Corporate Finance
Pre-Test Questions
Course Introduction
Corporate Finance explores the fundamental principles and practices involved in financial decision-making within corporations. The course covers key topics such as capital budgeting, risk and return, cost of capital, valuation of assets and firms, capital structure, dividend policy, and working capital management. Students will learn how financial managers analyze investment opportunities, manage financial resources, and design strategies to maximize shareholder value. Through case studies, analytical tools, and real-world applications, the course prepares students to understand the financial challenges faced by corporations and equips them with the skills necessary for effective financial planning and decision-making.
Recommended Textbook
Contemporary Financial Management 12th Edition by R. Charles Moyer
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Chapter 1: The Role and Objective of Financial Management
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Q1) A major disadvantage of a sole proprietorship is the fact that A) it is expensive to establish
B) the owner has unlimited personal liability
C) it is easy to finance growth
D) the owner pays taxes on all the income
Answer: B
Q2) What are the shortcomings in the profit maximization objective as a managerial strategy?
Answer: 1. Profit maximization lacks a time dimension.
2. There are many definitions of profit for a firm. There is much latitude permitted in recognizing and accounting for costs and revenues.
3. There is a question as to which profit is to be maximized: total profit, rate of profit or EPS.
4. There is no direct way to consider the risk associated with alternative decisions.
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Chapter 2: The Domestic and International Financial Marketplace
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Q1) Christy purchased 100 shares of Good Idea stock for $48 last year. Yesterday she sold the stock for $45. If she received $4 in dividends during the time she held the security, what is her holding period return?
A) 2.08%
B) 8.30%
C) -6.30%
D) 14.60%
Answer: A
Q2) You bought 100 shares of Risky Venture stock six months ago for $14 per share and sold it yesterday for $12. The company paid a total of $0.24 per share in dividends to you during the time you held the stock. What was your holding period return?
A) -25.14%
B) -16.67%
C) -12.57%
D) 16.00%
Answer: C
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Chapter 3: Evaluation of Financial Performance
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Q1) Firms with ____ growth rates would be expected to have ____ payout ratios.
A) high, low
B) high, high
C) low, low
D) low, high
Answer: A
Q2) ____ ratios indicate how efficiently a firm is using its assets to generate sales.
A) Liquidity
B) Asset management
C) Financial leverage
D) Equity
Answer: B
Q3) The current ratio would normally be increased by
A) paying off some current liabilities with cash
B) selling bonds and investing the proceeds in marketable securities
C) buying treasury stock
D) paying off some current liabilities with cash and selling bonds and investing the proceeds in marketable securities
Answer: D
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Chapter 4: Financial Planning and Forecasting
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Q1) The financial plan that is a "blueprint" detailing where the firm wants to be at some future point in time is the:
A) Executive Manifest
B) Strategic Plan
C) FASB Plan
D) Operational plan
Q2) Generally, which of the following non-cash charges is/are added to earnings after tax to calculate the after-tax cash flow?
I. Depreciation
II. Deferred taxes
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Q3) The first step in the preparation of a cash budget is:
A) Estimation of future spending
B) Estimation of asset value
C) Estimation of cash receipts
D) Estimation of future stock sales
Q4) Explain the cash flow generation process:
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Chapter 5: The Time Value of Money
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Q1) Idlewild Bank has granted you a seven year loan for $50,000. If your seven annual end of the year payments are $11,660.45, what is the rate of interest Idlewild is charging?
A) 14%
B) 23%
C) 12.6%
D) 11%
Q2) If you invest the $10,000 you receive at graduation (age 22) in a mutual fund that averages a 12% annual return, how much will you have at retirement in 40 years?
A) $909,090
B) $930,510
C) $783,879
D) $510,285
Q3) Annuity due calculations are especially important when dealing with
A) term loans
B) lease contracts
C) capital investments
D) capital recovery problems
Q4) Explain the concept of interest and compare it to rate of interest.
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Chapter 6: Fixed Income Securities: Characteristics and Valuation
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Q1) What is the value of a $1000 par value Consul perpetual bond with a 6 percent coupon rate if the required rate of return is 9 percent?
A) $1,000
B) $666.67
C) $333.33
D) $540
Q2) Which of the following statements is/are correct about long-term loans?
I. Debentures are generally sold with a lower interest rate than mortgage bonds or secured bonds.
II. The quality of a debenture depends on the general creditworthiness of the issuing company.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Q3) Explain a sinking fund.
Q4) How does a firm value an asset?
