Corporate Finance
Final Exam Questions
Course Introduction
Corporate Finance explores the principles and practices involved in managing a corporation's financial activities with the goal of maximizing shareholder value. The course examines crucial topics such as capital budgeting, risk assessment, cost of capital, debt and equity financing, dividend policy, and corporate valuation. Students learn how managers analyze investment opportunities, structure financing arrangements, and make decisions regarding acquisitions, mergers, and restructuring. Through case studies and real-world applications, the course provides a comprehensive understanding of both the theoretical frameworks and practical tools used in modern corporate financial management.
Recommended Textbook
Financial Management Principles and Applications 12th Edition by Sheridan Titman
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Page 2
Chapter 1: Getting Started-Principles of Finance
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Sample Questions
Q1) In efficient markets,price adjustments to new information are gradual.
A)True
B)False
Answer: False
Q2) If managers do not pursue the goal of maximizing shareholder wealth
A)they concentrate on more important matters like growing market share.
B)they can focus more on social responsibilities.
C)they are likely to lose their jobs.
D)they can focus more on long-term profitability.
Answer: C
Q3) A corporation is owned by
A)shareholders and partners.
B)the shareholders who hold the company's stock.
C)the Board of Directors.
D)its Chief Executive Officer.
Answer: B
Q4) The goal of the firm should be the maximization of profit.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Firms and the Financial Market
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Sample Questions
Q1) Financial intermediaries help bring savers and borrowers together.
A)True
B)False
Answer: True
Q2) Describe the costs and benefits to investors of owning Mutual Funds.
Answer: Owners of mutual fund shares get professional management of their portfolio,and get a diversified portfolio,as each mutual share is a share in the whole portfolio purchased by the mutual fund.In order to get these benefits,the investor must pay commissions upon purchase,and/or pay yearly management fees.The fees can significantly diminish the value of the shares of the mutual fund to the investor.An alternative for the investor is to buy an index fund,that is a fund that tracks an index such as the Dow Jones Industrial Average or the S & P 500.An index fund tracking the DJIA,for example,will automatically purchase stocks in the same percentage that they are used to determine the Dow Jones Industrial Average.Owning an index fund reduces costs,because there is no need to have professionals running the portfolio.
Q3) A company has the option to pay bond interest or not.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Understanding Financial Statements,taxes,and Cash Flows
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Sample Questions
Q1) Which of the following best represents the stream of income that is available to stockholders?
A)Net profit after tax
B)Earnings before interest,taxes and dividends
C)Gross profit
D)Operating profit
Answer: A
Q2) Total equity on the balance sheet increases as dividends paid increases.
A)True
B)False
Answer: False
Q3) Patriot Corporation purchased manufacturing equipment with an expected useful life of five years.The purchase of the machinery would be shown as
A)an expense on the balance sheet.
B)an expense on the income statement.
C)an asset on the balance sheet.
D)both an expense and an asset.
Answer: C
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Chapter 4: Financial Analysis-Sizing up Firm Performance
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Sample Questions
Q1) Wireless Communications has a total asset turnover of 2.66,total liabilities of $1,004,162,and sales revenues of $7,025,000.What is Wireless's debt ratio?
A)38.0%
B)14.3%
C)26.7%
D)81.1%
Q2) There is no such thing as a liquidity ratio being too high.
A)True
B)False
Q3) Holding all other variables constant,which of the following could cause a firm's current ratio to decrease from 3.0 to 2.5? An increase in A)inventory.
B)long-term debt.
C)accounts receivable.
D)accounts payable.
Q4) Discuss the limitations of ratio analysis.
Q5) What is the purpose of using common size balance sheets and common size income statements?
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Chapter 5: Time Value of Money-The Basics
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Sample Questions
Q1) High discount rates favor
A)neither long-term nor short-term investments.
B)both long-term and short-term investments.
C)long-term investments.
D)short-term investments.
Q2) Which of the following is the formula for present value?
