Corporate Finance
Practice Questions
Course Introduction
Corporate Finance explores the fundamental concepts and principles that govern the financial management of corporations. The course covers key topics such as capital budgeting, capital structure, valuation methods, risk and return analysis, dividend policy, and working capital management. Students will learn how financial decisions are made within firms, the tools used to evaluate investment opportunities, and strategies for maximizing shareholder value. Emphasis is placed on the application of theory to real-world financial decision-making, ethical considerations, and the impact of corporate finance on broader economic systems.
Recommended Textbook
Practical Financial Management 7th Edition by William R. Lasher
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Page 2
Chapter 1: Foundations
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Sample Questions
Q1) All of the following are characteristics of C Corporations except:
A) unlimited life.
B) limited liability for the stockholders.
C) avoidance of double taxation.
D) ease of raising additional capital for expansion.
Answer: C
Q2) Financial assets are valuable because they give owners rights to future cash flows.
A)True
B)False
Answer: True
Q3) Investing in stock represents partial ownership of a corporation and gives the investor the potential for future cash flows from earnings distribution and stock price appreciation if the business prospers.
A)True
B)False
Answer: True
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Chapter 2: Financial Background: a Review of Accounting, Financial Statements, and Taxes
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Sample Questions
Q1) The bad debt reserve represents:
A) money that will be paid by the company.
B) money that will be paid by customers.
C) the fact that not all receivables are collected in the normal course of business.
D) insurance against bad debts.
Answer: C
Q2) Retained earnings are:
A) a liability.
B) profits that have not been distributed to shareholders as dividends.
C) the equivalent of stock.
D) the same as cash.
Answer: B
Q3) In addition to raising money, the government uses the tax system to:
A) promote a larger and more comprehensive government authority.
B) incentivize desirable behavior on the part of taxpayers.
C) support our position as the world's strongest nation.
D) keep the nation growing as rapidly as possible.
Answer: B
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Chapter 3: Cash Flows and Financial Analysis
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Sample Questions
Q1) The repayment of debt is:
A) an operating activity.
B) an investing activity no matter how the money from the loan was allocated.
C) a financing activity.
D) an investing activity assuming the debt was used for the purchase of a fixed asset.
Answer: C
Q2) Assume a firm has a beginning inventory of $30,000 and an ending inventory of $50,000. The result of applying the preferred formulation for calculating its inventory turnover is 3.0. However, when the sales formulation is used, the result is 5.0. The firm's gross profit is:
A) $200,000.
B) $80,000.
C) $40,000.
D) $120,000.
Answer: B
Q3) Smart Motors' return on sales is 3 percent and its total asset turnover is 2.2. What is Smart's ROA?
Answer: ROA = ROS ´ Total asset turnover ROA = 3% ´ 2.2 = 6.6%
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Page 5
Chapter 4: Financial Planning
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Sample Questions
Q1) The financial plan is:
A) the financial portion of a business plan.
B) the most important part of the strategic plan.
C) frequently not included in business plans.
D) All of the above
Q2) Which of the following are typical planning assumptions?
A) A 10% increase in sales
B) An increase in interest rates from 9% to 11%
C) A decrease in the firm's inventory turnover from 3x to 2x
D) All of the above
Q3) Which of the following is not a purpose of business planning?
A) Communicating information to investors
B) Making a statement of goals
C) Credibility and supporting detail
D) Provide pro forma statements based on hypothetical circumstances
Q4) Business plans and the information they contain are generally very private, and are not shared with investors or securities analysts.
A)True
B)False
Q5) Which is harder, planning for a new or an existing business? Why?
Page 6
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Chapter 5: The Financial System, Corporate Governance, and Interest
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Sample Questions
Q1) Economists forecast the following inflation rates for the next four years \(\begin{array}{ll}
\text { Year } & \text { InflationRate } \\ \hline 1 & 3 \% \\
2 & 4 \% \\
3 & 5 \% \\
4 & 6 \%
\end{array}\) What inflation adjustment should be included in the interest rate on a four-year loan made today?
