Corporate Finance
Practice Exam
Course Introduction
Corporate Finance explores the fundamental principles and practices involved in financial decision-making within a corporation. The course covers topics such as capital budgeting, valuation of financial assets, cost of capital, capital structure, dividend policy, and working capital management. Students will learn how firms raise funds, allocate resources, and manage risk to maximize shareholder value. Through case studies and real-world examples, the course equips students with analytical tools and frameworks necessary to evaluate investment opportunities and financial strategies in a dynamic business environment.
Recommended Textbook
Corporate Finance Core Principles and Applications 5th Ediiton by Stephen A. Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) The Securities Act of 1933 focuses on
A)all new and outstanding stock transactions.
B)the issuance of new securities.
C)the redemption of outstanding debt.
D)insider trading.
E)Federal Deposit Insurance Corporation (FDIC)insurance.
Answer: B
Q2) Art purchased 2,500 shares of Delta stock.His purchase represents 10 percent ownership in the firm.His shares have increased in value from the $12 a share he originally paid to today's market value of $13 a share.Assume Delta goes bankrupt and owes $450,000 more in debts than the firm can pay after liquidating all of its assets.What is the maximum loss per share Art will incur on this investment?
A)$0 a share
B)$12 a share
C)$12.50 a share,computed as ($12 + $13)/ 2
D)$13 a share
E)$18 share,computed as (10% × $450,000)/ 2,500 shares
Answer: B
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Page 3
Chapter 2: Financial Statements and Cash Flow
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Q1) Cash flow to stockholders must be positive when
A)the net sale of common stock exceeds the amount of dividends paid.
B)no income is distributed but new shares of stock are sold.
C)both the cash flow to assets and the cash flow to creditors are negative.
D)both the cash flow to assets and the cash flow to creditors are positive.
E)the dividends paid exceed the net new equity raised.
Answer: E
Q2) Assume sales are $1,100,cost of goods sold is $510,depreciation expense is $80,interest paid is $40,selling and general expenses are $230,dividends paid is $45,and the tax rate is 34 percent.What is the addition to retained earnings?
A)$203.40
B)$113.40
C)$166.20
D)$109.60
E)$158.40
Answer: B
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Chapter 3: Financial Statements Analysis and Financial Models
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Questions
Q1) Tree Top Furniture has current sales of $287,600 and fixed assets of $314,000.The firm is currently operating at 96 percent of capacity.What is the maximum percentage increase the firm can have in sales without investing in additional fixed assets?
A)4.17%
B)4.00%
C)6.72%
D)3.92%
E)6.33%
Answer: A
Q2) Blue Mountain Foods has net fixed assets of $89,700 and current assets of $38,400,of which $21,400 is inventory.What is the common-size statement value of inventory?
A)23.86%
B)18.56%
C)16.71%
D)55.73%
E)24.71%
Answer: C
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Chapter 4: Discounted Cash Flow Valuation
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Sample Questions
Q1) Theo just won a prize that will pay him $10,000 a year for 10 years,starting at the end of Year 10.What is the current value of this prize if the discount rate is 7 percent,compounded annually?
A)$37,982.98
B)$35,704.33
C)$38,203.63
D)$36,191.91
E)$35,928.70
Q2) An investment will pay $5,500 every 2 years for the next 40 years.The annual rate of interest is 12 percent.What is the value of this investment at the end of Year 40?
A)$1,630,590.34
B)$1,096,222.20
C)$1,206,504.11
D)$1,353,997.81
E)$1,990,095.67
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Chapter 5: Interest Rates and Bond Valuation
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Sample Questions
Q1) North & South RR bonds bear a coupon rate of 5.5 percent,payable annually.The bonds mature in 6.5 years,sell at par,and have a $1,000 face value.What is the yield to maturity?
A)5.59%
B)5.86%
C)5.50%
D)5.42%
E)5.71%
Q2) A General Co.bond has a coupon rate of 6 percent and pays interest annually.The face value is $1,000,and the current market price is $1,006.49.The bond matures in 16 years.What is the yield to maturity?
A)6.08%
B)5.94%
C)6.11%
D)6.03%
E)5.97%
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Chapter 6: Stock Valuation
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Sample Questions
Q1) According to finance professionals,which one of these factors has the biggest impact on a firm's PE ratio?
