Applied Corporate Finance
Test Preparation
Course Introduction
Applied Corporate Finance focuses on the practical application of financial principles and analytical tools within corporate environments. The course examines key topics such as capital budgeting, cost of capital, capital structure, dividend policy, risk management, and valuation techniques. Students will analyze real-world case studies and use financial models to support decision-making processes, enabling them to understand how corporate finance strategies are implemented in various industries. The objective is to equip students with the skills to identify and address complex financial challenges, making strategic recommendations that align with corporate goals and enhance shareholder value.
Recommended Textbook
Corporate Finance Linking Theory to What Companies Do 3rd Edition by John Graham
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Page 2
Chapter 1: The Scope of Corporate Finance
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Sample Questions
Q1) A stock purschased on the New York Stock Exchange is an example of
A) a primary, money market transaction
B) a secondary, money market transaction
C) a primary, captial market transaction
D) a secondary, captial market transaction
Answer: D
Q2) What of the following is FALSE regarding debt capital?
A) Debt holders receive interest payments at fixed intervals.
B) Debt holders receive the amount of their loan (called principal) at the debt's maturity date.
C) Debt holders can force the firm into bankruptcy if interest payments are not made.
D) Debt holders have voting rights for the firm's board of directors.
Answer: D
Q3) What is the goal of financial management?
A) Maximize corporate profits.
B) Maximize shareholder wealth.
C) Minimize costs.
D) Maximize earnings.
Answer: B
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Page 3
Chapter 2: Financial Statement and Cash Flow Analysis
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Sample
Questions
Q1) In a given year a company decreased its inventory by $250,000,increased its accounts receivable by $50,000 and increased its accounts payable by $100,000.What is the net change of the company's cash?
A) $400,000
B) $300,000
C) $200,000
D) $100,000
Answer: A
Q2) You have the following information about a firm: total asset = $350,000; common stock equity = $175,000; ROE = 12.5%.What is the firm's earnings available for common stockholders?
A) $43,750
B) $21,875
C) $50,000
D) $47,632
Answer: B
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4
Chapter 3: The Time Value of Money
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Sample Questions
Q1) Florida considers any loan of more than an APR compounded monthly to be usurious.What is the usurious effective annual rate?
A) 18.00%
B) 19.25%
C) 19.56%
D) 22.25%
Answer: C
Q2) You set up a college fund in which you pay $2,000 each year at the BEGINNING of the year.How much money will you have accumulated in the fund after 18 years,if your fund earns 7% compounded annually?
A) $72,757.93
B) $67,998.07
C) $20,118.17
D) $28,339.25
Answer: A
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Chapter 4: Valuing Bonds
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Sample Questions
Q1) Bond ratings:
A) have no impact on a bond's price.
B) are based upon the bond rating agencies' assessment of the borrower's default risk
C) result in yield spreads between different quality bonds.
D) Both (b) and (c)
E) All of the above
Q2) Roxy Bonds will mature in 16 years,the coupon rate of the bond is 5% paid SEMIANNUALLY,if the bonds currently sell for $1180 what is the bond's yield to maturity?
A) 3.52%
B) 2.50%
C) 4.62%
D) 5.00%
Q3) You just bought a 5-year zero coupon bond with a $1,000 face value for $735.67.What is the yield to maturity of this bond?
A) 10.36%
B) 6.33%
C) 4.69%
D) 8.18%
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Chapter 5: Valuing Stocks
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Sample Questions
Q1) The largest stock exchange in the world is
A) the London Stock Exchange.
B) the New York Stock Exchange.
C) the NASDAQ.
D) the Paris Bourse.
Q2) If the required return on the stock investment is 13%,what should be Miller's stock price five years from today?
A) $11.50
B) $6.24
C) $19.69
D) $16.28
Q3) ConsGrough,Inc.has increased its annual common dividend by 3% in each of the years that the company has existed.If you believe that the company can continue to do so indefinitely,then what is the required rate of return if the price of ConsGrough is $171.67 and the dividend that it paid yesterday was $5?
A) .029
B) .03
C) .06
D) none of the above
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Page 7
Chapter 6: The Trade-Off Between Risk and Return
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Sample Questions
Q1) Investors should expect to be compensated for bearing ____ risk,but they should not expect to be compensated for bearing ____ risk.
