Corporate Finance
Exam Practice Tests
Course Introduction
Corporate Finance explores the fundamental concepts and analytical tools necessary for making sound financial decisions within a corporation. The course covers key topics such as capital budgeting, risk and return, cost of capital, capital structure, dividend policy, working capital management, and valuation of firms. Through real-world case studies and quantitative analysis, students learn how managers allocate resources, raise capital, and maximize shareholder value while considering the impact of financial markets and corporate governance. The course equips students with the skills to critically evaluate financial strategies in both domestic and international contexts.
Recommended Textbook
Introduction to Corporate Finance 3rd Edition by John Graham
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Page 2
Chapter 1: The Scope of Corporate Finance
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Sample Questions
Q1) Shareholders are said to have a residual claim on the firm's assets.What does this mean?
A) Shareholders have limited liability in their investment.
B) Shareholders do not receive any payoff from the firm until all creditors are paid.
C) Shareholders are allowed to recover their investment first if the firm experiences financial distress.
D) Shareholders have priority in electing the board of directors for the firm.
Answer: B
Q2) To maximize the value of a business,a firm needs access to capital and to minimize risk for investors.Given these guidelines,which business form should maximize value for a firm?
A) Sole proprietorship
B) Limited partnership
C) General partnership
D) Corporation
Answer: D
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Chapter 2: Financial Statement and Cash Flow Analysis
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Sample Questions
Q1) Accountants:
A) generally construct financial statements using the cash-based approach
B) generally construct financial statements using the accrual-based approach
C) must apply Generally Accepted Accounting Principles to fairly portray how the firm has performed in the past
D) must apply Generally Accepted Accounting Principles to fairly portray how the firm will perform in the future
E) both (b)and (c)
Answer: E
Q2) Refer to Tax Table.Bavarian Sausage,Inc.has a pretax income of $325,000.What is the company's marginal tax rate?
A) 34%
B) 39%
C) 35%
D) 25%
Answer: B
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4
Chapter 3: The Time Value of Money
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Sample Questions
Q1) If you were to invest $120 for two years,while earning 8% compound interest,what is the TOTAL AMOUNT OF INTEREST that you will earn?
A) $139.97
B) $139.20
C) $19.20
D) $19.97
Answer: D
Q2) You inherit $15,000 from your aunt.You decide to invest the money in a three-year CD that pays 4% interest to use as a down payment on a house.How much money will you have when the CD matures?
A) $13,334.95
B) $15,600.00
C) $16,800.00
D) $16,872.96
Answer: D
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5
Chapter 4: Valuing Bonds
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Sample Questions
Q1) Unsecured bonds that have legal claims inferior to other outstanding bonds are
A) debentures.
B) mortgage bonds.
C) subordinated debentures.
D) discount bonds.
Q2) Elroy Investors is interested in purchasing the bonds of the Judy Company.Judy's bonds are currently priced at $1,100.00 and have 14 years to maturity.If the bonds have a 6% coupon rate what is the yield-to-maturity of these ANNUAL coupon paying bonds?
A) 5.00%
B) 4.99%
C) 2.50%
D) none of the above.
Q3) Of the following bonds,which one has the highest degree of interest rate risk?
A) 20 year 8% bond
B) 5 year 8% bond
C) 10 year 8% bond
D) Not enough information.
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Chapter 5: Valuing Stocks
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Sample Questions
Q1) Zuma Corporation just paid a dividend of $5.23 and has an expected growth rate of 5% for the foreseeable future,if the discount rate is 17% what is the appropriate stock price today?
A) $43.58
B) $45.59
C) $45.76
D) $48.86
Q2) DDP Enterprises currently does not pay a dividend but plans to makes its first dividend payment of $1 in 3 years,if the expected growth rate is 10% per year once dividends commence,and the appropriate is discount rate is 18%,what is the current stock price today?
A) $ 8.98
B) $ 8.37
C) $ 13.75
D) $ 14.75
Q3) What is the intrinsic value (or current price)of ABC?
A) $21.00
B) $22.98
C) $23.41
D) $24.48
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Chapter 6: The Trade-Off Between Risk and Return
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Sample Questions
Q1) Refer to Terry Corporation.What is the total percentage return on the investment for the one year?
