Corporate Finance
Exam Materials
Course Introduction
Corporate Finance examines the principles and practices involved in managing a firm's financial resources to maximize shareholder value. The course covers key topics such as capital budgeting, financial statement analysis, risk and return, valuation of assets and firms, cost of capital, capital structure decisions, dividend policy, and working capital management. Emphasis is placed on practical application of theoretical concepts through case studies, problem-solving, and real-world scenarios, equipping students with essential tools to make informed financial decisions in a corporate environment.
Recommended Textbook
Foundations of Financial Management 16th Edition by Stanley Block
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21 Chapters
2224 Verified Questions
2224 Flashcards
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Page 2
Chapter 1: The Goals and Activities of Financial Management
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Sample Questions
Q1) Financial markets exist as a vast global network of individuals and financial institutions that may be lenders, borrowers, or owners of public companies worldwide.
A)True
B)False
Answer: True
Q2) Who is accountable for social responsibility within a firm?
A) The board of directors
B) Management
C) Investors
D) The financial market.
Answer: A
Q3) During the 1930s, financial practice revolved around such topics as the preservation of capital, maintenance of liquidity, the reorganization of financially troubled corporations, and bankruptcy.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Review of Accounting
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Sample Questions
Q1) Hoover Inc. has current assets of $350,000 and fixed plant assets of $650,000. Current liabilities are $100,000 and long-term liabilities are $250,000. There is $120,000 in preferred stock outstanding and the firm has issued 10,000 shares of common stock. Compute book value (net worth) per share
A) $84.00.
B) $53.00.
C) $75.00.
D) $65.00.
Answer: B
Q2) A statement of cash flows allows a financial analyst to determine
A) whether a cash dividend is affordable.
B) how increases in assets have been financed.
C) whether long-term assets are being financed with long-term or short-term financing.
D) All of the options
Answer: D
Q3) Sales minus cost of goods sold is equal to gross profit.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Financial Analysis
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Sample Questions
Q1) An increasing average receivables collection period indicates
A) the firm is generating more income.
B) accounts receivable are going down.
C) the company is becoming more efficient in its collection policy.
D) the company is becoming less efficient in its collection policy
Answer: D
Q2) A decreasing average receivables collection period could be associated with A) increasing sales.
B) decreasing sales.
C) decreasing accounts receivable.
D) increasing sales and decreasing accounts receivable.
Answer: D
Q3) If Randolph Co. has sales of $3,000,000, net income of $200,000, and total asset turnover of 1.5x, what is its return on assets (ROA)?
A) 10%
B) 17%
C) 14%
D) 6%
Answer: A
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Page 5
Chapter 4: Financial Forecasting
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Sample Questions
Q1) Firms that successfully increase their inventory turnover ratio will, among other things,
A) be able to reduce their borrowing needs.
B) be able to reduce their dividend payments to stockholders.
C) find it more difficult to be given credit by their resource suppliers.
D) have a greater need for high balances in their cash accounts.
Q2) The purpose of pro-forma financial statements is so that cash is never left short and a financial outlook of the firm is created and analyzed.
A)True
B)False
Q3) Required new funds shows that the firms need more cash during times of company growth, especially if sales increases.
A)True
B)False
Q4) The generation of sales and profits ensures that there will be adequate cash on hand to meet financial obligations as they come due.
A)True
B)False
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) If fixed costs rise while other variables stay constant
A) the break-even point rises.
B) the degree of operating leverage increases.
C) total profit declines.
D) All of the options are true.
Q2) The contribution margin is equal to sales price per unit minus total costs per unit.
A)True
B)False
Q3) If a firm has fixed costs of $30,000, a variable cost per unit of $.75, and a break-even point of 5,000 units, the sales price per unit is _____.
A) $2.50
B) $6.75
C) $4.00
D) $4.50
Q4) Degree of operating leverage should be computed only over a profitable range of business operations.
A)True
B)False
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) The term structure of interest rates
A) is an indication of investors' expectations about inflation and future interest rates.
B) will be downward sloping if short-term interest rates are higher than long-term rates.
C) will be upward sloping under normal conditions.
D) All of the options are true.
Q2) Generally, a downward sloping yield curve indicates aforthcoming economic boom.
A)True B)False
Q3) Some analysts believe that the term structure of interest rates is determined by the behavior of various types of financial institutions. This theory is called the A) expectations hypothesis.
B) market segmentation theory.
C) liquidity premium theory.
D) theory of industry supply and demand for bonds.
Q4) Immediate access to capital markets allows greater risk-taking capability. A)True B)False
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8
Chapter 7: Current Asset Management
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Sample Questions
Q1) Float is the difference between the cash balance on the corporate books and the amount currently credited to the corporation by the bank.
A)True
B)False
Q2) One way businesses try to overcome the risk associated with new customers is to access a credit scoring report that will predict the probability of a customer causing credit problems in the future.
