Corporate Finance Practice Exam
Course Introduction
Corporate Finance introduces students to the fundamental principles and practices of financial management within corporations. The course covers essential topics such as financial statement analysis, time value of money, capital budgeting, risk and return, cost of capital, and capital structure. Students will explore the decision-making processes regarding investment, financing, and dividend policies, with an emphasis on maximizing firm value and shareholder wealth. Through case studies and practical examples, learners will develop analytical skills to evaluate financial strategies and address real-world challenges in corporate finance.
Recommended Textbook
Fundamentals of Financial Management 15th Edition by Eugene F. Brigham
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21 Chapters
1827 Verified Questions
1827 Flashcards
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Page 2
Chapter 1: An Overview of Financial Management
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Sample Questions
Q1) In most corporations,the CFO ranks under the CEO.
A)True
B)False
Answer: True
Q2) The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to
A) Maximize managers' own interests,which are by definition consistent with maximizing shareholders' wealth.
B) Maximize the firm's expected EPS,which must also maximize the firm's price per share.
C) Minimize the firm's risks because most stockholders dislike risk.In turn,this will maximize the firm's stock price.
D) Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers.
E) Since it is impossible to measure a stock's intrinsic value,the text states that it is better for managers to attempt to maximize the current stock price than its intrinsic value.
Answer: D
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3
Chapter 2: Financial Markets and Institutions
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Sample Questions
Q1) Money markets are markets for
A) Foreign currencies.
B) Consumer automobile loans.
C) Common stocks.
D) Long-term bonds.
E) Short-term debt securities such as Treasury bills and commercial paper.
Answer: E
Q2) Which of the following is a primary market transaction?
A) You sell 200 shares of IBM stock on the NYSE through your broker.
B) You buy 200 shares of IBM stock from your brother.The trade is not made through a broker;you just give him cash and he gives you the stock.
C) IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker.
D) One financial institution buys 200,000 shares of IBM stock from another institution.An investment banker arranges the transaction.
E) IBM sells 2,000,000 shares of treasury stock to its employees when they exercise options that were granted in prior years.
Answer: C
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Page 4
Chapter 3: 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.If the firm has sufficient retained earnings,it can purchase assets and pay for them with cash from retained earnings.
A)True
B)False
Answer: False
Q2) The next-to-last line on the income statement shows the firm's earnings,while the last line shows the dividends the company paid.Therefore,the dividends are frequently called "the bottom line."
A)True
B)False
Answer: False
Q3) The statement of cash flows has four main sections,one each for operating,investing,and financing activities,and one that shows a summary of the cash and cash equivalents at the end of the year.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Analysis of Financial Statements
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Sample Questions
Q1) If a firm sold some inventory for cash and left the funds in its bank account,its current ratio would probably not change much,but its quick ratio would decline.
A)True
B)False
Q2) Garcia Industries has sales of $187,500 and accounts receivable of $18,500,and it gives its customers 25 days to pay.The industry average DSO is 27 days,based on a 365-day year.If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average,and if it earns 8.0% on any cash freed up by this change,how would that affect its net income,assuming other things are held constant? Assume all sales to be on credit.Do not round your intermediate calculations.
A) $333.37
B) $311.15
C) $370.41
D) $422.27
E) $459.31
Q3) The operating margin measures operating income per dollar of assets.
A)True
B)False
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6
Chapter 5: Time Value of Money
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Sample Questions
Q1) What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $2,400 at the end of Year 4 if the interest rate is 5%?
A) $7,464.66
B) $9,952.87
C) $8,858.06
D) $12,341.56
E) $10,848.63
Q2) A time line is not meaningful unless all cash flows occur annually.
A)True
B)False
Q3) Midway through the life of an amortized loan,the percentage of the payment that represents interest could be equal to,less than,or greater than to the percentage that represents repayment of principal.The proportions depend on the original life of the loan and the interest rate.
A)True
B)False
Q4) A time line is meaningful even if all cash flows do not occur annually.
