Corporate Finance
Mock Exam
Course Introduction
Corporate Finance explores the principles and practices underlying financial decision-making within corporations. The course covers topics such as capital budgeting, risk and return analysis, capital structure, dividend policy, and valuation techniques. Students learn how firms raise, allocate, and manage funds to maximize shareholder value, while considering ethical and regulatory frameworks. Emphasis is placed on real-world application of financial theories, enabling students to analyze investment opportunities, assess financing options, and understand the financial implications of strategic business decisions.
Recommended Textbook
Financial Institutions Instruments and Markets 7th Edition by Christopher Viney
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Page 2
Chapter 1: A Modern Financial System: An Overview
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Q1) Which of the following is NOT a characteristic commonly associated with preference shares?
A) A specified, fixed return
B) No voting rights
C) Higher ranking than bond holders on claims on assets
D) No entitlement to take possession of assets if the borrower defaults on payment
Answer: C
Q2) Long-term debt financing instruments used by companies are called:
A) bills.
B) debentures.
C) shares.
D) equities.
Answer: B
Q3) A stock is a debt security that promises to make specified interest payments.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Commercial Banks
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Q1) Some of the elements in assessing capital adequacy requirements for banks under the Basel II capital accord are:
A) credit risk, liquidity risk and interest rate risk.
B) credit risk, market risk and type of capital held.
C) default risk, interest rate risk and market risk.
D) default risk, liquidity risk and type of capital held.
Answer: B
Q2) With regard to bank bills,the bill is sold at a discount:
A) because the bank needs to find a buyer.
B) to encourage buyers.
C) because the difference between the initial price and the final sale price is the return to the holder.
D) because the bank pays the face value of the funds to the borrower at maturity.
Answer: C
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4
Chapter 3: Non-Bank Financial Institutions
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Q1) An insurance company is not a depository financial institution.
A)True
B)False
Answer: True
Q2) Which of the following statements with regard to life insurance companies is true?
A) Life insurance companies are more likely to acquire short-term assets than long-term securities, for liquidity reasons.
B) Life insurance companies are more likely to acquire long-term assets because their liabilities are long-term in nature.
C) Life insurance companies tend to acquire short-term assets because they have relatively predictable inflows and outflows.
D) The Reserve Bank of Australia regulates life insurance companies.
Answer: B
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Chapter 4: The Share Market and the Corporation
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Q1) Which of the following is incorrect?
A) A real estate investment trust may purchase industrial property.
B) An infrastructure fund may hold investments in power stations.
C) The units of a listed REIT purchases property are generally illiquid.
D) An investor may use a CFD to go long in a rising market.
Q2) When a shareholder first sells their shares on a stock exchange this involves the secondary role of the share market.
A)True
B)False
Q3) The strategy of lowering risk exposure by holding a number of investments in a portfolio is called:
A) augmentation.
B) diversification.
C) expansion.
D) optimisation.
Q4) Discuss the roles of the participants in a primary market issue of shares.
Q5) Discuss briefly what part agency theory plays in the corporate governance of a company.
Q6) Discuss what is meant by the derivative role of a share market.
Q7) Discuss what is meant by the interest rate role of a stock exchange.
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Chapter 5: Corporations Issuing Equity in the Share Market
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Q1) The claims of the equity holders on the assets of the firm have priority over those of:
A) the debt holders.
B) the preferred shareholders.
C) the unsecured debt holders.
D) no other holder.
Q2) What is the function of a proxy statement for a shareholder?
A) It gives them the right of a vote for each share they own.
B) It gives them the right to transfer their share to another party.
C) It gives them the entitlement to new shares when issued.
D) It gives them the right to sell their shares at a premium.
Q3) A pro-rata share rights offer of 1: 5 gives existing shareholders:
A) the right to purchase one new share for every five shares held.
B) the right to purchase five new shares for every one share held.
C) the right to purchase one share for every 1/5 shares held.
D) the right to purchase 10 shares for every five shares held.
Q4) The investment decision for a corporation involves the types of securities it is going to issue or invest in.
A)True
B)False
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Chapter 6: Investors in the Share Market
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Q1) The financial ratio that measures operating profit after tax to shareholders funds is:
A) EBIT to long-term funds.
B) Return on equity.
C) EBIT to total funds.
