Corporate Finance
Exam Practice Tests
Course Introduction
Corporate Finance is a foundational course that examines how corporations manage their financial resources to maximize value and achieve strategic goals. The course covers key topics such as capital budgeting, investment appraisal, cost of capital, capital structure decisions, dividend policy, and working capital management. Students will learn how financial managers assess risk, make investment decisions, raise and allocate capital, and evaluate financial performance using real-world case studies and analytical tools. The course aims to develop both theoretical understanding and practical skills essential for effective financial decision-making in corporate environments.
Recommended Textbook
Fundamentals of Financial Management 15th Edition by Eugene F. Brigham
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1827 Verified Questions
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Page 2
Chapter 1: An Overview of Financial Management
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Sample Questions
Q1) If a stock's market price is above its intrinsic value,then the stock can be thought of as being undervalued,and it would be a good buy.
A)True
B)False
Answer: False
Q2) An advantage of the corporate form of organization is that corporations are generally less highly regulated than proprietorships and partnerships.
A)True
B)False
Answer: False
Q3) If a stock's intrinsic value is greater than its market price,then the stock is overvalued and should be sold.
A)True
B)False
Answer: False
Q4) The Chairman of the Board must also be the CEO.
A)True
B)False Answer: False
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Chapter 2: Financial Markets and Institutions
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Sample Questions
Q1) A simple average of those returns (which gives equal weight to each company in the S&P 500)is then calculated.That average is called "the return on the S&P Index," and it is often used as an indicator of the "return on the market."
A)True
B)False
Answer: False
Q2) In a "Dutch auction" for new stock,individual investors place bids for shares directly.Each potential bidder indicates the price he or she is willing to pay and how many shares he or she will purchase at that price.The highest price that permits the company to sell all the shares it wants to sell is determined,and this is the "market clearing price." All bidders who specified this price or higher are allowed to purchase their shares at the market clearing price.
A)True
B)False
Answer: True
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4
Chapter 3: Financial Statements,cash Flow and Taxes
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Sample Questions
Q1) Carter Corporation has some money to invest,and its treasurer is choosing between City of Chicago municipal bonds and U.S.Treasury bonds.Both have the same maturity,and they are equally risky and liquid.If Treasury bonds yield 6.00%,and Carter's marginal income tax rate is 15.00%,what yield on the Chicago municipal bonds would make Carter's treasurer indifferent between the two?
A) 4.79%
B) 4.74%
C) 5.10%
D) 5.61%
E) 6.38%
Answer: C
Q2) On the balance sheet,total assets must always equal the sum of total liabilities and equity.
A)True
B)False
Answer: True
Q3) EBITDA stands for "earnings before interest,taxes,debt,and assets."
A)True
B)False
Answer: False
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Chapter 4: Analysis of Financial Statements
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) The use of debt financing will tend to lower the basic earning power ratio,other things held constant.
B) A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.
C) If two firms have identical sales,interest rates paid,operating costs,and assets,but differ in the way they are financed,the firm with less debt will generally have the higher expected ROE.
D) The numerator used in the TIE ratio is earnings before taxes (EBT).EBT is used because interest is paid with post-tax dollars,so the firm's ability to pay current interest is affected by taxes.
E) Other things held constant,increasing the total debt to total capital ratio will increase the ROA.
Q2) If a firm's ROE is equal to 9% and its ROA is equal to 6%,its equity multiplier must be 1.5.
A)True
B)False
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Page 6
Chapter 5: Time Value of Money
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Sample Questions
Q1) You plan to invest some money in a bank account.Which of the following banks provides you with the highest effective rate of interest?
A) Bank 1;6.1% with annual compounding.
B) Bank 2;6.0% with monthly compounding.
C) Bank 3;6.0% with annual compounding.
D) Bank 4;6.0% with quarterly compounding.
E) Bank 5;6.0% with daily (365-day)compounding.
Q2) Which of the following statements is CORRECT?
A) The cash flows for an ordinary (or deferred)annuity all occur at the beginning of the periods.
B) If a series of unequal cash flows occurs at regular intervals,such as once a year,then the series is by definition an annuity.
