Corporate Finance
Exam Questions
Course Introduction
Corporate Finance explores the financial principles and strategies used by corporations to maximize shareholder value. This course covers essential topics such as financial statement analysis, capital budgeting, risk and return assessment, cost of capital, capital structure, dividend policy, and working capital management. Students will develop an understanding of how financial decisions are made within organizations, how firms finance their operations, and the tools and techniques used for long-term financial planning. Practical case studies and real-world examples provide insights into mergers and acquisitions, corporate governance, and the impact of market forces on corporate financial decision-making.
Recommended Textbook
Financial Management Principles and Applications 12th Edition by Sheridan Titman
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Chapter 1: Getting Started-Principles of Finance
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Sample Questions
Q1) In a general partnership,all partners have unlimited liability for the actions of any one partner when that partner is conducting business for the firm.
A)True
B)False
Answer: True
Q2) Ultimate control in a corporation is vested in the board of directors.
A)True
B)False
Answer: False
Q3) The goal of profit maximization is equivalent to the goal of maximization of share value.
A)True
B)False Answer: False
Q4) Limited partners may actively manage the business.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Firms and the Financial Market
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Sample Questions
Q1) In Financial markets,borrowers and lenders most both be located in the same country.
A)True
B)False
Answer: False
Q2) Banks that are financial intermediaries generate earnings when they facilitate the transfer of money from savers to borrowers by paying savers a smaller return than they demand from borrowers.
A)True
B)False Answer: True
Q3) Bonds are less risky than are stocks because their return is more predictable.
A)True
B)False Answer: True
Q4) Organized security exchanges do not physically occupy space.
A)True
B)False Answer: False
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Chapter 3: Understanding Financial Statements,taxes,and Cash Flows
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Sample Questions
Q1) Your firm has the following income statement items: sales of $50,250,000;income tax of $1,744,000;operating expenses of $8,750,000;cost of goods sold of $35,025,000;and interest expense of $750,000.What is the amount of the firm's net income?
A)$255,223
B)$4,731,000
C)$2,616,000
D)$7,775,000
Answer: B
Q2) Your firm has the following income statement items: sales of $50,250,000;income tax of $1,744,000;operating expenses of $10,115,000;cost of goods sold of $35,025,000;and interest expense of $750,000.What is the amount of the firm's EBIT?
A)$15,552,000
B)$58,000,000
C)$5,110,000
D)$4,630,000
Answer: C
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Chapter 4: Financial Analysis-Sizing up Firm Performance
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Sample Questions
Q1) An increase in ________ will decrease the times-interest-earned ratio.
A)the tax rate
B)gross profit
C)interest expense
D)common stock
Q2) Snype,Inc.has an accounts receivable turnover ratio of 7.3.Stork Company has an accounts receivable turnover ratio of 5.0.Which of the following statements is correct?
A)Snype's average collection period is less than Stork's.
B)Stork's average collection period is less than Snype's.
C)Snype has a lower accounts receivable account on average than does Stork Company.
D)Stork Company has (on average)a lower accounts receivable account than does Snype.
Q3) Water Works,Inc.has a current ratio of 1.33,current liabilities of $540,000,and inventory of $400,000.What is Water Works,Inc.'s quick ratio?
A)1.11
B)0.86
C)1.90
D)0.59
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Page 6
Chapter 5: Time Value of Money-The Basics
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Sample Questions
Q1) As the compound interest rate increases,the present value of future cash flows decreases.
A)True
B)False
Q2) Which of the following statements is FALSE?
A)A dollar received one year from now will be worth more than a dollar received today.
B)On monthly compounding loans,the annual percentage yield will be less than the nominal or quoted rate of interest.
C)Compounding essentially means earning interest on interest on an initial balance.
D)Perpetuities pay an equal payment forever.
Q3) The present value of $400 to be received at the end of 10 years,if the discount rate is 5%,is
A)$400.00.
B)$248.40.
C)$313.60.
D)$245.60.
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Chapter 6: The Time Value of Money-Annuities and Other Topics
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Sample Questions
Q1) A perpetuity is an investment that continues forever but pays a different dollar amount each year.
