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, capital structure, risk management, dividend policy, valuation of assets and firms, and the cost of capital. Students will learn how companies raise and allocate capital, evaluate investment opportunities, manage financial risks, and maximize shareholder value. By integrating theory with real-world case studies and financial modeling, the course equips students with the analytical tools and strategic insights necessary for effective financial management in contemporary business environments.
Recommended Textbook
Foundations of Financial Management 16th Edition by Stanley Block
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Page 2
Chapter 1: The Goals and Activities of Financial Management
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Sample Questions
Q1) Financial capital is composed of long-term plant and equipment, as well as other tangible investments.
A)True
B)False
Answer: False
Q2) The Dodd-Frank Act was created by Congress along with its goals and regulatory responsibility, but it is facilitated by various agencies.
A)True
B)False
Answer: True
Q3) Credit default swaps are
A) an insurance product designed to protect financial institutions from customers who default on their loans.
B) securities with a maturity of less than one year.
C) the result of a leveling off or slowing down of stock price increases.
D) market trades in previously issued securities.
Answer: A
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Page 3
Chapter 2: Review of Accounting
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Sample Questions
Q1) Federal corporate tax rates have changed several times since 1980.
A)True
B)False Answer: True
Q2) Operating profit is essentially a measure of how efficient management is in generating revenues and controlling expenses.
A)True
B)False Answer: True
Q3) Assume that two companies both have a net income of $100,000. The firm with the highest depreciation expense will have the highest cash flow, assuming all other adjustments are equal.
A)True
B)False Answer: True
Q4) Sales minus cost of goods sold is equal to earnings before taxes.
A)True
B)False Answer: False
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Chapter 3: Financial Analysis
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Sample Questions
Q1) If XYZ's receivables turnover is 4x, what does that mean?
A) XYZ's total sales are rotated four times a year.
B) XYZ has a really good receivables turnover rate.
C) XYZ is able to collect its receivables every 90 days, or 4 times a year.
D) XYZ generates four times as much sales through receivables than sales through cash.
Answer: C
Q2) If a firm has both a fixed interest expense and fixed lease payments,
A) times interest earned ratio will be smaller than fixed charge coverage ratio.
B) times interest earned ratio will be greater than fixed charge coverage ratio.
C) times interest earned ratio will be the same as fixed charge coverage ratio.
D) fixed charge coverage ratio cannot be computed.
Answer: B
Q3) The higher a firm's debt utilization ratios, excluding debt-to-total assets, the
A) less risky the firm's financial position.
B) more risky the firm's financial position.
C) more easily the firm will be able to pay dividends.
D) None of the options
Answer: A
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Page 5
Chapter 4: Financial Forecasting
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Sample Questions
Q1) In order to estimate production requirements, we
A) subtract projected sales in units from desired ending inventory and add beginning inventory.
B) add projected sales in units to desired ending inventory and subtract beginning inventory.
C) add beginning inventory to desired ending inventory and divide by two.
D) add beginning inventory to desired ending inventory and subtract projected sales in units.
Q2) Required new funds shows that the firms need more cash during times of company growth, especially if sales increases.
A)True
B)False
Q3) In the development of the pro forma financial statements, the last step in the process is the development of the
A) cash budget.
B) pro forma balance sheet.
C) pro forma income statement.
D) capital budget.
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6
Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) If a firm has the lowest possible degree of operating leverage and the lowest possible degree of financial leverage, then
A) DOL equals 1, and DFL equals 0.
B) DOL equals 0, and DFL equals 1.
C) DOL equals 1, and DFL equals 1.
D) None of the options
Q2) Firms with cyclical sales should employ a high degree of leverage.
A)True
B)False
Q3) Which of the following is concerned with the change in operating profit as a result of a change in unit volume?
A) Financial leverage
B) Break-even point
C) Operating leverage
D) Combined leverage
Q4) If economic conditions were expected to be favorable, an investor would likely prefer a firm with a low degree of leverage.
A)True
B)False
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) Retail companies like Target and Macy's are more likely to have A) stable sales and earnings per share.
B) cyclical sales but less volatile earnings per share.
C) cyclical sales and more volatile earnings per share.
D) cyclical sales but stable accounts receivable and inventory.
Q2) A "normal" term structure of interest rates would depict
A) short-term rates are higher than long-term rates.
B) long-term rates are higher than short-term rates.
C) no general relationship between short- and long-term rates.
D) intermediate rates (one to five years) are lower than both the short-term and long-term rates.
Q3) The term structure of interest rates will influence the ratio of long-term financing to short-term financing used at any given time.
A)True
B)False
Q4) The three most important factors when selecting a financing plan are risk, asset liquidity, and timing.
A)True
B)False
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Chapter 7: Current Asset Management
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Sample Questions
Q1) Every message routed through SWIFT is encrypted and every money transaction is authorized by another code for security purposes.
