Corporate Finance Exam
Bank
Course Introduction
Corporate Finance explores the fundamental principles and practices that guide financial decision-making within corporations. The course covers key topics such as capital budgeting, capital structure, valuation of financial assets, risk management, and the analysis of financial statements. Students learn how corporations raise and allocate capital, assess investment opportunities, manage financial risks, and maximize shareholder value. Through case studies, financial modeling, and real-world examples, participants gain the analytical tools required to make informed financial decisions in a corporate environment.
Recommended Textbook
Fundamentals of Corporate Finance 10th Alternate Edition by Stephen A. Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Q1) Which one of the following terms is defined as the management of a firm's long-term investments?
A) working capital management
B) financial allocation
C) agency cost analysis
D) capital budgeting
E) capital structure
Answer: D
Q2) Which form of business structure is most associated with agency problems?
A) sole proprietorship
B) general partnership
C) limited partnership
D) corporation
E) limited liability company
Answer: D
Q3) Describe the key advantages associated with the corporate form of organization.
Answer: The advantages of the corporate form of organization are the ease of transferring ownership,the owners' limited liability for business debts,the ability to raise large amounts of capital,and the potential for an unlimited life for the organization.
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Page 3
Two: Financial Statements and Long-Term Financial Planning
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Q1) Which of the following are current assets?
I.patent
II.inventory
III.accounts payable
IV.cash
A) I and III only
B) II and IV only
C) I,II,and IV only
D) I,II and IV only
E) II,III,and IV only
Answer: B
Q2) A positive cash flow to stockholders indicates which one of the following with certainty?
A) The dividends paid exceeded the net new equity raised.
B) The amount of the sale of common stock exceeded the amount of dividends paid.
C) No dividends were distributed but new shares of stock were sold.
D) Both the cash flow to assets and the cash flow to creditors must be negative.
E) Both the cash flow to assets and the cash flow to creditors must be positive.
Answer: A
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Chapter 3: Working With Financial Statements
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Q1) It is easier to evaluate a firm using financial statements when the firm:
A) is a conglomerate.
B) has recently merged with its largest competitor.
C) uses the same accounting procedures as other firms in the industry.
D) has a different fiscal year than other firms in the industry.
E) tends to have many one-time events such as asset sales and property acquisitions.
Answer: C
Q2) Dee's has a fixed asset turnover rate of 1.12 and a total asset turnover rate of 0.91.Sam's has a fixed asset turnover rate of 1.15 and a total asset turnover rate of 0.88.Both companies have similar operations.Based on this information,Dee's must be doing which one of the following?
A) utilizing its fixed assets more efficiently than Sam's
B) utilizing its total assets more efficiently than Sam's
C) generating $1 in sales for every $1.12 in net fixed assets
D) generating $1.12 in net income for every $1 in net fixed assets
E) maintaining the same level of current assets as Sam's
Answer: B
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Page 5
Chapter 4: Long-Term Financial Planning and Growthpart
Three: Valuation of Future Cash Flows
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Q1) Sal's Pizza has a dividend payout ratio of 10 percent.The firm does not want to issue additional equity shares but does want to maintain its current debt-equity ratio and its current dividend policy.The firm is profitable.Which one of the following defines the maximum rate at which this firm can grow?
A) internal growth rate × (1 - 0.10)
B) sustainable growth rate × (1 - 0.10)
C) internal growth rate
D) sustainable growth rate
E) zero percent
Q2) A firm has a retention ratio of 45 percent and a sustainable growth rate of 6.2 percent.The capital intensity ratio is 1.2 and the debt-equity ratio is 0.64.What is the profit margin?
A) 6.28 percent
B) 7.67 percent
C) 9.49 percent
D) 12.38 percent
E) 14.63 percent
Q3) Identify the four primary determinants of a firm's growth and explain how each factor could either add to or limit the growth potential of a firm.
Page 6
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Chapter 5: Introduction to Valuation: the Time Value of Money
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Q1) Tracy invested $1,000 five years ago and earns 4 percent interest on her investment.By leaving her interest earnings in her account,she increases the amount of interest she earns each year.The way she is handling her interest income is referred to as which one of the following?
A) simplifying
B) compounding
C) aggregation
D) accumulation
E) discounting
Q2) You want to have $25,000 saved 6 years from now to buy a house.How much less do you have to deposit today to reach this goal if you can earn 5.5 percent rather than 5 percent on your savings? Today's deposit is the only deposit you will make to this savings account.
