Corporate Finance
Mock Exam
Course Introduction
Corporate Finance explores the fundamental principles and practices related to financial decision-making within corporations. The course covers key topics such as capital budgeting, risk and return analysis, capital structure, dividend policy, and working capital management. Students will learn how financial managers assess investment opportunities, raise financing through debt and equity, and create value for shareholders. Emphasis is placed on practical tools and analytical techniques used to evaluate financial statements, estimate project cash flows, and determine the cost of capital. Case studies and real-world scenarios are used to develop problem-solving skills essential for success in corporate financial management.
Recommended Textbook Finance Applications and Theory 2nd Edition by Marcia Millon Cornett
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20 Chapters
2330 Verified Questions
2330 Flashcards
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Page 2
Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) These individuals help firms access capital markets and advise managers about how to interact with those capital markets.
A) Auditors
B) Investment analysts
C) Investment bankers
D) Credit analysts
Answer: C
Q2) Which of the following is an example of aligning managers' personal interests with those of the owners?
A) Allow the managers to have as many perks as they request.
B) Pay the managers high salaries.
C) Offer the managers an equity stake in the firm.
D) Trust the managers' actions as they will always act in the owners' best interest.
Answer: C
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Chapter 2: Reviewing Financial Statements
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Sample Questions
Q1) Balance Sheet Jack and Jill Corporation's year-end 2009 balance sheet lists current assets of $250,000, fixed assets of $800,000, current liabilities of $195,000, and long-term debt of $300,000. What is Jack and Jill's total stockholders' equity?
A) $495,000
B) $555,000
C) $1,050,000
D) There is not enough information to calculate total stockholder's equity.
Answer: B
Q2) You are evaluating the balance sheet for Goodman's Bees Corporation. From the balance sheet you find the following balances: Cash and marketable securities = $200,000, Accounts receivable = $1,100,000, Inventory = $2,000,000, Accrued wages and taxes = $500,000, Accounts payable = $600,000, and Notes payable = $100,000.
Calculate Goodman's Bees' net working capital.
A) $2,000,000
B) $2,100,000
C) $1,400,000
D) $1,900,000
Answer: B
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Page 4
Chapter 3: Analyzing Financial Statements
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131 Verified Questions
131 Flashcards
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Sample Questions
Q1) Which ratio measures the number of dollars of operating cash available to meet each dollar of interest and other fixed charges that the firm owes?
A) Times interest earned
B) Fixed-charge coverage ratio
C) Cash coverage ratio
D) Operating coverage ratio
Answer: C
Q2) Debt Management Ratios Paige's Purses, Inc. reported a debt to equity ratio of 2.4 times at the end of 2011. If the firm's total assets at year-end are $27 million, how much of their assets is financed with equity?
A) $7.94m
B) $11.25m
C) $19.06 m
D) $64.8m
Answer: A
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Chapter 4: Time Value of Money 1: Analyzing Single Cash Flows
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143 Flashcards
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Sample Questions
Q1) Interest-on-Interest Consider a $2,000 deposit earning 6 percent interest per year for 5 years. How much total interest is earned on the original deposit (excluding interest earned on interest)?
A) $60.00
B) $76.45
C) $600.00
D) $676.45
Q2) Show the time line for a $300 cash outlay today, a $483.15 inflow in year five, and a 10 percent interest rate.
Q3) Solving for Time How many years will it take $100 to grow to $1,000 with an annual interest rate of 8 percent?
A) 9.00 years
B) 10.00 years
C) 29.92 years
D) 33.35 years
Q4) Explain why the Rule of 72 is less accurate with higher interest rates.
Q5) How does compounding help build wealth (or increase debt) over time?
Q6) Why is a dollar worth more today than a dollar received one year from now?
Q7) Explain how "interest rate" and "rate of return" are similar, yet different.
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Chapter 5: Time Value of Money 2: Analyzing Annuity Cash Flows
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148 Verified Questions
148 Flashcards
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Sample Questions
Q1) What is the difference between an annuity due and an ordinary annuity?
Q2) Future Value Compute the future value in year 10 of a $1,000 deposit in year 1 and another $1,500 deposit at the end of year 4 using an 8% interest rate.
A) $3,120.73
B) $4,379.31
C) $4,500.00
D) $5,397.31
Q3) Present Value of Multiple Annuities A small business owner visits his bank to ask for a loan. The owner states that he can repay a loan at $1,500 per month for the next three years and then $500 per month for the two years after that. If the bank is charging customers 5.5 percent APR, how much would it be willing to lend the business owner?