A)True
B)False
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Chapter 6: Interest Rates
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Sample Questions
Q1) Assume that inflation is expected to decline steadily in the future,but that the real risk-free rate,r*,will remain constant.Which of the following statements is CORRECT,other things held constant?
A) If the pure expectations theory holds,the Treasury yield curve must be downward sloping.
B) If the pure expectations theory holds,the corporate yield curve must be downward sloping.
C) If there is a positive maturity risk premium,the Treasury yield curve must be upward sloping.
D) If inflation is expected to decline,there can be no maturity risk premium.
E) The expectations theory cannot hold if inflation is decreasing.
Q2) If investors expect the rate of inflation to increase sharply in the future,then we should not be surprised to see an upward sloping yield curve.
A)True
B)False
Q3) Because the maturity risk premium is normally positive,the yield curve is normally upward sloping.
A)True
B)False
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Page 8
Chapter 7: Bonds and Their Valuation
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Sample Questions
Q1) The market value of any real or financial asset,including stocks,bonds,or art work purchased in hope of selling it at a profit,may be estimated by determining future cash flows and then discounting them back to the present.
A)True
B)False
Q2) Which of the following statements is CORRECT?
A) A zero coupon bond's current yield is equal to its yield to maturity.
B) If a bond's yield to maturity exceeds its coupon rate,the bond will sell at par.
C) All else equal,if a bond's yield to maturity increases,its price will fall.
D) If a bond's yield to maturity exceeds its coupon rate,the bond will sell at a premium over par.
E) All else equal,if a bond's yield to maturity increases,its current yield will fall.
Q3) Junk bonds are high-risk,high-yield debt instruments.They are often used to finance leveraged buyouts and mergers,and to provide financing to companies of questionable financial strength.
A)True
B)False
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Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) When adding a randomly chosen new stock to an existing portfolio,the higher (or more positive)the degree of correlation between the new stock and stocks already in the portfolio,the less the additional stock will reduce the portfolio's risk.
A)True
B)False
Q2) The tighter the probability distribution of its expected future returns,the greater the risk of a given investment as measured by its standard deviation.
A)True
B)False
Q3) Which of the following statements is CORRECT?
A) Beta is measured by the slope of the security market line.
B) If the risk-free rate rises,then the market risk premium must also rise.
C) If a company's beta is halved,then its required return will also be halved.
D) If a company's beta doubles,then its required return will also double.
E) The slope of the security market line is equal to the market risk premium, (r<sub>M</sub> - r<sub>RF</sub>).
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Chapter 9: Stocks and Their Valuation
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Sample Questions
Q1) Which of the following statements is NOT CORRECT?
A) The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends.
B) The corporate valuation model discounts free cash flows by the required return on equity.
C) The corporate valuation model can be used to find the value of a division.
D) An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements.
E) Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon,or continuing,value.
Q2) The corporate valuation model can be used only when a company doesn't pay dividends.
A)True
B)False
Q3) Founders' shares,a type of classified stock owned by the firm's founders,generally have more votes per share than the other classes of common stock.
A)True
B)False
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Chapter 10: The Cost of Capital
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) Since debt capital can cause a company to go bankrupt but equity capital cannot,debt is riskier than equity,and thus the after-tax cost of debt is always greater than the cost of equity.
B) The tax-adjusted cost of debt is always greater than the interest rate on debt,provided the company does in fact pay taxes.
C) If a company assigns the same cost of capital to all of its projects regardless of each project's risk,then the company is likely to reject some safe projects that it actually should accept and to accept some risky projects that it should reject.
D) Because no flotation costs are required to obtain capital as retained earnings,the cost of retained earnings is generally lower than the after-tax cost of debt.
E) Higher flotation costs tend to reduce the cost of equity capital.
Q2) The cost of debt is equal to one minus the marginal tax rate multiplied by the average coupon rate on all outstanding debt.
