Corporate Finance
Final Exam
Course Introduction
Corporate Finance is a foundational course that examines the principles and tools necessary for effective financial decision-making within corporations. The course covers key topics such as capital budgeting, valuation of assets and companies, risk and return, cost of capital, capital structure, dividend policy, and working capital management. Students will learn how financial managers assess investment opportunities, procure funding, and manage resources to maximize shareholder value. Real-world case studies and quantitative techniques are used to enhance analytical skills and develop practical solutions to common financial challenges faced by businesses.
Recommended Textbook
Financial Markets and Institutions 12th Edition by Jeff Madura
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Page 2
Chapter 1: Role of Financial Markets and Institutions
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Sample Questions
Q1) Securities represent a claim on the issuer.
A)True
B)False
Answer: True
Q2) Which of the following is most likely to be described as a depository institution?
A) finance companies
B) securities firms
C) credit unions
D) pension funds
E) insurance companies
Answer: C
Q3) The adoption of the euro increased business between European countries and created a more competitive environment in Europe.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Determination of Interest Rates
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Q1) If a strong economy allows for a large ____ in households' income, the supply curve will shift ____.
A) decrease; outward
B) increase; inward
C) increase; outward
D) none of the above
Answer: C
Q2) The federal government's _________ determines the budget deficit and therefore determines the government's demand for loanable funds.
A) monetary policy
B) fiscal policy
C) congressional policy
D) economic policy
Answer: B
Q3) The ____ sector is the largest supplier of loanable funds.
A) household
B) government
C) business
D) none of the above
Answer: A
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Chapter 3: Structure of Interest Rates
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Q1) In some time periods, there is evidence that corporations initially financed long-term projects with short-term funds. They planned to borrow long-term funds once interest rates were lower. Thisspecifically supports the ____ for explaining the term structure of interest rates.
A) liquidity premium theory
B) expectations theory
C) segmented markets theory
D) A and C
Answer: B
Q2) Interest rate movements across countries tend to be _________ correlated as a result of ____________ financial markets.
A) positively; internationally integrated
B) positively; fully segmented
C) negatively; partially segmented
D) negatively; internationally integrated
Answer: A
Q3) The higher a bond rating, the lower the perceived credit risk.
A)True
B)False
Answer: True
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Chapter 4: Functions of the Fed
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Sample Questions
Q1) All commercial banks are required to be members of the Fed.
A)True
B)False
Q2) Most of the Fed's income is transferred to the U.S. Department of Justice.
A)True
B)False
Q3) The form of money consisting of currency held by the public and checkable deposits at depository institutions is called
A) M1.
B) M2.
C) M3.
D) MMDA.
Q4) All ____ are required to be members of the Federal Reserve System.
A) state banks
B) national banks
C) savings and loan associations
D) finance companies
E) A and B
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Page 6
Chapter 5: Monetary Policy
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Q1) The Fed can ____ the level of spending as a means of stimulating the economy by ____ the money supply.
A) increase; decreasing
B) decrease; increasing
C) decrease; decreasing
D) increase; increasing
Q2) To correct excessive inflation, the Fed could use open market operations by buying Treasury securities in the secondary market.
A)True
B)False
Q3) The time between when the Fed adjusts the money supply and when the adjustment has an effect on the economy is the
A) recognition lag.
B) implementation lag.
C) impact lag.
D) open-market lag.
Q4) The Fed needs the approval of the presidential administration to make decisions. A)True
B)False
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Chapter 6: Money Markets
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Sample Questions
Q1) The so-called "flight to quality" causes the risk differential between risky and risk-free securities to be
A) eliminated.
B) reduced.
C) increased.
D) unchanged (there is no effect).
Q2) Assume investors require a 5 percent annualized return on a six-month T-bill with a par value of $10,000. The price investors would be willing to pay is $____.
A) 10,000
B) 9,524
C) 9,756
D) none of the above
Q3) An investor initially purchased securities at a price of $9,923,418, with an agreement to sell them back at a price of $10,000,000 at the end of a 90-day period. The repo rate is ____ percent.
A) 3.1
B) 0.77
C) 1
D) none of the above
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Page 8
Chapter 7: Bond Markets
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Sample Questions
Q1) High-risk bonds are called trash bonds.
A)True
B)False
Q2) Bonds are issued in the primary market through a telecommunications network.
A)True
B)False
Q3) Corporate bonds are more standardized than stocks.
A)True
B)False
Q4) A call provision on bonds normally
A) allows the firm to sell new bonds at par value.
B) gives the firm to sell new bonds above market value.
C) allows the firm to sell bonds to the Treasury.
