Corporate Finance
Final Test Solutions
Course Introduction
Corporate Finance explores the principles and practices involved in managing a firms financial resources. This course covers topics such as capital budgeting, investment decision-making, financial analysis, valuation of assets, risk management, capital structure, and dividend policy. Students will learn how companies obtain and deploy funds, assess investment opportunities, and create value for shareholders, with a focus on real-world application and ethical considerations in financial decision-making.
Recommended Textbook
Principles of Managerial Finance Brief 6th Edition by Lawrence J. Gitman
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15 Chapters
2750 Verified Questions
2750 Flashcards
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Chapter 1: The Role of Managerial Finance
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Sample Questions
Q1) In partnerships, a partner can readily transfer his/her wealth to other partners.
A)True
B)False
Answer: False
Q2) The financial manager places primary emphasis on cash flows, the inflow and outflow of cash.
A)True
B)False
Answer: True
Q3) The ________ is responsible for evaluating and recommending proposed asset investments.
A) Financial Manager
B) Credit Manager
C) Pension Fund Manager
D) Capital Expenditures Manager
Answer: D
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Page 3
Chapter 2: The Financial Market Environment
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Sample Questions
Q1) In the OTC market, the ask price is the highest price offered by a dealer to purchase a given security.
A)True
B)False
Answer: False
Q2) Financial markets are intermediaries that channel the savings of individuals, businesses and government into loans or investments.
A)True
B)False
Answer: False
Q3) The ________ market is where securities are initially issued and the ________ market is where pre-owned securities (not new issues) are traded.
A) primary; secondary
B) money; capital
C) secondary; primary
D) primary; money
Answer: A
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Page 4
Chapter 3: Financial Statements and Ratio Analysis
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Sample Questions
Q1) The ________ ratio is commonly used to assess the owner's appraisal of the share value.
A) debt
B) price/earnings
C) return on equity
D) return on total assets
Answer: B
Q2) Net fixed assets represent the difference between gross fixed assets and the total expense recorded for the depreciation over then entire lives of the firm's fixed assets.
A)True
B)False
Answer: True
Q3) All of the following are examples of fixed assets EXCEPT
A) automobiles.
B) buildings.
C) marketable securities.
D) equipment.
Answer: C
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Chapter 4: Cash Flow and Financial Planning
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185 Flashcards
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Sample Questions
Q1) The ZZZ Mattress Co. has been requested by the 1st National Bank, a major creditor, to prepare a pro forma balance sheet for the year ending, December 31, 2011. Using the percent-of-sales method and the following financial data, prepare the pro forma income statement and balance sheet and discuss the resulting external financing required. (See Table 4.7)
2011 sales are estimated at $330,000.
Accounts receivable represent 20 percent of sales. A minimum cash balance of $1,650 is maintained.
Inventory represents 32 percent of sales.
Fixed-asset outlays in 2006 are $20,000. Total depreciation expense for 2011 will be $15,000.
Accounts payable represents 15 percent of sales.
Notes payable and accruals will remain the same.
No long-term debt will be retired in 2011.
No common stock will be repurchased in 2011.
The firm will pay dividends equal to 50 percent of its earnings after taxes.
Q2) The finance definition of operating cash flow excludes interest as an operating flow. A)True B)False
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Page 6
Chapter 5: Time Value of Money
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Sample Questions
Q1) The annual percentage rate (APR) is the nominal rate of interest, found by multiplying the periodic rate by the number of periods in one year.
A)True
B)False
Q2) Assume Julian has a choice between two deposit accounts. Account A has an annual percentage rate of 7.55 percent but with interest compounded monthly. Account B has an annual percentage rate of 7.45 percent with interest compounded continuously. Which account provides the highest effective annual return?
A) Account A
B) Account B
C) Both provide the same effective annual return.
D) We don't have sufficient information to make a choice.
