Corporate Finance
Final Exam Questions
Course Introduction
Corporate Finance explores the fundamental principles and practices governing financial decision-making within corporations. The course covers topics such as capital budgeting, risk and return analysis, cost of capital, capital structure, dividend policy, working capital management, and financial planning. Through a combination of theoretical frameworks and real-world case studies, students learn how firms assess investment opportunities, finance their operations, and create value for shareholders, while considering the broader economic and regulatory environment. This course equips students with analytical tools essential for making informed financial decisions in a corporate context.
Recommended Textbook Fundamentals of Corporate Finance 2nd Edition by Jonathan Berk
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Page 2
Chapter 1: Corporate Finance and the Financial Manager
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Q1) What is the term for the applicable price that the seller gets when he sells a stock on the exchange?
Answer: The seller gets the bid price when he sells a stock on the exchange.
Q2) An S corporation earns $4.50 per share before taxes.The corporate tax rate is 35%,the personal tax rate on dividends is 20%,and the personal tax rate on non-dividend income is 39%.What is the total amount of taxes paid if the company pays a $2.00 dividend?
A)$0.90
B)$1.58
C)$2.48
D)$1.76
Answer: D
Q3) A limited liability company is essentially
A)a limited partnership without limited partners.
B)a limited partnership without a general partner.
C)just another name for a limited partnership.
D)just another name for a corporation.
Answer: B
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3
Chapter 2: Introduction to Financial Statement Analysis
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Q1) The notes to the financial statements would be LEAST likely to be used for which of the following purposes?
A)to provide information regarding the context in which these financial numbers were generated
B)to disclose the financial implications of any off balance sheet transactions
C)to show how the value of assets listed in the financial statements were arrived at D)to explain the method of accounting that was used in the preparation of the financial statements
Answer: B
Q2) What is a firm's gross profit?
A)the difference between the sales and other income generated by the firm,and all costs,taxes,and expenses incurred by the firm in a given period
B)the difference between sales revenues and the costs associated with those sales.
C)the difference between sales revenues and cash expenditures associated with those sales.
D)all of the above
Answer: B
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4
Chapter 3: Time Value of Money: An Introduction
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Sample Questions
Q1) A wholesale food retailer is offered $14 per two-layer carton for 5000 cartons of peaches.The wholesaler can buy peaches from their growers at $12.50 per carton.Shipping costs $1.50 per carton,for the first 1000 cartons,and $1.00 per carton for every carton over that.Will taking this opportunity increase the value of the wholesale food retailer?
A)No.The costs are $1200 more than the benefits.
B)No.The costs and the benefits are the same.
C)Yes.The costs are $1000 less than the benefits.
D)Yes.The costs are $2000 less than the benefits.
Answer: D
Q2) To compute the future value of a cash flow,you must:
A)discount it.
B)compound it.
C)double it.
D)arbitrage it.
Answer: B
Q3) Explain why a dollar today is worth more than a dollar tomorrow. Answer: A dollar today can be invested to earn interest,which will make it worth more than a dollar tomorrow.
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Page 5
Chapter 4: Time Value of Money: Valuing Cash Flow
Streams
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Q1) Since your first birthday,your grandparents have been depositing $1000 into a savings account on every one of your birthdays.The account pays 4% interest annually.Immediately after your grandparents make the deposit on your 18th birthday,the amount of money in your savings account will be closest to:
A)$25,645
B)$36,465
C)$12,659
D)$18,000
Q2) The internal rate of return (IRR)is the interest rate that sets the net present value (NPV)of the cash flows equal to zero
A)True
B)False
Q3) The present value (PV)(at age 30)of your retirement savings is closest to:
A)$87,000
B)$108,000
C)$46,600
D)$75,230
Q4) In terms of present value (PV),how much will Joe receive for selling the family business?
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Chapter 5: Interest Rates
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Q1) What is the shape of the yield curve and what expectations are investors likely to have about future interest rates?
A)inverted;higher
B)normal;higher
C)inverted;lower D)normal;lower
Q2) The monthly discount rate that you should use to evaluate the truck lease is closest to:
A)0.487%
B)0.512%
C)0.498%
D)0.500%
Q3) A homeowner has five years of monthly payments of $1400 before she has paid off her house.If the interest rate is 7% APR,what is the remaining balance on her loan?
