Corporate Finance
Exam Solutions
Course Introduction
Corporate Finance explores the fundamental principles and practices that govern financial decision-making within corporations. This course covers topics such as capital budgeting, capital structure, financial analysis, valuation of firms, risk management, and working capital management. Students will learn how companies raise capital, invest resources, and maximize firm value while balancing risk and return. Through case studies and practical applications, the course examines real-world financial challenges and strategic decisions faced by financial managers, providing a strong foundation for careers in finance, investment banking, consulting, and corporate strategy.
Recommended Textbook
Foundations of Finance 9th Edition by Arthur J. Keown
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17 Chapters
2570 Verified Questions
2570 Flashcards
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Page 2
Chapter 1: An Introduction to the Foundations of Financial Management
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Sample Questions
Q1) Short-term United States Treasury bills are widely used as proxies for risk-free assets,yet the returns on these T-bills are consistently greater than zero.Is this consistent with the concept of a risk-return trade-off?
Answer: Yes.Investors also require a return for delaying consumption as well as a return for taking on risk.
Q2) A homeowner that owes more on his/her mortgage than the home is worth is said to be "under water."
A)True
B)False
Answer: True
Q3) When evaluating an investment project,which of the following best describes the financial information needed by the decision maker?
A) after-tax accounting profits
B) after-tax incremental cash flows to the company as a whole
C) incremental cash flows before taxes so the decision will not be biased by a tax code that may change in the future
D) pre-tax accounting profits adjusted for any accounting method changes
Answer: B
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Chapter 2: The Financial Markets and Interest Rates
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Sample Questions
Q1) Which of the following is an advantage of using private placements for debt?
A) reduced costs from the elimination of the registration statement for the SEC, investment-banking underwriting fees and distribution costs
B) lower interest costs
C) fewer and less burdensome restrictive covenants
D) the possibility of future SEC registration
Answer: A
Q2) What is the term for a graphical representation of the relationship between interest rates and the maturities of debt securities?
A) term curve
B) maturity chart
C) yield curve
D) inflationary expectations
Answer: C
Q3) Each purchase occurring in the secondary markets increases the total stock of financial assets that exist in the economy.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Understanding Financial Statements and Cash Flows
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Sample Questions
Q1) Which of the following accounts belongs in the liability section of a balance sheet?
A) interest expense
B) accumulated depreciation
C) accounts payable
D) preferred stock
Answer: C
Q2) What are the limitations of financial statements?
Answer: When reviewing financial statements,keep in mind that accounting rules give managers discretion; thus,they may take advantage of the leeway,as long as it doesn't violate GAAP,to produce the high or stable earnings that investors are looking for.Therefore,what we see from financial statements may not exactly reflect the company's financial situation.In other words,if two companies have the same financial condition,their financial statements can be different,depending on how and when the managers choose to report certain transactions.
Q3) Net profit margin is equal to the gross profit margin times the operating profit margin.
A)True
B)False
Answer: False
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Chapter 4: Evaluating a Firms Financial Performance
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Sample Questions
Q1) An analyst is evaluating two companies,A and B.Company A has a debt ratio of 50% and Company B has a debt ratio of 25%.In his report,the analyst is concerned about Company B's debt level,but not about Company A's debt level.Which of the following would best explain this position?
A) Company B has much higher operating income than Company A.
B) Company A has a lower times interest earned ratio and thus the analyst is not worried about the amount of debt.
C) Company B has a higher operating return on assets than Company A, but Company A has a higher return on equity than Company B.
D) Company B has more total assets than Company A.
Q2) Beverly Corp.had total sales of $1,200,000 in 2010 (80 percent of its sales are credit).The company's gross profit margin is 25 percent,its ending inventory is $150,000,and its accounts receivable balance is $90,000.What additional amount of cash could the firm have generated if it had increased its inventory turnover ratio to 9.0 and reduced its average collection period to 28.21875 days?
Q3) When comparing a firm to its peers,why is it difficult to determine the industry to which the firm belongs? Why should you be careful when comparing a firm with industry norms?
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6
Chapter 5: The Time Value of Money
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Sample Questions
Q1) You borrow $25,000 to buy a car,and agree to make 48 monthly payments of $607.39 to repay the loan.What annual rate of interest,which is being compounded monthly,are you being charged?
Q2) You invest $1,000 at a variable rate of interest.Initially the rate is 4% compounded annually for the first year,and the rate increases one-half of one percent annually for five years (year two's rate is 4.5%,year three's rate is 5.0%,etc.).How much will you have in the account after five years?
A) $1,276
B) $1,359
C) $1,462
D) $1,338
Q3) Biff deposited $9,000 in a bank account,and 10 years later he closes out the account,which is worth $18,000.What annual rate of interest has he earned over the 10 years?
A) 6.45%
B) 7.18%
C) 9.10%
D) 10.0%
Q4) How does compound interest differ from simple interest?