A) 3%, because that's the rate at the time the loan is made and borrowers won't pay any more
B) 6%, because that's the rate that will exist when the loan is repaid and the lender can loan the money out again
C) 4.5%, because that's the average expected inflation rate over the life of the loan
D) at least 7%, because the lender needs to protect itself from unexpectedly high inflation rates
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Chapter 6: Time Value of Money
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Sample Questions
Q1) Your local bank offers 4-year certificates of deposit (CDs) 12 % compounded quarterly. How much additional interest will you earn over 4 years on a $10,000 CD that is compounded quarterly, compared with one that is compounded annually?
A) $6,050
B) $0
C) $312
D) $220
Q2) The EAR associated with credit cards is actually the nominal rate and is less than the APR.
A)True
B)False
Q3) A series of equal payments that occur at equal intervals and go on forever is called a(n):
A) ordinary annuity.
B) annuity due.
C) perpetuity.
D) non-ending stream.
E) None of the above
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Chapter 7: The Valuation and Characteristics of Bonds
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Sample Questions
Q1) When a call protection provision is written into the bond indenture, the issuing company is prevented from calling the bond throughout the bond's life.
A)True
B)False
Q2) Fifteen years remain on a 25-year, 8% coupon bond payable semiannually with a face value of $1,000. The return on comparable bonds is 10%. The formula for determining the market price of the bond today is:
A) P<sub>B</sub> = $40[FVFA<sub>10,25</sub>] + $1,000[FVF<sub>10,25</sub>]
B) P<sub>B</sub> = $40[PVFA<sub>4,30</sub>] + $1,000[PVF<sub>4,30</sub>]
C) P<sub>B</sub> = $80[PVFA<sub>4,15</sub>] + $1,000[PVF<sub>4,15</sub>]
D) P<sub>B</sub> = $40[PVFA<sub>5,30</sub>] + $1,000[PVF<sub>5,30</sub>]
Q3) A record of owners of bearer bonds is kept by a transfer agent. A)True B)False
Q4) Investors are given the option accepting calls on bonds with call features. A)True B)False
Q5) Why are bond ratings so important to companies?
Q6) Explain call provisions on a bond. How does it help bond-issuers?
Page 9
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Chapter 8: The Valuation and Characteristics of Stock
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Sample Questions
Q1) The considerations associated with stock valuation do not include:
A) the expected future dividend performance of the stock.
B) the estimated selling time and price of the stock.
C) the exchange on which the stock is traded.
D) the market return on stocks of that type.
Q2) Morton Industries' common stock sells for $54. Dividends are expected to continue to grow at a rate of 8% annually. If Morton returns 13%, what was its most recent dividend?
A) $2.70
B) $2.50
C) $4.00
D) None of the above
Q3) If a call option has zero intrinsic value then:
A) the call option is in the money.
B) the call option is out of the money.
C) the call option has a zero time premium.
D) a put option with the same strike price also has zero intrinsic value.
Q4) The Rich Company has a dividend growth rate of 14 percent, a current share price of $56.00, and a current dividend of $1.50. What is the required rate of return for Rich Company shares?
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Chapter 9: Risk and Return
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Sample Questions
Q1) Which of the following is not an example of a source of systematic or market risk?
A) Interest rate changes
B) Foreign competition with an industry's products
C) Changes in the overall economic outlook
D) Changes in the inflation rate
Q2) The slope of the security market line is a reflection of the risk tolerance or level of risk aversion of the investment community. As the line becomes steeper, investors become more risk averse and demand higher risk premiums.
A)True
B)False
Q3) Stocks with equal stand-alone risk can have opposite risk impacts on a portfolio because of the timing of the variations in their returns.
A)True
B)False
Q4) Portfolio risk is best reduced through diversification into stocks in fundamentally different industries.