A)$59,890
B)$64,918
C)$70,703
D)$84,000
Q4) Everything else remaining same,under what situation will APR and EAR be equal?
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Chapter 6: Bonds
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Q1) Which of the following bonds will be least sensitive to a change in interest rates?
A)a ten-year bond with a $2000 face value whose yield to maturity is 5.8% and coupon rate is 5.8% APR paid semiannually
B)a 15-year bond with a $5000 face value whose yield to maturity is 7.4% and coupon rate is 6.2% APR paid annually
C)a 20-year bond with a $3000 face value whose yield to maturity is 6.0% and coupon rate is 5.4% APR paid semiannually
D)a 30-year bond with a $1000 face value whose yield to maturity is 5.5% and coupon rate is 6.4% APR paid annually
Q2) The price (expressed as a percentage of the face value)of a one-year,zero-coupon corporate bond with a AAA rating is closest to:
A)94.70
B)95.60
C)94.16
D)95.42
Q3) How are the cash flows of a coupon bond different from an amortizing loan?
Q4) Under what situation can a zero-coupon bond be selling at par to its face value?
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Chapter 7: Stock Valuation
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Q1) Stocks that do not pay a dividend must have a value of $0.
A)True
B)False
Q2) Credenza Industries is expected to pay a dividend of $1.20 at the end of the coming year.It is expected to sell for $62.00 at the end of the year.If its equity cost of capital is 8%,what is the expected capital gain from the sale of this stock at the end of the coming year?
A)$3.48
B)$4.86
C)$14.28
D)$58.52
Q3) How can the dividend-discount model handle changing growth rates?
Q4) Assuming everything else remains unchanged,how does a firm's decision to increase its dividend-payout ratio affect its growth rate?
Q5) A floor broker is a person at the NASDAQ with a trading license who represents orders on the floor.
A)True
B)False
Q6) What is a major assumption about growth rate in the dividend-discount model?
Page 9
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Chapter 8: Investment Decision Rules
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Q1) An investor is considering the two investments shown above.Which of the following statements about these investments is true?
A)The investor should take investment A since it has a greater net present value (NPV).
B)The investor should take investment A since it has a greater internal rate of return (IRR).
C)The investor should take investment B since it has a greater net present value (NPV).
D)Neither investment should be taken since they both have a negative net present value (NPV).
Q2) How do you apply the Net Present Value rule when multiple projects are available and you have the added constraint of accepting only one project?
Q3) What is the decision criteria using the Net Present Value rule?
Q4) The Net Present Value rule implies that we should compare a project's net present value (NPV)to zero.
A)True
B)False
Q5) Under what situation can the net present value (NPV)profile be upward sloping?
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Chapter 9: Fundamentals of Capital Budgeting
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Q1) The level of incremental sales associated with introducing the new one hour photo service is closest to:
A)$90,000
B)$150,000
C)$60,000
D)$120,000
Q2) Which of the following statements is FALSE?
A)We can use scenario analysis to evaluate alternative pricing strategies for our project. B)Scenario analysis considers the effect on net present value (NPV)of changing multiple project parameters.
C)The difference between the internal rate of return (IRR)of a project and the cost of capital tells you how much error in the cost of capital it would take to change the investment decision.
D)Scenario analysis breaks the net present value (NPV)calculation into its component assumptions and shows how the net present value (NPV)varies as each one of the underlying assumptions changes.
Q3) What is the most important function of sensitivity analysis?
Q4) What are project externalities?
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Chapter 10: Stock Valuation: A Second Look
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Q1) If you want to value a firm that consistently pays out its earnings as dividends,the simplest model for you to use is the A)enterprise value model.
B)method of comparables.
C)dividend-discount model.
D)discounted free cash flow model.
Q2) Gonzales Corporation generated free cash flow of $88 million this year.For the next two years,the company's free cash flow is expected to grow at a rate of 8%.After that time,the company's free cash flow is expected to level off to the industry long-term growth rate of 4% per year.If the weighted average cost of capital is 10% and Gonzales Corporation has cash of $100 million,debt of $300 million,and 100 million shares outstanding,what is Gonzales Corporation's expected current share price?
A)$16.42
B)$13.85
C)$14.42
D)$18.42
Q3) What are the implications of the efficient markets hypothesis for corporate managers regarding accounting earnings?