Q3) A wealthy industrialist wishes to establish a $2,000,000 trust fund which will provide income for his grandchild into perpetuity. He stipulates in the trust agreement that the principal may not be distributed. The grandchild may only receive the interest earned. If the interest rate earned on the trust is expected to be at least 7 percent in all future periods, how much income will the grandchild receive each year?
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Page 7
Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) A call feature in a bond allows bondholders to change each bond into a stated number of shares of common stock.
A)True
B)False
Q2) The risk premium over and above the risk free rate consists of a number of components, including all of the following EXCEPT
A) default risk.
B) inflation risk.
C) tax treatment risk.
D) liquidity risk.
Q3) There is an inverse relationship between the quality or rating of a bond and the rate of return it must provide bondholders.
A)True
B)False
Q4) Because a rise in interest rates, and therefore the required return, results in an increase in bond value, bondholders are typically more concerned with dropping interest rates.
A)True B)False
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Chapter 7: Stock Valuation
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Sample Questions
Q1) Because equity holders are the last to receive any distribution of assets as a result of bankruptcy proceedings, common stockholders expect
A) fixed dividend payments.
B) greater compensation in the form of dividends and/or rising stock prices.
C) all profits to be paid out in dividends.
D) warrants to be attached to the stock issue as a sweetener.
Q2) In an inefficient market, stock prices adjust quickly to new public information. A)True B)False
Q3) If the expected return is above the required return on an asset, rational investors will
A) buy the asset, which will drive the price up and cause expected return to reach the level of the required return.
B) sell the asset, which will drive the price down and cause the expected return to reach the level of the required return.
C) sell the asset, which will drive the price up and cause the expected return to reach the level of the required return.
D) sell the asset, since price is expected to decrease.
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Page 9
Chapter 8: Risk and Return
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Sample Questions
Q1) The ________ is a measure of relative dispersion used in comparing the risk of assets with differing expected returns.
A) coefficient of variation
B) chi square
C) mean
D) standard deviation
Q2) If you expect the market to increase which of the following portfolios should you purchase?
A) A portfolio with a beta of 1.9.
B) A portfolio with a beta of 1.0.
C) A portfolio with a beta of 0.
D) A portfolio with a beta of -0.5.
Q3) The inclusion of assets from countries that are less sensitive to the U.S. business cycle reduces the portfolio's responsiveness to market movement and to foreign currency fluctuation.
A)True
B)False
Q4) Unsystematic risk can be eliminated through diversification.
A)True
B)False
Page 10
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) Since retained earnings are viewed as a fully subscribed issue of additional common stock, the cost of retained earnings is
A) less than the cost of new common stock equity.
B) equal to the cost of new common stock equity.
C) greater than the cost of new common stock equity.
D) not related to the cost of new common stock equity.
Q2) The cost of common stock equity can be thought of as the "magic number" that is used to decide whether a proposed corporate investment will increase or decrease the firm's stock price.
A)True
B)False
Q3) Generally, the order of cost, from the least expensive to the most expensive, for long-term capital of a corporation is
A) new common stock, retained earnings, preferred stock, long-term debt.
B) common stock, preferred stock, long-term debt, short-term debt.
C) preferred stock, retained earnings, common stock, new common stock.
D) long-term debt, preferred stock, retained earnings, new common stock.
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Page 11
Chapter 10: Capital Budgeting Techniques
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Sample Questions
Q1) The cash flows of any project having a conventional pattern include all of the basic components EXCEPT
A) initial investment.
B) operating cash outflows.
C) operating cash inflows.
D) terminal cash flow.
Q2) If a firm has unlimited funds to invest, all the mutually exclusive projects that meet its minimum investment criteria can be implemented.
A)True
B)False
Q3) Mutually exclusive projects are those whose cash flows compete with one another; the acceptance of one eliminates others from further consideration.
A)True
B)False
Q4) If the NPV is greater than the initial investment, a project should be accepted.