A)True
B)False
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Chapter 10: Capital Budgeting
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Sample Questions
Q1) Capital budgeting involves how companies spend:
A) day to day resources.
B) money raised in capital markets.
C) expenses only.
D) large sums on infrequent projects.
Q2) A project requires an initial outlay of $100,000, and is expected to generate annual net cash inflows of $28,000 for the next 5 years. Determine the payback period for the project.
A) 0.28 years
B) 1.4 years
C) 3.57 years
D) 17.86 years
Q3) One of the steps involved in calculating the MIRR is to:
A) calculate the future value of all cash outflows.
B) determine the present values of all cash outflows at the cost of capital.
C) determine the present value of cash inflows at the cost of capital.
D) subtract cash outflows from cash inflows before calculating the future value.
Q4) When can IRR and NPV give different results? Explain how this can happen.
Q5) What are some of the practical reasons for capital rationing?
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Chapter 11: Cash Flow Estimation
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Sample Questions
Q1) Which of the following issues related to a new venture will affect the terminal value calculation?
A) The magnitude of the cash flow at the end of the detailed forecast period
B) Aggressive assumptions about growth in the long run
C) The generation of substantial revenues in the last years of the detailed forecast period
D) Changing economic conditions that affect long term growth prospects
E) All of the above
Q2) Which of the following is not considered a relevant factor in estimating the incremental cash flows of a proposed capital project?
A) Pre-startup expenditures
B) Financing costs
C) Incremental working capital requirements
D) Taxes on incremental expenses and earnings
Q3) In terms of the capital budgeting process, net cash flows are:
A) the net cash outlays required to place a project in service.
B) the funds invested in additional assets.
C) incremental changes in a firm's cash flow.
D) the outlays that have already been made.
Q4) Define opportunity costs and explain their role in capital budgeting.
Page 13
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Chapter 12: Risk Topics and Real Options in Capital
Budgeting
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Sample Questions
Q1) The probability of a path is the product of all the branch probabilities along it and is called a:
A) joint probability.
B) conditional probability.
C) basic probability.
D) None of the above
Q2) Zeta Inc.'s cost of capital is 12% and the risk-free rate is 5%. It plans to invest in a new project. The cash flow projections ($000) for the project are given below. Calculate the certainty equivalent NPV ($000). \(\begin{array}{llllll}
\text { Year } & \mathbf{0} & \mathbf{1} & \mathbf{2} & \mathbf{3} & \mathbf{4} \\
\text { Cash Flow } & -240 & 75 & 75 & 75 & 75 \\
\text { CE factor } & 1 & 0.9 & 0.85 & 0.8 & 0.75 \end{array}\)
A) ($19.78)
B) $19.78
C) $12.20
D) ($12.20)
Q3) Explain the certainty equivalent approach.
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Chapter 13: Cost of Capital
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Sample Questions
Q1) The component cost of preferred stock is equal to the current dividend yield on a firm's existing shares of preferred stock.
A)True
B)False
Q2) Assume the following information about a firm's capital components: \(\begin{array}{lll}
\text { Debt } & \text { Capital Structure } & \text { Cost } \\ \text { Preferred stock } & \$ 20,000 & 8 \% \\
\text { Common stock } & \$ 20,000 & 11 \% \\ & \$ 60,000 & 14 \%
\end{array}\) The firm's WACC is:
A) 11.00%.
B) 11.90%.
C) 12.20%.
D) 12.05%.
Q3) The weights applied to the various components of a firm's cost of capital are based on the current composition of a firm's capital structure.
A)True
B)False
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Page 15
Chapter 14: Capital Structure and Leverage
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Q1) If a firm's sales change by 15% and it has a degree of operating leverage (DOL) of 2.0, what is the expected change in earnings before interest and taxes (EBIT)?
A) 30%
B) 40%
C) 50%
D) 60%
Q2) In a favorable economic climate, at low to moderate levels of debt, investors value the positive effects of leverage and almost ignore increases in risk.
