Corporate Finance
Midterm Exam
Course Introduction
Corporate Finance explores the fundamental principles and practices that shape financial decision-making within corporations. This course covers topics such as capital budgeting, capital structure, working capital management, dividend policy, and risk analysis. Students will learn how firms allocate resources, value financial assets, raise capital, and evaluate investment opportunities, considering the impact of financial markets and institutions. Through theoretical frameworks and practical applications, the course equips students with the knowledge and analytical tools necessary to make informed financial decisions in a corporate setting.
Recommended Textbook
Essentials of Corporate Finance 2nd Australia Edition by Stephen Ross
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18 Chapters
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Page 2
Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) The top financial officer in a firm is commonly referred to as the:
A)chief financial officer
B)president of finance
C)controller
D)treasurer
E)finance manager
Answer: A
Q2) The legal papers which designate a firm's name,nature of business,and intended life Are called the:
A)corporate bylaws
B)articles of incorporation or constitution
C)partnership agreement
D)joint stock company forms
E)proprietary declaration
Answer: B
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Page 3
Chapter 2: Financial Statements, Taxes, and Cash Flow
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Q1) Which of the following is an intangible fixed asset?
A)inventory
B)delivery truck
C)patents
D)accounts receivable
E)buildings
Answer: C
Q2) Which one of the following will increase the cash flow from assets,all else constant?
A)a decrease in net capital spending
B)a decrease in the cash flow to creditors
C)a decrease in the annual depreciation
D)an increase in the change in net working capital
E)an increase in the net new equity raised
Answer: A
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Chapter 3: Working With Financial Statements
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Q1) Foreign Travel Services has net income of $48 400,total assets of $219 000,total equity of $154 800,and total sales of $311 700.What is the common-size percentage for the net income?
A)9.00 per cent
B)13.90 per cent
C)15.53 per cent
D)22.10 per cent
E)31.27 per cent
Answer: C
Q2) The ratio which includes all debts of all maturities to all creditors is called the:
A)cash coverage ratio
B)times interest earned ratio
C)equity multiplier
D)capital intensity ratio
E)total debt ratio
Answer: E
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Chapter 4: Introduction to Valuation: the Time Value of Money
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Sample Questions
Q1) Today,Tony is investing $16 000 at 6.5 per cent,compounded annually,for 4 years.How much additional income could he earn if he had invested this amount at 7 per cent,compounded annually?
A)$323.22
B)$389.28
C)$401.16
D)$442.79
E)$484.08
Q2) Todd will be receiving a $10 000 bonus one year from now.The process of determining how much that bonus is worth today is called:
A)aggregating
B)discounting
C)simplifying
D)compounding
E)extrapolating
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6
Chapter 5: Discounted Cash Flow Valuation
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Sample Questions
Q1) Kristi is considering an investment that will pay $5000 a year for 7 years,starting one year from today.How much should she pay for this investment if she wishes to earn a 12 per cent rate of return?
A)$17 899.08
B)$18 023.88
C)$20 186.75
D)$22 818.78
E)$24 507.19
Q2) An annuity where the cash flows continue forever is called a(n):
A)ordinary annuity
B)annuity due
C)absolute annuity
D)perpetuity
E)perpetuity due
Q3) In Canada and the United Kingdom,a perpetuity is also called a(n):
A)consol
B)infinite bond
C)infinity flow
D)dowry
E)preference stream
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) Bondi Beachwear Pty Ltd takes out a short-term loan through Witch Bank using a bill of exchange.The face value of the bill is $200 000 and it will mature in 60 days.If the interest rate quoted by the bank is 6.50% per annum what is the amount that Bondi Beachwear will receive (to the nearest dollar)?
A)$198 786
B)$197 875
C)$187 793
D)$178 793
E)$197 886
Q2) Investors of government bonds require an 8% per annum real return.The inflation rate (CPI)is 5.50%.What is the exact nominal rate?
A)2.50%
B)10.50%
C)13.94%
D)13.50%
E)12.91%
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Chapter 7: Equity Markets and Stock Valuation
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Q1) Marble Books,Inc.is expected to pay an annual dividend of $1.80 per share next year.The required return is 16 per cent and the growth rate is 4 per cent.What is the expected value of this stock five years from now?
A)$18.25
B)$16.80
C)$18.98
D)$15.60
E)$15.00
Q2) Kate could not attend the last shareholders' meeting and thus she granted the authority to vote on her behalf to the managers of the firm.Which one of the following terms is used to describe the method by which Kate's shares were voted?
