Corporate Finance
Exam Review
Course Introduction
Corporate Finance explores the principles and techniques involved in the financial management of corporations. The course covers fundamental topics such as capital budgeting, capital structure, dividend policy, working capital management, and methods of financing. Students learn how financial decisions impact a companys value and risk profile, examine the trade-offs between risk and return, and analyze real-world case studies to understand the strategic role of finance in driving business growth. The course also emphasizes the use of quantitative tools for evaluating financial information and informs ethical considerations in financial decision-making.
Recommended Textbook
Corporate Finance Linking Theory to What Companies Do 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) Which form of business organization allows shareholders to be taxed as partners while still retaining their limited liability status?
A) Corporation
B) Partnership
C) S Corporation
D) Sole Proprietorship
Answer: C
Q2) Hedging is
A) Buying derivatives to take advantage of likely changes in the market
B) Buying stocks firm's own stock
C) Insuring against risks a firm likely faces
D) Making sure that the hedges are not too high at the firm's headquarters
Answer: C
Q3) A stock purschased on the New York Stock Exchange is an example of
A) a primary, money market transaction
B) a secondary, money market transaction
C) a primary, captial market transaction
D) a secondary, captial market transaction
Answer: D
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Page 3
Chapter 2: Financial Statement and Cash Flow Analysis
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Sample Questions
Q1) Which of the following represents an inflow of cash?
A) A decrease in any liability
B) Dividends paid
C) Repurchase or retirement of stock
D) An increase in any asset
E) A decrease in any asset
Answer: E
Q2) How do we calculate a company's operating cash flow?
A) EBIT - taxes + depreciation
B) EBIT - taxes - depreciation
C) EBIT + taxes + depreciation
D) EBIT - Sales
Answer: A
Q3) What is Bavarian Sausage,Inc.'s average collection period?
A) 14.39 days
B) 4.20 days
C) 122.56 days
D) 86.90 days
Answer: D
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Page 4
Chapter 3: The Time Value of Money
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Sample Questions
Q1) Which of the following statements is TRUE?
A) In an annuity due payments occur at the end of the period.
B) In an ordinary annuity payments occur at the end of the period.
C) A perpetuity will mature at some point in the future.
D) One cannot calculate the present value of a perpetuity.
Answer: B
Q2) Uncle Fester puts $50,000 into a bank account earning 6%.You can't withdraw the money until the balance has doubled.How long will you have to leave the money in the account?
A) 9 years
B) 10 years
C) 11 years
D) 12 years
Answer: D
Q3) Discounting is:
A) calculating the future value of present cash flows.
B) calculating the present value of future cash flows.
C) is necessary in order to pull present values to the future.
D) none of the above
Answer: B
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Chapter 4: Valuing Bonds
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Sample Questions
Q1) A zero coupon bond has a yield to maturity of 5%; what is the bond's taxable capital gain in last year of the bonds existence?
A) $ 47.61
B) $ 1,000.00
C) $ 0.00
D) $ 45.26
Q2) Bavarian Sausage just issued a 10-year 12% coupon bond.The face value of the bond is $1,000 and the bond makes SEMIANNUAL coupon payments.If the required return on the bond is 10%,what is the bond's price?
A) $1,122.89
B) $815.26
C) $1,000.00
D) $1,124.62
Q3) Roxy Bonds have 15 years to maturity,with a coupon rate of 4%,paid ANNUALLY; if the bonds sell for $800,what is the yield to maturity of Roxy Bonds?
A) 4.00%
B) 5.25%
C) 5.92%
D) 6.07%
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Page 6
Chapter 5: Valuing Stocks
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Sample Questions
Q1) Which of the following securities poses the greatest financial risk for the investor?
A) common equity
B) preferred equity
C) debt
D) convertible debt
Q2) What is the term that represents the abbreviation used to identify a company when its stock price is being quoted?
A) CUSIP
B) Ticker tape
C) Ticker symbol
D) none of the above
Q3) Balance Corp.has a weighted average cost of capital equal to 5.5%.If the firm is financed with 25% equity and 75% debt and if the after-tax of that debt is 4%,then what is the cost of equity for the firm?