A) unsystematic; systematic
B) systematic; unsystematic
C) co-movement; systematic
D) unsystematic; co-movement
E) total risk; unsystematic
Q2) A stock was purchased two years ago for $20.The stock does not pay dividends and sells today for $26.00.If sold today,what was the annual realized return on your investment?
A) 9%
B) 12%
C) 14%
D) 15%
Q3) Inflation,recession,and higher interest rates are economic events that are characterized as:
A) Company-specific risk that can be diversified away.
B) Market risk.
C) Systematic risk that can be diversified away.
D) Diversifiable risk
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Chapter 7: Risk, return, and the Capital Asset Pricing Model
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Sample Questions
Q1) Standard deviation measures:
A) systematic risk.
B) unsystematic risk.
C) total risk.
D) beta risk.
Q2) Which of the following statements is true?
A) Because expected returns on stocks exceeds expected returns on bonds, stocks should actually outperform bonds in any given year.
B) Because expected returns on stocks exceeds expected returns on bonds, it is more reasonable to expect that stocks will outperform bonds in any given year.
C) Expected return is the return one will actually receive.
D) Both (a) and (c)
E) All of the above statements are true.
Q3) Given Exhibit 7-5,what is the weight of Security 1?
A) 42.9%
B) 33.3%
C) 23.8%
D) Cannot be determined with the data given
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Chapter 8: Capital Budgeting Process and Decision Criteria
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Sample Questions
Q1) What is the payback period of the proposed Swerling Company project?
A) 1.28years
B) 2.28 years
C) 3.28 years
D) 4.28 years
Q2) The IRR method assumes that the reinvestment rate of cash flows is
A) the cost of capital
B) the IRR
C) essentially arbitrary
D) zero
Q3) Which of the following statements is false?
A) The main virtue of the payback method is its simplicity.
B) Some managers believe the payback method implicitly accounts for the riskiness of longer-term projects.
C) Some managers may prefer the payback method because it leads to accepting projects that payback quickly which may be ideal for them in terms of building their short-term career.
D) The payback method considers all cash flows for a project, even those occurring after the payback period.
E) Both (a) and (d) are false
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Chapter 9: Cash Flow and Capital Budgeting
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Sample Questions
Q1) Refer to DSSS Corporation.What is the depreciation expense in year 3?
A) $44,996
B) $10,004
C) $60,008
D) $19,994
Q2) A project will generate a real cash flow three years from now of $100,000.If the nominal discount rate is 10% and expected inflation is 3%,what is the nominal cash flow for year 3?
A) $112,551
B) $106,090
C) $109,273
D) $122,504
Q3) The relevant tax rate for capital budgeting purposes is the:
A) average tax rate.
B) maximum tax rate.
C) minimum tax rate.
D) marginal tax rate.
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11
Chapter 10: Risk and Capital Budgeting
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Sample Questions
Q1) What is Bavarian Brewhouse's WACC if their marginal tax rate equals 34%
A) 12.08%
B) 12.99%
C) 13.44%
D) 5.28%
Q2) What is the Never-crash Airline's after tax cost of debt?
A) 7.00%
B) 4.62%
C) 2.38%
D) 4.50%
Q3) What is Bavarian Sausage's breakeven point in the worst case scenario?
A) 572
B) 1,125
C) 5,000
D) 2,526
Q4) What is the percentage of equity used by Running Shoes,Inc.?
A) 74.63%
B) 73.53%
C) 72.46%
D) 68.97%
Page 12
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Chapter 11: Raising Long-Term Financing
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Sample Questions
Q1) If ABC's stock price closes at $46.75 the day before the offering,calculate the total cost of the seasoned equity offering to ABC's existing stockholders as a percentage of the offering proceeds.
A) 32.72%
B) 31.65%
C) 30.17%
D) 29.89%
Q2) A bond sold in the U.S.by a German based company is an example of a(n)
A) Eurobond.
B) Yankee bond.
C) Samurai bond.
D) none of the above
Q3) Refer to Smith Enterprises 2.What are the net proceeds per share?
A) $15
B) $16
C) $14.10
D) $17.20
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Chapter 12: Capital Structure
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Sample Questions
Q1) What is the Bavarian Brew's required return on levered equity after the restructuring?