D) allows the firm to buy back bonds that it previously issued.
Q5) All of the bonds issued by a particular company will have the same maturity, price, and credit rating.
A)True B)False
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Chapter 8: Bond Valuation and Risk
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Q1) Any announcement that signals stronger than expected economic growth tends to increase bond prices.
A)True
B)False
Q2) A zero-coupon bond makes no coupon payments.
A)True
B)False
Q3) If the level of inflation is expected to decrease, there will be upward pressure on interest rates and on the required rate of return on bonds.
A)True
B)False
Q4) Duration is a measure of the life of a bond on a present value basis.
A)True
B)False
Q5) Although the European debt crisis had substantial effects on European financial markets, the crisis was contained and did not affect markets and financial institutions outside Europe.
A)True
B)False
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Chapter 9: Mortgage Markets
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Sample Questions
Q1) At a given point in time, the interest rate offered on a new fixed-rate mortgage is typically ____ the initial interest rate offered on a new adjustable-rate mortgage.
A) below
B) above
C) equal to
D) all of the above are very common
Q2) Which of the following is not a guarantor of federally insured mortgages?
A) Federal Housing Administration (FHA)
B) Veterans Administration (VA)
C) Federal Deposit Insurance Corporation (FDIC)
D) All of the above are guarantors of federally insured mortgages.
Q3) "Securitization" refers to the private insurance of conventional mortgages.
A)True
B)False
Q4) Mortgages are rarely sold in the secondary market.
A)True
B)False
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Chapter 10: Stock Offerings and Investor Monitoring
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Q1) Most individual investors attend road shows of firms that are about to go public before they purchase shares at the time of an IPO.
A)True
B)False
Q2) A firm will typically attempt to sell shares from a secondary offering
A) far below the prevailing market price.
B) far above the prevailing market price.
C) at the prevailing market price.
D) at the offer price of the IPO.
Q3) The prevailing price per share divided by the firm's earnings per share is known as the
A) dividend yield.
B) price-earnings ratio.
C) fully diluted earnings per share.
D) annual dividend.
Q4) Private firms that need a large equity investment but are not yet in a position to go public may attempt to obtain funding from a venture capital (VC) fund.
A)True
B)False
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Chapter 11: Stock Valuation and Risk
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Sample Questions
Q1) A firm's stock price is affected not only by macroeconomic and market conditions but also by firm-specific conditions.
A)True
B)False
Q2) The ____ is commonly used as a proxy for the risk-free rate in the capital asset pricing model.
A) Treasury bond rate
B) prime rate
C) discount rate
D) federal funds rate
Q3) Investors can avoid unsystematic risk by:
A) using the capital asset pricing model.
B) investing in stocks with low PE ratios.
C) holding diversified portfolios.
D) using the free cash flow model.
Q4) A weak dollar may enhance the value of a U.S. firm whose sales are dependent on the U.S. economy.
A)True
B)False
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Chapter 12: Market Microstructure and Strategies
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Sample Questions
Q1) Mark would like to purchase a stock priced at $70. The stock is not expected to pay any dividends in the coming year. Mark can either put up the entire amount and purchase the stock, or borrowhalf of the investment amount from his brokerage firm at an annual interest rate of 12 percent and put up the remainder. Mark thinks he can sell the stock for $100 after one year. If Mark borrows from his brokerage firm, his estimated return on the stock would be ____ percent.
A) 42.86
B) 85.71
C) 73.71
D) 30
Q2) A criticism of dark pools is that they:
A) reduce transparency.
B) are more expensive than the public stock exchanges.
C) are not accessible to institutional investors.
D) cannot be used to trade large blocks of stock.
Q3) A stop-loss order is a particular type of limit order whereby the investor specifies a selling price that is below the current market price of the stock.
A)True
B)False
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Page 14
Chapter 13: Financial Futures Markets
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Sample Questions
Q1) Assume that corporate bond portfolio managers are concerned about the possibility of many bond defaults resulting from a future recession. A short position in Treasury bond futures ____ an effective hedge against the credit (default) risk. A short position in Treasury bill futures ____ an effective hedge against the credit (default) risk. A) would be; would be B) would be; would not be C) would not be; would not be D) would not be; would be
Q2) A bond index futures contract allows for the buying, but not the selling, of a bond index for a specified price at a specified date.
A)True
B)False
Q3) Purchasers of financial futures contracts usually know who the sellers are, and vice versa.
A)True
B)False
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Page 15
Chapter 14: Options Markets
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Sample Questions
Q1) An option with a higher exercise price has a higher call option premium and a lower put option premium.