C) The cash flows for an annuity due must all occur at the ends of the periods.
D) The cash flows for an annuity must all be equal,and they must occur at regular intervals,such as once a year or once a month.
E) If some cash flows occur at the beginning of the periods while others occur at the ends,then we have what the textbook defines as a variable annuity.
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Chapter 6: Interest Rates
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Sample Questions
Q1) Suppose the interest rate on a 1-year T-bond is 5.00% and that on a 2-year T-bond is 6.80%.Assume that the pure expectations theory is NOT valid,and the MRP is zero for a 1-year T-bond but 0.40% for a 2-year bond.What is the yield on a 1-year T-bond expected to be one year from now? Round the intermediate calculations to 4 decimal places and final answer to 2 decimal places.
A) 7.43
B) 8.52
C) 6.57
D) 7.82
E) 5.86
Q2) If the Treasury yield curve were downward sloping,the yield to maturity on a 10-year Treasury coupon bond would be higher than that on a 1-year T-bill.
A)True
B)False
Q3) If investors expect a zero rate of inflation,then the nominal rate of return on a very short-term U.S.Treasury bond should be equal to the real risk-free rate,r*.
A)True
B)False
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Chapter 7: Bonds and Their Valuation
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) If a bond is selling at a discount,the yield to call is a better measure of return than is the yield to maturity.
B) On an expected yield basis,the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.
C) On an expected yield basis,the expected current yield will always be positive because an investor would not purchase a bond that is not expected to pay any cash coupon interest.
D) If a coupon bond is selling at par,its current yield equals its yield to maturity,and its expected capital gains yield is zero.
E) The current yield on Bond A exceeds the current yield on Bond B;therefore,Bond A must have a higher yield to maturity than Bond B.
Q2) As a general rule,a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.
A)True
B)False
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Page 9
Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) Assume that two investors each hold a portfolio,and that portfolio is their only asset.Investor A's portfolio has a beta of minus 2.0,while Investor B's portfolio has a beta of plus 2.0.Assuming that the unsystematic risks of the stocks in the two portfolios are the same,then the two investors face the same amount of risk.However,the holders of either portfolio could lower their risks,and by exactly the same amount,by adding some "normal" stocks with beta = 1.0.
A)True
B)False
Q2) Portfolio A has but one security,while Portfolio B has 100 securities.Because of diversification effects,we would expect Portfolio B to have the lower risk.However,it is possible for Portfolio A to be less risky.
A)True
B)False
Q3) The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1)stock is zero.
A)True
B)False
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Page 10
Chapter 9: Stocks and Their Valuation
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Sample Questions
Q1) Classified stock differentiates various classes of common stock.Using it is one way companies can meet special needs,such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.
A)True
B)False
Q2) Which of the following statements is NOT CORRECT?
A) The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends.
B) The corporate valuation model discounts free cash flows by the required return on equity.
C) The corporate valuation model can be used to find the value of a division.
D) An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements.
E) Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon,or continuing,value.
Q3) The corporate valuation model cannot be used unless a company pays dividends. A)True B)False
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11
Chapter 10: The Cost of Capital
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Sample Questions
Q1) The cost of external equity capital raised by issuing new common stock (r<sub>e</sub>)is defined as follows,in words: "The cost of external equity equals the cost of equity capital from retaining earnings (r<sub>s</sub>),divided by one minus the percentage flotation cost required to sell the new stock, (1 - F)."
A)True
B)False
Q2) Keys Printing plans to issue a $1,000 par value,20-year noncallable bond with a 7.00% annual coupon,paid semiannually.The company's marginal tax rate is 40.00%,but Congress is considering a change in the corporate tax rate to 45.00%.By how much would the component cost of debt used to calculate the WACC change if the new tax rate was adopted? Do not round your intermediate calculations.
A) -0.36%
B) -0.42%
C) -0.44%
D) -0.30%
E) -0.35%
Q3) "Capital" is sometimes defined as funds supplied to a firm by investors.
