Corporate Finance
Midterm Exam
Course Introduction
Corporate Finance provides an in-depth exploration of how businesses make financial decisions and manage resources to maximize value. The course covers fundamental topics such as capital budgeting, risk and return analysis, cost of capital, financial statement analysis, and the valuation of stocks and bonds. Students will also learn about capital structure, dividend policy, mergers and acquisitions, and working capital management. Practical case studies and real-world examples are utilized to illustrate theoretical concepts, preparing students to tackle financial challenges in both corporate and investment settings.
Recommended Textbook
Principles of Managerial Finance 13th Edition by Lawrence J. Gitman
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19 Chapters
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Page 2
Chapter 1: The Role of Managerial Finance
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Sample Questions
Q1) 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
Q2) Agents of corporate owners are themselves owners of the firm and have been elected by all the corporate owners to represent them in decision-making and management of the firm.
A)True
B)False
Answer: False
Q3) All of the following as considered stakeholders EXCEPT
A) consumers
B) suppliers
C) employees
D) competitors
Answer: D
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Page 3
Chapter 2: The Financial Market Environment
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Sample Questions
Q1) Firms that require funds from external sources can obtain them from A) private placement.
B) financial institutions.
C) financial markets.
D) all of the above.
Answer: D
Q2) The dividend exclusion for corporations receiving dividends from another corporation has resulted in
A) a lower cost of equity for the corporation paying the dividend.
B) a higher relative cost of bond-financing for the corporation paying the dividend.
C) stock investments being relatively less attractive, relative to bond investments made by one corporation in another corporation.
D) stock investments being relatively more attractive relative to bond investments made by one corporation in another corporation.
Answer: D
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Chapter 3: Financial Statements and Ratio Analysis
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209 Flashcards
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Sample Questions
Q1) Using the DuPont system of analysis and holding other factors constant, an increase in financial leverage will result in ________ in the return on equity.
A) an increase
B) a decrease
C) no change
D) an undetermined change
Answer: A
Q2) The average collection period for Dana Dairy Products in 2010 was (See Table 3.2)
A) 32.5 days.
B) 11.8 days.
C) 25.3 days.
D) 35.9 days.
Answer: A
Q3) Total assets for CEE in 2010 were ________. (See Table 3.1)
A) $ 45,895
B) $124,300
C) $ 58,603
D) $ 97,345
Answer: D
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Page 5
Chapter 4: Cash Flow and Financial Planning
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183 Flashcards
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Sample Questions
Q1) In the statement of cash flows, the financing flows are cash flows that result from debt and equity financing transactions, including incurrence and repayment of debt, cash inflow from the sale of stock, and cash outflows to repurchase stock or pay cash dividends.
A)True
B)False
Q2) Non-cash charges are expenses that involve an actual outlay of cash during the period but are not deducted on the income statement.
A)True
B)False
Q3) Because the typical cash budget shows cash flows only on a monthly basis, the information provided by the cash budget is not necessarily adequate for ensuring solvency.
A)True
B)False
Q4) A firm's net cash flow is the mathematical difference between the firm's beginning cash and its cash disbursements in each period.
A)True
B)False
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Chapter 5: Time Value of Money
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Sample Questions
Q1) How many years would it take for Jughead to save an adequate amount for retirement if he deposits $2,000 per month into an account beginning today that pays 12 percent per year if he wishes to have a total of $1,000,000 at retirement?
A) 13.7 years
B) 15.5 years
C) 14.9 years
D) 11.5 years
Q2) 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?
Q3) In general, with an amortized loan, the payment amount remains constant over the life of the loan, the principal portion of each payment grows over the life of the loan, and the interest portion of each payment grows over the life of the loan.
A)True
B)False
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Page 7
Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) The ________ rate of interest is typically the required rate of return on a three-month U.S. Treasury bill.
A) nominal
B) real
C) risk-free
D) premium
Q2) The conversion feature of a bond is a feature that is included in all corporate bond issues that gives the issuer the opportunity to repurchase bonds at a stated price prior to maturity.
A)True
B)False
Q3) What is the current price of a $1,000 par value bond maturing in 9 years with a coupon rate of 8 percent, paid annually, that has a YTM of 9 percent?
A) $700
B) $945
C) $940
D) $1,062
Q4) Calculate the current value of Bond M. (See Table 6.2)
Q5) Explain liquidity, default risk, and maturity risk premiums.
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Chapter 7: Stock Valuation
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Sample Questions
Q1) Small business investment companies (SBICs) are corporations chartered by the federal government that can borrow at attractive rates from the U.S. Treasury and use the funds to make venture capital investments in private companies.