Q5) What is a "payment-in-kind" bond and why is it considered a "weak security"?
Q6) List the advantages and disadvantages of long-term debt financing:
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Chapter 7: Common Stock: Characteristics, Valuation, and Issuance
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Q1) Which of the following are reasons why large multinational corporations may sell equity in international markets rather than selling stock only in the country in which they are domiciled?
A) Global equity offerings result in higher price per share.
B) The existence of a 12-hour per day trading schedule
C) Higher positive returns around the time of the announcement to sell in global markets
D) Private placements are not an option.
Q2) Helix common stock currently sells for $30 and its current dividend is $1.50. If the required rate of return on Helix stock is 15%, what is the implied growth rate of its earnings and dividends?
A) 13.5%
B) 9.5%
C) 10.0%
D) 30.0%
Q3) What are the advantages and disadvantages of common stock financing?
Q4) List the responsibilities of investment bankers.
Q5) List the various rights of common stockholders.
Page 9
Q6) What are some of the costs associated with new security offerings?
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Chapter 8: Analysis of Risk and Return
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Q1) The maturity premium reflects a preference by many lenders for A) shorter maturities
B) reducing yields
C) high yield securities
D) longer maturities
Q2) The business risk of a firm refers to the
A) results from using fixed-cost sources of funds
B) variability in the price of a firm's securities
C) variability in the firm's operating earnings over time
D) influence of government regulations on business earnings
Q3) The ____ theory of the yield curve holds that required returns on long-term securities tend to be greater the longer the time to maturity.
A) expectations
B) market segmentation
C) preferred habitat
D) liquidity premium
Q4) Explain marketability risk and marketability premium.
Q5) How can standard deviation, a statistical measure of dispersion, be used in investment analysis?
Q6) Why is risk an increasing function of time?
Page 10
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Chapter 9: Capital Budgeting and Cash Flow Analysis
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Sample Questions
Q1) Of the following, an example of a component of a firm's cost of capital is:
A) Repurchase of company stock.
B) Investment of corporate funds into a money market account.
C) The purchase of another company's bonds.
D) The return on common stock required by investors.
Q2) Seduck has just replaced a set of hydraulic screens that had been in operation for 6 years with a newer screening system that cost $180,000 installed. The old system cost $140,000 and had been depreciated as a 10-year MACRS asset. Its salvage value is $10,000. What is the NINV for the new equipment? Assume a 40% tax rate. Use the rounded MACRS schedule listed below: (10-Year Depreciation Schedule: 10%, 18%, 14%, 12%, 9%, 7%, 7%, 7%, 7%, 6%, 3%)
A) $170,000
B) $157,200
C) $202,514
D) $151,228
Q3) There are four ways tax consequences may affect the after-tax net proceeds received from the sale of an asset. Describe the four ways and the tax impact.
Q4) List the steps that a firm uses in the capital budgeting process:
Q5) Why should sunk costs not be considered when evaluating a project?
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Chapter 10: Capital Budgeting: Decision Criteria and Real
Option Considerations
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Sample Questions
Q1) When evaluating international capital expenditure projects, the analyst may compute the present value of the net cash flows in the local currency and then ____.
A) discount by one plus the spot rate (1+ S0)
B) multiply by the forward exchange rate
C) discount by the future exchange rate
D) multiply by the spot exchange rate
Q2) What is the internal rate of return for a project that has a net investment of $370,000 and net cash flows of $60,000 in year 1, $75,000 in year 2, and $85,000 in years 3 through 8?
A) 15.5%
B) 13.6%
C) 17.4%
D) none of the above are correct
Q3) Which of the following is not a technique to handle the capital rationing problem?
A) linear programming
B) goal programming
C) ranking projects according to payback
D) ranking projects according to profitability index
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Chapter 11: Capital Budgeting and Risk
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Q1) ____ are needed for sensitivity analysis and have made the application simple and inexpensive.
A) risk tolerance tables
B) financial statements
C) financial calculators
D) computer spreadsheets
Q2) The Chris-Kraft Co. is financed entirely with equity and the firm has a beta of 1.25. The current risk-free rate is 7 percent and the expected market return is 15 percent. Chris-Kraft is considering an investment project with a risk that matches the firm's average risk, requires a net investment of $70,000, and has net cash flows of $18,000 per year for 8 years. Should Chris-Kraft invest in the project?
A) Yes, NPV = $5,726
B) Yes, NPV = $75,726
C) No, NPV = -$10,934
D) No, NPV = -$5,726
Q3) What is the reason companies utilize the certainty equivalent approach in evaluating projects?