A) $4,046.90
B) $59,293.50
C) $24.261.00
D) $66,000.00
Q4) Describe how compounding affects the future value computation of an annuity.
Q5) Explain why the effective annual rate (EAR) is a more accurate measure of the interest rate paid than the annual percentage rate (APR)?
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Chapter 6: Understanding Financial Markets and Institutions
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104 Flashcards
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Sample Questions
Q1) An example of an illiquid asset is _____________________.
A) U.S. Treasury bill
B) Bonds issued by GM
C) Common stock issued by Apple Inc.
D) Common stock issued by a small but financially strong firm
Q2) The Wall Street Journal reports that the rate on 4-year Treasury securities is 7.50% and the rate on 5-year Treasury securities is 9.15%. According to the unbiased expectations hypotheses, what does the market expect the 1-year Treasury rate to be four years from today, E(<sub>5</sub>r<sub>1</sub>)?
A) 16.0%
B) 18.4%
C) 15.9%
D) 13.7%
Q3) This is the risk that an asset's sale price will be lower than its purchase price.
A) default risk
B) liquidity risk
C) price risk
D) trading risk
Q4) Why is it useful to calculate forward rates?
Page 8
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Chapter 7: Valuing Bonds
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Sample Questions
Q1) Which of the following is a reason municipal bonds offer lower rates of interest income for their investors?
A) They are able to avoid interest rate risk.
B) They are able to avoid reinvestment rate risk.
C) They are able to offer reduced credit risk as they are backed by the federal government.
D) They are tax exempt-at least at the federal level.
Q2) To compensate the bondholders for getting the bond called, the issuer pays which of the following?
A) call feature
B) call premium
C) coupon rate
D) original issue premium
Q3) Which of the following bonds will have the largest percentage increase in value if interest rates decrease by 1%?
A) 2-year, 5% coupon bond
B) 30-year, 10% coupon bond
C) 10-year, zero coupon
D) 30-year, zero coupon
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Page 9
Chapter 8: Valuing Stocks
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Sample Questions
Q1) Dividend yield is defined as
A) the last four quarters of dividend income expressed as a percentage of the par value of the stock.
B) the last four quarters of dividend income expressed as a percentage of the current stock price.
C) the last dividend paid expressed as a percentage of the current stock price.
D) the next dividend to be paid expressed as a percentage of the current stock price.
Q2) Which of the following is an electronic stock market without a physical trading floor?
A) American Stock Exchange
B) Mercantile Exchange
C) New York Stock Exchange
D) Nasdaq Stock Market
Q3) These investors earn returns from receiving dividends and from stock price appreciation.
A) bondholders
B) stockholders
C) investment bankers
D) managers
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Chapter 9: Characterizing Risk and Return
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Sample Questions
Q1) Which of the following is correct?
A) Total risk is measured by the standard deviation.
B) There is a positive relationship between risk and return.
C) If you observe a high variability in a stock's returns you can infer that the stock is very risky.
D) All of these statements are correct.
Q2) This is a measure of risk to reward earned by an investment over a specific period of time.
A) coefficient of variation
B) market deviation
C) standard deviation
D) total variation
Q3) Which of the following are investor diversification problems?
A) Many employees hold mostly their employer's stocks as investments.
B) Many households hold relatively few individual stocks-the median is three.
C) Investors seem to prefer local firms thereby limiting diversification opportunities.
D) All of these are investor diversification problems.
Q4) What does diversification do to the risk and return characteristics of a portfolio?
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Chapter 10: Estimating Risk and Return
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106 Verified Questions
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Sample Questions
Q1) This is the average of the possible returns weighted by the likelihood of those returns occurring.
A) efficient return
B) expected return
C) market return
D) required return
Q2) ABC Inc. has a dividend yield equal to 3% and is expected to grow at a 7% rate for the next 7 years. What is ABC's required return?
A) 10%
B) 11%
C) 4%
D) 5%
Q3) The asset pricing theory based on a beta, a measure of market risk.
A) Behavioral Asset Pricing Model
B) Capital Asset Pricing Model
C) Efficient Markets Asset Pricing Model
D) Efficient Market Hypothesis
Q4) Land O Lakes Systems has a beta of 1.66. Does this mean that you should expect Land O Lakes to earn a return 88 percent higher than the S&P500 Index return? Explain.
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Chapter 11: Calculating the Cost of Capital
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Sample Questions
Q1) Which of these completes this statement to make it true? The constant growth model is
A) always going to have assumptions that will hold true.
B) able to be adjusted for stocks that don't expect constant growth without sizeable errors.