D) interest cover.
Q2) Define and explain what a share split involves.
Q3) When a share is trading for a period with a cash dividend entitlement,then the share is said to trade:
A) bonus dividend.
B) pro dividend.
C) cum-dividend.
D) ex-dividend.
Q4) Which of the following is an aim of a stock split?
A) To increase the number of shares on issue and so affect the capital structure
B) To reduce the dividend payments
C) To increase the share price
D) To try to improve the liquidity of shares
Q5) What is a stock-market index?
Discuss three main types.
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Chapter 7: Forecasting Share Price Movements
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Q1) Fundamental analysis top-down approach considers how the directors of the company affect its share performance.
A)True
B)False
Q2) Investment analysts use a number of approaches in the analysis of fundamentals that may affect share prices.Which of the following statements in relation to the bottom-up approach to share price analysis is MOST correct? The bottom-up approach:
A) identifies the level of systematic risk within industry sectors.
B) is applied to select specific firms from within desired industry sectors.
C) indicates a well-diversified portfolio that eliminates unsystematic risk.
D) provides investment indicators based on forecast financial ratios.
Q3) Foreign exchange risk is best described as the:
A) variability in the current account balance of the balance of payments.
B) cost of one currency in terms of another.
C) risk that the price of one currency relative to another currency will change.
D) variability of domestic and international interest rates.
Q4) What is a moving average model?
Explain how it is used in technical analysis.
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Page 9
Chapter 8: Mathematics of Finance: An Introduction to Basic Concepts
and Calculations
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Sample Questions
Q1) A finite stream of regular cash flows over a given period is known as a/an:
A) perpetuity.
B) annuity.
C) debenture.
D) allowance.
Q2) Calculate the effective annual interest rate if your bank quotes you 10% per annum,compounded quarterly.
A) 14.01%
B) 10.38%
C) 10%
D) 2.50%
Q3) If a company sells (discounts)a bank bill with a face value of $100 000,a term to maturity of 90 days,and a yield of 7.23% per annum,how much will the company raise on the issue? (Ignore transaction fees.)
A) $84 869.90
B) $98 248.49
C) $98 269.99
D) None of given answers.
Q4) Distinguish between simple interest and compound interest.
Q5) In relation to interest rates,explain what a yield is.
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Chapter 9: Short-Term Debt
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Q1) The role of a lead manager for a promissory note issuance program is to:
A) provide the funds to the issuer.
B) act as an arranger of the debt issue.
C) act as an underwriting syndicate and purchase paper not taken up by the market.
D) provide a supporting guarantee for the issue.
Q2) What is the discount rate of a 120-day bank bill with a face value of $100 000 and currently selling for $95 234,with a full 120 days to run?
A) 13.93%
B) 14.50%
C) 15.22%
D) 16.58%
Q3) Compared to other forms of business finance such as term loans,bill financing offers:
A) the advantages of lower costs for the bank not having to fund the bill on its balance sheet.
B) disadvantages for the bank due to the issue fees involved.
C) higher costs due to the lack of collateral.
D) lower flexibility for the bank.
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Chapter 10: Medium-To-Long-Term Debt
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Q1) All of the following features of a bond are fixed except the:
A) coupon rate.
B) face value.
C) price.
D) interest payments.
Q2) The coupon interest of a bond is calculated based on its _______,and is paid periodically.
A) market value
B) book value
C) face value
D) surrender value
Q3) Compared with unsecured notes,a debenture can offer:
A) a fixed charge over the issuer's already pledged assets.
B) a floating charge over the issuer's unpledged assets.
C) less chance of sale before maturity, as they are not usually traded.
D) provisions for interest rate changes.
Q4) A bond is a long-term debt instrument issued directly into the capital markets.
A)True
B)False
Q5) Identify the main debt securities of the Australian bond market.
Page 12
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Chapter 11: International Debt Markets
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Q1) Currently the yields for fixed-interest euromarket securities (MTNs)are 6.5% per annum.An existing MTN with a face value of USD 1 million,paying 7.3% per annum coupons and maturing in three years trades currently at a price of:
A) $982 371.28
B) $1 000 000.00
C) $1 049 367.68
D) $1 678 976.97
Q2) Which of the following is NOT a feature of euro floating rate notes (FRNs)?