A)FV<sub>n</sub> = P(1 + i)<sup>n</sup>
B)FV<sub>n</sub> = (1 + i)/P
C)FV<sub>n</sub> = P/(1 + i)<sup>n</sup>
D)FV<sub>n</sub> = P(1 + i)<sup>-n</sup>
Q3) The end of one time period and the beginning of the next occupy the same place on a timeline.
A)True
B)False
Q4) The first amount on a timeline represent the present value of all the future amounts at a given interest rate.
A)True
B)False
Q5) If you invest $450 today and it increases to $6,185 at the end of 20 years,what rate of return have you earned?
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Chapter 6: The Time Value of Money-Annuities and Other Topics
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Sample Questions
Q1) How much money must you pay into an account at the beginning of each of 30 years in order to have $10,000 at the end of the 30th year? Assume that the account pays 11% per annum,and round to the nearest $1.
A)$39
B)$46
C)$50
D)None of the above
Q2) A friend of yours would like you to lend him $5,000 today to be paid back in 5 annual payments.What would be the equal annual end-of-year payment on this loan if you charge your friend 7% interest?
A)$869.45
B)$1,000.00
C)$1,219.51
D)$1,350.00
Q3) If you have an opportunity cost of 10%,how much must you invest each year to have $4,000 accumulated in 10 years?
Q4) What is the value (price)of a bond that pays $400 semiannually for 10 years and returns $10,000 at the end of 10 years? The market discount rate is 10% paid semiannually.
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Chapter 7: An Introduction to Risk and Return-History of
Financial Market Returns
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Sample Questions
Q1) The expected rate of return is the weighted average of the possible returns for an investment.
A)True
B)False
Q2) Historically,in the United States stocks have had higher returns and greater volatility than have government bonds.
A)True
B)False
Q3) Why do the arithmetic average return and the geometric return differ?
Q4) What is the arithmetic average return of Roddy Richard's investment?
A)2.42%
B)3.96%
C)5.18%
D)15.1%
Q5) Investors are always rewarded for taking higher risk with higher realized returns. A)True
B)False
Q6) Are markets moving toward being more efficient or toward being less efficient?
9
Q7) Under the efficient market hypothesis,would securities be properly priced.
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Chapter 8: Risk and Return-Capital Market Theory
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Sample Questions
Q1) You are thinking of adding one of two investments to an already well diversified portfolio.
Security A Security B
Expected return = 12% Expected return = 12%
Standard deviation of returns = 20.9% Standard deviation of returns = 10.1%
Beta = .8 Beta = 2
If you are a risk-averse investor
A)security A is the better choice.
B)security B is the better choice.
C)either security would be acceptable.
D)cannot be determined with information given.
Q2) Unsystematic risk can be eliminated through diversification.
A)True
B)False
Q3) The CAPM designates the risk-return tradeoff existing in the market,where risk is defined in terms of beta.
A)True
B)False
Q4) Provide an intuitive discussion of beta and its importance for measuring risk.
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Chapter 9: Debt Valuation and Interest Rates
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Sample Questions
Q1) Which of the following statements about bonds is true?
A)As the maturity date of a bond approaches,the market value of a bond will become more volatile.
B)Long-term bonds have less interest rate risk than do short-term bonds.
C)Bond prices move in the same direction as market interest rates.
D)If market interest rates are above a bond's coupon interest rate,then the bond will sell below its par value.
Q2) You are considering the purchase of Hytec bonds that were issued 14 years ago.When the bonds were originally sold,they had a 30-year maturity and a 14.375% coupon interest rate that is payable semiannually.The bond is currently selling for $1,508.72.What is the yield to maturity on the bonds?
A)8.50%
B)14.38%
C)11.11%
D)7.67%
Q3) When inflation rates go up,bond prices go up as well.
A)True
B)False
Q4) Compare and contrast current yield and yield to maturity.
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Chapter 10: Stock Valuation
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Sample Questions
Q1) Determine the rate of return on a preferred stock that costs $50 and pays a $6 per share dividend.
Q2) Which of the following statements concerning preferred stock is correct?
A)Preferred stock generally is more costly to the firm than common stock.