A) $524.24
B) $691.18
C) $724.60
D) $745.11
E) $819.02
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Chapter 6: Discounted Cash Flow Valuation
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Q1) You plan on saving $5,200 this year,nothing next year,and $7,500 the following year.You will deposit these amounts into your investment account at the end of each year.What will your investment account be worth at the end of year three if you can earn 8.5 percent on your funds?
A) $13,528.12
B) $13,621.57
C) $13,907.11
D) $14,526.50
E) $14,779.40
Q2) You have been investing $250 a month for the last 13 years.Today,your investment account is worth $73,262.What is your average rate of return on your investments?
A) 8.94 percent
B) 9.23 percent
C) 9.36 percent
D) 9.41 percent
E) 9.78 percent
Q3) Why might a borrower select an interest-only loan instead of an amortized loan,which would be cheaper?
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8
Chapter 7: Interest Rates and Bond Valuation
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Q1) Grand Adventure Properties offers a 9.5 percent coupon bond with annual payments.The yield to maturity is 11.2 percent and the maturity date is 11 years from today.What is the market price of this bond if the face value is $1,000?
A) $895.43
B) $896.67
C) $941.20
D) $946.18
E) $953.30
Q2) The yield to maturity on a bond is currently 8.46 percent.The real rate of return is 3.22 percent.What is the rate of inflation?
A) 5.08 percent
B) 5.64 percent
C) 6.24 percent
D) 6.53 percent
E) 6.71 percent
Q3) Describe the relationships that exist between the coupon rate,the yield to maturity,and the current yield for both a discount bond and a premium bond.
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Chapter 8: Stock Valuationpart Four: Capital Budgeting
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Q1) Westover Winds just paid a dividend of $2.10 per share.The company will increase its dividend by 8 percent next year and will then reduce its dividend growth rate by 2 percentage points per year until it reaches the industry average of 2 percent dividend growth,after which the company will keep a constant growth rate forever.What is the price of this stock today given a required return of 11 percent?
A) $26.54
B) $28.99
C) $31.83
D) $32.06
E) $32.47
Q2) A stock pays a constant annual dividend and sells for $56.10 a share.If the market rate of return on this stock is 12.5 percent,what is the amount of the next annual dividend?
A) $5.67
B) $5.94
C) $6.21
D) $6.84
E) $7.30
Q3) What are the primary differences and similarities between NASDAQ and the NYSE?
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Page 10
Chapter 9: Net Present Value and Other Investment Criteria
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Q1) An investment project provides cash flows of $1,190 per year for 10 years.If the initial cost is $8,000,what is the payback period?
A) 3.36 years
B) 5.28 years
C) 6.72 years
D) 8.13 years
E) never
Q2) An investment project costs $21,500 and has annual cash flows of $6,500 for 6 years.If the discount rate is 15 percent,what is the discounted payback period?
A) 4.41 years
B) 4.91 years
C) 5.12 years
D) 5.40 years
E) never
Q3) Explain how the internal rate of return (IRR)decision rule is applied to projects with financing type cash flows.
Q4) How does the net present value (NPV)decision rule relate to the primary goal of financial management,which is creating wealth for shareholders?
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Chapter 10: Making Capital Investment Decisions
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Q1) The operating cash flow of a cost cutting project:
A) is equal to the depreciation tax shield.
B) is equal to zero because there is no incremental sales.
C) can only be analyzed by projecting the sales and costs for a firm's entire operations.
D) includes any changes that occur in the current accounts.
E) can be positive even though there are no sales.
Q2) In a single sentence,explain how you can determine which cash flows should be included in the analysis of a project.
Q3) The top-down approach to computing the operating cash flow:
A) ignores noncash expenses.
B) applies only if a project increases sales.
C) applies only to cost cutting projects.
D) is equal to sales - costs - taxes + depreciation.
E) is used solely to compute a bid price.
Q4) How can two firms arrive at two different bid prices when bidding for the same job and given the same bid specifications?
Q5) What is the formula for the tax-shield approach to OCF? Explain the two key points the formula illustrates.
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Chapter 11: Project Analysis and Evaluationpart Five: Risk and Return
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Q1) Given the following,which feature identifies the most desirable level of output for a project?
A) operating cash flow equal to the depreciation expense
B) payback period equal to the project's life
C) discounted payback period equal to the project's life
D) zero IRR
E) zero operating cash flow
Q2) An increase in which of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used.
I.annual salary for the firm's president
II.contribution margin per unit
III.cost of equipment required by a project
IV.variable cost per unit
A) I and III only
B) I and IV only
C) II and III only
D) I,III,and IV only
E) I,II,and IV only
Q3) What are the key features of the accounting,cash,and financial break-even points?
