Corporate Finance
Exam Answer Key
Course Introduction
Corporate Finance is a comprehensive course that explores the principles and practices underlying the financial management of corporations. It covers essential topics such as capital budgeting, financial analysis, risk and return, cost of capital, capital structure, and dividend policy. The course also delves into modern challenges faced by financial managers, including mergers and acquisitions, working capital management, and international financial considerations. Through real-world case studies and quantitative techniques, students will gain the analytical tools necessary to make strategic financial decisions and understand how these decisions impact a companys value and long-term growth.
Recommended Textbook
Principles of Finance 6th Edition by Scott Besley
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17 Chapters
1889 Verified Questions
1889 Flashcards
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Page 2
Chapter 1: An Overview of Finance
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42 Verified Questions
42 Flashcards
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Sample Questions
Q1) In the early 1900s, the investments arena was dominated by a small group of very wealthy investors and opulent corporations.
A)True
B)False
Answer: True
Q2) Historically, in the United States, after the country has experienced economic or financial tragedy, cries for new, tougher regulations become abundant, and politicians are generally quick to enact new legislation to take what they think are corrective actions.
A)True
B)False
Answer: True
Q3) The financial manager interacts jointly with many different individuals and departments within the firm.Forecasting and planning, as well as coordination and control, are two of the major areas of responsibility where this interaction takes place.
A)True
B)False
Answer: False
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Chapter 2: Financial Assets Instruments
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111 Flashcards
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Sample Questions
Q1) A junk bond is a high risk, high yield debt instrument typically used to finance a leveraged buyout or a merger, or to provide financing to a company of questionable financial strength.
A)True
B)False
Answer: True
Q2) Because junk bonds are such high-risk instruments, the returns on such bonds aren't very high and the existence of this market detracts from social welfare.
A)True
B)False
Answer: False
Q3) Convertible securities are bonds or preferred stocks that, under specified terms and conditions, can be exchanged for common stock at the option of the holder.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Financial Markets and the Investment Banking Process
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47 Verified Questions
47 Flashcards
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Sample Questions
Q1) Students emerging from college and entering the work force typically consume ____ than their income resulting in ____.
A) less; saving
B) more; borrowing
C) less; borrowing
D) more; saving
Answer: B
Q2) The primary role of financial markets is to help bring together borrowers and savers by facilitating the flow of funds from individuals and businesses that have surplus funds to individuals, businesses, and governments that have needs for funds in excess of their income.
A)True
B)False
Answer: True
Q3) All financial markets are physical locations in which parties meet to exchange financial assets.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Financial Intermediaries and the Banking System
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98 Flashcards
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Sample Questions
Q1) Life insurance protects
A) the insured from premature death.
B) the beneficiaries of the insured from the economic consequences of death.
C) beneficiaries from premature death.
D) the insured from fatal risks faced by the insured.
E) None of the above.
Q2) Which statement is not true about life insurance companies?
A) They have relatively predictable inflows and outflows.
B) Their liabilities are long-term in nature.
C) They invest heavily in short-term highly marketable securities.
D) They sell contracts that offer financial protection against premature death.
E) All of the above.
Q3) If the federal reserve purchases $100 million worth of government securities in open market operations, what is the maximum amount of change in the money supply if the reserve requirement is 8% and banks hold no excess reserves?
A) Decrease by $1.25 billion
B) Increase by $1.25 billion
C) Decrease by $1.15 billion
D) Increase by $1.15 billion
Page 6
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Chapter 5: The Cost of Money Interest Rates
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65 Flashcards
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Sample Questions
Q1) Assume that the current interest rate on a 1-year bond is 8 percent, the current rate on a 2-year bond is 10 percent, and the current rate on a 3-year bond is 12 percent.If the expectations theory of the term structure is correct, what is the 1-year interest rate expected during Year 3? (Base your answer on an arithmetic rather than geometric average.)
A) 12.0%
B) 16.0%
C) 13.5%
D) 10.5%
E) 14.0%
Q2) The term structure is defined as the relationship between interest rates and maturities of similar securities.
A)True
B)False
Q3) Which of the following assets is the most liquid?
A) Stock
B) Treasury bills
C) Corporate bonds
D) Cash
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Page 7
Chapter 6: Business Organizations and the Tax Environment
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Sample Questions
Q1) The U.S.corporate tax rate is lower than most industrialized nations.
