Corporate Finance
Mock Exam
Course Introduction
Corporate Finance explores the principles and techniques that underlie financial decision-making within corporations. The course covers key topics such as capital budgeting, risk and return, valuation of stocks and bonds, cost of capital, capital structure, dividend policy, and working capital management. Emphasis is placed on understanding how managers can create value for shareholders through strategic financial planning, analysis, and investment decisions. Real-world case studies and practical applications are incorporated to provide students with the skills necessary to analyze financial statements, assess investment opportunities, and make sound financial decisions in a corporate environment.
Recommended Textbook
Corporate Finance A Focused Approach 5th Edition by Michael C. Ehrhardt
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1391 Verified Questions
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Chapter 1: An overview of financial management and the financial environment
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Sample Questions
Q1) The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm's owners.
A)True
B)False
Answer: False
Q2) Which of the following factors would be most likely to lead to an increase in interest rates in the economy?
A) Households reduce their consumption and increase their savings.
B) The Federal Reserve decides to try to stimulate the economy.
C) There is a decrease in expected inflation.
D) The economy falls into a recession.
E) Most businesses decide to modernize and expand their manufacturing capacity, and to install new equipment to reduce labor costs.
Answer: E
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Chapter 2: Financial statements, cash flow, and taxes
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Sample Questions
Q1) Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends.Retained earnings are kept in cash or near cash accounts and, thus, these cash accounts, when added together, will always be equal to the firm's total retained earnings.
A)True
B)False
Answer: False
Q2) Total net operating capital is equal to net fixed assets.
A)True
B)False
Answer: False
Q3) Net operating profit after taxes (NOPAT)is the amount of net income a company would generate from its operations if it had no interest income or interest expense. A)True
B)False
Answer: True
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Chapter 3: Analysis of financial statements
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104 Flashcards
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Sample Questions
Q1) A decline in a firm's inventory turnover ratio suggests that it is managing its inventory more efficiently and also that its liquidity position is improving, i.e., it is becoming more liquid.
A)True
B)False
Answer: False
Q2) Heaton Corp.sells on terms that allow customers 45 days to pay for merchandise.Its sales last year were $425, 000, and its year-end receivables were $60, 000.If its DSO is less than the 45-day credit period, then customers are paying on time.Otherwise, they are paying late.By how much are customers paying early or late? Base your answer on this equation: DSO - Credit period = days early or late, and use a 365-day year when calculating the DSO.A positive answer indicates late payments, while a negative answer indicates early payments.
A) 6.20
B) 6.53
C) 6.86
D) 7.20
E) 7.56
Answer: B
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Page 5
Chapter 4: Time value of money
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Sample Questions
Q1) The greater the number of compounding periods within a year, then (1)the greater the future value of a lump sum investment at Time 0 and (2)the smaller the present value of a given lump sum to be received at some future date.
A)True
B)False
Q2) Suppose you borrowed $14, 000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years.How much interest would you have to pay in the first year?
A) $1, 200.33
B) $1, 263.50
C) $1, 330.00
D) $1, 400.00
E) $1, 470.00
Q3) Which of the following bank accounts has the lowest effective annual return?
A) An account that pays 8% nominal interest with daily (365-day)compounding.
B) An account that pays 8% nominal interest with monthly compounding.
C) An account that pays 8% nominal interest with annual compounding.
D) An account that pays 7% nominal interest with daily (365-day)compounding.
E) An account that pays 7% nominal interest with monthly compounding.
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Page 6
Chapter 5: Bonds, bond valuation, and interest rates
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) The market value of a bond will always approach its par value as its maturity date approaches.This holds true even if the firm has filed for bankruptcy.
B) Rising inflation makes the actual yield to maturity on a bond greater than a quoted yield to maturity that is based on market prices.
C) The yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield; it has a zero expected capital gains yield.
D) On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.
E) The yield to maturity for a coupon bond that sells at a premium consists entirely of a positive capital gains yield; it has a zero current interest yield.
Q2) If a firm raises capital by selling new bonds, it is called the "issuing firm, " and the coupon rate is generally set equal to the required rate on bonds of equal risk.