A)True
B)False
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Page 12
Chapter 11: The Basics of Capital Budgeting
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Sample Questions
Q1) Fernando Designs is considering a project that has the following cash flow and WACC data.What is the project's discounted payback? \[\begin{array} { l c c c c }
\text { WACC: } & { 10.00 \% } & & & \\
\text { Year } & 0 & 1 & 2 & 3 \\
\hline \text { Cash flows } & - \$ 650 & \$ 500 & \$ 500 & \$ 500 \end{array}\]
A) 1.62 years
B) 1.58 years
C) 1.15 years
D) 1.47 years
E) 1.24 years
Q2) The phenomenon called "multiple internal rates of return" arises when two or more mutually exclusive projects that have different lives are being compared.
A)True
B)False
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13
Chapter 12: Cash Flow Estimation and Risk Analysis
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Sample Questions
Q1) Although it is extremely difficult to make accurate forecasts of the revenues that a project will generate,projects' initial outlays and subsequent costs can be forecasted with great accuracy.This is especially true for large product development projects.
A)True
B)False
Q2) Opportunity costs include those cash inflows that could be generated from assets the firm already owns if those assets are not used for the project being evaluated.
A)True
B)False
Q3) Typically,a project will have a higher NPV if the firm uses accelerated rather than straight-line depreciation.This is because the total cash flows over the project's life will be higher if accelerated depreciation is used,other things held constant.
A)True
B)False
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14
Chapter 13: Real Options and Other Topics in Capital
Budgeting
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Sample Questions
Q1) Traditionally,an NPV analysis assumes that projects will be accepted or rejected,which implies that they will be undertaken now or never.However,in practice,companies sometimes have a third choice--delay the decision until later,when more information will be available.
A)True
B)False
Q2) If a firm practices capital rationing,this means that it is accepting fewer projects than would be theoretically optimal;hence,it is not maximizing its theoretical value.
A)True
B)False
Q3) For planning purposes,managers must forecast the total capital budget because the amount of capital raised affects the WACC.
A)True
B)False
Q4) Real options are most valuable when the underlying source of risk--such as uncertainty about unit sales,or the sales price,or input costs--is very low.
A)True
B)False
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Chapter 14: Capital Structure and Leverage
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Sample Questions
Q1) You have been hired by a new firm that is just being started.The CFO wants to finance with 60% debt,but the president thinks it would be better to hold the percentage of debt in the capital structure (w<sub>d</sub>)to only 10%.Other things held constant,and based on the data below,if the firm uses more debt,by how much would the ROE change,i.e. ,what is ROE<sub>Higher</sub> - ROE<sub>Lower</sub>? Do not round your intermediate calculations. \(\begin{array}{lrlr}\text { Operating Data }&&\text { Other Data }\\
\text { Capital } & \$ 4,000 & \text { Higher wd } & 60 \% \\ \text { ROIC = EBIT }(1-\mathrm{T}) / \text { Capital } & 17.00 \% & \text { Higher interest rate } & 13 \% \\
\text { Tax rate } & 35 \% & \text { Lower wd } & 10 \% \\ & & \text { Lower interest rate } & 9 \% \end{array}\)
?
A) 10.31%
B) 11.59%
C) 10.43%
D) 9.15%
E) 10.54%
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Page 16
Chapter 15: Distributions to Shareholders: Dividends and Share Repurchases
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Sample Questions
Q1) Firm M is a mature company in a mature industry.Its annual net income and cash flows are consistently high and stable.However,M's growth prospects are quite limited,so its capital budget is small relative to its net income.Firm N is a relatively new company in a new and growing industry.Its markets and products have not stabilized,so its annual operating income fluctuates considerably.However,N has substantial growth opportunities,and its capital budget is expected to be large relative to its net income for the foreseeable future.Which of the following statements is CORRECT?
A) Firm M probably has a lower target debt ratio than Firm N.
B) Firm M probably has a higher target dividend payout ratio than Firm N.
C) If the corporate tax rate increases,the debt ratio of both firms is likely to decline.
D) The two firms are equally likely to pay high dividends.
E) Firm N is likely to have a clientele of shareholders who want a consistent,stable dividend income.
Q2) Other things held constant,the higher a firm's target payout ratio,the higher its expected growth rate should be.
