Corporate Finance
Exam Bank
Course Introduction
Corporate Finance explores the fundamental principles and strategies that govern financial decision-making within corporations. This course covers key topics such as capital budgeting, capital structure, risk analysis, valuation, cost of capital, and dividend policy. Students will examine how firms raise capital, invest resources efficiently, and create value for shareholders, while also considering ethical and global perspectives. Through case studies and practical applications, learners will develop analytical skills to address complex financial problems and support strategic business objectives.
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 decisions made by financial managers should all be ones which increase the: A)size of the firm.
B)growth rate of the firm.
C)market value of the existing owners' equity.
D)marketability of the managers.
E)financial distress of the firm.
Answer: C
Q2) Which one of the following statements is correct concerning the organizational structure of a corporation?
A)The vice president of finance reports to the chairman of the board.
B)The chief executive officer reports to the board of directors.
C)The controller reports to the president.
D)The treasurer reports to the chief executive officer.
E)The chief operations officer reports to the vice president of production.
Answer: B
Q3) What should be the primary goal of a financial manager of a corporation? Why?
Answer: The primary goal of financial management is to maximize the current market value of the outstanding stock.This goal focuses on enhancing the returns to current stockholders who are the owners of the firm.
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Chapter 2: Financial Statements and Cash Flow
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Q1) Which of the following are included in current liabilities?
I.Debt payable to a mortgage company in nine months
II.Note payable to a supplier in eighteen months
III.Accounts payable to suppliers
IV.Loan payable to a bank in fourteen months
A)I and III only
B)II and III only
C)III and IV only
D)II,III,and IV only
E)I,II,and III only
Answer: A
Q2) Free cash flow is:
A)without cost to the firm.
B)equal to net income plus taxes.
C)a term used to describe an increase in net working capital.
D)cash that is available to distribute to creditors and equity holders.
E)another term for operating cash flow.
Answer: D
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Chapter 3: Financial Statements Analysis and Financial Models
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Q1) Marcel's has a debt-equity ratio of 60 percent,a capital intensity ratio of .98,and a profit margin of 4.2 percent.What is the return on equity?
A)6.86%
B)4.89%
C)6.13%
D)2.57%
E)2.47%
Answer: A
Q2) Suppose a firm calculates its external funding need and finds that it is negative.What are the firm's options in this case?
Answer: With a negative external financing need,the firm has a surplus of funds that it can use to reduce current liabilities,reduce long-term debt,buy back stock,or increase dividends.If positive net present value opportunities exist,the firm could also invest the excess funds.
Q3) Identify the three parts of the DuPont identity and specify what each part measures. Answer: ROE = Profit margin (Operating efficiency)× Total asset turnover (Asset use efficiency)× Equity multiplier (Financial leverage).
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Chapter 4: Discounted Cash Flow Valuation
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Q1) Identify a type of loan that is a pure discount loan and explain which features of the loan qualify it to be classified as a pure discount loan.
Q2) A growing annuity is a set of:
A)arbitrary cash flows occurring each time period for no more than ten years.
B)level cash flows occurring each time period forever.
C)steadily increasing cash flows occurring each time period for a fixed number of periods.
D)increasing cash flows occurring each time period forever.
E)level cash flows occurring each time period for a fixed period of time.
Q3) Which of these are basic assumptions of the growing perpetuity present value formula?
I.The cash flow is the Time 0 cash flow.
II.The time periods are regular and discrete.
III.g < r
IV.The number of time periods is finite.
A)I and II only
B)II and III only
C)I,II,and III only
D)II,III,and IV only
E)I,II,III,and IV
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Chapter 5: Interest Rates and Bond Valuation
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Q1) The increase you realize in buying power as a result of owning a bond is referred to as the _____ rate of return.
A)inflated
B)market
C)nominal
D)real
E)risk-free
Q2) Assume you are the manager of a multi-million dollar portfolio of corporate bonds and you believe interest rates will rise in the near future.Other investors have not yet accepted your belief but you want to act based on your personal beliefs.What adjustments should you make to the portfolio?
Q3) Which one of these definitions is correct?