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Chapter 12: Some Lessons From Capital Market History
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Q1) Estimates of the rate of return on a security based on a historical arithmetic average will probably tend to _____ the expected return for the long-term and estimates using the historical geometric average will probably tend to _____ the expected return for the short-term.
A) overestimate;overestimate
B) overestimate;underestimate
C) underestimate;overestimate
D) underestimate;underestimate
E) accurately;accurately
Q2) Which one of the following statements is correct?
A) The greater the volatility of returns,the greater the risk premium.
B) The lower the volatility of returns,the greater the risk premium.
C) The lower the average return,the greater the risk premium.
D) The risk premium is unrelated to the average rate of return.
E) The risk premium is not affected by the volatility of returns.
Q3) You want to invest in an index fund which directly correlates to the overall U.S.stock market.How can you determine if the market risk premium you are expecting to earn is reasonable for the long-term?
Q4) Define and explain the three forms of market efficiency.
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Six: Cost of Capital and Long-Term Financial Policy
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Q1) Which one of the following statements is correct?
A) The unexpected return is always negative.
B) The expected return minus the unexpected return is equal to the total return.
C) Over time,the average return is equal to the unexpected return.
D) The expected return includes the surprise portion of news announcements.
E) Over time,the average unexpected return will be zero.
Q2) Which one of the following statements related to unexpected returns is correct?
A) All announcements by a firm affect that firm's unexpected returns.
B) Unexpected returns over time have a negative effect on the total return of a firm.
C) Unexpected returns are relatively predictable in the short-term.
D) Unexpected returns generally cause the actual return to vary significantly from the expected return over the long-term.
E) Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.
Q3) A portfolio beta is a weighted average of the betas of the individual securities which comprise the portfolio.However,the standard deviation is not a weighted average of the standard deviations of the individual securities which comprise the portfolio.Explain why this difference exists.
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Chapter 14: Cost of Capital
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Q1) Which of the following statements are correct?
I.The SML approach is dependent upon a reliable measure of a firm's unsystematic risk.
II.The SML approach can be applied to firms that retain all of their earnings.
III.The SML approach assumes a firm's future risks are similar to its past risks.
IV.The SML approach assumes the reward-to-risk ratio is constant.
A) I and III only
B) II and IV only
C) III and IV only
D) I,II,and III only
E) II,III,and IV only
Q2) The common stock of Metal Molds has a negative growth rate of 1.5 percent and a required return of 18 percent.The current stock price is $11.40.What was the amount of the last dividend paid?
A) $2.07
B) $2.11
C) $2.19
D) $2.22
E) $2.26
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Chapter 15: Raising Capital
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Q1) D.L.Jones & Co.recently went public.The firm received $20.80 a share on the entire offer of 25,000 shares.Keeser & Co.served as the underwriter and sold 23,700 shares to the public at an offer price of $22 a share.What type of underwriting was this?
A) best efforts
B) shelf
C) over subscribed
D) private placement
E) firm commitment
Q2) Steve is the founder of Jefferson & Westover.Recently,the firm decided to issue an IPO with Steve retaining 30 percent ownership of the firm.The IPO agreement contained both a Green Shoe provision and a 6-month lockup agreement.Steve's cost basis per share is $15.The offering price for the IPO was $16.On the first day of trading,the market price per share rose to $28.20 and closed for the day at $25.60.Now,six months after the IPO release,the stock is valued at $15.40 a share.Explain who benefited the most during the lockup period,an outside investor or Steve,and why.
Q3) It can be argued that the decision to accept venture capital is one of the most critical decisions an entrepreneur must make.Explain why.
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Page 17
Chapter 16: Financial Leverage and Capital Structure Policy
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Q1) The costs incurred by a business in an effort to avoid bankruptcy are classified as _____ costs.
A) flotation
B) direct bankruptcy
C) indirect bankruptcy
D) financial solvency
E) capital structure
Q2) Which one of the following has the greatest tendency to increase the percentage of debt included in the optimal capital structure of a firm?
A) exceptionally high depreciation expenses
B) very low marginal tax rate
C) substantial tax shields from other sources
D) low probabilities of financial distress
E) minimal taxable income
Q3) A firm should select the capital structure that:
A) produces the highest cost of capital.
B) maximizes the value of the firm.
C) minimizes taxes.
D) is fully unlevered.
E) equates the value of debt with the value of equity.
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Chapter 17: Dividends and Payout Policypart Seven: Short-Term
Financial Planning and Management
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Q1) Prezario's has 25,000 shares of stock outstanding with a par value of $1 per share.The current market value of the firm is $847,000.Currently,the retained earnings account balance is $428,000 and the capital in excess of par value account balance is $187,000.The company just announced a 3-for-1 stock split.What is the common stock account balance after the stock split?