Q4) How can beta, a measure of systematic risk of a portfolio of securities, be used to judge the risk of a firm?
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Chapter 12: The Cost of Capital
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Q1) If a preferred stock is callable, then the calculation of the cost of preferred stock financing is
A) similar to that for bonds
B) equal to Dp/Pn
C) equal to Dp less flotation costs
D) less than Dp/Pn
Q2) A firm with a 40 percent marginal tax rate has a capital structure of $60,000,000 in debt and $140,000,000 in equity. What is the firm's weighted cost of capital if the marginal pretax cost of debt is 12 percent, the firm's average pretax cost of debt outstanding is 8%, and the cost of equity is 14.5 percent?
A) 13.75%
B) 11.59%
C) 12.31%
D) 10.45%
Q3) How is the marginal cost of the various component capital sources determined?
Q4) Explain how the investment opportunity curve is determined.
Q5) Sources of debt capital to small firms is limited. Generally, what are the sources of funds for the small firm?
Q6) What is the investment opportunity curve and how is it accomplished?
Page 14
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Chapter 13: Capital Structure Concepts
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Q1) As the proportion of debt in the capital structure increases, investors require a ____ return and the value of existing debt will ____.
A) higher, increase
B) higher, decrease
C) lower, increase
D) lower, decrease
Q2) What is the present value of the tax shield to a firm that has a capital structure consisting of $100 million of perpetual debt and $180 million of equity, if the average interest rate on debt is 9%, the return on equity is 13%, and the marginal tax rate is 40%?
A) $72 million
B) $40 million
C) $60 million
D) $3.6 million
Q3) As more debt is added to the capital structure of a firm, the cost of debt capital
A) initially rises slowly, then falls beyond some point
B) increases at a steady rate throughout the entire range
C) beyond some point, becomes greater than the cost of equity
D) initially rises slowly, then increases rapidly beyond some point
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Chapter 14: Capital Structure Management in Practice
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Q1) Why does a firm use operating and financial leverage? In what ways does it help the firm, in what ways does it hurt the firm?
Q2) Last year Avator's operating income (EBIT) increased by 22 percent while its dollar sales increased by 15%. What is Avator's degree of operating leverage (DOL)?
A) 0.68
B) 2.0
C) 1.47
D) 0.32
Q3) Knight Moves is considering two alternative financing plans. The firm is expected to operate at the $75 million EBIT level. Under Plan D (debt financing) EPS is expected to be $2.25, and under Plan E (equity financing) EPS is expected to be $1.82. If the market is expected to assign a P/E ratio of 12 to the debt plan and 15 to the equity plan, which plan should Knight pursue?
A) debt
B) equity
C) indifferent between the two alternatives
D) neither is satisfactory
Q4) What are the effects of leverage on shareholder wealth and the cost of capital?
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Chapter 15: Dividend Policy
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Q1) In considering the arguments for the relevance of dividends, which of the following statements is/are correct?
I. Shareholders who are risk averse may prefer some dividends over the promise of future capital gains.
II. Flotation costs on new stock sales make dividend payout more desirable, rather than issuing new stock.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Q2) All of the following are dividend policies EXCEPT:
A) stockholders want dividends and they want them to be consistent
B) stockholders prefer the delay of the payment of dividends if there is a corresponding increase in capital gains.
C) stockholders of small firms favor a dividend policy of retention.
D) stockholders who prefer a high dividend payout are unwilling to pay extra for the stock of companies that provide a higher yield mostly because they are living on a fixed income.
Q3) What are the procedures for repurchasing stock?
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Chapter 16: Working Capital Policy and Short-term Financing
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Q1) The size and nature of a firm's investment in current assets is a function of a number of different factors including all of the following except
A) how efficient the firm manages its fixed assets
B) the length of the operating cycle
C) the sales level
D) credit policies
Q2) Lenders normally feel that the relative risk associated with short-term debt is ____ the risk associated with long-term debt.
A) lower than B) equal to C) higher than D) none of the above
Q3) Computerized financial planning models may be classified as any of the following except:
A) deterministic B) optimistic C) probabilistic D) none of the above
Q4) What is financial forecasting?
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Chapter 17: The Management of Cash and Marketable Securities
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Q1) Concentration banking involves:
A) using decentralized collection centers
B) having a large balance at a large commercial bank
C) having multiple accounts with a brokerage firm
D) utilizing an investment banker for when trying to market both stocks and bonds
Q2) Which of the following types of marketable securities normally has the lowest yields?