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Chapter 6: The Meaning and Measurement of Risk and Return
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Sample Questions
Q1) You purchased 500 shares of A.M.J.Inc.common stock one year ago for $50 per share.You received a dividend of $2 per share today and decide to take your profits by selling at $54.50 per share.What is your holding period return?
A) 13.0%
B) 9.0%
C) 6.5%
D) 4.0%
Q2) The expected return for the market portfolio is 13%,the expected return on U.S.Treasury bills is 2%,and the expected return on AAA-rated short-term corporate bonds is 7%.Calculate the required return for a stock with a beta equal to 1.5.
Q3) Most stocks have betas between
A) -1.00 and 1.00.
B) 0.00 and 1.00.
C) 0.60 and 1.60.
D) 1.00 and 2.00.
Q4) Accounting profits is the most relevant variable the financial manager uses to measure returns.
A)True B)False
Page 8
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Chapter 7: The Valuation and Characteristics of Bonds
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Sample Questions
Q1) Nunavet Ocean Cruises sold an issue of 12-year $1,000 par bonds to build new ships.The bonds pay 4.85% interest,semiannually.Today's required rate of return is 9.7%.How much should these bonds sell for today? Round off to the nearest $1.
A) $771.86
B) $732.93
C) $660.45
D) $598.33
Q2) Convertible bonds decrease in value whenever the price of the company's stock increases.
A)True
B)False
Q3) Other things held equal,a bond with a call provision is worth more to investors than a bond without a call provision.
A)True
B)False
Q4) How does the bond rating affect an investor's required rate of return? What factors affect a bond's rating?
Q5) What are the three important elements of asset valuation?
Q6) Explain the different types of value.
Page 9
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Chapter 8: The Valuation and Characteristics of Stock
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Sample Questions
Q1) Cumulative voting is advantageous to minority shareholders because it may allow them to elect a member of the board of directors.
A)True
B)False
Q2) Under majority voting,a majority (>50%)shareholder will just be able to elect a simple majority of the board of directors.
A)True
B)False
Q3) Two approaches that allow for the retirement of preferred stock are call provisions and sinking fund provisions.
A)True
B)False
Q4) Stimpson Inc.preferred stock pays a $.50 annual dividend.What is the value of the stock if your required rate of return is 10%?
A) $.05
B) $.50
C) $5.00
D) $50.00
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) The cost of preferred stock is equal to the preferred stock dividend divided by the net proceeds per preferred share.
A)True B)False
Q2) The capital asset pricing model uses three variables to evaluate required returns on common equity: the risk-free rate,the beta coefficient,and the market risk premium.
A)True B)False
Q3) If a firm's tax rate increases,then its weighted average cost of capital increases also.
A)True B)False
Q4) Cost of capital is commonly used interchangeably with all of the following terms EXCEPT
A) the firm's required rate of return.
B) the hurdle rate for new investments.
C) the internal rate of return for new investments.
D) the firm's opportunity cost of funds.
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Chapter 10: Capital-Budgeting Techniques and Practice
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Sample Questions
Q1) The internal rate of return is the discount rate that equates the present value of the project's free cash flows with the project's initial cash outlay.
A)True
B)False
Q2) Advantages of the payback period include that it is easy to calculate,easy to understand,and that it is based on cash flows rather than on accounting profits.
A)True
B)False
Q3) If the NPV (Net Present Value)of a project with one sign reversal is positive,then the project's IRR (Internal Rate of Return)________ the required rate of return. A) must be less than B) must be greater than C) could be greater or less than D) The project's IRR cannot be determined without actual cash flows.
Q4) One of the disadvantages of the payback method is that it ignores time value of money.
A)True
B)False
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12
Chapter 11: Cash Flows and Other Topics in Capital Budgeting
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Sample Questions
Q1) An asset with an original cost of $100,000 and a current book value of $20,000 is sold for $50,000 as part of a capital budgeting project.The company has a tax rate of 30%.This transaction will have what impact on the project's initial outlay?
A) reduce it by $20,000
B) reduce it by $50,000
C) reduce it by $6,000
D) reduce it by $15,000
Q2) Calculate the internal rate of return on the following projects:
a.Initial outlay of $60,500 with an after-tax cash flow of $11,897 per year for eight years.
b.Initial outlay of $647,000 with an after-tax cash flow of $118,000 per year for ten years.
c.Initial outlay of $25,400 with an after-tax cash flow $11,788 per year for three years.
Q3) Accounting profits are used to make capital budgeting decisions because generally accepted accounting principles ensure that profits are the best measure of a company's economic activity.
A)True
B)False
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Chapter 12: Determining the Financing Mix
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Sample Questions
Q1) Corporations utilize external financing either because they do not have sufficient earnings to reinvest or they want to rebalance their capital structures.