A)Accounting practices of the firm
B)Risk-level of the firm
C)Size of the firm
D)Growth opportunities
E)Age of the firm
Q2) Nu Tek's next annual dividend will be $4.26 a share and all later dividends are expected to increase by 4.4 percent annually.What is the rate of return if this stock is currently selling for $48.74 a share?
A)10.76%
B)11.98%
C)13.14%
D)13.67%
E)12.87%
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8
Chapter 7: Net Present Value and Other Investment Rules
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Sample Questions
Q1) You are considering a project with an initial cost of $13,000.What is the payback period for this project if the annual cash inflows are $3,450,$5,970,$2,100,and $1,400 for Years 1 to 4,respectively?
A)4.06 years
B)3.97 years
C)3.89 years
D)Never
E)3.81 years
Q2) What is the internal rate of return on an investment that has an initial cost of $63,100 and projected cash inflows of $18,700,$38,600,and $34,100 for Years 1 to 3,respectively?
A)11.86%
B)12.37%
C)20.08%
D)13.92%
E)19.10%
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9
Chapter 8: Making Capital Investment Decisions
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Sample Questions
Q1) A project will increase sales by $92,800 and cash expenses by $53,200.The project will cost $89,000 and be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project.The tax rate is 35 percent.What is the operating cash flow of the project using the tax shield approach?
A)$42,350.50
B)$28,650.00
C)$33,527.50
D)$35,170.50
E)$37,672.50
Q2) The pretax salvage value of an asset is equal to the
A)book value if straight-line depreciation is used.
B)book value if MACRS depreciation is used.
C)market value minus the book value.
D)book value minus the market value.
E)market value.
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10
Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
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Sample Questions
Q1) A project has earnings before interest and taxes of $7,318,fixed costs of $13,480,a selling price of $14 a unit,and a sales quantity of 7,500 units.Depreciation is $2,200.What is the variable cost per unit?
A)$10.56
B)$12.08
C)$8.87
D)$10.93
E)$11.24
Q2) All else constant,as the variable cost per unit increases,the A)net profit increases.
B)contribution margin decreases.
C)sensitivity to fixed costs decreases.
D)operating cash flow increases.
E)financial breakeven point decreases.
Q3) In financial breakeven,the EAC is used to
A)allocate depreciation over the life of a project.
B)determine the tax benefit of depreciation.
C)allocate the initial investment over the life of a project.
D)determine the ideal contribution margin.
E)ascertain the appropriate discount rate.
Page 11
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Chapter 10: Risk and Return: Lessons From Market History
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Sample Questions
Q1) A stock had returns of 7 percent,7 percent,7 percent,and 7 percent annually over the past 4 years.What is the geometric average return for this time period?
A)6.875%
B)7%
C)6.929%
D)9.998%
E)9.441%
Q2) Given a set of returns,the wider the distribution of those returns,the
A)higher the number of those returns.
B)lower the average rate of return.
C)lower the variance.
D)higher the standard deviation.
E)lower the volatility.
Q3) The higher the Sharpe ratio,the
A)greater the total risk.
B)greater the return per unit of risk.
C)more the security resembles the overall market.
D)greater the risk per unit of return.
E)lower the level of total risk.
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12
Chapter 11: Return and Risk: The Capital Asset Pricing Model
Capm
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Sample Questions
Q1) Which one of these measures the squared deviations of actual returns from expected returns?
A)Variance
B)Covariance
C)Beta
D)Correlation
E)Alpha
Q2) Alpha stock has a beta of 1.29.The risk-free rate of return is 3.2 percent,and the market rate of return is 10.7 percent.What is the Alpha stock risk premium?
A)7.24%
B)9.30%
C)7.59%
D)8.77%
E)9.68%
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Chapter 12: Risk, Cost of Capital, and Valuation
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Sample Questions
Q1) Asian Foods needs $110,000 for a new project.The firm has a target capital structure of 30 percent debt and 70 percent external equity.The flotation cost of debt is 5.25 percent compared to 10.15 percent for equity.What amount does the firm need to raise?
