Corporate Finance
Final Exam
Course Introduction
Corporate Finance explores the principles and techniques essential for financial decision-making within corporations. The course covers topics such as capital budgeting, risk and return, cost of capital, capital structure, dividend policy, and working capital management. Students learn how to evaluate investment projects, analyze financial statements, assess various sources of funding, and understand the impact of financial decisions on firm value. Emphasis is placed on both theoretical foundations and practical applications, preparing students to address complex financial challenges faced by modern organizations.
Recommended Textbook
Corporate Finance Core Principles and Applications 4th Edition by Sheldon M. Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Q1) Which one of the following is a capital budgeting decision?
A)Deciding whether or not to open a new store
B)Determining how much inventory to keep on hand
C)Determining how much debt should be borrowed from a particular lender
D)Deciding if stock shares should be repurchased
E)Determining how much cash to keep on hand
Answer: A
Q2) Which one of the following statements concerning a sole proprietorship is correct?
A)A sole proprietorship is often structured as a limited liability company.
B)The owner of a sole proprietorship may be forced to sell his/her personal assets to pay company debts.
C)The owners of a sole proprietorship share profits as established by the partnership agreement.
D)The profits of a sole proprietorship are taxed twice.
E)A sole proprietorship is difficult to create.
Answer: B
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3
Chapter 2: Financial Statements and Cash Flow
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Q1) A change in which one of these accounts will appear as an investing activity in an accounting statement of cash flows?
A)Accounts payable
B)Inventory
C)Interest expense
D)Fixed assets
E)Sales
Answer: D
Q2) Thompson's Jet Skis has operating cash flow of $258.Depreciation is $45 and interest paid is $53.A net total of $79 was paid on long-term debt.The firm spent $210 on fixed assets and increased net working capital by $48.What is the amount of the cash flow to stockholders?
A)-$104
B)-$132
C)$28
D)$114
E)$142
Answer: B
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Chapter 3: Financial Statements Analysis and Financial Models
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Q1) A total asset turnover measure of 1.03 means that a firm has $1.03 in:
A)sales for every $1 in total assets.
B)total assets for every $1 in sales.
C)total assets for every $1 in total equity.
D)total assets for every $1 in cash.
E)long-term assets for every $1 in short-term assets.
Answer: A
Q2) Last year,Bennett's had a price-earnings ratio of 10.2.This year,the price earnings ratio is 10.4.Based on this information,it can be stated with absolute certainty that:
A)the price per share increased.
B)the earnings per share decreased.
C)either the price per share,the earnings per share,or both,changed.
D)investors are receiving a higher rate of return this year.
E)investors are paying a higher price for each share of stock purchased.
Answer: C
Q3) Identify the three parts of the DuPont identity and specify what each part measures. Answer: ROE = Profit margin (Operating efficiency)× Total asset turnover (Asset use efficiency)× Equity multiplier (Financial leverage).
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Chapter 4: Discounted Cash Flow Valuation
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Q1) A 4.25 percent preferred stock has a liquidating value of $100 a share.What is one share of this stock currently worth to an investor who desires a 14.5 percent annual rate of return?
A)$31.09
B)$24.25
C)$29.31
D)$34.12
E)$28.16
Q2) An annuity:
A)has less value than a comparable perpetuity.
B)is either an equal or an unequal stream of payments that occur in equal time periods for a finite period.
C)is a stream of payments that fluctuate with current market interest rates.
D)is a stream of equal payments that occur in equal periods of time for a finite period. E)has a longer life span than a perpetuity.
Q3) There are three factors that affect the present value of an annuity.Explain what these three factors are and discuss how an increase in each will impact the present value of the annuity.
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6
Chapter 5: Interest Rates and Bond Valuation
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Q1) Which one of these bonds is subject to the greatest interest rate risk?
A)5-year,zero coupon bond
B)5-year bond with a 4.5 percent coupon rate
C)5-year bond with a 5 percent coupon rate
D)10-year,zero coupon bond
E)10-year,5 percent coupon bond
Q2) Which of the following items are generally included in a bond indenture?
I.Sinking fund requirements
II.Security description
III.Bid and asked prices
IV.Total amount of bonds issued
A)I and II only
B)II and IV only
C)II,III,and IV only
D)I,II,and IV only
E)I,II,III,and IV
Q3) Assume a firm borrows $20 million by issuing bonds.Explain how a sinking fund requirement added to the bond's indenture can lessen the potential for default on the bond issue.