A)True
B)False
Q2) What is the present value of an investment that pays $10,000 every year at year-end for the next five years and $15,000 every year at year-end for years six through 10? The annual rate of interest for the investment is 9%.
A)$125,000.00
B)$97,250.00
C)$135,173.00
D)$76,827.50
Q3) If your opportunity cost is 12%,how much will you pay for a bond that pays $100 per year forever?
Q4) One characteristic of an annuity is that an equal sum of money is deposited or withdrawn each period.
A)True
B)False
Q5) If you have an opportunity cost of 10%,how much must you invest each year to have $4,000 accumulated in 10 years?
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Chapter 7: An Introduction to Risk and Return-History of
Financial Market Returns
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Sample Questions
Q1) What is the geometric average return on her stock if she sells it five years from today?
A)-2.33%
B).59%
C)3.67%
D)4.88%
Q2) Marcus Berger invested $9842.33 in Hawkeyehats,Inc.four years ago.He sold the stock today for $11,396.22.What is his geometric average return?
A)2.98%
B)3.73%
C)3.95%
D)There is insufficient information to derive an answer.
Q3) Even though an investor expects a positive rate of return,it is possible that the actual return will be negative.
A)True
B)False
Q4) Are markets moving toward being more efficient or toward being less efficient?
Q5) Under the efficient market hypothesis,would securities be properly priced.
Q6) Why do the arithmetic average return and the geometric return differ?
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Chapter 8: Risk and Return-Capital Market Theory
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Sample Questions
Q1) The expected return from investing in the asset is
A)9.00%.
B)9.35%.
C)10.00%.
D)10.55%.
Q2) The return for the market during the next period is expected to be 11.5%;the risk-free rate is 2.5%.Calculate the required rate of return for a stock with a beta of 1.5.
Q3) The expected return on MSFT next year is 12% with a standard deviation of 20%.The expected return on AAPL next year is 24% with a standard deviation of 30%.If James makes equal investments in MSFT and AAPL,what is the expected return on his portfolio.
A)20%
B)16%
C)18%%
D)25%
Q4) The market rewards assuming additional unsystematic risk with additional returns.
A)True
B)False
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Chapter 9: Debt Valuation and Interest Rates
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Sample Questions
Q1) The nominal interest rate
A)does not include inflation.
B)includes inflation and the real rate of interest.
C)ignores the Fisher effect.
D)is the rate at which banks lend money to other banks.
Q2) Given the following information,determine the market value of EAO Company bonds.
Par value $1,000
Coupon rate 10%
Years to maturity 6
Market rate 8%
Interest paid semiannually
Q3) Compare and contrast current yield and yield to maturity.
Q4) The issuance of bonds to raise capital for a corporation
A)magnifies the returns to the stockholders.
B)increases risk to the stockholders.
C)is a cheaper form of capital than the issuance of common stock.
D)all of the above.
Q5) When inflation rates go up,bond prices go up as well.
A)True
B)False
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Chapter 10: Stock Valuation
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Sample Questions
Q1) UVP preferred stock pays $5.00 in annual dividends.If your required rate of return is 13%,how much will you be willing to pay for one share?
A)$38.46
B)$26.26
C)$65.46
D)$46.38
Q2) Murky Pharmaceuticals has issued preferred stock with a par value of $100 and a 5% dividend.The investors' required yield is 10%.What is the value of a share of Murky preferred?
A)$100
B)$75
C)$50
D)$25
Q3) The stockholder's expected rate of return consists of a dividend yield and interest. A)True
B)False
Q4) Determine the rate of return on a $25 common stock that pays a dividend of $2.50 in year 1 and grows at a rate of 5%.
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Chapter 11: Investment Decision Criteria
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Sample Questions
Q1) Project Black Swan requires an initial investment of $115,000.It has positive cash flows of $140,000 for each of the next two years.Because of major demolition and environmental clean-up costs,cash flow for the third and final year of the project is $(170,000).If the company 's required rate of return is 12%,the project should be
A)rejected because the IRR is less than 12%.
B)accepted because the NPV is positive at 12%.
C)the project is unacceptable at any discount rate.
D)rejected because there may be more than one IRR.