A)True
B)False
Q3) Financial risk is additional risk borne by shareholders as the firm issues more debt.
A)True
B)False
Q4) An increase in financial leverage will always reduce a firm's ROA, if its total assets are held constant.
A)True
B)False
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Chapter 15: Dividends
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Q1) Which of the following would usually be the most credible, positive dividend signal?
A) A dividend increase when earnings are down
B) A dividend increase when earnings are up
C) A dividend decrease when earnings are down
D) A dividend decrease when earnings are up
E) No change in dividends when earnings are way down
Q2) Zimmer Corp. has just declared a 5 for 4 stock split. If the pre-split price of common stock was $36 a share, what will be the post-split price per share (assuming no other changes occur)?
A) $30.00
B) $27,00
C) $28.80
D) $32.00
Q3) According to the ____ dividend policy a firm that has more funds than it needs should pay a cash dividend to shareholders.
A) target payout ratio
B) stable dividend per share
C) residual
D) None of the above
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Chapter 16: The Management of Working Capital Multiple
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Sample Questions
Q1) If a firm only accepts cash for the purchase of its products, what effect would this have on the operating and cash cycles?
A) The operating and cash cycles would be equal.
B) The operating and cash cycles would decrease relative to offering credit to customers.
C) Only the cash cycle would decrease relative to offering credit to customers.
D) Only the operating cycle would increase relative to offering credit to customers.
Q2) Which of the following statements related to trade credit is true?
A) Trade credit has an explicit interest cost.
B) Large firms tend to use trade credit more than small firms.
C) The total trade credit owed at any point in time is called accounts receivable.
D) Trade credit arises from the time lag between the receipt of and payment for supplies.
Q3) Inventory carrying costs include:
A) the costs of storage, security, taxes, and insurance.
B) the costs of financing and obsolescence.
C) the costs of spoilage, shrinkage, and breakage.
D) All of the above
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Chapter 17: The Management of Working Capital
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Q1) Under just-in-time (JIT) inventory systems, manufacturers shifts the task of maintaining inventory to their suppliers, who in turn shift it to their own suppliers.
A)True
B)False
Q2) A lockbox system that accelerates cash collections also decreases a firm's receivables.
A)True B)False
Q3) Trade credit information is frequently exchanged among firms selling to the same customer through credit bureaus.
A)True
B)False
Q4) "Leaning on the trade" is an expression associated with a customer's insistence that vendors extend more liberal credit terms.
A)True B)False
Q5) Under what conditions might larger balances in inventory and accounts receivable not help the firm to run more smoothly and efficiently?
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Chapter 18: Corporate Restructuring
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Q1) When company A and company B combine to form company C, the action is referred to as a merger or an acquisition.
A)True
B)False
Q2) Which of the following types of mergers would expand the acquiring firm's market share in its own industry?
A) Vertical
B) Horizontal
C) Conglomerate
D) a and b
E) All of the above
Q3) A combination of two entities in which only one legally ceases to exist is:
A) a subsidiary.
B) a parent company.
C) a consolidation.
D) a merger.
Q4) In an acquisition a new firm is formed from the assets of the combining firms.
A)True
B)False
Q5) Contrast the merger negotiations in a friendly merger and a hostile merger.
Page 20
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Chapter 19: International Finance
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Q1) If the direct quote, forward exchange rate is higher than the spot rate, the forward currency is trading at a:
A) spot rate.
B) discount.
C) premium.
D) forward spot rate.
Q2) When a foreign currency is expected to become more valuable in the future, the forward currency is said to be selling at a premium over the spot rate.
A)True
B)False
Q3) A spot exchange rate for two currencies:
A) is based on immediate (two day) delivery of currency.
B) is always constant over time.
C) cannot exceed the forward exchange rate for the currencies.
D) a and b
E) All of the above
Q4) The direct quote states the price of a unit of foreign currency in US dollars.
A)True
B)False
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