A) $8,333
B) $25,000
C) $75,000
D) $77,333
E) $232,000
Q2) The board of directors of Wilson Sporting Equipment met this afternoon and passed a resolution to pay a cash dividend of $0.42 a share next month.In relation to this dividend,today is referred to as which one of the following dates?
A) decision date
B) date-of-record
C) declaration date
D) payment date
E) ex-dividend date
Q3) Explain the meaning of the dividend clientele effect and why it is important.
Page 19
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Chapter 18: Short-Term Finance and Planning
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Q1) Which one of the following actions will tend to increase the accounts receivable period? Assume the accounts receivable period is currently 34 days.
A) tightening the standards for granting credit to customers
B) refusing to grant additional credit to any customer who pays late
C) increasing the finance charges applied to all customer balances outstanding over thirty days
D) granting discounts for cash sales
E) eliminating the discount for early payment by credit customers
Q2) The operating cycle describes how a product:
A) is priced.
B) is sold.
C) moves through the current asset accounts.
D) moves through the production process.
E) generates a profit.
Q3) Compensating balances are frequently a part of revolving lending arrangements with banks,yet they add to the cost of financing for the borrower.Why,then,would borrowers agree to such terms? What other types of alternative financing are available?
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Chapter 19: Cash and Liquidity Management
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Q1) Currently,your firm requires 2 days to process the checks which customers mail in to pay for their credit purchases.The average mail time associated with these payments is 3.4 days and the check clearing time is 2.1 days.If your firm adopts a lockbox system,the mail time will be cut in half.In addition,if employees are reassigned,checks could be processed the same day they are received.How long will your collection time be if both the lockbox system and the job reassignments are implemented?
A) 3.85 days
B) 4.10 days
C) 4.80 days
D) 4.90 days
E) 5.55 days
Q2) Float management systems may provide only minimal benefits to a firm.Given that most firms have other projects with higher positive net present values,why should a firm's managers spend time implementing a float management system?
Q3) Explain how the Check Clearing Act for the 21<sup>st</sup> Century affects both collection and disbursement float.
Q4) Explain how the unethical use of uncollected funds has been impacted by the growth of on-line retailing and banking.
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Page 21
Topics in Corporate Finance
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Q1) If you extend credit for a one-time sale to a new customer you risk an amount equal to:
A) the sales price of the item sold.
B) the variable cost of the item sold.
C) the fixed cost of the item sold.
D) the profit margin on the item sold.
E) zero.
Q2) At the optimal order quantity size,the:
A) total cost of holding inventory is fully offset by the restocking costs.
B) carrying costs are equal to zero.
C) restocking costs are equal to zero.
D) total costs equal the carrying costs.
E) carrying costs equal the restocking costs.
Q3) Which one of the following inventory items is probably the most liquid?
A) a custom made set of kitchen cabinets
B) metal cabinets for dishwashers
C) wheat stored in a grain silo
D) a customized drilling press
E) a partially built modular home
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Chapter 21: International Corporate Finance
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Q1) In the spot market,$1 is currently equal to £0.6211.Assume the expected inflation rate in the U.K.is 2.6 percent while it is 4.3 percent in the U.S.What is the expected exchange rate four years from now if relative purchasing power parity exists?
A) £0.5799
B) £0.5822
C) £0.6105
D) £0.6623
E) £0.6644
Q2) You want to import $147,000 worth of rugs from India.How many rupees will you need to pay for this purchase if one rupee is worth $0.0203?
A) Rs 6,887,424
B) Rs 7,238,911
C) Rs 7,241,379
D) Rs 8,367,594
E) Rs 8,415,096
Q3) Using currencies A,B,and C construct an example in which triangle arbitrage exists and then show how to exploit it.
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Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) Old Country Productions requires skilled furniture finishers to put the final touches on all of the furniture it produces.The firm hired two individuals last year who had been students in Mr.Tedwell's wood shop class in high school.Both of these employees have demonstrated exceptional skills and have already been promoted to senior finishing positions.The firm currently has an opening for one additional finisher.Tom,the head of the finishing section,has stipulated that he only wants to interview candidates who have completed Mr.Tedwell's course.Tom's behavior is typical of someone who has which one of the following characteristic behaviours?
A) endowment effect
B) framing effect
C) representativeness heuristic
D) narrow framing
E) affect heuristic
Q2) Explain why a low-priced,low trading volume stock is more apt to present limits to arbitrage than is a high-priced,high trading volume stock.