A)True
B)False
Q3) Assuming that inventory is used up at a constant rate and safety stock is zero, the average inventory will be half the re-order size. Since safety stock = 0, and (EOQ/2) + Safety stock = Average inventory, then we carry one half that amount.
A)True
B)False
Q4) Bankers' acceptances are short-term securities that arise from foreign trade.
A)True
B)False
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) The higher the cost of bank financing, the more beneficial it is to take the cash discount.
A)True
B)False
Q2) Commercial paper offers which of the following advantages to the issuer?
A) It may be issued below the prime rate.
B) It requires no compensating balances.
C) It is secured by corporate assets to protect the buyer.
D) It may be issued below the prime rate and requires no compensating balances.
Q3) The cost of not taking a 2/10, net 30 cash discount is usually less than the prime rate.
A)True
B)False
Q4) A term loan is usually characterized by
A) a maturity of one to seven years.
B) a variable interest rate.
C) monthly or quarterly installment payments.
D) all of these options are true.
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10
Chapter 9: The Time Value of Money
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Sample
Questions
Q1) A company wants to find the yield on an investment that requires a certain amount today in which then returns a single amount some time in the future. Which time value of money table would the company use?
A) the present value of $1 or the future value of $1.
B) the future value of an annuity of $1.
C) present value of an annuity of $1.
D) None of these are correct.
Q2) Kathy has $50,000 to invest today and would like to determine whether it is realistic for her to achieve her goal of buying a home for $150,000 in 10 years with this investment. What return must she achieve in order to buy her home in 10 years?
A) Above 10%
B) Between 8% to 10%
C) Exactly 10%
D) Below 8%
Q3) Compounding refers to the growth process that turns $1 today into a greater value several periods in the future.
A)True
B)False
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11
Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) "Business risk" relates to the inability of the firm to meet its debt obligations as they come due.
Financial risk relates to the inability to meet debt obligations.
A)True
B)False
Q2) The dividend on preferred stock is most similar to
A) a common stock with no growth in dividends.
B) a common stock with a constant growth in dividends.
C) a common stock with a variable growth in dividends.
D) a certificate of deposit.
Q3) Which is a characteristic of the price of preferred stock?
A) Since preferred stock dividends are fixed, they are tax-deductible.
B) Because preferred stock has no maturity, the price analysis is similar to that of debt.
C) Preferred stock is valued as a perpetuity.
D) None of these options are true.
Q4) The price of a bond is equal to the present value of all future interest payments added to the present value of the principal.
A)True
B)False
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Chapter 11: Cost of Capital
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Sample Questions
Q1) The financial managers of the firm decide on its cost of capital for financing projects. Managers will consistently analyze alternatives and select the optimum, but they cannot dictate the actual cost itself.
A)True
B)False
Q2) The slope of the security market line (SML) will often increase when the economy is in a boom period.
A)True
B)False
Q3) The cost of capital for each source of funds is dependent on current market conditions and expected rates of return.
A)True
B)False
Q4) A firm should always be at a single optimum debt-to-equity ratio to minimize its cost of capital.
A)True
B)False
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13
Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) In most cases, asset lives are shorter under MACRS depreciation than they would be with straight-line depreciation.
Asset lives will be generally comparable under alternative methods.
A)True
B)False
Q2) For high-internal rate of return investments, it is perfectly acceptable to assume that reinvestment will occur at an equally high, if not higher, rate.
Under the IRR assumption, it may be unrealistic to assume reinvestment at that high resulting rate can occur.
A)True
B)False
Q3) Assuming that a firm has no capital rationing constraint and that a firm's investment alternatives are not mutually exclusive, the firm should accept all investment proposals
A) for which it can obtain financing.
B) that have a positive net present value.
C) that have positive cash flows.
D) that provide returns greater than the after-tax cost of debt.
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Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) Which investment has the least amount of risk?
A) Coefficient of variation = 8%, expected return = $800
B) Coefficient of variation = 8%, standard deviation = $200
C) Standard deviation = $300, expected return = $5,000
D) Standard deviation = $100, expected return = $80
Q2) An example of negative correlation may exist between the
A) forest products and housing industries.
B) jewelry and discount furniture industries.
C) steel and aluminum industries.
D) oil and auto industries.
Q3) The efficient frontier is always along the left-most portion of the risk-return trade-off diagram in which risk is measured on the X-axis and return is measured on the Y-axis. A)True
B)False
Q4) In considering the share price effect on risk-return trade-offs, our goal should always be to earn the highest return possible.
A)True
B)False
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Page 15
Chapter 14: Capital Markets
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Sample Questions
Q1) Global capital markets are influenced by
A) interest rates.
B) investor confidence.
C) relative economic growth.
D) all of these options are true.
Q2) In the last decade, the Chinese have invested in U.S. securities and real assets.