C) only going to be appropriate for the limited number of stocks that just happen to expect constant growth.
D) only going to be appropriate for the limited number of stocks that just happen to expect nonconstant growth.
Q2) Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has 2 divisions, A and B, with betas for each division of 0.5 and 1.5, respectively. If all current and future projects will be financed with half debt and half equity, and if the current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 5%) is 14% and the after-tax yield on the company's bonds is 6%, what are the WACCs for divisions A and B?
A) 7.75%; 12.25%
B) 8.75%; 12.00%
C) 9.25%; 11.00%
D) 8.95%; 10.15%
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Page 13
Chapter 12: Estimating Cash Flows on Capital Budgeting Projects
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Sample Questions
Q1) If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a(n)
A) Incremental cash outflow
B) Opportunity cost
C) Sunk cost
D) Expensible item
Q2) Your firm needs a computerized machine tool lathe which costs $50,000 and another $12,000 in maintenance for each year of its 3-year life. After 3 years, this machine will be replaced. The machine falls into the MACRS 3-year class life category.
Assume a tax rate of 30% and a discount rate of 12%. If the lathe can be sold for $6,000 at the end of year 3, what is the after-tax salvage value?
A) $3,470.50
B) $4,344.50
C) $5,499.50
D) $5,311.50
Q3) Will operating cash flow typically be larger or smaller than net income? Why?
Q4) Everything held constant, would you rather depreciate a project with straight-line depreciation or with DDB?
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Chapter 13: Weighing Net Present Value and Other Capital
Budgeting
Criteria
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Sample Questions
Q1) Use the PI decision rule to evaluate these projects; which one(s) should be accepted or rejected?
A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B
Q2) Use the IRR decision rule to evaluate these projects; which one(s) should be accepted or rejected?
A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B
Q3) Which of the following statements is correct?
A) Discounted payback solves all the shortcomings of payback.
B) The reinvestment rate of NPV and MIRR is the same.
C) The MIRR and IRR have the same reinvestment rate.
D) All of these are correct statements.
Q4) Explain the Rule of Signs as it pertains to IRR.
Page 15
Q5) For a project with normal cash flows, what would you expect the relationship to be between the MIRR and the IRR?
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Chapter 14: Working Capital Management and Policies
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Sample Questions
Q1) Hollywood Shoes would like to maintain their cash account at a minimum level of $50,000, but expects the standard deviation in net daily cash flows to be $4,000; the effective annual rate on marketable securities to be 6 percent per year; and the trading cost per sale or purchase of marketable securities to be $100 per transaction. What will be their optimal cash return point?
A) $59,094.77
B) $69,588.47
C) $181,131.66
D) $54,000.00
Q2) If a firm has a cash cycle of 18 days and an operating cycle of 29 days, what is its payables turnover?
A) 11
B) 18
C) 29
D) 33.18
Q3) Carrying costs are associated with having current assets and fall into two general categories. List those two categories.
Q4) When a firm is determining which current asset policy would work best for them, what factors must they consider?
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Chapter 15: Financial Planning and Forecasting
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Sample Questions
Q1) Suppose you were forecasting sales for a firm that exhibited a cyclical pattern within each week. How would you go about forecasting sales for this firm?
A) You would need to compute day-of-the week indices centered on the seven days around each day of the week and use these indices to deseasonalize the historical observations.
B) Calculate the monthly average because it automatically deseasonalizes the historical observations.
C) Ignore the seasonality.
D) Compute the daily change as a percent of sales and calculate the geometric average.
Q2) Which of the following will increase a firm's need for additional funds?
A) An increase in the firm's average collection period.
B) An increase in the retention ratio.
C) A decrease in sales growth.
D) An increase in accrued wages.
Q3) Which liabilities would tend to spontaneously increase with sales? Why?
Q4) How is the capital intensity ratio calculated? How is it used in the AFN formula?
Q5) Is forecasting more important for small firms or large firms? Why?
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Chapter 16: Assessing Long-Term Debt, Equity, and Capital Structure
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Sample Questions
Q1) Suppose that Papa Bell Inc.'s equity is currently selling for $30 per share, with 4 million shares outstanding. If the firm also has 70 thousand bonds outstanding, which are selling at 95 percent of par ($1,000), what are the firm's current capital structure weights?
A) Weight of Equity = 74.11%; Weight of Debt = 25.89%
B) Weight of Equity = 64.34%; Weight of Debt = 35.66%
C) Weight of Equity = 67.80%; Weight of Debt = 32.20%
D) Weight of Equity = 65.19%; Weight of Debt = 34.81%
Q2) Why does allowing for the existence of corporate taxation cause firms to prefer the maximum amount of debt possible?