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Chapter 11: Risk and Return in Capital Markets
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Q1) What care,if any,should be taken when selecting stocks for an investment portfolio?
Q2) Assume that you purchased Ford Motor Company stock at the closing price on December 31,2004 and sold it at the closing price on December 30,2005.Your realized annual return is for the year 2005 is closest to:
A)-44.5%
B)-45.1%
C)-47.3%
D)-48.5%
Q3) Many former employees at Enron,an energy trading and supply company,had a large part of their portfolio invested in Enron stock.These employees were bearing a high degree of ________ risk.
A)unsystematic
B)systematic
C)market specific
D)non-diversifiable
Q4) Investors should earn a risk premium for bearing unsystematic risk.
A)True
B)False
Q5) Is volatility a reasonable measure of risk when evaluating large portfolios?
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Chapter 12: Systematic Risk and the Equity Risk Premium
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Q1) While we are using historic return to estimate a stock's beta,why can't we use historic data to forecast the expected return for the stock?
Q2) The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:
A)8%
B)9%
C)11%
D)6%
Q3) A portfolio has 40% of its value in IBM shares and the rest in Microsoft (MSFT).The volatility of IBM and MSFT are 40% and 30%,respectively,and the correlation between IBM and MSFT is -0.3.What is the standard deviation of the portfolio?
A)19.95%
B)18.65%
C)22.17%
D)20.18%
Q4) What diversification,if any,is achieved if two stocks in a portfolio are perfectly positively correlated?
Q5) Is it possible for a stock to have high total risk but low systematic risk?
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Chapter 13: The Cost of Capital
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Q1) Many financial managers use market risk premiums that are closer to 5%,which is lower than historical averages,because investors require a ________ risk premium for holding risky securities than in the past.
A)lower
B)higher
C)similar
D)none of the above
Q2) When we compute the cost of equity capital for a project we assume that the ________ of the project is equivalent to the average risk of the firm's investments.
A)diversifiable risk
B)market risk
C)non-systematic risk
D)volatility
Q3) When corporate tax rates decline,the net cost of debt financing
A)decreases.
B)is unchanged.
C)increases.
D)none of the above
Q4) What is the assumption about risk when using WACC to evaluate a project?
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Chapter 14: Raising Equity Capital
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Q1) Which of the following best describes a firm commitment IPO?
A)The underwriter purchases the entire issue at a small discount and then resells it at the offer price.
B)The underwriter sells new issues directly to the public in an online auction.
C)The underwriter tries to sell the stock for the best possible price but does not guarantee that the stock will be sold.
D)The underwriter solicits bids from investors and chooses the highest price at which there is sufficient demand to sell the entire issue.
Q2) Moon Company plans to issue 10 million shares in a seasoned equity offering.The owner,Ken Moon,plans to sell 4 million shares as part of the offering.Which of the following is true regarding the seasoned equity issue?
A)It is a primary offering.
B)It is a secondary offering.
C)Some shares are primary shares and some shares are secondary shares.
D)None of the above is true regarding this seasoned equity offering.
Q3) What are some of the disadvantages of going public?
Q4) What are angel investors?
Q5) What is the general long run performance of an IPO?
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Chapter 15: Debt Financing
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Q1) Which of the following statements is FALSE?
A)Global bonds combine the features of domestic,foreign,and Eurobonds,and are offered for sale in several different markets simultaneously.
B)In a leveraged buyout (LBO),a group of private investors purchases all the equity of a public corporation.
C)A term loan is a bank loan that lasts for a specific term.
D)Eurobonds are international bonds that are denominated in the local European currency of the country in which they are issued.
Q2) A company issues a callable (at par)20-year,5% coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a price of $102 per $100 of face value.What is the yield to maturity of this bond when it is released?
A)2.40%
B)4.84%
C)5.60%
D)6.66%
Q3) What is yield to worst?
Q4) What are bond covenants?
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Page 17
Chapter 16: Capital Structure
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Q1) Which of the following statements is FALSE?
A)If we can identify a comparison firm whose assets have the same risk as the project being evaluated,and if the comparison firm is levered,then we can use its equity cost of capital as the cost of capital for the project.
B)We can calculate the cost of capital of the firm's assets by computing the weighted average of the firm's equity and debt cost of capital,which we refer to as the firm's weighted average cost of capital.
C)The portfolio of a firm's equity and debt replicates the returns we would earn if the firm were unlevered.