A)True
B)False
Q2) Which of the following statements is correct?
A) The corporate bylaws are the set of rules drawn up by the state to enable managers to run the firm in accordance with state laws.
B) Procedures for electing corporate directors are contained in bylaws while the declaration of the activities that the firm will pursue and the number of directors are included in the corporate charter.
C) Procedures which govern changes in the bylaws of the corporation are contained in the corporate charter.
D) Although most companies design a charter, only the bylaws are legally required to be filed with the secretary of state in order for a corporation to be in official existence.
Q3) Performance shares are dollar bonuses awarded to managers on the basis of corporate performance.
A)True
B)False
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Page 8
Chapter 7: Analysis of Financial Statements
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123 Flashcards
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Sample Questions
Q1) The ____ provides a good indication of the firm's ability to meet its current obligations.
A) debt ratio
B) profit margin
C) days sales outstanding
D) quick ratio
E) return on equity
Q2) A(n) ____ is a statement summarizing the firm's revenue and expenses over an accounting period.
A) income statement
B) balance sheet
C) statement of cash flows
D) statement of retained earnings
Q3) In order to accurately estimate cash flow from operations, depreciation must be added back to net income.The reason for this is that even though depreciation is deducted from revenue it is really a non-cash charge.
A)True
B)False
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Chapter 8: Financial Planning and Control
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Sample Questions
Q1) The higher the DOL, the greater the firm's use of debt and the more earnings will change following a change in sales.
A)True
B)False
Q2) NJM Incorporated is a football manufacturer.NJM has fixed operating costs of $400,000 and variable costs of $12 per football.The footballs sell for $35 each and NJM plans to sell 300,000 footballs this year.What are NJM's total operating costs for the year?
A) $10,900,000
B) $4,000,000
C) $3,600,000
D) $3,200,000
E) $400,000
Q3) Financial control involves a feedback and adjustment process that (1) ensures that existing plans are followed, or (2) modifies existing plans in response to changes in the firm's operating environment.
A)True B)False
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Chapter 9: Time Value of Money
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Sample Questions
Q1) Financial calculator and tabular methods use different mathematical formulas to solve time value of money problems, and that is why they always lead to different results.
A)True
B)False
Q2) You can deposit your savings at the Darlington National Bank, which offers to pay 12.6 percent interest compounded monthly, or at the Bartlett Bank, which will pay interest of 11.5 percent compounded daily.(Assume 365 days in a year.) Which bank offers the higher effective annual rate?
A) Darlington National Bank.
B) Bartlett Bank.
C) Both banks offer the same effective rate.
D) Cannot be determined from the information provided.
E) Workable only if the banks use the same compounding period.
Q3) NPV and IRR will always lead to the same accept/reject decision for mutually exclusive projects.
A)True
B)False
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11
Chapter 10: Valuation Concepts
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Sample Questions
Q1) The realized rate of return on a stock is always equal to expected rate of return when the stock is purchased at the current market value.
A)True
B)False
Q2) The current price of a 10-year, $1,000 par value bond is $1,158.91.Interest on this bond is paid every six months, and the simple annual yield is 14 percent.Given these facts, what is the annual coupon rate on this bond?
A) 10%
B) 12%
C) 14%
D) 17%
E) 21%
Q3) Regardless of what interest rates do in the future, the bond's price will approach the par value of the bond as it nears its maturity date.
A)True
B)False
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Chapter 11: Risk and Rates of Return
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104 Flashcards
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Sample Questions
Q1) It is possible that the actual return on a risky asset is significantly different from expected return on that risky asset only when the market is not in equilibrium.
A)True
B)False
Q2) A probability distribution is a listing of all possible outcomes, or events, with a probability assigned to each outcome.
A)True
B)False
Q3) Given the following information, determine which beta coefficient for Stock A is consistent with equilibrium:r<sub>s</sub> = 11.3%; r<sub>RF</sub> = 5%; r<sub>M</sub> = 10%
A) 0.86
B) 1.26
C) 1.10
D) 0.80
E) 1.35
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13
Chapter 12: The Cost of Capital
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Sample Questions
Q1) The cost of capital should reflect the average cost of the various sources of long-term funds a firm uses to support its assets.