A) 10.25%
B) 10.92%
C) 6.00%
D) 12.75%
Q2) Roxy Corporation finances its operations with $20 million in stock and $30 million in bonds.If the firm issues $5 million in additional bonds and uses the proceeds to retire $5 million worth of equity.What will be the firm's new debt to equity ratio? (Assume zero taxes and perfect capital markets)
A) 0.75
B) 2.33
C) 0.86
D) 1.75
Q3) What is the value of Bavarian Brew after restructuring.Assume no corporate taxes.
A) $3,300,000
B) $5,000,000
C) $500,000
D) $1,000,000
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14
Chapter 13: Long-Term Debt and Leasing
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Sample Questions
Q1) Callable bonds may not be called immediately after a rate decrease because
A) the call price if often at a premium above par value.
B) the call provision is often deferred for several years after the bond's issue.
C) recalling the old bonds and issuing new ones involves non-trivial flotation costs.
D) all of the above.
Q2) What are the basic type of leases available to businesses?
A) operating leases
B) financial leases
C) capital leases
D) all of the above
Q3) Which of the following is also referred to as asset-backed lending?
A) term loans
B) syndicated loans
C) project finance loans
D) all of the above
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Chapter 14: Payout Policy
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Sample Questions
Q1) Emma International has earnings per share of $3.29; just paid dividend $1.25 and expects a ROI next year (and the foreseeable future)of 14% What is the expected growth rate?
A) 1.22%
B) 5.32%
C) 23.56%
D) 8.68%
Q2) Refer to SOOIE.What is his after tax return if he faces a 33% tax rate on dividend income and a 5% tax rate on capital gains?
A) 12.48%
B) 11.35%
C) 14.44%
D) 13.13%
Q3) Choc-lattes Corp.earned $5.00 per share in 2006,and paid a dividend of $2.00 per share.If it earns $5.50 in 2007 and maintains its $2.00 dividend,its payout ratio will be
A) 60%
B) 40%
C) 64%
D) 36%
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Page 16
Chapter 15: Financial Planning
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Sample Questions
Q1) If a company prefers to finance its required assets with a small portion of short-term borrowings,then that firm is utilizing a(n)
A) conservative financing strategy.
B) aggressive financing strategy.
C) matching strategy.
D) none of the above.
Q2) If Smith pays out 25% of their projected net income as dividends,what will be the company's addition to retained earnings,if sales grow by 25% and all items on the income statement grow proportionally with sales?
A) $222.75
B) $55.68
C) $167.07
D) $107.25
Q3) What are the Bavarian Brew's cash collections in April?
A) $528
B) $618
C) $702
D) $835
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Chapter 16: Cash Conversion, inventory, and Receivables Management
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Sample Questions
Q1) What is Polyana's average collection period?
A) .140 days
B) 7.140 days
C) 51.100 days
D) 63.875 days
Q2) Emma International is considering easing credit standards to increase sales,and potentially profits.Currently the firm sells 500,000 units at a sales price of $22 per unit and variable cost of $13 per unit.Currently the average collection period is 25 days and the bad debt expense is 2% of sales.The required return on investment is 12%.If credit standards are eased,the sales will increase to 600,000 units; the ACP will increase to 35 days; and the bad debt expense will increase to 3% All else will remain the same.What is the profit (or loss)associated with easing credit standards?
A) $724,000.00
B) $511,671.23
C) $212,328.77
D) $687,671.23
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Chapter 17: Cash, payables, and Liquidity Management
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Q1) Bavarian Brew is contemplating implementing a collection system that would decrease the collection float by 2.5 days.What would be the annual benefit of that system?
A) $481,250
B) $48,125
C) $96,250
D) $75,480
Q2) The time between receipt of the payment and its deposit into the firm's account is
A) mail float.
B) processing float.
C) availability float.
D) clearing float.
Q3) In which situation below would a lock-box system likely produce greater benefits?
A) when interest rates are very low
B) when interest rates are very high
C) when the firm's customers are concentrated locally
D) when the firm collects with ACH transfers
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Chapter 18: International Financial Management
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Q1) A coffee table in Canada sells for C$134.The same coffee table sells for $92 in the United States.The expected inflation rate for the next year in Canada is 10% and the expected one year inflation rate for the United States is 8%.What must the exchange rate be currently for Purchasing Power Parity to hold now,and what must the exchange rate change to in order for Purchasing Power Parity to hold in one year.