A)True
B)False
Q5) Use the NPV approach to select the best group of projects. (See Table 10.7)
Q6) Use the IRR approach to select the best group of projects. (See Table 10.7)
Page 12
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Chapter 11: Capital Budgeting Cash Flows and Risk
Refinements
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Sample Questions
Q1) The Annualized NPV of project B is ________. (See Table 11.12)
A) $11,673
B) $12,947
C) $38,227
D) $21,828
Q2) All of the following must be considered in computing the terminal value of a replacement project EXCEPT
A) operating cash flow for the final year.
B) after-tax proceeds for the sales of the new asset.
C) after-tax proceeds for the sales of the old asset.
D) change in net working capital.
Q3) Calculate the tax effect from the sale of the existing asset. (See Table 11.6)
Q4) The net present value without adjusting the discount rate for risk is ________. (See Table 11.8)
A) $336,000
B) $250,000
C) $179,400
D) $87,000
Page 13
Q5) Calculate the initial investment required for the new asset. (See Table 11.6)
Q6) Calculate the initial investment of the new asset. (See Table 11.3)
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Page 14
Chapter 12: Leverage and Capital Structure
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Sample Questions
Q1) At about what EBIT level should the financial manager be indifferent to either plan? (See Table 12.1)
Q2) Operating leverage measures the effect of fixed financing costs on the relationship between
A) Sales and EBIT.
B) Sales and EPS.
C) EBIT and EPS.
D) none of the above.
Q3) Higher financial leverage causes ________ to increase more for a given increase in ________.
A) EBIT; sales
B) EPS; sales
C) EPS; EBIT
D) EBIT; EPS
Q4) If we assume that EBIT is constant, the value of the firm is maximized by minimizing the weighted average cost of capital.
A)True
B)False
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Chapter 13: Payout Policy
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Sample Questions
Q1) In most states, legal capital is measured either by the par value of common stock; other states, however, define legal capital to include not only the par value of the stock, but also any paid in capital in excess of par.
A)True
B)False
Q2) The shareholder receiving a stock dividend receives A) a share of common stock of equal value to their existing shares of common stock. B) cash.
C) additional shares of common stock and cash.
D) nothing of value.
Q3) Dividends are the only means by which firms can distribute cash to shareholders.
A)True
B)False
Q4) Regular dividend policy is a dividend policy based on the payment of a certain percentage of earnings to owners in each dividend period.
A)True
B)False
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Page 16
Chapter 14: Working Capital and Current Assets Management
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Sample Questions
Q1) A firm with highly unpredictable sales revenue would best choose ________ financing strategy to minimize risk.
A) the aggressive
B) the conservative C) the trade-off
D) a seasonal
Q2) In theory, the conservative financing strategy ignores
A) all current liabilities.
B) the spontaneous forms of short-term financing.
C) current assets.
D) the high risk associated with this strategy.
Q3) A computerized inventory system that simulates needed materials requirements for the finished product, and then compares production needs to available inventory balances to determine when orders should be placed is the A) basic economic order quantity system.
B) materials requirement planning system.
C) just-in-time system.
D) red-line method.
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Chapter 15: Current Liabilities Management
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Sample Questions
Q1) One of the most common designations for the beginning of the credit period is A) 2/10.
B) the date of invoice.
C) the end of the month.
D) the transaction date.
Q2) Commercial banks lend unsecured short-term funds in the following three basic ways.
A) Single-payment note, lines of credit, and commercial paper.
B) Single-payment note, lines of credit, and revolving credit agreements.
C) Single-payment note, revolving credit agreements, and commercial paper.
D) Commercial paper, lines of credit, and revolving credit agreements.
Q3) ________ effectively raises the interest cost to the borrower on a line of credit.
A) An operating change restriction
B) An annual cleanup
C) A compensating balance
D) A commitment fee
Q4) Discuss and contrast the three types of loans discussed in the text that use inventory as collateral: floating inventory liens, trust receipt inventory loans, and warehouse receipt loans.
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