A) Federal agency issues
B) Treasury bills
C) repurchase agreements
D) commercial paper
Q3) A reason that banks would maintain a bank balance exceeding the compensating balance requirements is:
A) It reduces the opportunity cost.
B) It improves the firm's credit rating.
C) It alters the requirements imposed by the bank.
D) It reduces shortage costs.
Q4) Explain why firms would want to maintain a bank balance exceeding the compensating balance requirements.
Page 19
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Chapter 18: Management of Accounts Receivable and Inventories
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Q1) In trying to collect on past-due accounts, the firm may use several methods. List them.
Q2) The types of inventories that manufacturing firms generally hold include all the following except:
A) raw materials
B) working stock
C) finished goods
D) work-in-process
Q3) Mace Auto Parts Company sells to retail auto supply stores on credit terms of "net 60". Annual credit sales are $300 million (spread evenly throughout the year) and its accounts average 28 days overdue. The firm's variable cost ratio is 0.75 (i.e., variable costs are 75 percent of sales). When converting from annual to daily data or vice versa, assume there are 365 days per year. Determine Mace's average investment in receivables.
A) $ 821,918
B) $ 3,409,091
C) $72,328,767
D) $ 82,192
Q4) What are the "five Cs of credit"and how are they used?
Page 20
Q5) What are seasonal datings as it applies to credit terms?
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Chapter 19: Lease and Intermediate-term Financing
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Q1) T. Goho (lessee) wishes to lease a $25,000 car for 5 years. First Union Bank (lessor) has agreed to finance this lease and estimated the car will have a salvage value of $10,000 at the end of the lease. If First Union expects to depreciate the car on a straight-line basis to a salvage value of $0, what monthly lease payments will T. Goho have to make, given that First Union requires a 12% annual rate of return (assume a monthly interest rate of 1%)? Assume a marginal tax rate of 40%, and payments at the beginning of each month.
A) $528
B) $495
C) $317
D) $653
Q2) Ajax Capital has determined the amount to be amortized on an extruder is $540,000. If the required rate of return is 14%, what will be the total interest received over the life of the lease given that lease payments will be made at the beginning of each of the 7 years of the lease agreement? Assume a marginal tax rate of 40%.
A) $233,269
B) $748,786
C) $811,080
D) $110,467
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Chapter 20: Financing With Derivatives
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Q1) As a financing device, warrants have been used in connection with A) bond swaps
B) equity offerings
C) debt restructurings and bond swaps
D) bond swaps, equity offerings, and debt restructurings
Q2) Firms issue warrants for which of the following reasons?
I. Allows the company to sell stock at a price above what other company stock is selling for.
II. Allows the company to choose which investors are allowed to buy the company's stock.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Q3) A(n) ____ is a call option issued by a company on its securities, usually common stock.
A) debenture
B) warrant
C) futures contract
D) extendible note
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Chapter 21: Risk Management
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Q1) Which of the following statements about diversification is/are correct?
I. Diversification may be able to reduce the risk of a portfolio to less than the weighted average risk of the assets.
II.Diversification is always prudent and should be expanded to include new, unrelated products whenever possible.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Q2) Which of the following statements about hedging of business risks by investors is/are correct?
I. Operational information about companies is widely available and investors find it relatively simple to hedge business risk.
II. Investors have the necessary capital required to implement hedging strategies and do so consistently.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
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Chapter 22: International Financial Management
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Q1) A less restrictive form of purchasing power parity is:
A) Omnipotent purchasing power parity
B) Relative purchasing power parity
C) Absolute purchasing power parity
D) Exchange parity
Q2) Motorola has a contract to deliver cellular telephones in Japan in 6 months from now and the payment for these telephones will be in Japanese yen. What type of foreign exchange risk does Motorola face?
A) economic exposure
B) operating exposure
C) transaction exposure
D) translation exposure
Q3) A U.S. company that purchases goods on credit from a German supplier can protect itself against transaction exchange risk by
A) executing a contract in the forward exchange market
B) borrowing U.S. funds and investing in interest-bearing German securities
C) borrowing German funds and investing in interest-bearing U.S. securities
D) executing a contract in the forward exchange market, and by borrowing U.S. funds and investing in interest-bearing German securities
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Chapter 23: Corporate Restructuring
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Q1) A new takeover defense is boardmail. How does it work?