A)True
B)False
Q2) Eurodollar certificates of deposit
A) are not marketable investments.
B) are used by banks to loan out funds to anyone seeking U.S. dollars.
C) pay interest rates usually lower than the rates on U.S. treasury bills.
D) are European currencies deposited into international U.S. branch banks.
Q3) The "SWIFT" transfer system was developed to aid regional bank fund transfers within the United States.
A)True
B)False
Q4) Float is the difference between the cash balance on the corporate books and the amount currently credited to the corporation by the bank.
A)True
B)False
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) Accounts payable is a spontaneous source of funds that usually grows as the business expands.
A)True
B)False
Q2) Monthly installment loans usually increase the effective interest rate of borrowing by approximately 2 times the stated interest rate.
A)True
B)False
Q3) The term "credit crunch" refers to a period in which the interest rate on credit is so high that firms cannot afford to borrow money.
A)True
B)False
Q4) The commercial paper market is available to all New York Stock Exchange companies.
A)True B)False
Q5) Compensating balances represent unfair hidden costs of borrowing.
A)True B)False
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) If a single amount were put on deposit at a given interest rate and allowed to grow, its future value could be determined by reference to a "future value of $1" table.
A)True
B)False
Q2) Kathy has $50,000 to invest today and would like to determine whether it is realistic for her to achieve her goal of buying a home for $150,000 in 10 years with this investment. What return must she achieve in order to buy her home in 10 years?
A) Above 10%
B) Between 8% to 10%
C) Exactly 10%
D) Below 8%
Q3) John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the loan in 10 equal annual payments. What is the principal outstanding after the first loan payment?
A) $143,555
B) $134,560
C) $141,200
D) $138,620
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Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) A 10-year zero-coupon bond that yields 6% is issued with a $1,000 par value. What is the issuance price of the bond?
A) $558
B) $64
C) $614
D) $1,000
Q2) When inflation rises, bond sales prices fall.
A)True
B)False
Q3) The "risk premium" is primarily concerned with business risk, financial risk, and inflation risk.
The risk premium includes the business and financial risk elements only.
A)True
B)False
Q4) The market-determined required rate of return is the appropriate discount rate used in valuation calculations.
A)True
B)False
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Page 12
Chapter 11: Cost of Capital
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Sample Questions
Q1) A firm is paying an annual dividend of $2.65 for its preferred stock that is selling for $57.00. There is a selling cost of $3.30. What is the after-tax cost of preferred stock if the firm's tax rate is 33%?
A) 3.30%
B) 4.93%
C) 5.79%
D) 6.11%
Q2) The general rule for using the weighted average cost of capital (WACC) in capital budgeting decisions is to accept all projects with A) rates of return greater than or equal to the WACC.
B) rates of return less than the WACC.
C) rates of return equal to or less than the WACC.
D) positive rates of return.
Q3) The slope of the security market line (SML) will often increase when the economy is in a boom period.
A)True B)False
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13
Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) The net present value primary advantage over the internal rate of return method is that it does not require the time value of money calculations that the internal rate of return requires.
A)True
B)False
Q2) The net present value (NPV) method is considered to be a better method of evaluation than the internal rate of return (IRR) method because the NPV method
A) uses time value of money while IRR does not.
B) is a more liberal method of analysis.
C) assumes that cash flows can be reinvested at the firm's more conservative cost of capital.
D) None of these options are true.
Q3) Which of the following statements about the "payback method" is true?
A) The payback method considers cash flows after the payback has been reached.
B) The payback method does not consider the time value of money.
C) The payback method uses discounted cash-flow techniques.
D) The payback method generally leads to the same decision as other investment selection methods.
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Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) Decision trees present a tabular or graphical comparison of projected decision outcomes.
A)True
B)False
Q2) The highest possible value for positive correlation is +1.
A)True
B)False
Q3) The coefficient of variation is calculated to help correlate the standard deviation and the relative expected value of an investment, which makes it easier to compare different sized investments.
The coefficient of variation measures the amount of risk per unit of return.
A)True
B)False
Q4) Risk is not only measured in terms of losses, but also in terms of variability.
A)True
B)False
Q5) Expected value is defined as DP where the outcomes are D and probabilities are P. A)True
B)False
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Chapter 14: Capital Markets
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Sample Questions
Q1) Which federally supported credit agency was established to trade student loan debt?
A) Fannie Mae
B) Freddie Mac
C) Farmer Mac
D) Sallie Mae
Q2) The euro is
A) established in all of the European countries.
B) a common currency, but countries that use it are allowed to have their own monetary policy.
C) the most important international currency.
D) all of these options are true.
Q3) In the new issues market for corporate capital, common stocks account for the largest percentage of new funds raised.
A)True
B)False
Q4) In times of recession, a company's retained earnings may decline as a percent of internal funds.