A)$120,801.25
B)$118,211.17
C)$120,455.54
D)$119,497.79
E)$122,674.09
Q2) The Red Hen currently has a debt-to-equity ratio of 0.45,its cost of equity is 13.3 percent,and its beta is 1.49.The pretax cost of debt is 7.2 percent,the tax rate is 35 percent,and the risk-free rate is 3.1 percent.The firm's target debt-to-equity ratio is 0.4.What discount rate should be assigned to a new project the firm is considering if the project is equally as risky as the overall firm and will be financed solely with debt?
A)8.80%
B)9.76%
C)11.07%
D)9.34%
E)10.84%
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Chapter 13: Efficient Capital Markets and Behavioral Challenges
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Sample Questions
Q1) What does weak form efficiency imply?
A)Portfolio diversification is ineffective as all prices are interrelated.
B)Past price movement is unrelated to the movement of future prices.
C)Abnormal returns will disappear within a trading day.
D)Price patterns that existed in the past will reappear in the future.
E)Investors cannot earn abnormal profits based on any publicly available information.
Q2) The U.S.Securities and Exchange Commission periodically charges individuals for insider trading and claims those individuals have made unfair profits.Based on this fact,you would tend to argue that the financial markets are at best ________ form efficient.
A)weak
B)semiweak
C)semistrong
D)perfect
E)strong
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Chapter 14: Capital Structure: Basic Concepts
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Sample Questions
Q1) The fact that interest payments on debt are tax deductible is a key factor in which of these propositions?
A)Both MM Proposition I and II,with taxes
B)MM Proposition I,without tax
C)MM Proposition II,without tax
D)MM Proposition I,with tax
E)MM Proposition II,with tax
Q2) Managers should select the capital structure that
A)maximizes the value of the firm.
B)has no debt.
C)is fully levered.
D)minimizes taxes.
E)produces the highest current level of net income.
Q3) The formula associated with MM Proposition II,without taxes,is
A)R<sub>0</sub> = R<sub>S</sub> + (B / S)(R<sub>S</sub> - R<sub>B</sub>).
B)R<sub>WACC</sub> = R<sub>S</sub> - R<sub>B</sub>.
C)R<sub>s</sub> = R<sub>0</sub> + (B / S)(R<sub>0</sub> - R<sub>B</sub>).
D)R<sub>0</sub> = R<sub>B</sub> - R<sub>0</sub>.
E)R<sub>WACC</sub> = R<sub>0</sub> + R<sub>B</sub>.
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Page 16
Chapter 15: Capital Structure: Limits to the Use of Debt
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Sample Questions
Q1) A firm that has a negative net worth is said to be
A)experiencing accounting insolvency.
B)in legal bankruptcy.
C)experiencing technical insolvency.
D)experiencing a business failure.
E)in Chapter 11 bankruptcy reorganization.
Q2) Which one of these statements is correct for a levered firm?
A)An increase in tax rates will decrease the value of the firm.
B)An increase in financial distress costs increases the value of a firm.
C)To obtain its maximum value,a firm should select an all-equity capital structure.
D)The value of a firm is maximized when its cost of capital is also maximized.
E)The optimal level of debt for a firm results in the value of that firm being maximized.
Q3) The protective covenants contained within a loan agreement
A)impose restrictions on the lender.
B)are designed to protect the borrower's shareholders.
C)increase the borrower's flexibility.
D)tend in increase the bond's interest rate.
E)can increase the value of the borrowing firm.
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17
Chapter 16: Dividends and Other Payouts
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Sample Questions
Q1) The indifference policy advocates that
A)dividends are irrelevant.
B)firms are indifferent to dividend policy but stockholders are not.
C)stockholders are indifferent to dividend policy only as long as dividends are held constant.
D)dividend policy is irrelevant as long as the firm's investment policy is modified for dividend changes.
E)dividend policy is irrelevant.
Q2) Quick Mart has been paying a quarterly dividend of $1.20 a share.Which of the following are valid reasons for the firm to reduce or eliminate these dividends?
I.The firm is on the verge of violating a bond restriction.
II.The firm wants to save cash for an acquisition with a 40 percent premium.
III.The firm can raise new capital easily at a very low cost.