Q2) The director of capital budgeting of South Park Development Corporation is evaluating a project that will cost $200,000;it is expected to last for 10 years and produce after-tax cash flows,including depreciation,of $44,503 per year.If the firm's cost of capital is 14% and its tax rate is 40%,what is the project's IRR?
A)8%
B)14%
C)18%
D)-5%
Q3) Discuss the merits and shortcomings of using the payback period for capital budgeting decisions.
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Chapter 12: Analyzing Project Cash Flows
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Sample Questions
Q1) If the new machine is purchased,operating cash flow for years 1 through 5 will increase or decrease by how much?
A)Increase $15,000
B)Decrease $9,900
C)Increase $12,142
D)Increase $5,346
Q2) Anderson-EOG Inc.is evaluating the construction of a gas pipeline to bring natural gas from Western New York state to New York City.The controller argues that every project of the company has to absorb a portion of administrative overhead including corporate headquarters and executive salaries.The Treasurer argues that these costs are irrelevant because they are merely being shifted from part of the company to another.Who is correct?
Q3) A company converts space to use as a manufacturing facility.Previously it was rented to another company as a warehouse.This is an example of a sunk cost.
A)True
B)False
Q4) What is meant by "real dollars" and the "real" discount rate? How can they be used to account for inflation when evaluating capital budgeting proposals?
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Chapter 13: Risk Analysis and Project Evaluation
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Sample Questions
Q1) Enchanted Hearth expects to sell 1,200 wood pellet stoves in 2011 at an average price of $2,400 each.It believes that unit sales will grow between -5% and +5% per year and prices will rise or fall by as much as 5% per year.Forecast sales revenue for 2013 if the number of units sold increases by 5% per year and prices remain flat.
A)$2,880,000
B)$3,168,000
C)$3,333,960
D)$3,175,200
Q2) Betty Gilmore plans to sell berry pies at a local farmer's market.The permit and space rental will cost her $2,000 for the June through August season.The pies will sell for $7.00.Ingredients and overhead average $4.00 per pie.She also has to pay five percent of her gross sales to the markets's organizers.How many pies will she need to sell to cover her fixed costs and realize a $3,000 profit?
A)752
B)1,667 pies
C)1,887 pies
D)1,250 pies
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Chapter 14: The Cost of Capital
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Sample Questions
Q1) Survey literature indicates that separate project costs of capital
A)are used by less than half of major companies.
B)are used by more than 75% of major companies.
C)are used by nearly all major companies.
D)are almost never used by major companies.
Q2) Sola Cola Corporation is undertaking a capital budgeting analysis.The rate on 10-year U.S.Treasury bonds is 3.60%,and the return on the S & P 500 index is 11.6%.If the cost of Sola Cola's common equity is 19.6%,calculate their beta.
A)1.69
B)5.4
C)2.0
D)1.38
Q3) Larger issues of new common stock can cause ________ to increase.
A)flotation costs
B)the investor's required rate of return
C)the stock price
D)the tax rate
Q4) Briefly identify and describe some important uses of a firm's weighted average cost of capital.
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Chapter 15: Capital Structure Policy
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Sample Questions
Q1) Allston-Brighton Corp.has total assets of $10 million,total liabilities of $4 million,of which $1 million are non-interest bearing.Interest expense was $180,000.Earnings before interest and taxes were $2.5 million.Depreciation was $1.5 million.Compute the following ratios: Debt ratio,Interest-bearing debt ratio,Times interest earned ratio,and EBITDA coverage ratio.
Q2) Capital structure theory suggests that companies may put the interests of ________ ahead of the interests of ________.
A)Potential stockholders,existing stockholders
B)Stockholders,bondholders
C)Existing shareholders,IRS
D)There are no potential conflicts arising from the way a firm manages its capital structure.
Q3) Bipolar Beverages total assets equal $360 million.The book value of Bipolar's equity is $180 million.The market value of Bipolar's equity is $ 250 million.The book value of the company's interest bearing debt is $120 million.Compute Bipolar's Debt Ratio and Debt to Value Ratio.
Q4) What is meant by the terms "favorable" and "unfavorable" leverage?
