Corporate Finance
Pre-Test Questions
Course Introduction
Corporate Finance explores the fundamental principles and practical tools used by organizations to manage their financial resources and maximize firm value. The course covers topics such as financial statement analysis, time value of money, capital budgeting, risk and return, cost of capital, corporate financing strategies, and dividend policy. Students will learn how firms make investment decisions, raise capital, and allocate financial resources to achieve strategic objectives. Real-world case studies and quantitative methods are integrated to provide students with analytical skills necessary to evaluate financial decisions within a corporate context.
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) The treasurer is in charge of accounting while the controller supervises most other financial functions.
A)True
B)False
Answer: False
Q2) Which of the following is not true regarding bonds?
A) Both principal and interest are paid to the investor
B) Bondholders are owners of the borrowing firm
C) Buying a bond means lending money
D) All of the above Answer: B
Q3) Which of the following is part of the finance department?
A) Quality control
B) Purchasing
C) Treasury
D) Marketing Answer: C
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Page 3
Chapter 2: Financial Background: a Review of Accounting, Financial Statements, and Taxes
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Sample Questions
Q1) The usefulness of financial statements in assessing the investment value of securities is always somewhat limited because:
A) the information in financial statements more subjective rather than objective.
B) companies are not always honest about their figures.
C) past performance may not be indicative of future performance.
D) the information is often confusing.
Answer: C
Q2) Uncollected receivables are normally:
A) depreciated.
B) expensed.
C) not reported.
D) written off.
Answer: D
Q3) The taxation of proprietorships is about the same as that of corporations.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Cash Flows and Financial Analysis
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Sample Questions
Q1) Which of the following is not affected by a change in interest expenses?
A) Gross margin and ROE
B) ROE and EPS
C) EBIT and EBT
D) Gross margin and EBIT
Answer: D
Q2) Which of the following is a debt management ratio?
A) Fixed charge coverage
B) P/E ratio
C) Return on sales
D) Current ratio
Answer: A
Q3) Cash flow from operating activities is increased by:
A) depreciation.
B) an increase in accounts receivable.
C) an increase in inventory.
D) a decrease in accounts payable.
E) All of the above
Answer: A
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Page 5
Chapter 4: Financial Planning
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Sample Questions
Q1) What is the sustainable growth rate of a firm with the following selected financial results? \(\begin{array}{ll}
\text { Sales } & \$ 20,300 \\
\text { Net income } & \$ 1,015 \\
\text { Equity multiplier } & 2 \mathrm{x} \\
\text { Assets } & \$ 10,150 \\
\text { Annulal Dividend } & \$ 406
\end{array}\)
A) 12%
B) 8%
C) 10%
D) 6%
Q2) The managerial value of planning includes:
A) the planning process brings the management team together.
B) a resulting road map for running the business.
C) planning that provides credibility to employees.
D) Both a & b
E) All of the above
Q3) How have personal computers affected financial planning. Have they made planning something that anyone can do? Explain.
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Chapter 5: The Financial System, Corporate Governance, and Interest
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Sample Questions
Q1) Which of the following statements is/are TRUE?
A) A yield curve plots interest rates against time to maturity.
B) A normal yield curve is upward sloping.
C) Average expected inflation is reflected in interest rates.
D) Both a & c
E) All of the above
Q2) Real interest rates have no inflation adjustments.
A)True
B)False
Q3) Money markets deal in:
A) long-term equities.
B) short-term equities.
C) long-term debt.
D) short-term debt.
Q4) Interest is defined as the:
A) return on all investments.
B) return on debt investments.
C) return on equity investments.
D) the one year return on investments in stocks or bonds.
7
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Chapter 6: Time Value of Money
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Sample Questions
Q1) A cash flow projected today for a specific period of time is a:
A) present value of a single sum.
B) future value of a single sum.
C) present value of an annuity.
D) future value of an annuity.
Q2) Under which compounding frequency will you earn the most on an investment receiving 12% APR in interest?
A) Monthly
B) Quarterly
C) Semi-annually
D) Annually
Q3) The time value of money means that a dollar today is worth more than a dollar at any time in the future.
A)True
B)False
Q4) A perpetuity is a stream of:
A) regular payments that go on forever.
B) irregular payments for a period of time.
C) payments for their present value.
D) payments tomorrow.
Page 8
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Chapter 7: The Valuation and Characteristics of Bonds
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Sample Questions
Q1) What does non-amortized debt mean?
A) Interest payments are constant over the life of the bond.
B) Interest payments are based on current market rates for bonds of similar risk.
C) No repayment of principal is made during the life of the bond.
D) The face value of the bond is not repaid to the lender.
Q2) A record of owners of bearer bonds is kept by a transfer agent.
A)True
B)False
Q3) Which of the following bond ratings indicate junk bonds?