A) 9.09%
B) 10.00%
C) 18.18%
D) 20.00%
Q2) If you were to plot the return of asset classes on a graph with the standard deviation of returns on the horizontal axis and expected returns on the vertical axis,then which security class is most likely to be in the farthest upper right hand corner of the graph?
A) Treasury Bills
B) Treasury Bonds
C) Corporate Bonds
D) Stocks
Q3) What is the average return for stock A?
A) 12.6%
B) 13.8%
C) 5.00%
D) 8.26%
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8
Chapter 7: Risk,return,and the Capital Asset Pricing Model
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Sample Questions
Q1) Given Exhibit 7-2,what is the expected return?
A) 10.75%
B) 13.00%
C) 16.00%
D) 17.75%
Q2) The difference between the return on the market portfolio and the risk-free rate is known as the:
A) total return.
B) systematic premium.
C) unsystematic return.
D) market risk premium.
Q3) The hypothesis that states that it is nearly impossible to predict exactly when stocks will do well relative to bonds is known as the:
A) fair price hypothesis.
B) efficient market hypothesis.
C) full information hypothesis.
D) full price hypothesis.
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Chapter 8: Capital Budgeting Process and Decision Criteria
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Sample Questions
Q1) Which of the following statements is false?
A) The main virtue of the payback method is its simplicity.
B) Some managers believe the payback method implicitly accounts for the riskiness of longer-term projects.
C) Some managers may prefer the payback method because it leads to accepting projects that payback quickly which may be ideal for them in terms of building their short-term career.
D) The payback method considers all cash flows for a project,even those occurring after the payback period.
E) Both (a)and (d)are false
Q2) Refer to Exhibit 8-2.The project's average accounting rate of return equals the average contribution to net income divided by the average book value of the investment. Assume the equipment is depreciated on a straight-line basis over 4 years,what is the average accounting rate of return?
A) 16.7%
B) 33.3%
C) 66.7%
D) Cannot tell from the given information
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Chapter 9: Cash Flow and Capital Budgeting
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Sample Questions
Q1) When a firm cannot invest in every positive NPV project because of limited funds,this is known as:
A) capital budgeting.
B) capital investing.
C) capital rationing.
D) capital financing.
Q2) When a firm operates at less than full capacity
A) managers should charge the cost of accelerating new capacity development against the current proposal for using excess capacity.
B) treating that excess capacity as a free asset is a good idea in both the long- and short-run.
C) treating that excess capacity as a free asset may accelerate the need for more capacity in the future.
D) All of the above are true.
E) Both (a)and (c)are true.
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11
Chapter 10: Risk and Capital Budgeting
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Sample Questions
Q1) What is Bavarian Sausage's breakeven point in the worst case scenario?
A) 572
B) 1,125
C) 5,000
D) 2,526
Q2) By how much would Bavarian Sausage's breakeven point change in the best case scenario if variable cost increase by $2?
A) increase by 228
B) decrease by 228
C) remain unchanged
D) increase by 95
Q3) Refer to Running Shoes,Inc.What is the cost of equity?
A) 9.20%
B) 9.60%
C) 10.40%
D) 11.60%
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Page 12
Chapter 11: Raising Long-Term Financing
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Sample Questions
Q1) Refer to Smith Enterprises.What is the first day return on an investment in the IPO?
A) 21.42%
B) 15.79%
C) 18.75%
D) 12.56%
Q2) Which of the following statements is true?
A) When a firm performs a spin-off the total stock value of the parent firm should drop by approximately the market value of the new public spin-off.
B) A reverse LBO is also known as a second IPO.
C) Tracking stocks are designed to track the earnings of wholly-owned subsidiaries.
D) all of the above statements are true
E) Only statements (a)and (c)are true.
Q3) In the U.S.,firms that need to raise capital externally,prefer to issue
A) common stock.
B) preferred stock.
C) debt.
D) hybrid securities.
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13
Chapter 12: Capital Structure
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Sample Questions
Q1) Refer to Bavarian Brew.What is the PV of bankruptcy costs for which the company is indifferent about the proposed change in capital structure?