Q3) Explain 1)the concept of house money,2)why the house money concept is such a common behavior for so many individuals and 3)why house money is an irrational behavior.
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Chapter 23: Enterprise Risk Management
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Q1) You decided to speculate in the market and sold 8 gold futures contracts when the futures price was $867.50 per ounce.The price on the contract maturity date was $730.40.What was your total profit or loss if the contract size was 100 ounces?
A) -$109,680
B) -$13,710
C) $13,710
D) $54,840
E) $109,680
Q2) What is cross-hedging? Why do you suppose firms use this method of risk management? What are some of the drawbacks?
Q3) The National Bank has an agreement with The Foreign Bank to exchange 500,000 U.S.dollars for 380,000 Euros on the first day of each of the next 3 calendar quarters.This agreement is best described as a(n):
A) floating exchange.
B) spot trade.
C) option.
D) futures contract.
E) swap contract.
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Chapter 24: Options and Corporate Finance
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Q1) The common stock of Hazelton Refiners is selling for $72.30 a share.U.S.Treasury bills are currently yielding 4.8 percent.What is the current value of a one-year call option on this stock if the exercise price is $70 and you assume the option will finish in the money?
A) $0
B) $1.20
C) $3.00
D) $4.20
E) $5.51
Q2) Call options are frequently attached to bonds,making them callable at the option of the issuer.Consider a firm that just issued two sets of bonds: One is callable,has a 7 percent coupon rate,15 years to maturity,and cannot be called during the first three years;the second is noncallable,has a 7 percent coupon rate,15 years to maturity,and is identical to the first bond in every way except for the call option.Suppose the noncallable bonds are sold for $1,000 each.Will the callable bonds sell for more or less than $1,000? Who "purchases" the option in this case and who "sells" it?
Q3) Explain the rationale behind the idea that equity is a call option on a firm's assets.When would a shareholder allow this call to expire?
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26
Chapter 25: Option Valuation
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Q1) Which one of the following is the correct formula for approximating the change in an option's value given a small change in the value of the underlying stock?
A) Change in option value Change in stock value/Delta
B) Change in option value Change in stock value/(1 - Delta)
C) Change in option value Change in stock value/(1 + Delta)
D) Change in option value Change in stock value × (1 - Delta)
E) Change in option value Change in stock value × Delta
Q2) Which one of the following statements is correct?
A) The price of an American put is equal to the stock price minus the exercise price.
B) The value of a European call is greater than the value of a comparable American call.
C) The value of a put is equal to one minus the value of an equivalent call.
D) The value of a put minus the value of a comparable call is equal to the value of the stock minus the exercise price.
E) The value of an American put will equal or exceed the value of a comparable European put.
Q3) Give an example of a protective put and explain how this strategy reduces investor risk.
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Chapter 26: Mergers and Acquisitions
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Q1) Firms can frequently create synergy by merging and sharing complementary resources with another firm.Give two examples of situations where this would most likely occur.
Q2) The purchase accounting method requires that:
A) the excess of the purchase price over the fair market value of the target firm be recorded as a one-time expense on the income statement of the acquiring firm.
B) goodwill be amortized on a yearly basis for financial statement purposes.
C) the equity of the acquiring firm be reduced by the excess of the purchase price over the fair market value of the target firm.
D) the assets of the target firm be recorded at their fair market value on the balance sheet of the acquiring firm.
E) the excess amount paid for the target firm be recorded as a tangible asset on the books of the acquiring firm.
Q3) Defensive merger tactics are designed to thwart unwanted takeovers and mergers.Do such activities work to the advantage of shareholders all of the time? Are these types of activities ethical? Who do you think benefits the most from these activities?
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Chapter 27: Leasing
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Sample Questions
Q1) Cool Treats is considering either leasing or buying a new freezer unit.The lessor will charge $11,900 a year for a 2-year lease.The purchase price is $32,000.The freezer has a 2-year life after which time it is expected to have a resale value of $9,000.Cool Treats uses straight-line depreciation,borrows money at 8 percent,and has sufficient tax loss carryovers to offset any potential taxable income the firm might have over the next 5 years.What is the net advantage to leasing?
A) $2,167
B) $2,384
C) $2,573
D) $2,710
E) $3,063
Q2) A financial lease:
A) is generally called a capital lease by accountants.
B) requires the lessor to maintain the asset.
C) is a partially amortized lease.
D) is often called a single net lease.
E) can generally be cancelled without penalty.
Q3) Explain the differences between purchasing an asset and leasing an asset.
Q4) Why might a firm opt to sell and leaseback an asset which it currently owns?
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