Q5) Why is the Debt to Assets Ratio always higher than the Debt to Value ratio?
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Chapter 16: Dividend Policy
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Sample Questions
Q1) The residual dividend theory indicates that a firm would never pay dividends unless the firm's profits were larger than its equity financing needs.
A)True
B)False
Q2) Which of the following describes the clientele effect concept of dividend policy?
A)The clientele effect looks at investor preferences for dividends compared to share repurchase programs.
B)The clientele effect defines the relationship between the shareholder and a stockbroker.
C)The clientele effect focuses entirely on the stability of dividends.
D)Modern corporations do not consider shareholders to be "clients."
Q3) In response to a temporary decline in earnings per share,most companies would
A)decrease their cash dividend.
B)not decrease their cash dividend.
C)suspend their cash dividend.
D)substitute a stock dividend for the cash dividend.
Q4) Compare management's motives for preferring either stock repurchases or cash dividends.
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Chapter 17: Financial Forecasting and Planning
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Sample Questions
Q1) Apple Two Enterprises expects to generate sales of $5,950,000 for fiscal 2014;sales were $3,450,000 in fiscal 2013.Assume the following figures for the fiscal year ending 2013: cash $70,000;accounts receivable $250,000;inventory $400,000;net fixed assets $520,000;accounts payable $235,000;and accruals $155,000.Use the percent-of-sales method to forecast accounts payable for the fiscal year ending 2014.
A)$212,036
B)$405,290
C)$619,619
D)$155,000
Q2) The most commonly used method for making financial forecasts is the percent-of-sales method.
A)True
B)False
Q3) Pro forma statements are important since they formally report the performance of the firm during a previous reporting period.
A)True
B)False
Q4) What is meant by discretionary financing?
Q5) What is meant by spontaneous financing?
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Chapter 18: Working Capital Management
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Q1) Net working capital provides a very useful summary measure of a firm's short-term financing decisions.
A)True
B)False
Q2) King Co.'s inventory turnover ratio is 12.Its inventory conversion period is
A)12 days.
B)30.4 days.
C)2.5 days.
D)There is not enough information.
Q3) A toy manufacturer following the self-liquidating debt.principle will generally finance seasonal inventory build-up prior to the Holiday season with:
A)common stock.
B)selling equipment.
C)trade credit.
D)preferred stock.
Q4) The effective cost to the borrower of an unsecured bank loan is increased if a compensating balance is required.
A)True
B)False
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Chapter 19: International Business Finance
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Q1) The cost of debt used in the international investment decision is the lesser of the parent's or the subsidiary's cost of debt.
A)True
B)False
Q2) Spot exchange markets have the potential for arbitrage opportunities for a long period of time.
A)True
B)False
Q3) The asked rate is the price a customer will receive from a foreign currency trader when selling a foreign currency.
A)True
B)False
Q4) An important motive for direct foreign investment is to A)gain entry to markets with economies growing faster than the U.S.
B)insulate the firm from fluctuations in the value of the dollar.
C)diversify political risks.
D)increase a project's NPV by using lower foreign discount rates.
Q5) What are some of the potential risks,other than exchange rate risk,that need to be considered in foreign direct investment decisions.
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Chapter 20: Corporate Risk Management
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Q1) How can a currency futures contract be used as a hedge against a potentially dramatic appreciation of a foreign currency that a U.S.company is expecting to convert into U.S.dollars?
A)The U.S.company should sell the foreign currency using futures contracts.
B)The U.S.company should buy more foreign currency futures contracts than it should sell.
C)The U.S.company should buy the foreign currency using futures contracts.
D)This is a standard business situation that would be favorable if it were to happen,so no hedge is needed.
Q2) A firm agrees to accept payments on a $1,000,000 loan with a fixed interest rate of 8% in exchange for making the payments on a loan with floating rate payments based on LIBOR.Payments are interest only with principal due in 10 years.The firm will benefit
A)if LIBOR falls.
B)if LIBOR rises.
C)if Libor remains unchanged.
D)if LIBOR fluctuates randomly.
Q3) What are the major variables in the Black-Scholes option pricing model and in what direction do they influence the price of call options?
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