A) $450,000
B) $750,000
C) $340,000
D) $275,000
Q2) The uncertainty caused by the variability of a firm's cash flows is called ...
A) financial risk
B) business risk
C) financial leverage
D) none of the above
Q3) What is the gain from leverage for Bavarian Brew if the corporate tax rate equals 34%.In addition,assume that the personal tax rate on interest income equals 40% and that there is no tax on dividend income.
A) -$100,000
B) $100,000
C) $340,000
D) -$340,000
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14
Chapter 13: Long-Term Debt and Leasing
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Sample Questions
Q1) Which of the following qualifies as a Eurobond?
A) A dollar-denominated bond issued by a U.S.corporation and sold to Western European investors.
B) A dollar-denominated bond issued by a U.S.corporation and sold to U.S.investors.
C) A Euro-denominated bond issued by a German corporation and sold to U.S.investors.
D) A Euro-denominated bond issued by a German corporation and sold to European investors.
Q2) Suppose a firm is asked to pledge collateral for a term loan.Which of the following is likely to be least acceptable to the lender?
A) a rare book collection owned by the company.
B) the firm's inventory of industrial chemicals.
C) the firm's real estate holding.
D) securities held by the firm for investment.
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15
Chapter 14: Payout Policy
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Sample Questions
Q1) The signaling model of dividends predicts
A) managers of firms with high growth opportunities "signal" these good investments with low dividends
B) managers expecting higher future earnings "signal" with higher dividends
C) stock prices will fall at dividend increases.
D) lower quality firms will have larger dividend payouts due to poorer future prospects.
Q2) If Extruded Elements increases its payout ratio to 40% of earnings next year,but its expected growth rate remains constant,what is its expected dividend?
A) $4.13 per share
B) $2.63 per share
C) $3.94 per share
D) $2.76 per share
Q3) What was Bavarian Brewhouse's dividend payout ratio in 2004?
A) .58
B) .62
C) .35
D) .42
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Page 16
Chapter 15: Financial Planning
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Sample Questions
Q1) A firm currently has $2,000,000 in assets and $1,000,000 in accounts payable.If the firm expects sales to increase by 10% from last year to next year,then what is the estimated external funds required if the firm pays all of its net income to shareholders?
A) $100,000
B) $1,000,000
C) $2,000,000
D) none of the above
Q2) Increases in assets must be accompanied by
A) an increase in liabilities.
B) an increase in owners equity.
C) equal amounts of a)and b).
D) some combination of a)and b).
Q3) What is the value of Bavarian Brew's accounts payable at the end of April?
A) $346.63
B) $500.63
C) $1,000.63
D) $754.63
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Chapter 16: Cash Conversion, inventory, and Receivables Management
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Sample Questions
Q1) A positive cash conversion cycle means that:
A) trade credit is providing enough financing to cover the firm's entire operating cycle.
B) the firm collects on sales more slowly than it pays its payables.
C) the firm collects on sales more quickly than it pays its payables.
D) trade credit does not provide enough financing to cover the firm's entire operating cycle.
Q2) Bavarian Brew has an average age of inventory of 35 days,an average collection period of 27 days.What is the company's operating cycle?
A) 35 days
B) 27 days
C) 62 days
D) 8 days
Q3) What will be BTI's average investment in accounts receivable under the new standards?
A) $3,430,479
B) $3,240,741
C) $2,280,738
D) $2,746,854
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Chapter 17: Cash, payables, and Liquidity Management
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Sample Questions
Q1) Purchasing (or procurement)cards are designed to:
A) reduce the cost of low-dollar indirect purchases.
B) help combat a common type of check fraud.
C) provide a company with outsourcing of its accounts payable or disbursement operations.
D) eliminate nonearning cash balances in corporate checking accounts.
Q2) Which of the following is not a benefit of using EIPP in the business-to-business market?
A) Reduced float to the receiving party
B) Lower cost of receivables processing for the receiver and payment initiation and reconciliation costs for the payer
C) Better forecasting for both receiver and payer
D) Lower cost of receivables processing for the payer and payment initiation and reconciliation costs for the receiver.