A)Negative covenant: a "thou shalt" agreement within an indenture
B)Premium bond: bond that sells for less than face value
C)Dirty price: market price,excluding accrued interest
D)Call provision: issuer's right to repurchase a bond prior to maturity
E)Unfunded debt: long-term corporate debt
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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Q1) Mario's is going to pay $1,$2.50,and $5 a share over the next three years,respectively.After that,the company plans to pay annual dividends of $1.25 per share indefinitely.If your required return is 13 percent,how much are you willing to pay for one share today?
A)$13.87
B)$10.87
C)$11.67
D)$12.97
E)$13.67
Q2) Dixie Mart has 75,000 shares of stock outstanding.The firm expects to earn net income of $268,000 next year with annual increases of 4.5 percent per year thereafter.The firm also expects to pay out 40 percent of its net income in dividends and share repurchases.The required return is 12 percent.What is its share price?
A)$16.16
B)$19.06
C)$26.20
D)$47.64
E)$49.23
Q3) Contrast some of the features of preferred stock versus common stock.
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Chapter 7: Net Present Value and Other Investment Rules
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Q1) A project costs $22,900 to initiate.It is expected to provide cash flows of $15,900 in Year 1 and $9,900 in Year 2.In Year 3,it will cost the firm $5,500 to end the project.What is the modified IRR at a discount rate of 14 percent?
A)-6.79%
B)-6.67%
C)10.63%
D)11.08%
E)14.00%
Q2) Which two of the following methods of project analysis are most biased towards short-term projects?
I.Internal rate of return
II.Accounting rate of return
III.Payback
IV.Discounted payback
A)I and II only
B)III and IV only
C)II and III only
D)I and IV only
E)II and IV only
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Chapter 8: Making Capital Investment Decisions
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Q1) Kurt's Kabinets is looking at a project that will require $80,000 in fixed assets and another $20,000 in net working capital.The project is expected to produce sales of $138,000 with associated costs of $74,000.The project has a 4-year life.The company uses straight-line depreciation to a zero book value over the life of the project.The tax rate is 34 percent.What is the operating cash flow for this project?
A)$42,240
B)$62,240
C)$35,440
D)$49,040
E)$69,040
Q2) The bottom-up approach to computing the operating cash flow of a project applies only when:
A)both the depreciation expense and the interest expense are equal to zero.
B)the project is a cost-cutting project.
C)the interest expense is equal to zero.
D)no fixed assets are required for the project.
E)taxes are ignored and the interest expense is equal to zero.
Q3) When is it appropriate to use the equivalent annual cost (EAC)methodology,and how do you make a decision using it?
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Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
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Q1) Fixed production costs are:
A)directly related to labor costs.
B)measured as costs per unit of time.
C)dependent upon the output quantity.
D)ignored in project analysis.
E)treated as sunk costs in project analysis.
Q2) Explain how net present value analysis might cause managers to develop a false sense of security surrounding a project.
Q3) What type of situations might indicate that sensitivity analysis should be performed on a variable?
Q4) Should managers perform Monte Carlo simulation on all projects before accepting them? If so,why? If not,then when should Monte Carlo simulation be applied?
Q5) All else constant,the accounting profit break-even level of sales will decrease when the:
A)fixed costs increase.
B)contribution margin decreases.
C)depreciation expense decreases.
D)variable costs per unit increase.
E)selling price per unit decreases.
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Chapter 10: Risk and Return Lessons From Market History
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Q1) Given a normal distribution,assume you want to earn a rate of return that plots more than three standard deviations above the mean.What is your probability of earning such a return in any one year?
A)Zero percent
B)Less than .5 percent
C)Between .5 and 1 percent
D)Between 1 and 2 percent
E)More than 2 percent
Q2) You just sold 250 shares of stock for $37.75 a share.One year ago,you purchased the stock for $40.50 a share and have received dividends totaling $2.64 per share.What is your capital gain in dollars?
A)-$687.50
B)-$975.50
C)$687.50
D)$975.50
E)$1,347.50
Q3) How does the payment of a dividend affect the total return on a stock?
Q4) What is the difference between an arithmetic and a geometric average? Is one preferred over the other?
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Chapter 11: Return and Risk: the Capital Asset Pricing Model
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Q1) Which one of the following statements is correct concerning the standard deviation of a portfolio?
A)Standard deviation is used to determine the amount of risk premium that should apply to a portfolio.