A)consent-form
B)in absentia
C)cumulative
D)proxy
E)straight
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Chapter 8: Net Present Value and Other Investment Criteria
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Q1) Which one of the following methods of analysis is most similar to computing the return on assets (ROA)?
A)internal rate of return
B)profitability index
C)average accounting return
D)net present value
E)payback
Q2) Your firm requires an average accounting return (AAR)of at least 15 per cent on all fixed Asset purchases.Currently,you are considering some new equipment costing $96 000.This equipment will have a three-year life over which time it will be depreciated on a straight line basis to a zero book value.The annual net income from this project is estimated at $5500,$12 400,and $17 600 for the three years.Should you accept this project based on the accounting rate of return? Why or why not?
A)yes;because the AAR is less than 15 per cent
B)yes;because the AAR is equal to 15 per cent
C)yes;because the AAR is greater than 15 per cent
D)no;because the AAR is less than 15 per cent
E)no;because the AAR is equal to 15 per cent
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Chapter 9: Making Capital Investment Decisions
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Q1) Kate's Store is considering three mutually exclusive options for the use of the new addition to her facility.Kate can either expand the women's clothing section,add a new footwear section,or expand into home linens.She estimates annual profits of either $120 000 from the clothing,$104 000 from the footwear,or $98 000 from the home linens section,should that section be chosen for the expansion.What is the opportunity cost of her most profitable option?
A)$98 000
B)$104 000
C)$120 000
D)$202 000
E)$224 000
Q2) Which one of the following can be completely ignored when analysing a project?
A)depreciation
B)taxes
C)net working capital
D)sunk cost
E)erosion
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Chapter 10: Some Lessons From Capital Market History
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Q1) If the securities markets are only weak-form efficient,then the price of a stock will:
A)react to new information over a couple of weeks
B)react slowly to new information concerning the future outlook of the firm
C)tend to overreact to new information concerning the future plans of the firm
D)be based solely on historical information
E)totally reflect the true value of the firm
Q2) Which one of the following statements is correct?
A)The risk-free rate of return has a risk premium of 1.0.
B)The reward for bearing risk is called the standard deviation.
C)Risks and expected return are inversely related.
D)The higher the expected rate of return,the wider the distribution of returns.
E)Risk premiums are inversely related to the standard deviation of returns.
Q3) Which one of the following has a rate of return that is used as a proxy for the risk-free rate?
A)long-term government bonds
B)long-term corporate bonds
C)inflation,as measured by the consumer price index
D)treasury notes
E)large-company stocks
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Page 12
Chapter 11: Risk and Return
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Sample Questions
Q1) Suppose an investor created the following portfolio: What is the portfolio beta?
A)0.71
B)0.60
C)0.95
D)0
E)1.00
Q2) Portfolio diversification eliminates which one of the following?
A)unsystematic risk
B)reward for bearing risk
C)total investment risk
D)portfolio risk premium
E)market risk
Q3) Which one of the following best describes a portfolio?
A)investment in a risk-free security
B)security equally as risky as the overall market
C)group of assets held by an investor
D)risky security
E)new issue of stock
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Page 13
Chapter 12: Long-Term Financing
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Q1) Using the weighted average cost of capital (WACC)of another firm,one which is focused on the type of project you are considering,rather than using your own firm's WACC is called the:
A)insider's look
B)divisional approach
C)competitor's game
D)pure play approach
E)project divisor
Q2) Which one of the following statements is correct? Assume the pre-tax cost of debt is less than the cost of equity.
A)A firm may change its capital structure if the government changes its tax policies.
B)The cost of preferred stock decreases when the tax rate increases.
C)A decrease in the systematic risk of a firm will increase the firm's cost of capital.
D)A decrease in a firm's debt-equity ratio will decrease the firm's cost of capital.
E)A decrease in the dividend growth rate increases the cost of equity.
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14
Chapter 13: Leverage and Capital Structure
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Q1) Less Debt Inc.just revised its capital structure such that the firm's debt-equity ratio decreased from 0.80 to 0.40.Those individual investors who prefer the old capital structure:
A)should sell half of their equity holdings and invest in cash
B)should loan out funds equivalent to the amount invested in Less Debt
C)can replicate that structure by increasing their use of homemade leverage
D)should sell half of their equity holdings and loan out the net proceeds of the sale
E)can replicate that structure by reducing their debt and doubling their investment in the firm
Q2) Southern Fried Foods has a $12 million bond issue outstanding with a coupon rate of 6.75 per cent and a yield-to-maturity of 7.27 per cent.What is the present value of the tax shield if the tax rate is 35 per cent?