B)Most issues of preferred stock have a cumulative feature.
C)Preferred dividend payments are tax-deductible.
D)Preferred stock is a riskier form of capital to the firm than bonds.
Q3) Sacramento Light & Power issued preferred stock in 1998 that had a par value of $85.The preferred stock pays a dividend of 5.75%.Investors require a rate of return of 6.50% today on this stock.What is the value of the preferred stock today? Round to the nearest $1.
A)$100
B)$85
C)$75
D)$16
Q4) The stockholder's expected rate of return consists of a dividend yield and interest.
A)True
B)False
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Page 12
Chapter 11: Investment Decision Criteria
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Sample Questions
Q1) The IRR assumes that cash flows are reinvested at the cost of capital.
A)True
B)False
Q2) Project January has a NPV of $50,000,project December has a NPV of $40,000.Which of the following circumstances could make it possible to choose December over January?
A)January has a shorter payback period.
B)The projects are mutually exclusive.
C)The projects have unequal lives.
D)The projects are mandated.
Q3) If a project has a profitability index greater than 1
A)the npv will also be positive.
B)the irr will be higher than the required rate of return.
C)the present value of future cash flows will exceed the amount invested in the project.
D)all of the above.
Q4) Some capital budgeting decisions may be mandated by government regulations.
A)True
B)False
Q5) Why is it so difficult for firms to find good investment ideas?
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Chapter 12: Analyzing Project Cash Flows
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Sample Questions
Q1) When replacing old assets with new assets,it is safe to assume that working capital requirements will remain the same.
A)True
B)False
Q2) If an investment project would make use of land which the firm currently owns,the project should be charged with
A)a sunk cost.
B)an opportunity cost.
C)amortization.
D)interest.
Q3) Depreciation expenses affect capital budgeting analysis by increasing A)taxes paid.
B)incremental cash flows.
C)the initial outlay.
D)working capital.
Q4) Incremental cash flows include all of the following EXCEPT
A)research and development costs.
B)increased labor costs from the project.
C)advertising costs.
D)both B and C.
Page 14
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Chapter 13: Risk Analysis and Project Evaluation
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Sample Questions
Q1) When using simulation to analyze a large capital project,the decision rule is A)there is no clear cut decision rule,but the probabilities will produce a more informed decision.
B)accept the project if the probability of a positive NPV is greater than 50%.
C)reject the project if the probability of a negative NPV is greater than 5%.
D)reject the project if the probability of a negative NPV is greater than 16%
Q2) Break-even NPV means that the expected rate of return on a project is equal to the required rate of return.
A)True
B)False
Q3) Gardner Furniture Co.has calculated its degree of operating leverage as 3.5.If Gardner can increase sales revenue by 5%,net operating income should increase by A)15%.
B)17.5%.
C)1.43%.
D)3.5%.
Q4) Most of the variables used in forecasting cash flows are known with certainty.
A)True
B)False
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Chapter 14: The Cost of Capital
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Sample Questions
Q1) The CAPM approach is used to determine the cost of A)debt.
B)preferred stock.
C)common equity.
D)long term funds.
Q2) A project with a positive NPV may have a negative NPV when flotation costs are considered.
A)True
B)False
Q3) The weighted average cost of capital is the minimum required return that must be earned on additional investment if firm value is to remain unchanged.
A)True
B)False
Q4) The percentage of common stock in Spencer's weighted average cost of capital is
A)62.5%.
B)66.7%.
C)6.25%.
D)38.1%.
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Page 16
Chapter 15: Capital Structure Policy
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Sample Questions
Q1) Why is the Debt to Assets Ratio always higher than the Debt to Value ratio?
Q2) Weaknesses of the EBIT-EPS analysis include
A)that it disregards the implicit costs of debt financing.
B)that it ignores the effect of the specific financing decision on the firm's cost of common equity capital.
C)that it considers only the level of the earnings stream and ignores the variability inherent in it.
D)all of the above.
Q3) Agency costs occur when managers choose the easiest form of financing over the value maximizing capital structure.
