________.
A) $5200
B) $5668
C) -$2800
D) $9200
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Chapter 10: Stock Valuation: a Second Look
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Q1) Individual investors trade conservatively, given the difficulty of finding over-valued and under-valued stocks.
A)True
B)False
Q2) The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Another newspaper publishing firm (not shown) had sales of $600 million, EBITDA of $84 million, excess cash of $68 million, $18 million of debt, and 120 million shares outstanding. If the average enterprise value to sales for comparable businesses is used, which of the following is the best estimate of the firm's share price?
A) $6.45
B) $7.20
C) $7.17
D) $7.53
Q3) In an efficient market, investors will only find positive-NPV trading opportunities if they have some form of competitive advantage over other investors.
A)True
B)False
Q4) Which is the best valuation technique when using comparables?
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Chapter 11: Risk and Return in Capital Markets
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Q1) Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential "blockbuster" drug before the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cure's blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has ten separate, less important drugs before the FDA waiting for approval. If approved, each of Little Cure's drugs would produce $100 million in net income. The probability of the FDA approving a drug is 40%. What is the expected payoff for Big Cure's blockbuster drug?
A) $100 million
B) $0
C) $1 billion
D) $400 million
Q2) While ________ seems to be a reasonable measure of risk when evaluating a large portfolio, the ________ of an individual security does not explain the size of its average return.
A) volatility, volatility
B) the mean return, standard deviation
C) mode, volatility
D) mode, mean return
Q3) Which type of investment has historically had the lowest volatility?
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Page 13
Chapter 12: Systematic Risk and the Equity Risk Premium
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Q1) If you build a large enough portfolio, you can diversify away all the risks of a portfolio.
A)True
B)False
Q2) As we add more uncorrelated stocks to a portfolio where the stocks are held in equal weights, the benefit of diversification is most dramatic ________.
A) after 20 stocks have been added
B) when there are more than 500 stocks
C) when there are more than 1,000 stocks
D) at the outset
Q3) UPS, a delivery services company, has a beta of 1.4, and Wal-Mart has a beta of 0.9. The risk-free rate of interest is 4% and the market risk premium is 6%. What is the expected return on a portfolio with 50% of its money in UPS and the balance in Wal-Mart?
A) 10.9%
B) 10.4%
C) 12.0%
D) 13.1%
Q4) Is it possible for a stock to have high total risk but low systematic risk?
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Chapter 13: The Cost of Capital
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Q1) Your estimate of the market risk premium is 6%. The risk-free rate of return is 4% and General Motors has a beta of 1.4. What is General Motors' cost of equity capital?
A) 11.2%
B) 12.4%
C) 11.8%
D) 13.0%
Q2) Assume Ford Motor Company is discussing new ways to recapitalize the firm and raise additional capital. Its current capital structure has a 10% weight in equity, 20% in preferred stock, and 70% in debt. The cost of equity capital is 16%, the cost of preferred stock is 10%, and the pretax cost of debt is 8%. What is the weighted average cost of capital for Ford if its marginal tax rate is 40%?
A) 6.61%
B) 6.96%
C) 7.31%
D) 7.66%
Q3) What type of adjustment to debt is in practice?
Q4) Why do we use market values rather than book values in calculation of WACC?
Q5) What is the difference between the effective cost of debt and the cost of debt?
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Chapter 14: Raising Equity Capital
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Q1) Which of the following statements is FALSE?
A) In recent years, the investment banking firm of WR Hambrecht + Company has attempted to change the IPO process by selling new issues directly to the public using an online auction IPO mechanism called Open IPO.
B) The lead underwriter is the primary banking firm responsible for managing the deal. The lead underwriter provides most of the advice and arranges for a group of other underwriters, called the syndicate, to help market and sell the issue.
C) Because of the potential conflict of interest, the underwriter will not make a market in the stock after the issue.
D) The SEC requires that companies prepare a registration statement, a legal document that provides financial and other information about the company to investors, prior to an IPO. Company managers work closely with the underwriters to prepare this registration statement and submit it to the SEC.
Q2) How do the transaction costs of IPO puzzle financial economists?
Q3) What are venture capital firms?
Q4) What are some of the disadvantages of going public?
Q5) What are some of the highlights of Google's IPO process?
Q6) How does IPO pricing puzzle financial economists?
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Chapter 15: Debt Financing
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Q1) Which of the following statements regarding sinking fund provisions is FALSE?
A) With a sinking fund, if a bond is trading at below its face value, because the bonds are repurchased at par, the decision as to which bonds to repurchase is made by lottery.
B) With a sinking fund, instead of repaying the entire principal balance on the maturity date, the company makes regular payments into a sinking fund administered by a trustee over the life of the bond.
C) Sinking fund provisions usually specify a minimum rate at which the issuer must contribute to the fund.
D) Because the sinking fund allows the issuer to repurchase the bonds at par, the option to accelerate the payments is another form of call provision.