A) .025
B) .06
C) .1
D) none of the above
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Chapter 6: The Trade-Off Between Risk and Return
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Sample Questions
Q1) The additional return offered by a more risky investment relative to a safer one is called
A) the risk-free rate.
B) the risky return.
C) the risk premium.
D) the insurance premium.
Q2) Why are Treasury bills among the safest investments in the world?
A) They are short-term investments and therefore extremely sensitive to interest rate changes.
B) They are long-term investments and therefore extremely insensitive to interest rate changes.
C) They are short-term investments and therefore fairly insensitive to interest rate changes.
D) They are backed by the full faith and credit of the U.S. government.
E) Both (c) and (d).
Q3) What is the variance of the return of Hillary Investments?
A) .01072
B) .00268
C) .00214
D) none of the above
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Chapter 7: Risk, return, and the Capital Asset Pricing Model
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Sample Questions
Q1) A particular asset has a beta of 1.2 and an expected return of 10%.The expected return on the market portfolio is 13% and the risk-free is 5%.Which of the following statement is correct?
A) This asset lies on the security market line.
B) This asset lies above the security market line.
C) This asset lies below the security market line.
D) Cannot tell from the given information.
Q2) A mutual fund that adopts a passive management style is called:
A) an index fund.
B) a research fund.
C) an active fund.
D) a technology fund.
Q3) Given Exhibit 7-1,what is the expected return?
A) 13.00%
B) 15.96%
C) 16.00%
D) 17.75%
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9
Chapter 8: Capital Budgeting Process and Decision Criteria
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Sample Questions
Q1) NPV and IRR may give conflicting decisions for mutually exclusive projects because:
A) the risk of the projects may differ.
B) the scale of the projects may differ.
C) the discount rates on the projects may differ.
D) all of the above.
Q2) Should a firm invest in projects with NPV = $0?
A) Yes
B) No
C) The firm is indifferent between accepting or rejecting projects with zero NPVs
D) The firm should look at the PI and IRR of the projects
Q3) The payback method:
A) fails to explicitly consider the time value of money.
B) is the amount of time it takes for a project to recoup its profits.
C) is the best method for evaluating complex projects.
D) is never used by businesses today.
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10
Chapter 9: Cash Flow and Capital Budgeting
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Sample Questions
Q1) Refer to DSSS Corporation.What is the IRR of the project?
A) 22.79%
B) -10.01%
C) 19.47%
D) 27.36%
Q2) The difference between current assets and current liabilities is known as:
A) working capital.
B) net working capital.
C) terminal capital.
D) marginal capital.
Q3) Refer to Exhibit 9-2.The project requires an initial investment of $300,000 on equipment.Working capital is anticipated to be variable at 10% of revenues; the working capital investment must be made at the beginning of each period,and will be recovered in full at the end of year 4.Equipment will be sold at its book value at the end of year 4.The tax rate is 40%.
What is the net present value of the project if the firm's discount rate is 10%?
A) -$20,225
B) -$41,731
C) $24,155
D) $26,570
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Chapter 10: Risk and Capital Budgeting
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Sample Questions
Q1) You are considering the purchase of production volume of 100,000 widgets per year.You can purchase either a single 100,000 widget per year machine that costs $1,000,000 or first buy a 50,000 per year machine and then if sales volume permits,purchase another machine later.If widget production volume costs the same per unit to produce,what should the cost of the 50,000 per year machine be (to you)if there is a real option to expand production?
A) less than $500,000
B) $500,000
C) greater than $500,000
D) it is impossible to tell from the information given
Q2) A manager who wants to find out at which point a project's profits and costs are equal will conduct a(n)
A) sensitivity analysis
B) scenario analysis
C) breakeven analysis
D) none of the above
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Chapter 11: Raising Long-Term Financing
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Sample Questions
Q1) Some top U.S.multi-national firms have listed their stock in numerous stock markets outside the U.S.Which of the following are reasons for issuing a stock internationally?
A) It broadens the ownership base and helps a company integrate itself into the local business scene.
B) It increases local press coverage and serves as corporate advertising.
C) It can make corporate acquisitions easier because shares can be used as an acceptable method of payment.