B)The greater the diversification of a portfolio,the greater the standard deviation of that portfolio.
C)Standard deviation measures only the systematic risk of a portfolio.
D)The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio.
E)The standard deviation of a portfolio is equal to a weighted average of the standard deviations of the individual securities held within the portfolio.
Q2) 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
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Chapter 12: Risk, Cost of Capital, and Valuation
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Q1) The Lumber Shack just paid an annual dividend of $1.23 a share.The dividend growth rate is 4 percent,the tax rate is 34 percent,and the common stock sells for $38 a share.What is the cost of equity?
A)7.24%
B)7.09%
C)7.18%
D)7.37%
E)7.32%
Q2) Upper Roads is an all-equity financed firm.The beta is .75,the market risk premium is 8 percent,and the tax rate is 35 percent.The firm just issued its annual dividend of $1.42 per share and announced that future dividends will increase by 5 percent annually.The stock sells for $27 a share.What is the cost of equity?
A)10.26%
B)9.38%
C)11.19%
D)10.52%
E)11.78%
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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Q1) What are the basic principles behind behavioral finance?
Q2) In examining the issue of whether the choice of accounting methods affects stock prices,studies have found that:
A)the decision between LIFO and FIFO for inventory accounting can significantly affect stock prices.
B)a firm can affect its stock price if it either withholds information or provides incorrect information.
C)accounting changes that increase accounting earnings also increase stock prices.
D)switching depreciation methods can significantly affect stock prices.
E)the choice between the percentage-of-completion or the completed-contract method for construction projects affect stock prices.
Q3) What key item should managers look for when considering an acquisition?
Q4) The efficient market hypothesis says that on average managers will:
A)tend to earn below average rates of returns.
B)not be able to earn an excess return.
C)outperform investors with inside information.
D)tend to outperform most market participants.
E)earn the same rate of return over time regardless of the risk assumed.
Page 15
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Chapter 14: Capital Structure: Basic Concepts
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Q1) Which one of these statements is correct?
A)Firms across all industries in the U.S.tend to have similar debt-to-equity ratios.
B)The banking industry tends to have the lowest debt-to-equity ratio of any U.S.industry.
C)Financial leverage lowers risk to equity holders.
D)MM Propositions ignore bankruptcy costs.
E)MM Propositions without taxes illustrate that a firm's overall cost of capital is affected by leverage.
Q2) The interest tax shield is a key reason why:
A)the value of an unlevered firm is equal to the value of a levered firm.
B)the net cost of debt to a firm is generally less than the cost of equity.
C)firms tend to minimize their borrowing.
D)the cost of debt is equal to the cost of equity for a firm with a debt-to-equity ratio of 1.
E)firms prefer equity financing over debt financing.
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) The optimal capital structure will tend to include more debt for firms with:
A)less taxable income.
B)lower probability of financial distress.
C)substantial tax shields from other sources.
D)the lowest marginal tax rate.
E)the highest depreciation deductions.
Q2) Which one of these actions by a firm is an example of milking the property? Assume the firm is in a period of financial distress.
A)Repaying a bond that matured
B)Paying the semiannual bond interest
C)Paying an extra dividend
D)Cutting a regular dividend
E)Paying a regular dividend
Q3) In general,the capital structures used by U.S.firms:
A)tend to overweight debt in relation to equity.
B)are easily explained in terms of earnings volatility.
C)are easily explained by analyzing the types of assets owned by the various firms.
D)tend to be those which maximize the use of the firm's available tax shelters.
E)vary significantly across industries.
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Chapter 16: Dividends and Other Payouts
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Q1) A stock currently sells for $8.40 a share.What type of stock split does the firm need to do if it wants to increase the price so that it trades around $25 a share?
A)2-for-5 reverse stock split
B)1-for-3 reverse stock split
C)2-for-3 reverse stock split
D)5-for-2 stock split
E)3-for-1 stock split
Q2) Which one of the following is an argument in favor of a low dividend policy?
A)Few,if any,positive net present value projects are available to the firm
B)Only the gain on a sale of stock is taxed
C)Agency costs
D)Investor desire for current income
E)Lack of investor self-control
Q3) How can management best signal the market that a firm is doing well?