Q2) A firm is technically insolvent when: it is unable to meet it current obligations and:
A) the value of its assets exceeds the value of its liabilities.
B) the value of its assets is less than the value of its liabilities.
C) it files a bankruptcy petition.
D) it merges with another firm.
Q3) Which of the following would be considered a reason for corporate restructuring?
I. Availability of credit
II. Low cost of credit
A) I only
B) II only
C) Both I and II
D) Neither I nor II
Q4) A bond that contains a put option that can be exercised only if an unfriendly takeover occurs, is an example of a ____ .
A) pacman defense
B) liability restructuring
C) poison pill
D) standstill option
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Chapter 24: Continuous Compounding and Discounting
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Q1) Moneybag Bank & Trust is offering loans at 5% compounded continuously. Before you decide to borrow using that interest rate, what payment would be required on a $200,000 loan for a 30 year loan?
A) $1,089.59
B) $1,578.34
C) $1,183.92
D) $1,226.90
Q2) What is the effective interest rate on 12% if interest is compounded continuously?
A) 15.11%
B) 16.25%
C) 14.11%
D) 12.75%
Q3) What is the value of $10,000 invested for 5 years at 8% compounded continuously?
A) $14,693
B) $14,928
C) $14,918
D) $13,064
Q4) With continuous compounding, why is the effective rate higher than the nominal rate?
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Chapter 25: Mutually Exclusive Investments Having Unequal Lives
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Q1) The advantage(s) of the equivalent annual annuity method over the replacement chain technique in evaluating mutually exclusive investments having unequal lives include
A) the equivalent annual annuity method is often computationally simpler
B) the equivalent annual annuity method simplifies the handling of the time discrepancies that frequently arise in the replacement chain method
C) the equivalent annual annuity method is theoretically superior D) a and b only
Q2) How does the equivalent annual annuity approach solve the time discrepancy problem?
Q3) The importance of time discrepancies depends on several items when making capital budgeting decisions. State those items:
Q4) The best way to measure projects with unequal lives is:
A) the Gordon Model
B) the payback period
C) the net present value method
D) equivalent annual annuity approach
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Chapter 26: Breakeven Analysis
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Q1) Another name for breakeven analysis is:
A) cost-volume-profit analysis
B) graphic analysis
C) EBIT-EPS analysis
D) degree of operating leverage
Q2) The difference between the selling price per unit and the variable cost per unit is the:
A) contribution to the bottom line
B) contribution to revenue
C) contribution margin
D) contribution to EBIT
Q3) Explain the composition of operating costs and why they can cause an inaccurate breakeven analysis.
Q4) List the limitations of breakeven analysis:
Q5) The contribution margin per unit is the difference between:
A) the selling price per unit and fixed costs
B) the fixed costs and the variable costs
C) the variable cost per unit and the selling price per unit
D) the variable costs and the number of units sold
Q6) What are the possible uses for breakeven analysis?
28
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Chapter 27: Bond Refunding Analysis
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Q1) If interest rates decline, a firm should consider _______________ to take advantage of the lower interest rates.
A) selling fixed assets
B) stock sales
C) bond refunding
D) investing in marketable securities
Q2) If Alliant can issue a $110 million 20-year refunding bond at 7.45% and call an older $110 million issue with 20-years to maturity that had a coupon of 8.80%, what is the present value of the interest savings? Assume a 40% tax rate.
A) $11,620,259
B) $17,820,000
C) $ 9,117,935
D) $29,561,100
Q3) Bond ____ occurs when a firm exercises its option to redeem a callable bond issue and replaces it with a lower (interest) cost issue.
A) redemption
B) retirement
C) recall
D) refunding
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29
Chapter 28: Taxes
Available Study Resources on Quizplus for this Chatper
19 Verified Questions
19 Flashcards
Source URL: https://quizplus.com/quiz/3398
Sample Questions
Q1) A corporation's net operating loss may be carried ____ years and ____ years to offset taxable income in those years.
A) back 20, forward 2
B) back 3, forward 5
C) back 5, forward 15
D) back 2, forward 20
Q2) AMX corporation had operating income of $420,000 in 2010; received $12,000 in interest income; paid $22,000 in interest; received $20,000 in dividends; and paid $50,000 in dividends. What is the tax liability for AMX?
A) $141,440
B) $146,200
C) $148,920
D) none of the above
Q3) What is the tax liability in 2010 for a corporation with taxable income of $425,000?
A) $144,500
B) $132,750
C) $150,250
D) $122,700
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