A)True
B)False
Page 16
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Chapter 15: Investment Banking
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Sample Questions
Q1) Under SEC Rule 415, shelf registration
A) requires that companies registering securities, file a detailed statement for ongoing SEC review and approval.
B) has been used more frequently for equity than debt issues.
C) has allowed smaller investment bankers to compete for more business.
D) allows a corporation to issue securities when market conditions are more advantageous than current conditions.
Q2) A branch of investment banking that has been very opportunistic in recent years has been the increase in sales of foreign securities of companies formerly owned by the government.
A)True
B)False
Q3) When a firm issues new stock, it can result in a dilution of earnings in the short run. When dilution occurs because of a new issue, it typically takes time for the new equity infusion to boost earnings per share, but this condition is temporary in most cases.
A)True
B)False
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) Zero-coupon bonds are more risky then other bonds because there is no interest payments involved during the life of the bond.
A)True
B)False
Q2) Buchanan Corp. is refunding $10 million worth of 10% debt. The new bonds will be issued for 8%. The corporation's tax rate is 35%. The call premium is 9%. What is the net cost of the call premium after taxes?
A) $390,000
B) $1,080,000
C) $585,000
D) $702,000
Q3) If you expect interest rates to go up, you should buy a long-term bond now. Since bonds competing in the market are at fixed interest rates, you are better advised to lock in your money later when rates are higher.
A)True
B)False
Q4) A capital lease has many of the characteristics of a long-term debt obligation.
A)True
B)False
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Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) Common stockholders may assign a proxy, or the power to cast their ballot, only when majority voting is in place.
A)True
B)False
Q2) When comparing common stock of the same company, it is fair to say that
A) all shares, no matter how many classes, are all created with the same equal rights. B) companies sometimes have two different classes of shares with unequal rights to dividends and votes.
C) the Securities and Exchange Commission allows only one class of common stock. D) investors are indifferent between class A and class B shares.
Q3) A rights offering may be of limited value to shareholders.
A)True
B)False
Q4) When a stock sells ex-rights, the sale of the shares no longer entitles the purchaser to receive a right to purchase future stock.
A)True
B)False
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19
Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) The American Taxpayer Relief Act of 2013
A) taxes "qualified" dividends and long-term capital gains at the same rate.
B) taxes short-term and long-term capital gains at the same rate.
C) eliminated the tax rate on dividends to avoid double taxation.
D) made high dividend paying stock less attractive to high income investors.
Q2) At the maturity stage (Stage IV) of the life cycle, the firm will usually pay out about 15-25% of earnings in dividends.
A)True
B)False
Q3) One situation in which a stock dividend may be beneficial to the investor is when the cash dividend per share remains constant.
A)True
B)False
Q4) The "ex-dividend date" will typically be before the "holder of record date."
A)True
B)False
Q5) Stockholders in general prefer large dividends to small dividends.
A)True B)False
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Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) When a company has a convertible bond in its capital structure,
A) it can reduce its debt-to-equity ratio by calling the bond.
B) there is no effect on the firm's earnings per share.
C) there is no advantage to the firm in forcing conversion of the bonds.
D) all of these options are correct.
Q2) Theoretically, stock options are granted to employees so that the employees will make decisions that benefit the owners or shareholders.
A)True
B)False
Q3) A $1,000 par value bond with a conversion price of $50 has a conversion ratio of
A) $40.
B) 40 shares.
C) $20.
D) 20 shares.
Q4) A convertible bond is often utilized
A) as a sweetener when selling debt.
B) to sell common stock at prices higher than those prevailing when funds are needed.
C) when there is no demand for straight debt.
D) all of these options are true.
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) Goodwill is created when the purchasing firm pays more than what the acquired firm is worth.
A)True
B)False
Q2) Selling stockholders during a merger may receive a price well above current market or book value.
A)True
B)False
Q3) Which of the following is NOT a form of compensation that selling stockholders could receive?
A) Stock
B) Cash
C) Stock options
D) Fixed income securities
Q4) Synergy is the greatest and most easily measured nonfinancial benefit in a merger. A)True
B)False
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Chapter 21: International Financial Management
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Sample Questions
Q1) The Overseas Private Investment Corporation (OPIC)
A) loans money to multinational firms.
B) does feasibility studies for multinational firms.
C) sells insurance policies to qualified multinational firms.
D) sells foreign investments.
Q2) Which of the following factors will NOT increase the value of a currency in foreign markets?
A) High interest rates in that country
B) High inflation in that country
C) A positive balance of payments with that country
D) A strong stock market rally in that country
Q3) The International Finance Corporation (IFC) is
A) a unit of the World Bank charged with the responsibility of providing capital to multinational corporations and others involved in international trade.
B) a regulatory agency for international trade.
C) a private firm that provides accounts receivable financing to international firms.
D) a foreign affiliate of 10 major U.S. banks.
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