D)When evaluating any potential investment project,we must use a discount rate that is appropriate given the risk of the project's free cash flow.
Q2) A firm requires an investment of $20,000 and borrows $10,000 at 8%.If the return on equity is 20%,what is the firm's pre tax WACC?
A)14%
B)15%
C)16%
D)17%
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Chapter 17: Payout Policy
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Q1) Tax rates on dividends and capital gains differs across investors for a variety of reasons including A)income.
B)investment horizon.
C)tax jurisdiction.
D)all of the above
Q2) In a perfect capital market,when a dividend is paid,the share price drops by the amount of the dividend when the stock begins to trade ex-dividend.
A)True
B)False
Q3) Palo Alto Enterprises has $200,000 in cash.They wish to invest the money in Treasury bills at 5% and use the returns to pay dividends to shareholders after a year.Alternately they can pay a dividend and allow shareholders to make the investment.In perfect capital markets,which option will shareholders prefer?
A)immediate cash dividend
B)dividend after one year
C)prefer half from each source
D)indifferent between options
Q4) What choices does a firm have in using its free cash flow?
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Chapter 18: Financial Modeling and Pro Forma Analysis
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Q1) The asset and liability side of a pro forma balance sheet projection will not balance,in general,unless we make assumptions about how ________ and ________ will grow with sales.
A)dividends,equity
B)coupons,debt
C)debt,equity
D)dividends,preferred stock
Q2) Total working capital rather than changes in working capital has implications for cash flows.
A)True
B)False
Q3) One of the shortcomings of the percent of sales method is that it does not account for the fact that capacity changes are lumpy and not incremental.
A)True
B)False
Q4) For valuing a planned expansion,in addition to forecasting cash flows we need to estimate the firm's continuation value.
A)True
B)False
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Chapter 19: Working Capital Management
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Q1) The difference between a firm's operating cycle and its cash cycle is
A)its account receivable days.
B)its accounts payable days.
C)its inventory days.
D)There is no difference between the cash and operating cycles.
Q2) What is a compensating balance?
A)the cash a firm places into short-term investments
B)the cash a firm holds in order to pay its bills
C)the cash a firm holds to gain tax advantages
D)the cash a firm holds in an account at the bank in order for the bank to perform services for that firm
Q3) Jerome Industries has inventory days of 48,accounts receivable days of 21,and accounts payable days of 30.What is its cash conversion cycle?
A)39 days
B)57 days
C)69 days
D)72 days
Q4) Can a firm's cash cycle be longer than a firm's operating cycle?
Q5) What are the advantages of holding inventory?
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Chapter 20: Short-Term Financial Planning
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Q1) A company that makes decorations for Christmas trees has high sales in its fourth quarter but very low sales during the rest of the year.It manufactures decorations steadily throughout the year,however.Which of the following is NOT a likely consequence of this scenario?
A)The firm will need sources of short-term cash to fund inventory in the second and third quarters.
B)The firm will see negative net cash flows in the second and third quarter.
C)The firm will have a large short-term surplus in the fourth quarter.
D)Cash payables will rise from the first to fourth quarter.
Q2) Which of the following firms is likely to have the highest short-term financing needs?
A)a pharmaceutical manufacturer
B)a grocery store
C)an electric utility
D)a toy store
Q3) Commercial paper is usually a more expensive source of funds than a short-term bank loan.
A)True
B)False
Q4) What is the average and maximum maturity of commercial paper?
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Chapter 21: Option Applications and Corporate Finance
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Q1) Rose Industries is currently trading for $47 per share.The stock pays no dividends.A one-year European call option on Luther with a strike price of $45 is currently trading for $7.45.If the risk-free interest rate is 6% per year,then calculate the price of a one-year European put option on Luther with a strike price of $45.
Q2) This graph depicts the payoffs of a
A)a short position in a put option at expiration.
B)short position in a call option at expiration.
C)a long position in a put option at expiration.
D)a long position in a call option at expiration.
Q3) Assume you want to buy five call option contracts that with an exercise price closest to being at-the-money and that expires December 2010.The current price that you would have to pay for such a contract is:
A)$550
B)$110
C)$475
D)$300
Q4) What are European options?
Q5) When is an option in-the-money?
Q6) When is an option at-the-money?