A) Because the flotation costs associated with debt are significantly lower than the flotation costs associated with equity.
B) Because debt is tax-deductible, the effective cost of debt is much cheaper than using equity.
C) Because debt places fewer demands on the firm's cash flows.
D) None of these.
Q3) Why does the optimal capital structure shift from "debt doesn't matter" to "the more debt, the better" when we add corporate taxation to our assumptions?
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Chapter 17: Sharing Firm Wealth: Dividends, Share
Repurchases, and Other Payouts
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Sample Questions
Q1) Suppose a firm pays total dividends of $50,000 out of net income of $500,000. What would the firm's payout ratio be?
A) 0.10
B) 1.00
C) 10.00
D) 50.00
Q2) As the number of days until the next dividend decreases, what will happen to the present value of the stock?
A) It will decrease.
B) It will increase.
C) It will stay the same.
D) One cannot determine what will happen to the price of the stock in this situation.
Q3) This is a repurchase where the firm simply buys shares of its own stock on the stock market just like any other investor would.
A) fixed-price tender offer
B) fixed-duration tender offer
C) fixed-shares tender offer
D) open-market stock repurchase
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Chapter 18: Issuing Capital and the Investment Banking Process
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Sample Questions
Q1) All of the following are advantages of an IPO except ________________.
A) The market provides a market value for the firm's common stock.
B) The original owners can reallocate their personal wealth away from the firm into more diversified portfolios.
C) The market provides a transparent measure of firm performance which can attract more investors.
D) IPOs are traditionally priced at a premium to cover the costs of the underwriters.
Q2) Calculating Costs of Issuing Stock Wildcat, Inc., needs to raise $750 million to finance its plan for nationwide expansion. In discussions with its investment bank, Wildcat's learns that the bankers recommend an offer price (or gross price) of $25 per share and they will charge an underwriter's spread of $1.50 per share. Calculate the net proceeds to Wildcat's from the sale of stock. How many shares of stock will Wildcat's need to sell in order to receive the $750 million they need?
A) 30,000,000
B) 31,914,894
C) 500,000,000
D) 750,000,000
Q3) As a new or small firm considers going public, what must the owners consider?
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Chapter 19: International Corporate Finance
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Sample Questions
Q1) All of the following are examples of factors that affect trading activity between countries except __________________.
A) Charging a 0.75% import tax on steel imported from China into the U.S.
B) Charging $3 tariff per barrel of crude oil imported in the U.S.
C) Restricting the importation of produce into the U.S from South America
D) All of these are factors that affect trading activity between countries
Q2) Compute the amount of each foreign currency that can be purchased for $5,000:
a. 1 Danish Krone = $0.18
b. 1 Indian Rupee = $0.15
c. 1 Israeli Shekel = $0.37
$5,000 equals:
A) 17,777.78 Krone; 33,333.33 Rupee; 18,513.51 Shekel
B) 17,777.78 Krone; 33,333.33 Rupee; 13,513.51 Shekel
C) 27,777.78 Krone; 38,333.33 Rupee; 13,513.51 Shekel
D) 27,777.78 Krone; 33,333.33 Rupee; 13,513.51 Shekel
Q3) What is meant when it is said that the U.S. dollar is strengthening? How would it impact your vacation abroad and foreign visitors to the U.S.?
Q4) What is meant by hedging exchange rate risk and what are some ways it is done?
Q5) What are the advantages of borrowing money in the country you plan to invest in?
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Chapter 20: Mergers and Acquisitions and Financial
Distress
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Sample Questions
Q1) Calculation of Average Costs with Economies of Scope Flowers Galore is considering a merger with Balloons N More. Flowers Galore's total operating costs of producing services are $400,000 for a sales volume of $4 million. Balloons' total operating costs of producing services are $30,000 for a sales volume of $700,000. If the two firms merge, calculate the total average cost for the merged firm assuming no synergies.
A) 4.29%
B) 9.15%
C) 10.00%
D) 7.14%
Q2) All of the following are problems associated with using the Z-score model to make credit risk evaluations except _______________.
A) The model does not benchmark firms to the average in the industry
B) The model does not use important data that is difficult to quantify such as the phase of the business cycle.
C) The model categorizes firms as either high risk or low risk
D) All of these are problems associated with using the Z-score model
Q3) List the order for the distribution of the funds from asset liquidation in a bankruptcy.
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