A)True
B)False
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Page 17
Chapter 16: Working Capital Management
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) Trade credit is provided only to relatively large,strong firms.
B) Commercial paper is a form of short-term financing that is primarily used by large,strong,financially stable companies.
C) Short-term debt is favored by firms because,while it is generally more expensive than long-term debt,it exposes the borrowing firm to less risk than long-term debt.
D) Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
E) Commercial paper is typically offered at a long-term maturity of at least five years.
Q2) If a profitable firm finds that it simply must "stretch" its accounts payable,then this suggests that it is undercapitalized,i.e. ,that it needs more working capital to support its operations.
A)True
B)False
Q3) The calculated cost of trade credit can be reduced by paying late.
A)True
B)False
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Page 18
Chapter 17: Financial Planning and Forecasting
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Sample Questions
Q1) Which of the following is NOT a key element in strategic planning as it is described in the text?
A) The mission statement.
B) The statement of the corporate scope.
C) The statement of cash flows.
D) The statement of corporate objectives.
E) The operating plan.
Q2) Kamath-Meier Corporation's CFO uses this equation,which was developed by regressing inventories on sales over the past 5 years,to forecast inventory requirements: Inventories = $22.0 + 0.125(Sales).The company expects sales of $275.0 million during the current year,and it expects sales to grow by 30% next year.What is the inventory forecast for next year? All dollars are in millions.
A) $59.4
B) $60.0
C) $54.7
D) $66.7
E) $82.0
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Chapter 18: Derivatives and Risk Management
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Sample Questions
Q1) An investor who "writes" a call option without the stock in his or her portfolio to back it up is selling a(n)
A) Call option.
B) Put option.
C) Out-of-the-money option.
D) Naked option.
E) Covered option.
Q2) A 6-month put option on Makler Corp.'s stock has a strike price of $50.00 and sells in the market for $8.50.Makler's current stock price is $39.00.What is the exercise value of the option? Do not round your intermediate calculations.
A) $8.36
B) $8.25
C) $12.32
D) $12.98
E) $11.00
Q3) Interest rate swaps allow a firm to exchange fixed for floating-rate payments,but a swap cannot reduce actual net interest expenses.
A)True
B)False
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Page 20
Chapter 19: Multinational Financial Management
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Sample Questions
Q1) The cash flows relevant for a foreign investment should,from the parent company's perspective,include the financial cash flows that the subsidiary can legally send back to the parent company plus the cash flows that must remain in the foreign country.
A)True
B)False
Q2) If one U.S.dollar buys 0.61 euro,how many dollars can you purchase for one euro?
A) 1.5574
B) 1.4262
C) 1.6393
D) 1.2623
E) 1.4590
Q3) If one U.S.dollar sells for 0.53 British pound,how many dollars should one British pound sell for?
A) 2.0566
B) 2.0943
C) 1.6792
D) 1.4906
E) 1.8868
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21
Chapter 20: Hybrid Financing: Preferred
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Sample Questions
Q1) Warren Corporation's stock sells for $38.00 per share.The company wants to sell some 20-year,annual interest,$1,000 par value bonds.Each bond would have 85 warrants attached to it,each exercisable into one share of stock at an exercise price of $50.00.The firm's straight bonds yield 11.6%.Each warrant is expected to have a market value of $1.80 given that the stock sells for $38.00.What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par? Do not round your intermediate calculations.
A) 8.64%
B) 9.60%
C) 11.04%
D) 10.08%
E) 11.52%
Q2) Refer to Exhibit 20.1.What is the minimum price (or "floor" price)at which the Saunders' bonds should sell?
A) $669.83
B) $632.56
C) $830.23
D) $869.77
E) $790.70
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Chapter 21: Mergers and Acquisitions
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Q1) The rate used to discount projected merger cash flows should be the overall cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.
A)True
B)False
Q2) The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on their respective market values before the announcement of the merger.
A)True
B)False
Q3) Since managers' central goal is to maximize stock price,managers' personal incentives do not interfere with mergers that would benefit the target firm's stockholders.
A)True B)False
Q4) In a financial merger,the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies,measured as if they were operated independently.
A)True B)False
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