Page 23
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Chapter 22: Mergers and Acquisitions
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Q1) Assume that Martin pays no premium to acquire Luther.Calculate Martin's price-earnings (P/E)ratio both pre and post merger.
Q2) Which of the following statements regarding mergers and taxes is false?
A)Carryback and carryforward provisions essentially deliver the benefits of conglomeration to a small firm with volatile earnings.
B)It might appear that a conglomerate has a tax advantage over a single-product firm simply because losses in one division can offset profits in another division.
C)Companies with current-year losses can also use them to offset earnings (carryback)for the twenty prior years.
D)The IRS will disallow a tax break if it can show that the principal reason for a takeover is tax avoidance,so it is unlikely that the tax advantage could,by itself,be a valid reason to acquire another firm.
Q3) On average,when a bid is announced,the stock price of the target drops.
A)True
B)False
Q4) What is a white knight?
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Chapter 23: International Corporate Finance
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Q1) Which of the following statements is FALSE?
A)If the foreign project is owned by a domestic corporation,managers and shareholders need to determine the home currency value of the foreign currency cash flows.
B)The most obvious difference between a domestic project and a foreign project is that the foreign project will most likely generate cash flows in a foreign currency.
C)The risk of the foreign project is unlikely to be exactly the same as the risk of domestic projects (or the firm as a whole),because the foreign project contains residual exchange rate risk that the domestic projects often do not contain.
D)In an internationally integrated capital market,two equivalent methods are available for calculating the net present value (NPV)of a foreign project: Either we can calculate the net present value (NPV)in the foreign country and convert it to the local currency at the forward rate,or we can convert the cash flows of the foreign project into the local currency and then calculate the net present value (NPV)of these cash flows.
Q2) What is foreign exchange market?
Q3) What are the timings of the foreign exchange market?
Q4) What are internationally segmented capital markets?
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Chapter 24: Leasing
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Q1) What will Luther's balance sheet look like if they acquire the new fleet of delivery trucks using an operating lease?
Q2) Suppose the lease is a five-year fair market value lease,and the trucks have a remaining useful life of 8 years.If the monthly lease payments are $25,000 and the appropriate discount rate is 6% APR with monthly compounding,will the lease be classified as an operating lease or a capital lease for the lessee?
A)Capital lease,because the title to the property transfers to the lessee at the end of the lease term.
B)Capital lease,because the present value of the minimum lease payments at the start of the lease is 90% or more of the asset's fair value.
C)Operating lease,because the present value of the minimum lease payments at the start of the lease is less than 90% of the asset's fair value.
D)Operating lease,because the lease term is more than 75% of the estimated economic life of the asset.
Q3) If St.Martin purchases the CT scanner,what is the amount of the lease-equivalent loan?
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Chapter 25: Insurance and Risk Management
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Q1) Insurance for large risks that cannot be well diversified has a ________,which increases its cost.
A)positive beta
B)moral hazard clause
C)negative beta
D)actuarially-biased risk
Q2) To cover the costs that result if some aspect of the business causes harm to a third party or someone else's property a firm would purchase
A)business interruption insurance.
B)property insurance.
C)business liability insurance.
D)key personnel insurance.
Q3) An interest rate that adjusts to current market conditions is called a ________.
A)floating rate.
B)fixed rate.
C)notional rate.
D)arbitrage rate.
Q4) What are some of the disadvantages of long-term supply contracts?
Q5) What is the actuarially fair cost of full insurance?
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Chapter 26: Corporate Governance
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Q1) Which of the following statements is false?
A)An active takeover market is part of the system through which the threat of dismissal is maintained.
B)When internal governance systems such as ownership,compensation,board oversight,and shareholder activism fail,the one remaining way to remove poorly performing managers is by mounting a hostile takeover.
C)Likely because hostile takeovers and internal governance systems are substitute mechanisms,researchers have found that boards are less likely to fire managers for poor performance during active takeover markets than they are during lulls in takeover activity.
D)The effectiveness of the corporate governance structure of a firm depends on how well protected its managers are from removal in a hostile takeover.
Q2) What is the role of takeovers in corporate governance?
Q3) How does a pyramid structure work?
Q4) What is corporate governance?
Q5) Describe the "stakeholder" model of corporate governance.
Q6) What is the difference between Inside,gray,and outside directors?
Q7) Describe the main requirements of the Sarbanes-Oxley Act of 2002.
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