D) all of the above are viable reasons
E) Only (a) and (b) are viable reasons
Q2) Refer to "Flip" shares 1.What was the total dollar value of this investment at the end of the first day? (Ignore any tax implications for this question)
A) $13,000
B) $14,650
C) $15,850
D) $16,350
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13
Chapter 12: Capital Structure
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Sample Questions
Q1) The Globe Incorporated has EBIT of $20 million for the current year.On the firm balance sheet,there is $80 million of debt outstanding that carries a coupon rate of 8 percent.Investors seek a return of 12 percent on the firm,and the firm has a corporate tax rate of 40%.What is the present value of the firm's tax shields?
A) $32,000,000
B) $30,000,000
C) $24,000,000
D) $6,400,000
Q2) The agency costs of (outside)equity can result in:
A) a benefit to society in the sense that the firm can raise external equity thus generating additional funds that can be invested.
B) a cost to society because the market value of corporate assets is reduced. C) entrepreneurs paying less than 100% of the cost of consuming perquisites.
D) all of these
E) none of these
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14
Chapter 13: Long-Term Debt and Leasing
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Sample Questions
Q1) The protection of bond collateral
A) is crucial to increasing the safety of the bond issue.
B) helps enhance the marketability of the bond issue.
C) does not usually occur in a bond issue.
D) both (a) and (b)
Q2) Quiz Company has a 12 year lease,with payments of $250,000 made at the beginning of each year.If no purchase option exists,and the company is in the 40% tax bracket,what is the annual after-tax cash outflow on the lease?
A) $416,667
B) $250,000
C) $150,000
D) $100,000
Q3) Refer to BLEC.What is the after tax cash flow for the first year from a purchase of the machine?
A) $31,583
B) $21,167
C) $19,515
D) $25,000
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Chapter 14: Payout Policy
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Q1) The empirical observation that stock prices fall on ex-dividend days by significantly less than the amount of the dividend has been often interpreted
A) as completely unexplainable by researchers.
B) as evidence that dividends are more highly valued than capital gains.
C) as evidence of a tax effect in dividend valuation.
D) none of the above.
Q2) Bavarian Brewhouse had after-tax earnings of $1,500,000 in 2004.The company needs $2,500,000 for new investments and plans to finance 50% of those investments with debt.If Bavarian Brew follows a residual dividend policy,what total dividend will be paid?
A) $1,500,000
B) $0
C) $250,000
D) $500,000
Q3) Which of the following is true concerning publicly traded companies?
A) the number of companies that pay dividends has been declining over time
B) the aggregate payout (dividend payout) of companies has increased over time
C) the aggregate payout (dividend payout) of companies has decreased over time
D) a and b
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Page 16
Chapter 15: Financial Planning
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Sample Questions
Q1) The percentage-of-sales method for forecasting pro forma financial statements assumes
A) that all income statement and balance sheet items grow in proportion to sales.
B) that all income statement and balance sheet items grow at a growing proportion to sales.
C) that all income statement and balance sheet items grow at a decreasing proportion to sales
D) none of the above.
Q2) 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
Q3) 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).
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17
Chapter 16: Cash Conversion, inventory, and Receivables Management
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Sample Questions
Q1) Which of the following is not one of the five C's of credit?
A) character
B) collections
C) capital
D) collateral
Q2) At what inventory level of this input should Smart EOQ reorder?
A) 2236 units
B) 5754 units
C) 4110 units
D) 1644 units
Q3) The inventory control system technique that segregates inventory into three groups is called the
A) economic order quantity model
B) ABC system
C) material requirements planning system
D) just-in-time system
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Chapter 17: Cash, payables, and Liquidity Management
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Sample Questions
Q1) What is Bavarian Brew's collection float?
A) 4 days
B) 2 days
C) 1.5 days
D) 7.5 days
Q2) Controlled disbursement is designed to:
A) provide early notification of checks that will be presented against a company's account on a given day.
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.
Q3) Which of the following statements is a detailed invoice listing all checks cleared,account charges,lockbox charges,electronic transactions,etc.?
A) bank statement
B) bank account analysis statement
C) reconciliation statement
D) financial statement
E) none of the above
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Page 19
Chapter 18: International Financial Management
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Sample Questions
Q1) The risk that movements in exchange rates will adversely affect the value of a particular transaction.