A)$283 500
B)$3 053 400
C)$3 560 000
D)$305 340
E)$4 200 000
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Page 15
Chapter 14: Dividends and Dividend Policy
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Q1) Lester's Dry Goods paid $1.10 per share in dividends last year.The company currently has excess cash and would like to distribute $0.40 a share to its shareholders.However,the company is concerned about increasing the dividend by that amount as it will not be able to afford any increase in the future and doesn't want to lower the dividend once it has been raised.Which one of the following is probably the best suggestion for distributing the $0.40 per share?
A)liquidating dividend of $0.40 per share
B)special dividend of $0.40 per share
C)extra dividend of $0.40 per share
D)increase the regular dividend by $0.11 and pay an extra cash dividend of $0.29
E)increase the regular dividend by $0.11 and pay a special dividend of $0.29
Q2) Which one of the following best defines a regular cash dividend?
A)one-time payment of cash by a firm to its shareholders
B)distribution by a firm to its shareholders
C)distribution of the proceeds from the sale of a portion of a firm's operations
D)cash payment by a firm to its owners as part of a firm's normal operations
E)payment from any source by a firm to its owners
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Chapter 15: Raising Capital
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Sample Questions
Q1) Which one of the following tends to be true for the average investor?
A)They are protected from losses by ASX regulations.
B)They often encounter the 'winner's curse'.
C)Average investors are not allowed to purchase IPOs at the offer price.
D)They frequently earn initially high returns on IPOs when shares are undersubscribed.
E)They generally receive their full allocation of shares even when an IPO is oversubscribed.
Q2) Nu Tech wants to raise $21 million to purchase equipment by issuing new securities.Management estimates the issue will cost the firm $320 000 for accounting,legal,and other costs.The underwriting fee is 7.5 per cent and the issue price is $21 per share.How many shares must be sold if Nu Tech is to receive sufficient funds to purchase all the desired equipment?
A)1 097 555 shares
B)1 008 010 shares
C)1 110 333 shares
D)1 021 121 shares
E)1 102 048 shares
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Page 17
Chapter 16: Short-Term Financial Planning
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Q1) The __________ facility is a major source of short-term finance for a corporation.It allows the company,without any previous notice,to put its bank account into ______,up to an agreed limit.
A)promissory notes rollover;deficit
B)overdraft;deficit
C)commercial bills rollover;surplus
D)revolving;deficit
E)revolving;surplus
Q2) Which one of the following will increase the operating cycle?
A)decreasing the days' sales in inventory
B)decreasing the accounts payable turnover rate
C)decreasing the inventory turnover rate
D)decreasing the accounts payable period
E)increasing the accounts receivable turnover rate
Q3) Which one of the following best describes a line of credit?
A)long-term prearranged,committed bank loan
B)short-term prearranged bank loan that can be either committed or noncommitted
C)short-term loan secured by accounts receivable
D)long-term,prearranged,noncommitted bank loan
E)short-term loan secured by inventory
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Chapter 17: Working Capital Management
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Q1) A firm grants credit with terms of 2/5,net 20.The firm's customers have ___ days to pay in order to receive a _____ per cent discount.
A)5;2
B)30;5
C)20;2
D)15;2
E)2;5
Q2) Don,a local building contractor,keeps an extra $5000 in his chequing account simply for any emergency which might arise.This is an example of the _____ motive for holding cash.
A)precautionary
B)availability
C)transaction
D)speculative
E)daily
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Chapter 18: International Aspects of Financial Management
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Q1) A vintage Parker,type 65,fountain pen from 1968,popular among collectors,costs 105 British pounds in the United Kingdom,while you can buy the identical pen for 229 Australian dollars in a shop in Melbourne.According to purchasing power parity,the AUD/GBP exchange rate is:
A)A$2.40/£1
B)A$2.18/£1
C)A$2.29/£1
D)A$1.05/£1
E)A$0.46/£1
Q2) The current spot rate between the UK and Australia is AUD$1 = £0.6764.The expected inflation rate in Australia is 1.8 per cent.The expected inflation rate in the UK is 3.4 per cent.If relative purchasing power parity exists,what will the exchange rate be 2 years from now?
A)£0.5331
B)£0.6549
C)£0.6982
D)£.0.6872
E)£.0.6656
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Page 20