A) Typically, FRNs issues are at least USD100 million.
B) FRNs are a bearer bond issue in the euromarkets.
C) A FRN call option gives the issuer the right to redeem the bonds before maturity.
D) As the coupon is adjusted frequently over its lifetime, the price of the FRN is quite volatile.
Q3) Eurocurrency markets are:
A) domestic European money markets.
B) domestic European capital markets.
C) international markets providing intermediated bank finance.
D) international markets providing foreign exchange transactions.
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Page 13
Chapter 12: Government Debt, monetary Policy and the Payments System
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Q1) Treasury bonds are not bearer securities and so coupon payments are made electronically to holders.
A)True
B)False
Q2) If market interest rates move upwards after an investor buys a government bond,the investor may:
A) sell the bond back to Treasury.
B) sell the bond in the secondary markets for a capital loss.
C) sell the bond in the secondary markets for a capital gain.
D) hold the bond until the market rates return to their original level and then have a capital gain.
Q3) Compared with a Treasury bond,a Treasury note:
A) pays a higher interest rate.
B) is sold at a price below its face value.
C) is sold in terms of price to the highest bidder.
D) has a higher yield.
Q4) An investor might hold government securities as part of a portfolio to lower its risk.
A)True
B)False
14
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Chapter 13: An Introduction to Interest Rate Determination and Forecasting
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Q1) In an economic period of high inflation,the yield curve would most likely be:
A) upward-sloping.
B) downward-sloping.
C) flat.
D) more curved.
Q2) Interest rates will fall when the demand curve for loanable funds:
A) shifts up.
B) shifts to the right.
C) is affected by poor growth prospects in the economy.
D) shifts sideways.
Q3) Which of the following determine(s)the level of interest rates?
i.The supply of savings by households and businesses
ii.The demand for investment funds
iii.The government's net supply of and/or demand for funds
A) i only
B) ii only
C) i and ii only
D) i, ii and iii
Q4) Define and discuss briefly the three common types of economic indicators.
Q5) Discuss when a central bank will generally increase interest rates.
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Chapter 14: Interest Rate Risk
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Q1) If a company has issued a fixed-interest bond to investors and then later interest rates fall on comparable securities,the value of the existing fixed-interest bond:
A) will increase.
B) will decrease.
C) will be unaffected.
D) depends only on the credit risk of the issuer.
Q2) The difference between interest-sensitive assets and interest-sensitive liabilities is termed the:
A) interest-sensitivity index.
B) rate-risk index.
C) gap.
D) duration.
Q3) If a bank has a duration gap of two years,a rise in interest rates from 5 to 8% per annum will lead to a/an:
A) increase of 5.71% in the market value of its net worth.
B) fall of 5.71% in the market value of its net worth.
C) increase of 5.71% in net interest income.
D) fall of 5.71% in net interest income.
Q4) Duration can be used for interest rate risk measurement.Explain how it is used.
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Chapter 15: Foreign Exchange: The Structure and Operation
of the Fx Market
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Q1) In the FX market,trading:
A) stops after the London markets have closed.
B) is restricted to the hours that the Australian banks are open.
C) takes place at any hour of the night or day.
D) stops after the London and New York markets have closed.
Q2) If the value of a currency moves within a defined band,relative to another major currency this is a:
A) partial floating regime.
B) floating rate regime.
C) managed floating regime.
D) crawling peg regime.
Q3) If a British car sells for £20 000 and the British pound is worth A$2.75,the Australian dollar price of the car is:
A) $13 333.
B) $30 000.
C) $55 000.
D) $133 333.
Q4) A USD/YEN quote means the price of USD1 in terms of YEN.
A)True
B)False
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Chapter 16: Foreign Exchange: Factors That Influence the Exchange Rate
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Q1) The Indonesian economy is predicted to average 64% per annum inflation over the next two years.If the forecast inflation for Australia over the same period is 2.5% per annum,how much will a rupiah cost you in two years' time if the current exchange rate is $0.1293/rupiah and PPP is maintained?
A) $0.0505
B) $0.0808
C) $0.3310
D) $0.2069
Q2) When there is a shortage of currency in the FX markets dealers will bid the price and the quantity of currency would increase.
A)True
B)False
Q3) For a country,a fully floating currency regime:
A) allows a government to remove most restrictions on investment flows.