A)True
B)False
Q2) Which of the following statements is most correct?
A) The weighted average cost of capital for a given capital budget level is a weighted average of the marginal cost of each relevant component that makes up the firm's target capital structure.
B) The weighted average cost of capital is calculated on a before-tax basis.
C) An increase in the risk-free rate is likely to increase the marginal cost of both debt and equity financing.
D) Answers a and c are both correct.
E) All of the above answers are correct.
Q3) Refer to J.Ross and Sons.What will be the WACC above this break point?
A) 12.5%
B) 8.3% C)
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Page 14
Chapter 13: Capital Budgeting
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Sample Questions
Q1) The main reason that the NPV method is regarded as being conceptually superior to the IRR method for evaluating mutually exclusive investments is that multiple IRRs may exist.
A)True
B)False
Q2) Which of the following is not a cash flow that results from the decision to accept a project?
A) Changes in working capital.
B) Shipping and installation costs.
C) Sunk costs.
D) Opportunity costs.
E) Externalities.
Q3) If a project is small relative to the total firm, and if its returns are not highly correlated with the returns on the firm's other assets, then the project may not be very risky in either the within-firm (corporate) or the market risk sense, even if the returns on the project are highly uncertain and thus the project has a high degree of stand-alone risk.
A)True
B)False
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Page 15
Chapter 14: Capital Structure and Dividend Policy Decisions
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Sample Questions
Q1) If the announcement of a stock sale does in fact trigger a decline in stock price, this reinforces the effects of flotation costs incurred with new equity issues.Further, this implies a larger break in the MCC schedule.
A)True
B)False
Q2) A firm that follows a residual dividend policy must believe that the dividend irrelevance theory is correct.
A)True
B)False
Q3) The optimal dividend policy for a firm strikes a balance between payment of current dividends and retention of earnings for future growth, and results in the maximization of stock price.
A)True
B)False
Q4) If we consider only agency costs associated with the issuance of debt, then this implies that the firm should move toward 100 percent debt financing.
A)True
B)False
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Page 16
Chapter 15: Working Capital Management
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Sample Questions
Q1) The working capital cash flow cycle encompasses order and receipt of raw materials, conversion of raw material into inventory, and finally, conversion of inventory into sales and accounts receivable.
A)True
B)False
Q2) A lockbox plan is most beneficial to firms that
A) Send payables over a wide geographic area.
B) Have widely disbursed manufacturing facilities.
C) Have a large marketable securities account to protect.
D) Hold inventories at many different sites.
E) Make collections over a wide geographic area.
Q3) If the unit sales of a firm double, the optimal order quantity as determined by the EOQ model will also double.
A)True
B)False
Q4) A zero balance account is used by firms as an effective tool of cash management to reduce the amount of idle cash a firm might otherwise keep.
A)True
B)False
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Chapter 16: Investment Concepts
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Sample Questions
Q1) More stock certificates are registered in the names of individual investors than in street names (i.e., brokerage firms).
A)True
B)False
Q2) To determine the weighted average returns of stocks held in a portfolio, the weights are determined as the fraction
A) of the total portfolio value of each stock at the midpoint of the holding period.
B) of the total portfolio value of each stock at the end of the holding period.
C) of the total portfolio average value of each stock during the holding period.
D) of the total portfolio invested in each stock at the beginning of the holding period.
Q3) The degree of risk adversity exhibited by investors varies among individuals at any point in time and changes for individuals across time.
A)True B)False
Q4) When the market is rising, it is called a bull market.
A)True
B)False
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18
Chapter 17: Security Valuation and Selection
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Sample Questions
Q1) Generally speaking, the P/E multiples are higher for firms with ____ expected growth rates and ____ expected required rates of return.
A) higher; lower
B) lower; higher
C) lower; lower
D) higher; higher
Q2) The means by which the Federal Reserve influences economic conditions in the United States is called ____.
A) Deficit spending
B) Fiscal policy
C) Monetary policy
D) Gross domestic product
E) Business cycle
Q3) ____ occurs when the government spends more than it collects in taxes.
A) Deficit spending
B) Fiscal policy
C) Monetary policy
D) Gross domestic product
E) Business cycle
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Page 19