A)True
B)False
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Chapter 6: Risk and return
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Sample Questions
Q1) Which of the following is NOT a potential problem when estimating and using betas, i.e., which statement is FALSE?
A) Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different from the "true" or "expected future" beta.
B) The beta of an "average stock, " or "the market, " can change over time, sometimes drastically.
C) Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.
D) All of the statements above are true.
E) The fact that a security or project may not have a past history that can be used as the basis for calculating beta.
Q2) The CAPM is built on historic conditions, although in most cases we use expected future data in applying it.Because betas used in the CAPM are calculated using expected future data, they are not subject to changes in future volatility.This is one of the strengths of the CAPM.
A)True
B)False
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Page 8
Chapter 7: Valuation of stocks and corporations
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Sample Questions
Q1) The last dividend paid by Wilden Corporation was $1.55.The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever.The firm's required return (rs)is 12.0%.What is the best estimate of the current stock price?
A) $37.05
B) $38.16
C) $39.30
D) $40.48
E) $41.70
Q2) Connor Publishing's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share.What is its effective annual (not nominal)rate of return?
A) 6.62%
B) 6.82%
C) 7.03%
D) 7.25%
E) 7.47%
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Chapter 8: Financial options and applications in corporate finance
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Sample Questions
Q1) An option that gives the holder the right to sell a stock at a specified price at some future time is
A) a put option.
B) an out-of-the-money option.
C) a naked option.
D) a covered option.
E) a call option.
Q2) If we define the "premium" on an option to be the difference between the price at which an option sells and the exercise value (or the difference between the stock's current market price and the strike price), then we would expect the premium to increase as the stock price increases, other things held constant.
A)True
B)False
Q3) Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock, provided the strike prices for the put and call are the same.
A)True
B)False
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Chapter 9: The cost of capital
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Sample Questions
Q1) To help them estimate the company's cost of capital, Smithco has hired you as a consultant.You have been provided with the following data: D? = $1.45; P? = $22.50; and g = 6.50% (constant).Based on the DCF approach, what is the cost of common from reinvested earnings?
A) 11.10%
B) 11.68%
C) 12.30%
D) 12.94%
E) 13.59%
Q2) Bartlett Company's target capital structure is 40% debt, 15% preferred, and 45% common equity.The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of common using reinvested earnings is 12.75%.The firm will not be issuing any new stock.You were hired as a consultant to help determine their cost of capital.What is its WACC?
A) 8.98%
B) 9.26%
C) 9.54%
D) 9.83%
E) 10.12%
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Page 11
Chapter 10: The basics of capital budgeting: evaluating cash flows
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Sample Questions
Q1) Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
A) The lower the WACC used to calculate a project's NPV, the lower the calculated NPV will be.
B) If a project's NPV is less than zero, then its IRR must be less than the WACC.
C) If a project's NPV is greater than zero, then its IRR must be less than zero.
D) The NPV of a relatively low-risk project should be found using a relatively high WACC.
E) A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC.
Q2) Other things held constant, an increase in the cost of capital will result in a decrease in a project's IRR.
A)True
B)False
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Chapter 11: Cash flow estimation and risk analysis
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Sample Questions
Q1) Although it is extremely difficult to make accurate forecasts of the revenues that a project will generate, projects' initial outlays and subsequent costs can be forecasted with great accuracy.This is especially true for large product development projects.
A)True
B)False
Q2) Erickson Inc.is considering a capital budgeting project that has an expected return of 25% and a standard deviation of 30%.What is the project's coefficient of variation?
A) 1.20
B) 1.26
C) 1.32
D) 1.39
E) 1.46
Q3) Changes in net working capital should not be reflected in a capital budgeting cash flow analysis because capital budgeting relates to fixed assets, not working capital.
A)True
B)False
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Chapter 12: Corporate valuation and financial planning
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Sample Questions
Q1) Last year Baron Enterprises had $350 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity last year.In millions, by how much could Baron's sales increase before it is required to increase its fixed assets?