A)True
B)False
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Chapter 11: The Basics of Capital Budgeting
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Sample Questions
Q1) Ehrmann Data Systems is considering a project that has the following cash flow and WACC data.What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative),in which case it will be rejected. \[\begin{array} { l c c c c }
\text { WACC: } & 9.00 \% & & & \\
\text { Year } & 0 & 1 & 2 & 3 \\
\hline \text { Cash flows } & - \$ 1,000 & \$ 450 & \$ 450 & \$ 450 \end{array}\]
A) 13.84%
B) 14.53%
C) 17.29%
D) 13.28%
E) 13.70%
Q2) When considering two mutually exclusive projects,the firm should always select the project whose internal rate of return is the highest,provided the projects have the same initial cost.This statement is true regardless of whether the projects can be repeated or not.
A)True
B)False
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Page 13
Chapter 12: Cash Flow Estimation and Risk Analysis
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80 Flashcards
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) An example of a sunk cost is the cost associated with restoring the site of a strip mine once the ore has been depleted.
B) Sunk costs must be considered if the IRR method is used but not if the firm relies on the NPV method.
C) A good example of a sunk cost is a situation where a bank opens a new office,and that new office leads to a decline in deposits of the bank's other offices.
D) A good example of a sunk cost is money that a banking corporation spent last year to investigate the site for a new office,then expensed that cost for tax purposes,and now is deciding whether to go forward with the project.
E) If sunk costs are considered and reflected in a project's cash flows,then the project's calculated NPV will be higher than it otherwise would have been had the sunk costs been ignored.
Q2) In cash flow estimation,the existence of externalities should be taken into account if those externalities have any effects on the firm's long-run cash flows.
A)True
B)False
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Page 14
Chapter 13: Real Options and Other Topics in Capital
Budgeting
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Sample Questions
Q1) Which one of the following statements is most CORRECT?
A) Real options change the size,but not the risk,of projects' expected NPVs.
B) Real options change the risk,but not the size,of projects' expected NPVs.
C) Real options can reduce the cost of capital that should be used to discount a project's expected cash flows.
D) Very few projects actually have real options.They are theoretically interesting but of little practical importance.
E) Real options are more valuable when there is very little uncertainty about the true values of future sales and costs.
Q2) If a firm practices capital rationing,this means that it is accepting fewer projects than would be theoretically optimal;hence,it is not maximizing its theoretical value.
A)True
B)False
Q3) For planning purposes,managers must forecast the total capital budget because the amount of capital raised affects the WACC.
A)True
B)False
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Page 15
Chapter 14: Capital Structure and Leverage
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Sample Questions
Q1) Longstreet Inc.has fixed operating costs of $300,000,variable costs of $2.50 per unit produced,and its product sells for $3.70 per unit.What is the company's break-even point,i.e. ,at what unit sales volume would income equal costs?
A) 250,000
B) 232,500
C) 222,500
D) 220,000
E) 255,000
Q2) The graphical probability distribution of ROE for a firm that uses financial leverage would tend to be more peaked than the distribution if the firm used no leverage,other things held constant.
A)True
B)False
Q3) If a firm utilizes debt financing,a 10% decline in earnings before interest and taxes (EBIT)will result in a decline in earnings per share that is larger than 10%,and the higher the debt ratio,the larger this difference will be.
A)True
B)False
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Chapter 15: Distributions to Shareholders: Dividends and Share Repurchases
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Sample Questions
Q1) If a retired individual lives on his or her investment income,then it would make sense for this person to prefer stocks with high payouts so he or she could receive cash without going to the trouble and expense of selling stocks.On the other hand,it would make sense for an individual who would just reinvest any dividends received to prefer a low-payout company because that would save him or her taxes and brokerage costs.
A)True
B)False
Q2) Mid-State BankCorp recently declared a 7-for-2 stock split.Prior to the split,the stock sold for $100 per share.If the firm's total market value is unchanged by the split,what will the stock price be following the split?
A) $35.71
B) $28.57
C) $28.86
D) $26.29
E) $25.43
Q3) A "reverse split" reduces the number of shares outstanding.