Q2) A firm issues $200 million in straight bonds at par and a coupon rate of 7%. The firm pays fees of 4.0% on the face value of the bonds. What is the net amount of funds that the debt issue will provide for the firm?
A) $182.4 million
B) $211 million
C) $192 million
D) $202 million
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Page 17
Chapter 16: Capital Structure
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Q1) Which of the following statements is FALSE?
A) While debt itself may be cheap, it increases the risk and therefore the cost of capital of the firm's equity.
B) Although debt does not have a lower cost of capital than equity, we can consider this cost in isolation.
C) We can use MM Proposition I to derive an explicit relationship between leverage and the equity cost of capital.
D) The total market value of the firm's securities is equal to the market value of its assets, whether the firm is unlevered or levered.
Q2) Managerial entrenchment means that managers ________ and run the firm for their own best interests.
A) may face little threat of being fired
B) are overseen by equity holders
C) are overseen by debt holders
D) are well compensated
Q3) How does the interest paid by a firm affect its value to investors?
Q4) What role do industries play in the capital structure choice for a firm?
Q5) What are the issues in determining the present value (PV) of financial distress?
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Chapter 17: Payout Policy
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Q1) The financial manager should ________.
A) try to maximize the after-tax payout to the shareholders, for a given payout amount
B) try to minimize the firm's earnings per share
C) never pay dividend as a payout policy
D) only repurchase shares as a payout policy
Q2) The WTC Corporation will pay a constant dividend of $4.20 per share, per year, in perpetuity. If all investors pay a 20% tax on dividends, there is no capital gains tax, and the cost of capital for investing in WTC stock is 14%, what is the price for a share of WTC stock?
A) $24.00
B) $19.20
C) $28.80
D) $48.00
Q3) According to the ________ theory of payout policy, managers pay out cash only when pressured to do so by investors.
A) agency
B) supply
C) price pressure
D) managerial entrenchment
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Page 19
Chapter 18: Financial Modeling and Pro Forma Analysis
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Q1) A firm has interest expense of $2,500 each year for ten years. If the tax rate is 30% and the discount rate is 7%, compute the value of the interest rate tax shield.
A) $5,744
B) $5,918
C) $5,268
D) $6,987
Q2) When the projected liabilities and equity are greater than the assets, the firm can plan to ________.
A) retain extra cash
B) pay dividends
C) retire debt
D) all of the above
Q3) The percent of sales method relies on the idea that capacity increases are ________, even though in practice such increases are ________.
A) incremental, lumpy
B) incremental, incremental
C) lumpy, incremental
D) lumpy, lumpy
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20
Chapter 19: Working Capital Management
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Q1) Commercial Supply Corp. bills its accounts on terms of 2/10 net 30. The firm's accounts receivable include $200,000 that has been outstanding for ten or fewer days, $126,000 outstanding for 11 to 30 days, $98,000 outstanding for 31 to 40 days, $12,000 outstanding for 41 to 50 days, $20,000 outstanding for 51 to 60 days, and $7,000 outstanding for more than 60 days. Is the aging schedule for Commercial Supply Corp. bottom heavy?
A) No, since 70% of the outstanding sales are on time and the percentage of long term outstanding payments is low.
B) Yes, since the percentage of payments that are late are greater than the percentage of payments that are on time.
C) No, since since the percentage of payments that are late are greater than the percentage of payments that are on time.
D) Given information is not sufficient to reach any conclusion.
Q2) Luther's Inventory days is closest to ________.
A) 32 days
B) 59 days
C) 39 days
D) 42 days
Q3) Can a firm's cash cycle be longer than a firm's operating cycle?
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Page 21
Chapter 20: Short-Term Financial Planning
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Q1) The accounts receivable and inventory of a firm typically are used as collateral when issuing short-term secured financing.
A)True
B)False
Q2) What is permanent working capital?
Q3) What is the term used for a short-term, unsecured debt sold by a large company to an intermediary, who then resells the debt to investors in return for a fee for his or her services?
A) commercial paper
B) direct paper
C) dealer paper
D) unsecured paper
Q4) A short-term bank loan that is often used until a firm can arrange for long-term financing is called ________.
A) a committed line of credit
B) a short-term mortgage loan
C) a bridge loan
D) a single, end-of-period-payment loan
Q5) What are commitment fees and what effect does it have on the loan?
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Chapter 21: Option Applications and Corporate Finance
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Q1) Suppose that a stock sells at a price of $40 on the expiration date. Compute the price of a call option if the option strike price is $20.
A) $20
B) $30
C) $40
D) $50
Q2) When a stock price appreciates by a certain percentage, a call option on the same stock appreciates by a lower percentage amount.
A)True
B)False
Q3) In case of normal swings in the risk-free rate, option prices are not very sensitive to changes in the risk-free rate.
A)True
B)False
Q4) What is a put option?
Q5) What are American options?