A) Transactions exposure
B) Translation exposure
C) Economic exposure
D) Political Risk
Q2) Refer to Smith Enterprises International Investment.What is the expected $ value of the after tax cash flow received at the end of year 2?
A) $7.86 million
B) $10.45 million
C) $14,72 million
D) $12.72 million
Q3) When one currency buys less of another currency in the forward market than it does in the spot market,we say that it is trading at
A) a forward discount.
B) a forward premium.
C) a spot discount.
D) a spot premium.
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Chapter 19: Options
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Q1) Which of the following statements regarding the Binomial Model is false?
A) It requires that we make assumptions about the probabilities of up and down movements in the underlying stock's price.
B) More complex versions of the binomial model can accommodate a wide range of final stock values.
C) It prices options through the principle of 'no arbitrage.'
D) It argues that the value of identical assets should be selling at identical prices.
Q2) The option that gives the owner the right to buy an asset at a fixed price at or before a certain date is called a
A) put option
B) call option
C) parity option
D) swaption
Q3) Which of the following factors will affect the price of an option?
A) The strike price of the option
B) The amount of time until expiration
C) The price of the underlying stock
D) All of the above
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Chapter 20: Entrepreneurial Finance and Venture Capital
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Q1) Which of the following statements is true concerning the term "venture capital?"
A) In the United States the term refers to all professionally managed, equity-based investments in private, entrepreneurial growth companies while in Europe the term refers to early-and expansion-stage financing.
B) In the United States the term refers to all professionally managed, equity-based investments in private, entrepreneurial growth companies while in Europe the term refers to later-stage financing.
C) In Europe the term refers to all professionally managed, equity-based investments in private, entrepreneurial growth companies while in the United States the term refers to early-and expansion-stage financing.
D) The terms refer to the same thing in both Europe and the United States.
Q2) Refer to Miller Venture Capital.If BST's stock trades at $25 at the end of the first trading day,what is the annual return on Miller's investment?
A) 900.00%
B) 24.65%
C) 33.35%
D) 350.00%
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Page 22
Chapter 21: Mergers, acquisitions, and Corporate Control
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Sample Questions
Q1) What is the value of the proposed acquisition to Needsalift?
A) $9,771,379
B) $10,666,344
C) $8,500,678
D) $10,596,175
Q2) Value-creating benefits of increased breadth of operations for merged companies
A) economies of scale
B) economies of scope
C) resource complementarities
D) synergy
Q3) Company B's resources were completely absorbed by Company A after their merger.The merger between the two companies was a
A) statutory merger
B) subsidiary merger
C) consolidation
D) none of the above
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Chapter 22: Bankruptcy and Financial Distress
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Q1) If the company has $2,475,000 in funds to distribute to unsecured creditors,how much do the owners of the firm receive in Case III?
A) $75,000
B) $0
C) $150,000
D) $225,000
Q2) Gizmo Co.has a Z-score based on its most recent financial information of 2.3.Based on this,
A) Gizmo has a high probability of failure.
B) Gizmo has a low probability of failure.
C) Gizmo's probability of failure is uncertain.
D) None of these, since the Z-score does not predict firm failure.
Q3) Winding up a firm's operations,selling off its assets,and distributing the proceeds to creditors is called
A) reorganization.
B) liquidation.
C) dissolution.
D) none of the above.
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Chapter 23: Risk Management
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Q1) Refer to Exhibit 23-2.Suppose that yesterday you purchased one September coffee futures contract at the settle price.At the end of today's trading day what is the change in the value of your contract?
A) $3,000
B) -$3,000
C) $3,750
D) -$3,750
Q2) Snooty Wine Importers has an order of exclusive Chateau de Snoot wines arriving from France in October,and the order will be paid in euros.Which of the following will hedge the importer's currency exposure?
A) buy euros forward
B) sell euros forward
C) sell dollars forward
D) sell wine futures
Q3) If the managers of a firm have a greater aversion to risk,then
A) they are less likely to hedge.
B) they are more likely to hedge.
C) they are more likely to use derivatives to speculate.
D) none of the above.
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Page 25