A)True
B)False
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Chapter 16: Working Capital Management
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Sample Questions
Q1) Which of the following statements is NOT CORRECT?
A) A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales,profits,and cash flows during the coming year.
B) Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected.
C) The cash budget is useful to help estimate future financing needs,especially the need for short-term working capital loans.
D) If a firm wants to generate more cash flow from operations in the next month or two,it could change its credit policy from 2/10,net 30 to net 60.
E) Managing working capital is important because it influences financing decisions and the firm's profitability.
Q2) If one of your firm's customers is "stretching" its accounts payable,this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.
A)True
B)False
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Chapter 17: Financial Planning and Forecasting
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Sample Questions
Q1) To determine the amount of additional funds needed (AFN),you may subtract the expected increase in liabilities,which represents a source of funds,from the sum of the expected increases in retained earnings and assets,both of which are uses of funds.
A)True
B)False
Q2) Spontaneously generated funds are generally defined as follows:
A) Assets required per dollar of sales.
B) A forecasting approach in which the forecasted percentage of sales for each item is held constant.
C) Funds that a firm must raise externally through borrowing or by selling new common or preferred stock.
D) Funds that arise out of normal business operations from its suppliers,employees,and the government,and they include spontaneous increases in accounts payable and accruals.
E) The amount of cash raised in a given year minus the amount of cash needed to finance the additional capital expenditures and working capital needed to support the firm's growth.
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Chapter 18: Derivatives and Risk Management
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) An option's value is determined by its exercise value,which is the market price of the stock less its strike price.Thus,an option can't sell for more than its exercise value.
B) As a stock's price increases,the premium portion of an option on that stock increases because the difference between the stock price and the fixed strike price increases.
C) If the company is consistently profitable,its call options will always be in the money.
D) The market value of an option depends in part on the option's length of time until expiration and on the variability of the underlying stock's price.
E) The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin becomes larger.
Q2) One objective of risk management can be to reduce the volatility of a firm's cash flows.
A)True
B)False
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Chapter 19: Multinational Financial Management
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Sample Questions
Q1) A foreign currency will,on average,depreciate against the U.S.dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.
A)True
B)False
Q2) Exchange rate risk is the risk that the cash flows from a foreign project,when converted to the parent company's currency,will be worth less than was originally projected because of exchange rate changes.
A)True
B)False
Q3) A box of candy costs 28.80 Swiss francs in Switzerland and $21.80 in the United States.Assuming that purchasing power parity (PPP)holds,how many Swiss francs are required to purchase one U.S.dollar? Do not round the intermediate calculations and round the final answer to four decimal places.
A) 1.0701
B) 1.1097
C) 1.3211
D) 1.6382
E) 1.2286
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Page 21
Chapter 20: Hybrid Financing: Preferred
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Sample Questions
Q1) Firms generally do not call their convertibles unless the conversion value is greater than the call price.
A)True
B)False
Q2) The "preferred" feature of preferred stock means that it will normally provide a higher expected return than will common stock.
A)True
B)False
Q3) The owner of a convertible bond owns,in effect,both a bond and a call option.
A)True
B)False
Q4) A convertible debenture can never sell for more than its conversion value or less than its bond value.
A)True
B)False
Q5) Operating leases help to shift the risk of obsolescence from the user to the lessor.
A)True
B)False
22
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Chapter 21: Mergers and Acquisitions
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Sample Questions
Q1) Since managers' central goal is to maximize stock price,managers' personal incentives do not interfere with mergers that would benefit the target firm's stockholders.
A)True
B)False
Q2) The value of the target firm is calculated by discounting residual cash flows that belong to the acquiring firm's shareholders at the target's cost of equity reflecting any changes to its capital structure as a result of the merger.
A)True
B)False
Q3) Leveraged buyouts (LBOs)occur when a firm's managers,generally backed by private equity groups,try to gain control of a publicly owned company by buying shares in the company using large amounts of borrowed money.
A)True
B)False
Q4) Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.
A)True
B)False
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