B) relieves the central bank of the need to maintain a particular fixed value of the currency in the FX markets.
C) does not require a country to maintain large amounts of FX reserves to support the currency.
D) all of the given answers are correct.
Page 18
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Chapter 17: Foreign Exchange: Risk Identification and Management
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Q1) When a foreign subsidiary's assets are _______ than its liabilities,if the foreign currency value depreciates for the country in which the foreign subsidiary operates,_______ will occur.
A) greater; currency exchange gains
B) greater; currency exchange losses
C) less; nothing
D) greater; nothing
Q2) One of the main risk management techniques to manage accounting exposure is a: A) forward market hedge.
B) futures contract hedge.
C) foreign currency options hedge.
D) balance sheet hedge.
Q3) When a company has an open FX position,this means:
A) it has a large amount of FX accounts.
B) it has just received a large FX account payable.
C) it has a USD account receivable and a USD account payable.
D) the net value of FX buys and sell transactions is yet to be settled.
Q4) In relation to foreign exchange risk policy formulation and the policy document,discuss the FX objectives of an organisation.
Page 19
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Chapter 18: An Introduction to Risk Management and Derivatives
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Q1) A standardised agreement traded on an organised exchange for delivery of a specified security or commodity at a specified price on a predetermined date is a/an:
A) hedging contract.
B) futures contract.
C) option contract.
D) swap contract.
Q2) According to the text there are three steps:
i.Assess the attitude of the organisation to each identified risk exposure
ii.Analyse the impact of the risk exposures
iii.Identify operational and financial risk exposures
Which is the correct order?
A) i, ii, iii
B) iii, ii, i
C) ii, i, iii
D) iii, i, ii
Q3) As risks for a company vary over time a flexible and robust risk management strategy is essential for an organisation no matter how large or small.
A)True
B)False
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Chapter 19: Future Contracts and Forward Rate Agreements
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Q1) An investor holds a long oil futures contract that expires in June.To close out her position in oil futures before the delivery date,she must:
A) buy one June oil futures contract.
B) buy two June oil futures contracts.
C) sell one June oil futures contract.
D) sell one July oil futures contract.
Q2) When a lender uses a 10-year Treasury bond futures contract to hedge an issue of an unsecured note,this type of hedging is called intersection-commodity hedging. A)True
B)False
Q3) If a bond investor sells a three-year Commonwealth Treasury bond futures contract at 7 per cent and on delivery date the interest rate of Treasury bonds is higher than they expected at 6 per cent,they will have:
A) gained money on their long position.
B) lost money on their long position.
C) lost money on their short position.
D) gained money on their short position.
Q4) Explain simply what is meant by hedging and how the basic rule is implemented.
Page 21
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Chapter 20: Options
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Q1) In options markets,options that give the option buyer the right to exercise the option only on the maturity date are:
A) call options.
B) put options.
C) European-type options.
D) American-type options.
Q2) What type of option will an option buyer buy if they believe a share price will fall?
A) Call
B) Put
C) Warrant
D) Swaption
Q3) Discuss briefly the two common option contracts for shares and options on futures contracts that are available through the AASX Trade 24.
Q4) A European call option can be exercised:
A) only on the expiration date.
B) at any time up to the expiration date.
C) if the price of the underlying asset falls below the exercise price.
D) immediately after the payment of dividends.
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Page 22
Chapter 21: Interest Rate Swaps, Cross-Currency Swaps
and Credit Default
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Q1) A financial contract that obligates one party to exchange a set of payments it owns for another set of payments owned by another party is called a cross call option.
A)True
B)False
Q2) In a swap arrangement,both parties may be able to receive more favourable funding rates than they would have done without the swap,and the swap dealer receives a spread as well.Where does the cost saving originate from?
A) The bank swap dealer effectively guarantees payments of all obligations.
B) The parties involved in the swap are able to borrow where each has a relative cost advantage.
C) The party paying floating cash flows always pays less than the party paying fixed cash flows.
D) With the bank always acting as a swap counterparty, each party is able to reduce the risk profile.
Q3) For the majority of interest rate swaps,an intermediary is involved.
A)True
B)False
Q4) Explain in the context of interest rate swaps what a matched swap is.
Page 23
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