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Page 7
Chapter 6: Stock Valuation
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Q1) A securities market primarily comprised of dealers who buy and sell for their own inventories is generally referred to as a(n)______ market.
A)over-the-counter
B)auction
C)broker
D)regional
E)trading floor
Q2) Duncan Street Mills is an all-equity firm with 28,000 shares of stock outstanding.The firm expects sales of $400,000 next year.Sales are expected to grow by 5 percent for the following two years and then level off to a constant 3 percent growth rate.Net cash flow varies in direct proportion to sales and is currently equal to 15 percent of sales.The required return for this firm is 16 percent.What is the estimated current value of one share of stock?
A)$17.02
B)$16.21
C)$16.94
D)$18.76
E)$17.34
Q3) Contrast some of the features of preferred stock versus common stock.
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Page 8
Chapter 7: Net Present Value and Other Investment Rules
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Q1) Project A has an initial cost of $22,400 and cash flows of $7,100,$8,800,and $1,900 for Years 1 to 3,respectively.Project B has an initial cost of $37,200 and cash flows of $18,300,$17,900,and $2,700 for Years 1 to 3,respectively.What is the incremental IRR?
A)15.67%
B)13.54%
C)15.91%
D)23.38%
E)27.31%
Q2) A project has a net present value of $1,200 and a project life of four years.Which one of these statements must be true?
A)The project's IRR is less than the required rate of return.
B)The project is expected to return $1,200 in Time 0 dollars over and above the discount rate.
C)The project would also have a positive net present value if Year 4 was omitted.
D)The project's cash inflows exceed its outflows by $1,200 over the four years.
E)The project is expected to return $1,200 in Year 4 dollars over and above the initial investment.
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Chapter 8: Making Capital Investment Decisions
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Q1) Margarite's Enterprises is considering a new project that will require $345,000 for new fixed assets,$160,000 for inventory,and $35,000 for accounts receivable.Short-term debt is expected to increase by $110,000.The project has a 5-year life.The fixed assets will be depreciated straight-line to zero over the life of the project.At the end of the project,the fixed assets can be sold for 25 percent of their original cost.The net working capital returns to its original level at the end of the project.The project is expected to generate annual sales of $550,000 and costs of $430,000.The tax rate is 35 percent and the required rate of return is 15 percent. What is the initial cost of this project?
A)$330,000
B)$430,000
C)$580,000
D)$360,000
E)$650,000
Q2) In capital budgeting,it is common practice to assume any net working capital required by a project will be recouped at the end of the project.What is the basis for this assumption?
Q3) When is it appropriate to use the equivalent annual cost (EAC)methodology,and how do you make a decision using it?
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Page 10
Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
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Q1) Financial break-even analysis is superior to accounting profit break-even analysis because it:
A)is easier to compute.
B)considers fixed costs while the accounting profit break-even does not.
C)utilizes Monte Carlo simulation.
D)considers the economic opportunity costs of the initial investment.
E)considers the contribution margin while the accounting profit break-even does not.
Q2) The option to wait:
I.may have minimal value if a project relates to a rapidly changing technology.
II.is partially dependent upon the discount rate applied to the project being evaluated.
III.could have a negative value.
IV.is valued based on a project's EAC.
A)I and III only
B)II and IV only
C)I and II only
D)II,III,and IV only
E)I,II,and III only
Q3) Explain the significance of the financial break-even point.
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Chapter 10: Risk and Return Lessons From Market History
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Q1) The average squared difference between the actual return and the average return is called the:
A)excess return.
B)variance.
C)standard deviation.
D)risk premium.
E)volatility return.
Q2) Over the period 1925-2012,stocks outperformed bonds by a wide margin.What conclusion should you draw from this performance?
A)Stocks will have a higher rate of return than bonds in any given year.
B)Investors should only purchase stocks.
C)Any stock you select will outperform a bond over the long-term.
D)On an annual basis,stock returns will exceed the rate of inflation but bond returns may or may not.
E)Stocks are riskier than bonds.
Q3) How does the payment of a dividend affect the total return on a stock?
Q4) What is the difference between an arithmetic and a geometric average? Is one preferred over the other?
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Page 12
Chapter 11: Return and Risk: the Capital Asset Pricing Model
Capm
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Q1) The stock of Martin Industries has a beta of 1.02.The risk-free rate of return is 3.7 percent and the market risk premium is 6.85 percent.What is the expected rate of return on Martin Industries stock?