A) $0.6866/C$ and $0.6741/C$
B) C$0.6866/$ and C$0.6741/$
C) $1.4565/C$ and $1.484/C$
D) none of the above
Q2) If the spot rate for Marsian Spotlets (MRS)is 4 per U.S.Dollar (USD)and the risk-free rates of return are 10% and 2%,respectively for the Marsian and U.S.economy,then what should the 1-year forward rate be for MRS/USD?
A) 4.3137
B) 4.0000
C) 0.2318
D) none of the above
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Chapter 19: Options
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Sample Questions
Q1) You notice that you can purchase an option for $5.The price of the underlying stock is currently $42.What is the option premium for this option?
A) $5
B) $37
C) $42
D) $47
Q2) An investor who employs a short straddle strategy is hoping that the underlying stock price
A) is extremely volatile
B) is stable
C) trends above the strike price of the options
D) trends below the strike price of the options
Q3) All of the following options are call options on Nixon Industries,which currently is trading at $35.They all have the same expiration date.Which of the following options should trade at the highest price.
A) A call option with a strike price of 20
B) A call option with a strike price of 30
C) A call option with a strike price of 40
D) A call option with a strike price of 50
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Chapter 20: Entrepreneurial Finance and Venture Capital
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Q1) Which of the following is not considered a type of an institutional venture capital fund?
A) small business investment companies
B) financial venture capital funds
C) corporate venture capital funds
D) all of the above are types of institutional venture capital funds
Q2) The investment contract provision that gives the venture capital fund the right to compel the firm to file with the SEC for a public offering is a
A) repurchase rights provision
B) participation rights provision
C) demand registration rights provision
D) ownership rights agreement
Q3) If the venture capital investor pushes for a 40% per year expected return,what share of IGBB's equity will it receive in exchange for its $8 million investment?
A) 34%
B) 39%
C) 30%
D) 26%
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Chapter 21: Mergers, acquisitions, and Corporate Control
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Q1) By the FTC definition,the merger between Exxon and Mobil is a(n)
A) vertical merger.
B) horizontal merger.
C) integrated merger.
D) all of the above.
Q2) If the project were financed completely with equity (retained earnings)and the required return remained unchanged post-acquisition,what is the most Needsalift would be willing to pay for Nothing Better! Ice Creams?
A) $9,319,482
B) $8,500,638
C) $10,000,000
D) $9,771,379
Q3) A mixed offering is a merger that is financed with
A) debt and equity.
B) cash and securities.
C) debt and trade credit.
D) none of the above.
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Chapter 22: Bankruptcy and Financial Distress
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Q1) A voluntary reorganization of debts whereby a firm's debt obligations are reorganized according to a creditors pro-rata share of the debting firm's total debt,is called
A) a composition.
B) an extension.
C) creditor control.
D) none of the above.
Q2) The debtor in possession (DIP)is
A) the lenders who are owed money by the bankrupt firm.
B) the trustee of the bankrupt firm.
C) the bankrupt (filing) firm.
D) none of the above.
Q3) Bavarian Sausages has a working capital/total assets ratio of 0.8,a retained earnings/total assets ratio of 0.2,an earnings before interest and taxes/total assets ratio of 0.34,a market value of equity/book value of equity ratio of 1.2,and a sales/total assets ratio of 0.75.What is the company's Z score?
A) 3.25
B) 2.78
C) 1.65
D) 3.83
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Chapter 23: Risk Management
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Q1) Roxy plans to buy four-month Treasury Bills in eight months.Currently the price on twelve-month Treasury Bills is $962,456 per million.The risk-free rate is 5.2%.What is the fair forward price per $1 million?
A) $983,193
B) $995,538
C) $1,012,504
D) $1,012,504.0
Q2) Refer to Exhibit 23-1.If you hold a long position of 20 June S&P 500 index futures contracts,how much compensation do you receive for the increase in the futures price at the end of the trading day?
A) $58,500
B) $11.70
C) $2,925
D) $234
Q3) A call option on interest rates is called an
A) interest rate collar
B) interest rate floor
C) interest rate cap
D) interest rate swap
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