A)True
B)False
Q3) Which of the following is an internal source of funds?
A) Cash flow from depreciation (tax shield)
B) Net loss
C) Repurchase of debt securities
D) Bank loan
Q4) Markets are efficient when prices adjust rapidly to new information, continuous markets exist, and large dollar trades can be absorbed without large price movements.
A)True
B)False
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Chapter 15: Investment Banking
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Sample Questions
Q1) "Best efforts" and "direct" methods account for a relatively small portion of investment banking roles.
A)True
B)False
Q2) Because of their lower levels of risk to the underwriter, and smaller issuances have lower spread percentages than large issuances.
The smaller the issue, the higher the fees as a percentage of offering price; hence, the greater the spread.
A)True
B)False
Q3) The entire area of investment banking is becoming more competitive.
A)True
B)False
Q4) Generally, the larger the dollar value of an issue, the smaller is the spread as a percentage of the offering price.
A)True
B)False
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) During a default situation, a bondholder is better off with a secured loan because debenture bonds don't give the bondholder any protection. Debenture bonds can allow the bondholder claims against the entire company, rather than just one specific secured asset.
A)True
B)False
Q2) In an inflationary economy, debt is adjusted for inflation and must be paid back with "more expensive dollars." Debt repayment in dollars is governed by the original contract, and unless specified as such, is not adjusted for inflation.
A)True
B)False
Q3) If you expect interest rates to go up, you should sell a long-term bond now. Selling means you are the one paying the interest, so locking in on a lower interest rate now would be best.
A)True
B)False
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Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) American Depository Receipts
A) have annual reports and financial statements presented in English.
B) pay dividends in dollars.
C) are more liquid and less expensive to buy than foreign stock.
D) all of these answers are true.
Q2) When a stock sells ex-rights, the sale of the shares no longer entitles the purchaser to receive a right to purchase future stock.
A)True
B)False
Q3) American Depository Receipts (ADRs) are
A) receipts sent to foreign stockholders who own American companies.
B) proof of ownership for Eurodollar deposits held by Americans.
C) certificates that have a legal claim on an ownership interest in a foreign company's common stock.
D) certificates in U.S. companies that allow foreign investors to buy shares of American companies.
Q4) Preferred stock generally carries a higher interest rate than debt.
A)True
B)False
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Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) Which of the following balance sheet accounts will be affected by a stock dividend but not by a stock split?
A) Retained earnings
B) Cash
C) Common stock
D) Dividends-in-arrears
Q2) Dividend reinvestment plans provide the stockholder with an opportunity to buy additional shares of stock with the cash dividend paid by the company.
A)True
B)False
Q3) According to the law, dividends may be funded from
A) past earnings.
B) current earnings.
C) future earnings.
D) past earnings and current earnings.
Q4) In Stage I of a firm's life cycle, the firm will pay high dividends to shareholders in order to attract additional investors.
A)True
B)False
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Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) A convertible security is almost always
A) a security that can be converted into any other type of security.
B) a debt security that can only be converted into preferred or common stock.
C) a security that can be converted into common stock at the holder's option.
D) a security that can be converted into common stock only at the option of the issuing corporation.
Q2) A warrant may carry a speculative premium above intrinsic value if the warrant isn't going to expire for a while.
A)True
B)False
Q3) Conversion premiums are found by subtracting the current stock price from the bond's semi annual interest payment.
A)True
B)False
Q4) The conversion price divided into the market value of a convertible bond provides the conversion ratio.
Face value is used, rather than market price.
A)True
B)False
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) The desire to expand management and marketing capabilities is a direct financial motive for an acquisition.
A)True
B)False
Q2) After a merger has been announced, subsequent cancellation generally causes the potential acquiree's stock to decline in value.
A)True
B)False
Q3) Which of the following type of merger goes against the antitrust policy?
A) A horizontal merger
B) A vertical merger
C) A cash purchase
D) A stock-for-stock exchange
Q4) A cash purchase of one company by another is similar to a capital budgeting decision.
A)True
B)False
Q5) In a merger, two or more companies are combined to form an entirely new entity.
A)True
B)False
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Chapter 21: International Financial Management
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Sample Questions
Q1) A portfolio of international stocks in comparison to purely U.S. stocks generally shows A) a lower percentage risk for a given number of stocks.
B) higher percentage risk for a given number of stocks.
C) the same percentage risk for a given number of stocks.
D) a lower percentage return for a given number of stocks.
Q2) A multinational corporation may be defined as
A) a company that owns property in a foreign country.
B) a company that hires foreign laborers.
C) a company that carries on some business activity outside of its own national borders.
D) all of the options are true.
Q3) Translation exposure occurs because of changes in foreign exchange rates.
A)True
B)False
Q4) In a free market, the exchange rate between two currencies is determined by the supply of and demand for those currencies with the influence of the central bank.
A)True
B)False
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