A)10.69%
B)6.91%
C)16.42%
D)14.46%
E)10.19%%
Q2) Which one of the following would tend to indicate that a portfolio is being effectively diversified?
A)A decrease in the portfolio standard deviation
B)An increase in the portfolio rate of return
C)An increase in the portfolio beta
D)An increase in the portfolio standard deviation
E)A constant portfolio beta
Q3) Why are some risks diversifiable and some nondiversifiable? Give an example of each.
Q4) According to the CAPM,the expected return on a risky asset depends on three components.Describe each component,and explain its role in determining expected return.
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Chapter 12: Risk, Cost of Capital, and Valuation
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Q1) Wilson's is reviewing a project with an internal rate of return of 13.09 percent and a beta of 1.42.The market risk premium is 8.1 percent,the tax rate is 35 percent,and the risk-free rate is 2.9 percent.The firm's WACC is 12.68 percent.Will the project be accepted if the WACC is used as the discount rate for the project? Should the project be accepted according to the CAPM,and why or why not?
A)Yes;No;The CAPM return of 14.40 percent exceeds the IRR of 13.09 percent.
B)Yes;Yes;The project plots above the security market line.
C)Yes;Yes;The CAPM of 10.28 percent is less than the IRR of 13.09 percent.
D)No;Yes;The project plots above the security market line.
E)No;No;The project plots below the security market line.
Q2) Assume the overall market has a risk premium of 8.3 percent and the risk-free rate is 3.6 percent.What is the risk premium for a stock that has a .87 beta and a standard deviation of 11.2 percent?
A)3.62%
B)7.22%
C)7.60%
D)4.58%
E)10.82%
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Chapter 13: Efficient Capital Markets and Behavioral Challenges
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Q1) If you live in a remote area with limited access to the news but do a lot of historical research on firms,you would prefer that the financial markets be ____ form efficient so you can have an advantage in the marketplace.
A)strong
B)semiweak
C)semistrong
D)perfect
E)weak
Q2) The hypothesis that market prices reflect all available information of every kind is called _____ form efficiency.
A)stable
B)weak
C)semistrong
D)strong
E)open
Q3) What key item should managers look for when considering an acquisition?
Q4) Define the three forms of market efficiency.
Q5) Explain why in an efficient market investments have an expected net present value (NPV)of zero.
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Chapter 14: Capital Structure: Basic Concepts
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Q1) When comparing levered versus unlevered capital structures,leverage works to increase EPS for high levels of EBIT because interest payments on the debt:
A)vary with EBIT levels.
B)stay fixed,leaving more income to be distributed over fewer shares.
C)stay fixed,leaving less income to be distributed over fewer shares.
D)stay fixed,leaving less income to be distributed over more shares.
E)stay fixed,leaving more income to be distributed over more shares.
Q2) A general rule for managers to follow is to establish a firm's capital structure such that the firm's:
A)cost of equity is minimized.
B)bondholders are fully secured.
C)value is maximized.
D)dividend payout is maximized.
E)assets are minimized.
Q3) Identify and explain the Modigliani-Miller proposition that supports the concept that adding debt to a firm's capital structure increases the value of that firm.
Q4) Explain homemade leverage and why it matters.
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16
Chapter 15: Capital Structure: Limits to the Use of Debt
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Q1) The pecking order states how financing should be raised.In order to avoid asymmetric information problems and misinterpretation of whether management is sending a signal on security overvaluation the firm's first rule is to:
A)issue convertible debt prior to straight debt to save funds.
B)use short-term debt to its maximum available limit prior to issuing long-term debt.
C)issue new equity first in order to retain internal funds and avoid interest costs.
D)issue new debt prior to new equity.
E)use internal financing prior to external financing.
Q2) Issuing debt instead of new equity in a closely held firm more likely causes owner-managers to:
A)work harder than they would if equity had been issued.
B)consume more perquisites because the cost is passed on to the debtholders.
C)enjoy more leisure time than they would with an equity issue.
D)accept more unprofitable projects.
E)shirk their duties as they have less capital at risk.
Q3) Explain a Section 363 bankruptcy and identify its primary benefit over a traditional bankruptcy.
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Chapter 16: Dividends and Other Payouts
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Q1) The date by which a stockholder must be registered on the firm's roll as having share ownership in order to receive a declared dividend is called the:
A)ex-dividend date.
B)date of record.
C)ex-rights date.
D)declaration date.