E) All of the above are benefits
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19
Chapter 18: International Financial Management
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Sample Questions
Q1) Refer to Smith Enterprises International Investment.What is the expected rate of inflation in France?
A) 4.47%
B) 5.00%
C) 6.52%
D) 3.56%
Q2) Refer to Smith Enterprises International Investment.What is the 2-year $/ forward exchange rate?
A) .8012
B) .7861
C) .8263
D) .8521
Q3) If the spot rate for Marsian Spotlets (MRS)is 4 per U.S.Dollar (USD)and the one-year risk-free rate of return in the U.S.is 4%,then what should the risk free rate on Mars be if the 1-year forward rate be for MRS/USD is 5?
A) 30.00%
B) 20.19%
C) 20.00%
D) none of the above
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Page 20
Chapter 19: Options
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Sample Questions
Q1) You find that an investor purchases a put option on shares of Company Z stock.What is the most likely reason that an investor would make such a purchase?
A) the investor believes that Company Z is an undervalued company
B) the investor believes that Company Z in an overvalued company
C) the investor would like to speculated that Company Z's stock price will randomly increase
D) none of the above
Q2) Which of the following would affect the premium of a call option?
A) interest rates
B) dividend yield
C) stock price volatility
D) all of the above
Q3) Smith Enterprises stock currently sells for $17.50.A call option on the stock has a strike price of $20 and currently sells at $4.50.What is the time value of the option?
A) $0
B) $2.50
C) $2
D) $4.50
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Chapter 20: Entrepreneurial Finance and Venture Capital
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Q1) Which group is the largest source of external seed and start-up capital for American businesses?
A) venture capital limited partnerships
B) institutional venture capital funds
C) angel capitalists
D) small business investment companies
Q2) Most of the capital for early venture funds came from
A) corporate backers.
B) wealthy individuals.
C) family trusts.
D) all of the above.
Q3) Most venture capital firms invest capital in order to purchase
A) equity of the entrepreneurial firm.
B) debt of the entrepreneurial firm.
C) an investment that is convertible into common stock of the entrepreneurial firm.
D) none of the above.
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Chapter 21: Mergers, acquisitions, and Corporate Control
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Q1) Refer to Smart Acquires Snazzy.If Smart Products' beta (b)falls to 0.95 post-acquisition,what would its weighted average cost of capital be?
A) 9.05%
B) 18.2%
C) 12.10%
D) 15.45%
Q2) Suppose Smart Products' stock price is $40 per share,and there are 12,000,000 shares outstanding.How many new shares must Smart issue to acquire Snazzy Snaps at the maximum price?
A) 6,534,325
B) 2,568,242
C) 1,727,255
D) 4,639,773
Q3) What is Smart Products' Herfindahl Index on focus?
A) 1.0
B) 0.40
C) 0.345
D) 0.333
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Chapter 22: Bankruptcy and Financial Distress
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Q1) If the company has $2,534,000 in funds to distribute to unsecured creditors,what percentage of their claims are going to be satisfied if Case I occurs?
A) 26.32%
B) 40.38%
C) 100%
D) 59.62%
Q2) For multinational situation,applies to U.S.assets of firms that file primary bankruptcy in another country
A) Chapter 9
B) Chapter 12
C) Chapter 13
D) Chapter 15
Q3) Which of the following was the largest bankruptcy in the United States?
A) Enron Corp
B) Texaco
C) Lehman Brothers
D) Chrysler
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Chapter 23: Risk Management
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Sample Questions
Q1) You sell 20 corn futures contracts when the futures price is $3.67 per bushel (each contract is for 5,000 bushels).If you eventually settle the contract at $3.78,what is your payoff?
A) $11,000
B) -$11,000
C) $13,000
D) -$13,000
Q2) Refer to Exhibit 23-2.If you are interested in purchasing a December futures contract,what is the price of a 37,500 lbs contract for December delivery?
A) $43,500
B) $37,500
C) $32,500
D) $47,500
Q3) Refer to Exhibit 23-2.How many December coffee futures contracts were outstanding at the end of the trading day?
A) 17,832
B) 6,379
C) 1,397
D) 7,776
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Page 25