Q6) What are European options?
Q7) When is an option in-the-money?
Q8) What is the short position of an options contract?
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Chapter 22: Mergers and Acquisitions
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Q1) You work for a levered buyout firm and are evaluating a potential buyout of Boogle Inc. Boogle's stock price is $18, and it has 3 million shares outstanding. You believe that if you buy the company and replace its dismal management team, its value will increase by 50%. You are planning on doing a levered buyout of Boogle and will offer $25 per share for control of the company. Assuming you get 50% control, what will your gain from the transaction be?
Q2) Consider two firms, Thither and Yon. Both companies will either make $30 million or lose $10 million every year with equal probability. The companies' profits are perfectly negatively correlated. What are the expected after-tax profits of Thither in any year, assuming a corporate tax rate of 35% and no tax loss carry back or carry forward?
A) $19.5 million
B) $6.5 million
C) $4.75 million
D) -$6.5 million
Q3) On average, when a bid is announced, the stock price of the target drops.
A)True
B)False
Q4) What is a white knight?
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Page 24
Chapter 23: International Corporate Finance
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Q1) The spot exchange rate for Indian Rupees is Rs 44/$. The one-year forward exchange rate is Rs 46/$ and the one-year U.S. interest rate is 5%. What is the implied one-year interest rate in India?
A) 8.56%
B) 9.24%
C) 9.77%
D) 10.24%
Q2) Which of the following statements is FALSE?
A) If the foreign tax rate exceeds the U.S. tax rate, companies must pay this higher rate on foreign earnings.
B) U.S. tax policy allows companies to apply the part of the tax credit that is not used to offset domestic taxes owed, so this extra tax credit is not wasted.
C) If the foreign tax rate is less than the U.S. tax rate, the company pays total taxes equal to the U.S. tax rate on its foreign earnings.
D) A full tax credit is given for foreign taxes paid up to the amount of the U.S. tax liability.
Q3) What is foreign exchange market?
Q4) What is floating rate?
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Chapter 24: Leasing
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Q1) Should St. Martin lease the scanner or borrow the funds and buy the scanner?
A) Buy the scanner; the NPV of the decision = $74,890.28.
B) Buy the scanner; the NPV of the decision = $1,749,890.28
C) Lease the scanner; the NPV of the decision = $1,812,027.19
D) Lease the scanner; the NPV of the decision = $692,559.51
Q2) Which of the following discount rates should be used for the lease versus borrow decision?
A) the risk-free rate of interest
B) the company's cost of borrowing
C) the company's after-tax cost of borrowing
D) the company's weighted average cost of capital
Q3) Which of the following statements regarding operating leases is FALSE?
A) They are also called a finance leases.
B) The lease is viewed as a rental for accounting purposes.
C) The lessee reports the entire lease payment as an operating expense.
D) They are disclosed in the footnotes of the lessee's financial statements.
Q4) What will Luther's balance sheet look like if they acquire the new fleet of delivery trucks using a capital lease?
Q5) In the chapter, the lease versus buy decision was called an unfair comparison. Why? What is the correct comparison?
Page 26
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Chapter 25: Insurance and Risk Management
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Q1) Which of the following is an agreement to trade an asset on some future date, at a price that is fixed today?
A) margin
B) futures contract
C) notional contract
D) interest rate swap
Q2) What are some of the disadvantages of long-term supply contracts?
Q3) The Century 22 fund has invested in a portfolio of mortgage-backed securities that has a current market value of $245 million. The duration of this portfolio of mortgaged back securities is 14.7 years. The fund has borrowed to purchase these securities, and the current value of its liabilities (i.e., the current value of the bonds Century 22 has issued) is $160 million. The duration of these liabilities is 5.4 years. What is the initial duration of the equity for the Century 22 fund?
Q4) What is the actuarially fair cost of full insurance?
Q5) What is the duration of a five-year zero-coupon bond?
A) 2.5 years
B) 1 year
C) 5 years
D) 0 years
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Chapter 26: Corporate Governance
Available Study Resources on Quizplus for this Chatper
45 Verified Questions
45 Flashcards
Source URL: https://quizplus.com/quiz/69743
Sample Questions
Q1) Which of the following countries has employees appoint some board members?
A) Canada
B) the United States
C) Turkey
D) Germany
Q2) Which of the following statements is FALSE?
A) Recently, shareholders have started organizing "no" votes. That is, when they are dissatisfied with a board, they simply refuse to vote to approve the slate of nominees for the board.
B) One early study of proxy contests found that the announcement of a contest increased firm stock price by 8% on average, even if the challenge was eventually unsuccessful and the incumbents won reelection.
C) Shareholders' only real role in governance is in electing the directors of the company.
D) Perhaps the most extreme form of direct action that disgruntled shareholders can take is to hold a proxy contest and introduce a rival slate of directors for election to the board.
Q3) How does a pyramid structure work?
Q4) What is corporate governance?
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