IV.Congress just changed the tax laws eliminating all taxes on capital gains.
A)I and IV only
B)II and IV only
C)II,III,and IV only
D)I,II,and IV only
E)I,II,III,and IV
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Page 18
Chapter 17: Options and Corporate Finance
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Q1) If you express a firm in terms of put options,the
A)current value of the firm is the exercise price.
B)option will always be in the money.
C)stockholders will be considered as the firm's owners.
D)bondholders determine whether or not the option will be exercised.
E)bondholders are the buyers of the put.
Q2) Assume you own both a June 20 put and a June 20 call on ALPO stock.Which one of the following statements is correct concerning your option positions? Ignore taxes and transaction costs.
A)Both a May 20 put and a May 20 call on ALPO will have higher values than your June 20 options.
B)An increase in the stock price will increase the value of your put and decrease the value of your call.
C)A decrease in the stock price will decrease the value of both of your options.
D)If put-call parity does not hold,you can profit from your positions even if ALPO stock sells for $20 a share.
E)The time premium on your June 20 put is equal to the time premium on a July 20 put on ALPO.
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Page 19
Chapter 18: Short-Term Finance and Planning
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Sample Questions
Q1) Which one of the following is a use of cash?
A)Acquisition of bank loan
B)Sale of common stock
C)Sale of marketable securities
D)Decrease in accounts payable
E)Decrease in inventory
Q2) A restrictive short-term financial policy is most associated with both
A)liberal credit terms and large investments in marketable securities.
B)minimal cash balances and large investments in marketable securities.
C)large investments in inventory and accounts receivable.
D)minimal cash balances and credit sales.
E)high credit sales and high cash balances.
Q3) Pat's Place has sales of $613,700 and cost of goods sold of $338,514.At the beginning of the year,inventory was $56,509.At the end of the year,the inventory balance was $52,411.What is the inventory turnover rate?
A)5.23 times
B)7.56 times
C)6.22 times
D)5.60 times
E)6.87 times
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Chapter 19: Raising Capital
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Sample Questions
Q1) Wood Cabinet's is an all-equity firm with 180,000 shares of stock outstanding that sell for $42 per share.The current net income is $320,400.An expansion project will cost $1.26 million.Assume the price-earnings ratio remains constant.By what amount must the new project increase the net income for the stock price to remain at $42?
A)$51,300
B)$57,600
C)$59,700
D)$62,100
E)$53,400
Q2) Which one of the following best describes an initial public offering?
A)The first sale of equity shares to the general public
B)Any newly issued shares offered to the general public
C)Shares sold to the public in exchange for cash
D)Shares held by a firm's founder
E)Any shares initially offered to a firm's existing shareholders
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21
Chapter 20: International Corporate Finance
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Sample Questions
Q1) Assume the inflation rate in the United States is 2.2 percent.The spot rate for a foreign currency is 0.947 while the 1-year forward rate is 0.951.What is the approximate rate of inflation in the foreign country?
A)2.62%
B)2.37%
C)1.49%
D)1.63%
E)1.78%
Q2) You want to import $62,000 worth of rugs from India.How many rupees will you need to pay for this purchase if one rupee is worth $.01606?
A)3,860,523RS
B)2,803,006RS
C)821,048RS
D)996RS
E)909RS
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Chapter 21: Mergers and Acquisitions Web Only
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Q1) LTL has 9,000 shares of stock outstanding at a market price per share of $21.STS has 45,000 shares outstanding that sell for $39 a share.By merging,$15,200 of synergy can be created.What would be the postmerger value of the combined firm if STS acquires LTL in a stock acquisition valued at $200,000?
A)$1,744,000
B)$1,759,200
C)$1,944,000
D)$1,766,500
E)$1,959,200
Q2) Low's has 17,500 shares of stock outstanding at a price per share of $37.40.Bert's has 25,000 shares outstanding at a price per share of $41.50.Bert's believes it can create $12,800 of synergy if it acquires Low's in an exchange of stock.What is the value of the combined firm following the merger? Assume both firms are all-equity financed.
A)$1,704,800
B)$1,597,500
C)$1,753,300
D)$1,692,000
E)$1,679,200
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