A)Distribute a liquidating dividend
B)Issue additional shares of stock
C)Increase the regular dividend amount
D)Issue stock to pay the regular dividend
E)Replace the regular dividend with a stock dividend
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Chapter 17: Options and Corporate Finance
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Q1) British Imports has a stock price of $18.70 a share.The $20 put is priced at $1.65.The intrinsic value of the put is ____ and the time value is _____.
A)$0;$1.65
B)$1.65;$0
C)$1.30;$.35
D)$.35;$1.30
E)$2.95;-$1.65
Q2) In the Black-Scholes option pricing model,what does the variable R represent?
A)The annually compounded risk-free rate of return
B)The continuously compounded variance
C)The continuously compounded annual risk-free rate of return
D)The annually compounded market rate of return
E)The continuously compounded market rate of return
Q3) The lower bound on a call's value is either the:
A)stock price minus the exercise price or zero,whichever is greater.
B)strike price or zero,whichever is greater.
C)strike price or zero,whichever is lower.
D)strike price or the stock price,whichever is lower.
E)stock price minus the exercise price or zero,whichever is lower.
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) Which of the following are uses of cash?
I.Marketable securities are sold
II.Inventory is increased
III.Long-term bank loan is acquired
IV.Stock is repurchased
A)I and III only
B)II and IV only
C)I and IV only
D)II and III only
E)II,III,and IV only
Q2) Pat's Place has sales of $498,000 and cost of goods sold of $221,000.At the beginning of the year,inventory was $36,400.At the end of the year,the inventory balance was $31,800.What is the inventory turnover rate?
A)5.23 times
B)7.56 times
C)6.48 times
D)14.60 times
E)8.22 times
Q3) Is it possible to have a negative cash cycle? If not,why not? If so,how can this occur?
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Page 20
Chapter 19: Raising Capital
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Q1) The primary purpose of a lockup agreement is to ensure:
A)the lead underwriter maintains an economic interest in the IPO it is managing.
B)company insiders maintain an economic interest in the issuer of an IPO for a minimum period of time.
C)research reports are issued.
D)the issuer of new securities receives a minimally agreed upon amount from the issue. E)investors purchasing shares at the offer price hold those shares for a stated number of days following the IPO.
Q2) Iver Mfg.wants to raise $14.7 million to purchase equipment by issuing new securities.Management estimates the issue will cost the firm $320,000 for accounting,legal,and other costs.The underwriting spread is 8.5 percent and the issue price is $22 per share.How many shares of stock must be sold if the firm is to receive sufficient funds to purchase all its desired equipment?
A)744,799 shares
B)802,108 shares
C)746,150 shares
D)740,759 shares
E)833,333 shares
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Chapter 20: International Corporate Finance
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Q1) Assume the inflation rate in the U.S.is 3.6 percent.The spot rate for a foreign currency is 5.872 while the 3-year forward rate is 6.084.What is the approximate rate of inflation in the foreign country?
A)4.68%
B)2.37%
C)2.42%
D)2.41%
E)4.79%
Q2) For accounting purposes,the translation gains and losses that affect a firm's balance sheet are:
A)recorded as an intangible asset.
B)treated as either current income or a current expense as they are incurred.
C)treated as an unsecured debt of the firm.
D)recorded as stockholders' equity.
E)recorded as a deferred liability.
Q3) Describe the foreign currency and home currency approaches to capital budgeting.Which is better? Which approach would you recommend a U.S.firm use? Justify your answer.
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Chapter 21: Mergers and Acquisitions Web Only
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Q1) Firm A has a market value of $212,000 while Firm B's market value is $87,000.Firm A just acquired Firm B for $92,500 cash.What is the net present value of the acquisition if the merger creates $7,500 of synergy?
A)$7,500
B)$94,500
C)-$5,500
D)$2,000
E)-$13,000
Q2) Low's has 12,000 shares of stock outstanding at a price per share of $16.40.Bert's has 21,000 shares outstanding at a price per share of $26.50.Bert's believes it can create $41,000 of synergy if it acquires Low's in an exchange of stock.What is the value of the combined firm following the merger? Assume both firms are all-equity financed.
A)$794,300
B)$597,500
C)$753,300
D)$400,700
E)$636,800
Q3) Explain the pros and cons of a cash acquisition over a stock acquisition.
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