A)True
B)False
Q4) Which of the following should be excluded from a firm's capital structure?
A)Common equity
B)Non-interest bearing debt
C)Long-term debt
D)Short-term bank notes
Q5) Under what conditions are shareholders likely to incur agency costs when managers make capital budgeting decisions?
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Chapter 16: Dividend Policy
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Sample Questions
Q1) Managers avoid cutting dividends even in response to short-term fluctuations in earnings.
A)True
B)False
Q2) A reverse stock split,1 for 10 for example,should result in a higher price per share.
A)True
B)False
Q3) Which of the following is the most important factor motivating dividend policy for large American corporations?
A)Changes in EPS
B)Maintain constant dividend payout ratio
C)Avoiding flotation costs of selling new stock
D)Avoid reducing dividends per share
Q4) In 2013,Apple Computers decided to raise a large amount of money by selling bonds (previously the company had little or no debt)and use the proceeds to repurchase billions of dollars worth of the company's stock.The decision was made after Apple stock lost more than 40% of its value in a six month period when most stock prices were rising.What were the company's intentions?
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18
Chapter 17: Financial Forecasting and Planning
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Sample Questions
Q1) Banner's projected accounts payable balance for 2015 is
A)$160,000.
B)$120,000.
C)$200,000.
D)$300,000.
Q2) Strategic planning encompasses all of the following EXCEPT
A)a cash budget.
B)a description of the firm's core competencies and activities.
C)a definition of the firm's customers.
D)a description of the firm's competitors and its own competitive strengths and weaknesses.
Q3) Which of the following require adjustments when forecasting asset needs as a percent of sales?
A)If assets must be purchased in large,discrete quantities
B)When the firm has excess capacity
C)When assets can be leased rather than purchased
D)Both A and B
Q4) A budget is a forecast of future events.
A)True
B)False
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Chapter 18: Working Capital Management
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Sample Questions
Q1) Commercial paper
A)rates are generally higher than rates on bank loans and comparable sources of short-term financing.
B)generally has a minimum compensating balance requirement.
C)offers the firm with very large credit needs a single source for all its short-term financing.
D)has all of the properties stated above.
Q2) Queen Co.'s balance in accounts receivable is $240,000.Annual credit sales are $2,880,000.Queen's average collection period is
A)12 days.
B)30.4 days.
C)2.5 days.
D)There is not enough information.
Q3) If management expects interest rates to rise and credit to tighten in the near future,it should consider
A)increasing its use of commercial paper and loans secured by current assets.
B)decreasing the use of spontaneous financing.
C)decreasing the level of permanent financing.
D)increasing the level of permanent financing.
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Page 20
Chapter 19: International Business Finance
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Sample Questions
Q1) The purchasing power parity theory is least likely to apply to the price of A)oral surgery.
B)smart phones.
C)crude oil.
D)cane sugar.
Q2) One U.S.dollar buys 101.31 yen and 12.536 Mexican pesos.What is price of pesos in yen?
A)8.0815
B).12374
C).08082
D)12.3740
Q3) A direct quote in Bombay tells one how many British pounds can buy one Indian rupee.
A)True
B)False
Q4) Some complexities of conducting international business include
A)multiple currencies.
B)differing legal requirements.
C)restrictions on repatriating earnings.
D)all of the above.
Page 21
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Chapter 20: Corporate Risk Management
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Sample Questions
Q1) Firms that wish to minimize risk will attempt to
A)minimize the standard deviation of expected cash flows.
B)maximize the standard deviation of expected cash flows.
C)maximize expected cash flows.
D)balance expected cash flows with the standard deviation of expected cash flows.
Q2) Which of the following should determine whether or not the firm should purchase insurance from an outside party?
A)Only the frequency of incidents
B)The cost of the policy and the expected losses
C)Only the maximum size of incidents
D)Only the firms normal cash reserves
Q3) How should corporations decide when to self insure against certain risks and when to purchase insurance from outside parties?
Q4) Political risk is only a factor when the firm is considering foreign direct investments. A)True B)False
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