A)True
B)False
Q2) Reese Insurance company sold a call option on interest rate futures with an exercise price of 92-10. The premium on the call option is 2-24. Just before the expiration date, the price of Treasurybond futures is 97-14. At this time, the option was exercised as the buyer closed out the position by selling an identical futures contract. Reese's net gain from selling the call option is $____.
A) 2,687.50
B) -2,687.50
C) 2,375.00
D) 7,437.50
E) none of the above
Q3) The writer of a put option is obligated to provide the specified financial instrument at the price specified by the option contract if the owner exercises the option.
A)True
B)False
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Chapter 15: Swap Markets
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Sample Questions
Q1) If a firm negotiates a plain vanilla swap, it will provide ____ payments in exchange for ____ payments.
A) fixed-rate; floating-rate
B) fixed-rate euro; fixed-rate dollar
C) stock dividend; fixed-rate
D) stock dividend; floating-rate
Q2) Savings institutions participate in the swap market primarily to A) serve as an intermediary by matching up two parties in a swap.
B) serve as a dealer by taking the counterparty position in a swap.
C) reduce interest rate risk.
D) none of the above
Q3) The option on a putable swap would most likely be exercised if interest rates
A) rise.
B) fall.
C) remain constant.
D) remain somewhat stable.
Q4) An equity swap involves the exchange of interest payments for payments linked to the degree of change in a bond index.
A)True
B)False
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Chapter 16: Foreign Exchange Derivative Markets
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Sample Questions
Q1) A speculator who expects the euro to appreciate might:
A) Purchase euros forward; when they are received, sell them in the spot market.
B) Sell euros forward, and then purchase them in the spot market just before fulfilling the forward obligation.
C) Sell futures contracts on euros, and then purchase euros in the spot market just before fulfilling the futures obligation.
D) all of the above
Q2) The primary advantage of currency options over forward and futures contracts is that they provide a right rather than an obligation to purchase or sell a particular currency at a specified pricewithin a given period.
A)True
B)False
Q3) The forward rate premium is dictated by the national income differential of the two currencies.
A)True
B)False
Q4) The indirect exchange rate is always the reciprocal of the direct exchange rate.
A)True
B)False
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Chapter 17: Commercial Bank Operations
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Sample Questions
Q1) Money market deposit accounts differ from conventional time deposits in that they A) specify a maturity.
B) offer limited check-writing privileges.
C) are less liquid.
D) none of the above
Q2) Before establishing foreign branches, a U.S. bank must obtain the approval of the:
A) U.S. Treasury
B) U.S. Commerce Department.
C) Federal Deposit Insurance Corporation.
D) Federal Reserve
Q3) Commercial banks are not allowed to invest in
A) Treasury securities
B) Freddie Mac securities.
C) Fannie Mae securities.
D) Banks can invest in all securities mentioned above.
Q4) Proprietary trading is generally less risky than a bank's lending operations.
A)True
B)False
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Chapter 18: Bank Regulation
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Q1) National banks are regulated by ____, and state banks are regulated by ____.
A) the Comptroller of the Currency; their state agency
B) the Comptroller of the Currency; the Comptroller of the Currency
C) their state agency; their state agency
D) their state agency; the Comptroller of the Currency
Q2) The Depository Institutions Deregulation and Monetary Control Act of 1980 allowed banks to set their own
A) reserve requirements.
B) capital ratios.
C) interest rates on savings deposits.
D) corporate loan interest rates.
Q3) All Fed member banks must hold
A) private insurance on deposits
B) FDIC insurance on deposits.
C) both FDIC and private insurance on deposits
D) none of the above
Q4) The Sarbanes-Oxley Act (2002) was enacted in response to some banks taking too much risk.
A)True
B)False
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Chapter 19: Bank Management
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Sample Questions
Q1) Banks would reduce their liquidity by restructuring their asset portfolio to contain fewer ____ and more ____.
A) Treasury securities; excess reserves
B) loans; Treasury securities
C) corporate bonds; Treasury securities
D) none of the above
Q2) For most banks, the average duration of liabilities exceeds the average duration of assets, so the duration gap is positive.
A)True
B)False
Q3) Macon Bank has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million. Macon Bank's net interest margin is
A) $1 million.
B) -$1 million.
C) 5 percent.
D) -5 percent.
Q4) Banks increase their risk by increasing their capital as a percentage of assets
A)True
B)False
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Chapter 20: Bank Performance
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Sample Questions
Q1) Interest income generated from all a bank's assets is called
A) net interest margin.
B) the spread.
C) gross interest income.
D) net interest income.
Q2) Which of the following factors affecting a bank's gross interest income is not influenced by the bank's policy decisions?