A) $170.09
B) $179.04
C) $188.46
D) $197.88
E) $207.78
Q2) Last year National Aeronautics had a FA/Sales ratio of 40%, comprised of $250 million of sales and $100 million of fixed assets.However, its fixed assets were used at only 75% of capacity.Now the company is developing its financial forecast for the coming year.As part of that process, the company wants to set its target Fixed Assets/Sales ratio at the level it would have had had it been operating at full capacity.What target FA/Sales ratio should the company set?
A) 28.5%
B) 30.0%
C) 31.5%
D) 33.1%
E) 34.7%
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Page 14
Chapter 13: Agency conflicts and corporate governance
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Sample Questions
Q1) A poison pill is also known as a corporate restructuring.
A)True
B)False
Q2) Two important issues in corporate governance are (1)the rules that cover the board's ability to fire the CEO and (2)the rules that cover the CEO's ability to remove members of the board.
A)True
B)False
Q3) The CEO of D'Amico Motors has been granted some stock options that have provisions similar to most other executive stock options.If D'Amico's stock underperforms the market, these options will necessarily be worthless.
A)True
B)False
Q4) ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent hostile takeovers.
A)True
B)False
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Page 15
Chapter 14: Distributions to shareholders: dividends and repurchases
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Sample Questions
Q1) McCann Publishing has a target capital structure of 35% debt and 65% equity.This year's capital budget is $850, 000 and it wants to pay a dividend of $400, 000.If the company follows a residual dividend policy, how much net income must it earn to meet its capital budgeting requirements and pay the dividend, all while keeping its capital structure in balance?
A) $904, 875
B) $952, 500
C) $1, 000, 125
D) $1, 050, 131
E) $1, 102, 638
Q2) One implication of the bird-in-the-hand theory of dividends is that a given reduction in dividend yield must be offset by a more than proportionate increase in growth in order to keep a firm's required return constant, other things held constant.
A)True
B)False
Q3) Stock dividends and stock splits should, at least conceptually, have the same effect on shareholders' wealth.
A)True
B)False
Page 16
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Chapter 15: Capital structure decisions
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Sample Questions
Q1) Which of the following statements best describes the optimal capital structure? The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the company's ____.
A) stock price.
B) cost of equity.
C) cost of debt.
D) cost of preferred stock.
E) earnings per share (EPS).
Q2) Firms U and L both have a basic earning power ratio of 20% and each has the same amount of assets.Firm U is unleveraged, i.e., it is 100% equity financed, while Firm L is financed with 50% debt and 50% equity.Firm L's debt has a before-tax cost of 8%.Both firms have positive net income.Which of the following statements is CORRECT?
A) Firm L has a lower ROA than Firm U.
B) Firm L has a lower ROE than Firm U.
C) Firm L has the higher times interest earned (TIE)ratio.
D) Firm L has a higher EBIT than Firm U.
E) The two companies have the same times interest earned (TIE)ratio.
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Page 17
Chapter 16: Supply chains and working capital management
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Sample Questions
Q1) Long-term loan agreements always contain provisions, or covenants, that constrain the firm's future actions.Short-term credit agreements are just as restrictive in order to protect the interest of the lender.
A)True
B)False
Q2) Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.
A)True
B)False
Q3) The calculated cost of trade credit can be reduced by paying late.
A)True
B)False
Q4) As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.
A)True
B)False
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Chapter 17: Multinational financial management
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Sample Questions
Q1) The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings in certain countries and to bring in goods only as needed.
A)True
B)False
Q2) Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate financial analysis.
A)True
B)False
Q3) A box of chocolate candy costs 28.80 Swiss francs in Switzerland and $20 in the United States.Assuming that purchasing power parity (PPP)holds, what is the current exchange rate?
A) 1 U.S.dollar equals 0.69 Swiss francs
B) 1 U.S.dollar equals 0.85 Swiss francs
C) 1 U.S.dollar equals 1.21 Swiss francs
D) 1 U.S.dollar equals 1.29 Swiss francs
E) 1 U.S.dollar equals 1.44 Swiss francs
Q4) A Eurodollar is a U.S.dollar deposited in a bank outside the United States.
A)True
B)False
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