A)True
B)False
Q2) Techno Robots produces a functioning toy robot.At a production and sales level of 10,000 robots,the firm has the following information:
Selling price per unit = $15
Variable costs per unit = $8
EBIT = $17,500
What is the break-even point in units for the firm?
Q3) Dakota Oil,Inc.reported that its sales and EBIT increased by 10%,but its EPS increased by 30%.The much larger change in earnings per share could be the result of
A) high operating leverage.
B) high financial leverage.
C) a high percentage of credit sale collections from prior years.
D) high fixed costs of production.
Q4) What are the three determinants of the volatility of a firm's earnings?
Q5) Describe the sources of business risk.
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Chapter 13: Dividend Policy and Internal Financing
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Sample Questions
Q1) The residual dividend theory suggests that dividends will only be paid
A) if the tax rate on capital gains is higher than the tax rate on dividends.
B) if the corporation has more positive NPV projects than it can fund.
C) if interest rates available to shareholders are higher than the required return on the company's stock.
D) if current retained earnings exceed the equity portion of the firm's capital budget.
Q2) The residual dividend theory implies that internally generated funds (i.e.,retained earnings)should be used to fund all new investment projects before the company uses any additional debt.
A)True
B)False
Q3) The information effect suggests dividend policy matters because dividends act as a persuasive communications tool,signaling investors about the financial condition of the firm.
A)True
B)False
Q4) Describe the types of dividend policies that corporations frequently use.Which is most common? Why?
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Chapter 14: Short-Term Financial Planning
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Sample Questions
Q1) Which of the following is a spontaneous source of financing?
A) accrued expenses
B) notes payable
C) common stock
D) paid-in-capital
Q2) Fixed assets are often estimated incorrectly by the percent of sales method because
A) fixed assets remain constant and the percent of sales method assumes all assets increase proportionally with sales.
B) fixed asset are very expensive.
C) fixed assets are typically purchased in "lumps" and therefore do not increase proportionally with sales.
D) fixed assets are part of the capital budgeting process.
Q3) Traditional financial forecasting takes the sales forecast as given and forecasts the corresponding expenses,assets,and liabilities of the firm.
A)True
B)False
Q4) What is the percent of sales method of financial forecasting?
Q5) What are some examples of spontaneous and discretionary sources of financing?
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Chapter 15: Working-Capital Management
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Sample Questions
Q1) AFB,Inc.purchases a new delivery van which is expected to increase cash flows for the next 10 years.AFB can finance the purchase with a standard 48-month vehicle loan,or by getting a 10-year loan from the bank.According to the hedging principle,AFB should A) use the 10-year financing in order to match the cash flow stream from the asset with the financing repayments.
B) use the 48-month loan since it matches the type of asset with the type of loan.
C) use either type of financing, but hedge the risk in the options market.
D) avoid using either loan and finance the truck with current cash reserves to avoid interest expense.
Q2) Two advantages of financing with current liabilities are flexibility and lower interest cost.
A)True
B)False
Q3) Total debt must always be equal to the sum of temporary,permanent,and spontaneous sources of financing.
A)True
B)False
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Chapter 16: International Business Finance
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Sample Questions
Q1) An important (additional)consideration for a direct foreign investment is
A) political risk.
B) maximizing the firm's profits.
C) attaining a high international P/E ratio.
D) maintaining the domestic cost of capital.
Q2) The bid-asked spread is much lower for currencies that are infrequently traded in order to compensate banks for providing the service.
A)True
B)False
Q3) Strategies to counter exchange rate risk include all of the following EXCEPT
A) futures contracts.
B) spot-market hedges.
C) forward-market hedges.
D) money-market hedges.
Q4) Which of the following is a reason for international investment?
A) to reduce portfolio risk
B) to increase P/E ratio
C) to gain an advantage in a foreign country
D) to gain access to foreign currency
Q5) Who is an arbitrageur? How does an arbitrageur make money?
Page 18
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Chapter 17: Cash,receivables,and Inventory Management
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Sample Questions
Q1) You have a choice between investing in a corporate bond or a municipal bond.The corporate bond has an annual yield of 10 percent,while the municipal bond has an annual yield of 7 percent.At what tax rate would you be indifferent between buying the corporate bond or the municipal bond?
Q2) A company is technically insolvent when A) cash outflows in a given period are greater than cash inflows.
B) earnings before interest payments are less than the interest payments.
C) it lacks the necessary liquidity to promptly pay its current debt obligations.
D) current ratio is less than 1.0.
Q3) What are the key decision variables at the firm's disposal for managing the level of the firm's accounts receivable balance?
Q4) Which of the following would be an example of the "speculative motive" for a firm holding cash balances?
A) make dividend payments
B) anticipating a strike
C) purchase of inventory
D) take advantage of an anticipated decline in the price of raw materials
Q5) What are the three motives for holding cash?
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