A)True
B)False
Q2) Cumulative preferred stocks are preferred stocks for which all passed (unpaid) dividends in arrears must be paid in additional shares of preferred stock prior to the payment of dividends to common stockholders.
A)True
B)False
Q3) Which of the following is false?
A) The common stock of a corporation can only be publicly owned.
B) Firms often issue common stock with no par value.
C) Preemptive rights help to prevent a dilution of ownership on the part of existing shareholders.
D) A firm's corporate charter indicates how many authorized shares it can issue.
Q4) Xiao Xin owns stock in a company which has paid the annual dividends shown in Table 7.1. Calculate the growth rate of these dividends.
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Page 9
Chapter 8: Risk and Return
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Sample Questions
Q1) What is the expected risk-free rate of return if asset X, with a beta of 1.5, has an expected return of 20 percent, and the expected market return is 15 percent?
A) 5.0%
B) 7.5%
C) 15.0%
D) 22.5%
Q2) Combining uncorrelated assets can reduce risk not as effectively as combining negatively correlated assets, but more effectively than combining positively correlated assets.
A)True
B)False
Q3) For the risk-indifferent manager, no change in return would be required for an increase in risk.
A)True
B)False
Q4) Assuming a risk-free rate of 8 percent and a market return of 12 percent, would a wise investor acquire a security with a Beta of 1.5 and a rate of return of 14 percent given the facts above?
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) A firm has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The cost of the preferred stock is
A) 7.2 percent.
B) 12 percent.
C) 12.4 percent.
D) 15 percent.
Q2) The cost of retained earnings equity for Tangshan Mining would be 18.00 percent if the expected return on U.S. Treasury Bills is 5.00 percent, the market risk premium is 10.00 percent, and the firm's beta is 1.3.
A)True
B)False
Q3) A corporation has concluded that its financial risk premium is too high. In order to decrease this, the firm can
A) increase the proportion of long-term debt to decrease the cost of capital.
B) increase short-term debt to decrease the cost of capital.
C) decrease the proportion of common stock equity to decrease financial risk.
D) increase the proportion of common stock equity to decrease financial risk.
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Chapter 10: Capital Budgeting Techniques
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Sample Questions
Q1) Since the cost of capital tends to be a reasonable estimate of the rate at which the firm could actually reinvest intermediate cash inflows, the use of NPV is in theory preferable to IRR.
A)True
B)False
Q2) On a purely theoretical basis, NPV is a better approach when selecting among two mutually exclusive projects.
A)True
B)False
Q3) The new financial analyst does not like the payback approach (Table 10.3) and determines that the firm's required rate of return is 15 percent. His recommendation would be to
A) accept projects A and B.
B) accept project A and reject B.
C) reject project A and accept B.
D) reject both.
Q4) Which projects should the firm implement? (See Table 10.5)
Q5) If the NPV is greater than the cost of capital, a project should be accepted.
A)True
B)False
Page 12
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Chapter 11: Capital Budgeting Cash Flows
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Sample Questions
Q1) If an investment in a new asset results in a change in current assets that exceeds the change in current liabilities, this change in net working capital represents an initial cash outflow.
A)True
B)False
Q2) An opportunity cost is a cash flow that could be realized from the best alternative use of an owned asset.
A)True
B)False
Q3) Calculate the book value of the existing press being replaced. (See Table 11.1)
Q4) The net present value of the project is ________. (See Table 11.5)
A) $3,874
B) $2,445
C) $5,614
D) $7,500
Q5) The book value of an asset is equal to its depreciable value minus the accumulated depreciation.
A)True
B)False
Q6) Given the information in Table 11.4, compute the initial investment.
Page 13
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Chapter 12: Risk and Refinements in Capital Budgeting
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Sample Questions
Q1) If a firm has a limited capital budget and too many good capital projects to fund them all, it is said to be facing the problem of
A) constrained capital.
B) wealth optimization.
C) capital rationing.
D) profitability.
Q2) The objective of capital rationing is to select the group of projects that provides the highest overall net present value and does not require more dollars than are budgeted.
A)True
B)False
Q3) Sensitivity analysis is a behavioral approach that uses a number of possible values for a given variable to assess its impact on a firm's return.
A)True
B)False
Q4) When unequal-lived projects are independent, the length of the projects' lives is not critical.
A)True
B)False
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Chapter 13: Leverage and Capital Structure
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Sample Questions
Q1) The firm's operating breakeven point is the point at which
A) total operating costs equal total fixed costs.