E)date of payment.
Q2) Pete's Pets has 15,000 shares of stock outstanding with a par value of $1 per share and a market price of $26 a share.The balance sheet shows $15,000 in the common stock account,$315,000 in the capital in excess of par value account,and $189,000 in the retained earnings account.The firm just announced a 5-for-4 stock split.How many shares of stock will be outstanding after the split?
A)10,000 shares
B)12,000 shares
C)18,750 shares
D)22,250 shares
E)24,000 shares
Q3) Identify at least four pros of paying dividends.
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18
Chapter 17: Options and Corporate Finance
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Q1) The $22.50 put option on ALF stock is priced at $1.12.What is the total intrinsic value of one option contract if the underlying stock is currently selling for $23.10 a share?
A)-$60
B)-$52
C)$0
D)$60
E)$52
Q2) In the Black-Scholes option pricing model,what does the variable R represent?
A)The annually compounded risk-free rate of return
B)The continuously compounded variance
C)The continuously compounded annual risk-free rate of return
D)The annually compounded market rate of return
E)The continuously compounded market rate of return
Q3) The intrinsic value of a put is equal to the:
A)lesser of the stock price minus the exercise price or zero.
B)greater of the strike price minus the stock price or zero.
C)lesser of the stock price or zero.
D)lesser of the strike price or the stock price.
E)greater of the stock price minus the exercise price or zero.
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Page 19
Chapter 18: Short-Term Finance and Planning
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Q1) Southern Markets has an accounts receivable period of 30 days.In the first quarter of a calendar year,the firm's accounts receivable collections will equal its credit sales for the months of:
A)December,January,and February.
B)January,February,and March.
C)February,March,and April.
D)February and Match.
E)January and February.
Q2) The Down Towner has sales of $642,000 and average accounts payable of $56,400.The cost of goods sold is equivalent to 68 percent of sales.How long does it take Down Towner to pay its suppliers?
A)32.07 days
B)43.45 days
C)40.69 days
D)47.16 days
E)31.85 days
Q3) Is it possible to have a negative cash cycle? If not,why not? If so,how can this occur?
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Chapter 19: Raising Capital
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Q1) You own 600 of the 12,000 outstanding shares of BLM stock.The firm just announced that it will be issuing an additional 3,000 shares to the general public in a cash offer at $19 per share.What type of event are you participating in if you opt to purchase 100 of these additional shares?
A)Private placement
B)Seasoned equity offering
C)Dutch auction
D)IPO
E)Rights offer
Q2) DDP has 84,000 shares of stock outstanding at a market price per share of $49.The firm plans a rights offering of 21,000 shares with an offer price of $47 a share.What will be the ex-rights stock price?
A)$48.33
B)$48.50
C)$48.60
D)$48.54
E)$48.40
Q3) Provide two arguments in favor of IPO underpricing and two arguments against IPO underpricing.
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Page 21
Chapter 20: International Corporate Finance
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Q1) Assume the inflation rate in the U.S.is 1.8 percent.The spot rate for a foreign currency is .876 while the 1-year forward rate is .871.What is the approximate rate of inflation in the foreign country?
A)1.23%
B)2.37%
C)1.49%
D)1.63%
E)2.04%
Q2) Up-Town Markets exchanged their floating-rate payments with Downtown Markets' fixed rate payments.This exchange is referred to as a:
A)gilt exchange.
B)forward rate.
C)cross-rate.
D)spot exchange.
E)swap.
Q3) What is required for absolute purchasing power parity to hold? Do you think absolute PPP can hold for a commodity sold in both North Dakota and Canada? How about Houston,Texas,and Winnipeg,Manitoba?
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Chapter 21: Mergers and Acquisitions Web Only
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Q1) Which one of these is the best justification for acquiring a firm?
A)Increasing the bidder firm's sphere of political influence
B)Managing a larger firm to justify higher management salaries
C)Desire to control more employees
D)Creating financial value by combining the bidder and target firms
E)Creating accounting goodwill
Q2) Explain the pros and cons of a cash acquisition over a stock acquisition.
Q3) Which of these may be a source of synergy?
I.Unused debt capacity
II.Economies of scale
III.Increase in overall revenue
IV.Unused net operating losses
A)I and IV only
B)II and III only
C)II,III,and IV only
D)I,II,and III only
E)I,II,III,and IV
Q4) Explain a golden parachute and justify why a firm's shareholders may be willing to agree to such an arrangement.
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