A) maturity and rate sensitivity of the bank's assets
B) market interest rate movements
C) the bank's loan rate
D) composition of the bank's assets
Q3) Any individual bank's ROA depends on the bank's policy decisions, but not on uncontrollable factors relating to the economy and government regulations.
A)True
B)False
Q4) The value of a commercial bank can be modeled as the present value of its future cash flows.
A)True B)False
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Chapter 21: Thrift Operations
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Sample Questions
Q1) Today, credit unions are regulated as to the A) types of services they can offer.
B) rates they offer on deposits.
C) maturity of residential loans they can make.
D) size of residential mortgage loans they can make.
Q2) Stock-owned savings institutions ____ susceptible to unfriendly takeovers. Mutual savings institutions ____ susceptible to unfriendly takeovers. A) are; are not B) are; are C) are not; are D) are not; are not
Q3) The National Credit Union Administration (NCUA) is responsible for regulating savings institutions.
A)True
B)False
Q4) The capital of savings institutions is primarily composed of retained earnings and funds obtained from issuing stock.
A)True B)False
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Chapter 22: Finance Company Operations
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Sample Questions
Q1) Finance companies are not subject to state regulations on intrastate business.
A)True
B)False
Q2) Finance companies would prefer to increase their long-term debt when interest rates
A) are relatively low and are expected to increase.
B) have increased.
C) have been stable for several years.
D) are projected to decrease.
Q3) Overall, the liquidity risk of finance companies is higher than that of other financial institutions.
A)True
B)False
Q4) When a finance company purchases a firm's receivables at a discount and becomes responsible for processing and collecting the balances of these accounts, it acts as a
A) leasing agent.
B) lessor.
C) lessee.
D) factor.
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Chapter 23: Mutual Fund Operations
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Sample Questions
Q1) Equity REITs essentially represent fixed-income portfolios, so their market values are heavily influenced by interest rate movements.
A)True
B)False
Q2) Mutual funds must register with the U.S. Treasury and provide interested investors with a prospectus that discloses details about the components of the funds and the risks involved.
A)True
B)False
Q3) Large mutual funds can exert some control over the management of firms because they commonly are the largest shareholders.
A)True
B)False
Q4) Most closed-end funds invest in
A) stock and bonds.
B) money market securities.
C) gold.
D) derivatives.
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Page 25
Chapter 24: Securities Operations
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Sample Questions
Q1) Flotation costs as a percentage of the value of securities issued are ____ for ____ issues.
A) lower; small
B) lower; large
C) higher; large
D) A and C
Q2) Which of the following is not a service that is commonly performed by a securities firm?
A) setting regulatory rules for stock exchanges
B) origination
C) underwriting
D) distribution
Q3) Securities firms that converted to bank holding companies during the credit crisis:
A) gained more flexibility to obtain financing from the Federal Reserve.
B) had to give up their traditional securities function of underwriting.
C) came under greater regulatory oversight by the Securities Investor Protection Corporation.
D) were prohibited from investing in or selling mortgage-backed securities.
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26
Chapter 25: Insurance Operations
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Sample Questions
Q1) Life insurance companies can attempt to reduce their exposure to interest rate risk by
A) increasing their proportion of long-term assets.
B) diversifying the age distribution of their customer base.
C) increasing their proportion of short-term assets.
D) concentrating on an older age distribution of their customer base.
Q2) Which type of life insurance policy specifically accommodates the needs of people who need more insurance now than later?
A) whole life
B) term
C) decreasing term
D) universal life
Q3) ____ are the most popular assets of life insurance companies.
A) Corporate stocks and corporate debt securities
B) Treasury securities
C) Mortgages and mortgage-backed securities
D) State and local bonds
Q4) Group insurance policies are very popular for employers and employees.
A)True
B)False
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Chapter 26: Pension Fund Operations
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Q1) A defined-benefit plan provides benefits that are determined by the accumulated contributions and the fund's investment performance.
A)True
B)False
Q2) To reduce interest rate risk, pension fund managers can
A) shift from variable-rate to fixed-rate bonds.
B) increase the average maturity on fixed-rate bonds.
C) sell bond futures contracts.
D) reduce the investment in money market securities.
Q3) A ____ plan allows a firm to know with certainty the amount of funds to contribute. The ____ plan allows a firm to know with certainty the amount of benefits that must be provided.
A) defined-benefit; defined-benefit
B) defined-contribution; defined-contribution
C) defined-contribution; defined-benefit
D) defined-benefit; defined-contribution
Q4) Underfunded pensions are primarily a problem with defined-contribution pension plans.
A)True
B)False
28
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