B) total operating costs are zero.
C) EBIT is less than sales.
D) EBIT is zero.
Q2) ________ is the potential use of fixed costs, both operating and financial, to magnify the effect of changes in sales on the firm's earnings per share.
A) Debt service
B) Total leverage
C) Operating leverage
D) Financial leverage
Q3) The base level of EBIT must be held constant to compare the financial leverage associated with different levels of fixed financial costs.
A)True
B)False
Q4) Both operating and financial leverage result in the magnification of return as well as risk.
A)True
B)False
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Chapter 14: Payout Policy
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Sample Questions
Q1) The stock repurchase can be viewed as a cash dividend.
A)True
B)False
Q2) Modigliani and Miller suggest that the value of the firm is not affected by the firm's dividend policy, due to
A) the relevance of dividends.
B) the clientele effect.
C) the informational content.
D) the optimal capital structure.
Q3) After the stock dividend is paid, the per share value of the stockholder's stock will remain the same as the value before the stock dividend and, thus, the market value of his or her total holdings in the firm will remain unchanged.
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 15: Working Capital and Current Assets Management
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Sample Questions
Q1) An increase in accounts receivable turnover due to an increase in collection efforts will decrease the firm's marginal investment in accounts receivable.
A)True
B)False
Q2) A technique that provides the analyst with the information concerning the proportion of each type of account that has been outstanding for a specified period of time is called
A) credit analysis.
B) credit scoring.
C) aging of receivables.
D) the economic order quantity model.
Q3) A ________ is a telegraphic communication that, via bookkeeping entries, removes funds from the payer's bank and deposits them in an account of the payee's bank.
A) direct send
B) wire transfer
C) depository transfer check
D) preauthorized check
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Chapter 16: Current Liabilities Management
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Sample Questions
Q1) Factoring accounts receivable is not a form of secured short-term borrowing. It entails the sale of accounts receivable at a discount to obtain needed short-term funds.
A)True
B)False
Q2) Accounts payable are spontaneous secured sources of short-term financing that arise from the normal operations of the firm.
A)True
B)False
Q3) Short-term self-liquidating loans are intended to
A) finance capital assets.
B) cover seasonal peaks in financing caused by inventory and receivables buildup.
C) finance merger and/or acquisition activity.
D) recapitalize the firm.
Q4) The effective interest rate on a bank loan depends on whether interest is paid when the loan matures or in advance.
A)True
B)False
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Chapter 17: Hybrid and Derivative Securities
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Sample Questions
Q1) Advantages of leasing from the lessee's perspective include all of the following EXCEPT
A) capability of effectively depreciating land.
B) ability to avoid restrictive covenants that are normally part of a long-term loan.
C) benefit of the salvage value at the end of the term of the lease reverts to the lessor.
D) 100 percent financing.
Q2) Call options are purchased with the expectation that the market price of the underlying security will rise while put options are purchased with the expectation that the market price of the underlying security will fall.
A)True
B)False
Q3) A capitalized lease is a financial lease that has the present value of all its payments included as an asset and corresponding liability on the firm's balance sheet. A)True
B)False
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Chapter 18: Mergers, Lbos, Divestitures, and Business Failure
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Sample Questions
Q1) A vertical merger is a merger of two firms in the same line of business.
A)True
B)False
Q2) A congeneric merger is a merger in which a firm acquires a supplier or a customer.
A)True
B)False
Q3) The value of a firm measured as the sum of the values of its operating units if each were sold separately is known as a firm's part and parcel value.
A)True
B)False
Q4) The selling of some of a firm's assets is called
A) business failure.
B) vertical segmentation.
C) reverse merger.
D) divestiture.
Q5) A congeneric merger is a merger combining firms in unrelated businesses.
A)True
B)False
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Chapter 19: International Managerial Finance
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Sample Questions
Q1) The Mercosur Group is a major South American trading bloc that includes countries that account for more than half of the total of Latin America's GDP.
A)True
B)False
Q2) Economic exposure is the risk resulting from the effects of changes in foreign exchange rates on the firm's value.
A)True
B)False
Q3) The ________ is a major South American trading bloc that includes countries that account for more than half of total Latin American GDP.
A) North American Free Trade Agreement (NAFTA)
B) Mercosur Group
C) Latin and South American Free Trade Area (LASTA)
D) Group of Seven
Q4) For foreign bonds, interest rates are usually not directly correlated with the domestic rates prevailing in the respective countries.
A)True
B)False
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Page 21