A) A/A
B) Baa/BBB
C) Ba/BB
D) B/B
E) Both c. and d.
Q4) A minimum TIE is an example of a restrictive covenant.
A)True
B)False
Q5) What are the different kinds of leases as per the FASB?
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) Justin Freez purchased a put option on General Auto's common stock at $2.90. The put has a striking price of $40 and General Auto's common stock is priced at $42.00. What is the most that Justin can lose on the put option purchase?
Q2) The current price of Zebar is $32.00 and its last dividend was $.60. What is its return if dividends are expected to grow indefinitely at 8 percent?
A) 9.88%
B) 11.38%
C) 18.75%
D) None of the above
Q3) Stockholders have preemptive rights because:
A) preemptive rights come with every stock purchase.
B) are required by law.
C) are written into the companies rules of operation (its charter, articles, or bylaws).
D) preemptive rights prevent disproportional ownership.
Q4) Briefly outline the rationale behind the efficient market hypothesis and explain its implications for technical and fundamental analysis.
Q5) Are growth rate models such oversimplifications of reality that they're useless?
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Page 10
Chapter 9: Risk and Return
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Sample Questions
Q1) If a firm receives bad news about its future earnings prospects, what should happen to the stock price in order to maintain the required return desired by new investors?
A) The stock price should increase.
B) The stock price should decrease.
C) The stock price remains unchanged.
D) The stock price remains the same, but dividends will decrease.
Q2) A portfolio's beta coefficient is the weighted average of the betas of the individual stocks, where the weights are the relative amounts invested in each stock.
A)True
B)False
Q3) Security A will yield a 6% return in one year. Security B will either yield a 3% return or a 9% return in year with equal probability. Which is the better investment based on risk aversion and why?
A) Security A, because it has a higher expected return with less risk.
B) Security B, because it has a higher expected return with less risk.
C) Security A, because it has an equivalent expected return with less risk.
D) Security B, because it may potentially produce a 9% return.
Q4) What is the market risk premium?
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Page 11
Chapter 10: Capital Budgeting
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Sample Questions
Q1) The future cash flows of a stand-alone capital project are: \(\begin{array}{lllll}
\text { Year } & 0 & 1 & 2 & 3&4 \\
\text { Cash flow } & (\$ 4,000) & \$ 1,500 & \$1,500 & \$ 1,500&\$1,500 \end{array}\) If the firm's cost of capital is 12%, which of the following statements is true?
A) The NPV is > $0 and the IRR is less than 12.5%.
B) The NPV is < $0 and the IRR is higher than 12.5%.
C) The NPV is > $0 and the IRR is approximately 18.5%.
D) The NPV is < $0 and the IRR is approximately 18.5%.
Q2) A project is expected to last ten years with an initial cost of $10,000.00. Assuming the present value payback method produces a value of 7.25 years and there are no additional costs beyond the initial cost, the PI is ____.
A) less than 1.0
B) greater than 1.0
C) equal to 1.0
D) undetermined
Q3) When can IRR and NPV give different results? Explain how this can happen.
Q4) 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) A four-year-old asset is to be replaced as part of a capital project. It originally cost $20,000 and has a depreciation (straight line) life of ten years. Its market value is currently $16,000. The firm's marginal tax rate is 34%. What is its contribution to the initial outlay?
A) $ 2,880
B) $14,640
C) $14,880
D) $ 2,640
Q2) Cash flows forecast to continue forever are compressed into finite terminal values using future value formulas.
A)True
B)False
Q3) Which of the following is true of replacement projects?
A) They generate costs that are planned and directly related to the sales forecast.
B) Their benefits usually come from expected savings.
C) They need not be adjusted for depreciation and taxes.
D) They imply increases in costs and revenues.
Q4) Define opportunity costs and explain their role in capital budgeting.
Q5) Define sunk costs and explain their role in capital budgeting.
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Chapter 12: Risk Topics and Real Options in Capital
Budgeting
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Sample Questions
Q1) A land option contract is considered what type of option?
A) Expansion option
B) Investment timing option
C) Flexibility option
D) Abandonment option
Q2) In theory, the risk-free rate is more appropriate for the NPV calculation in the certainty equivalent approach since:
A) it is assumed that there is no business-specific risk associated with the projects.
B) certainty equivalent factors cannot take negative values.
C) certainty equivalents imply zero risk.
D) certainty equivalents consider unsystematic risk only.
Q3) An automatic bias against high-risk projects is created by:
A) using the IRR technique, which produces an intrinsic return which is risk adjusted.
B) using a higher rate than the cost of capital when applying NPV and IRR to risky projects.
C) adjust NPVs and IRRs up when evaluating risky projects.
D) make an intuitive judgment about risk after the analysis is done.
Q4) What is Monte Carlo simulation? How is it used in the capital budgeting?
Page 14
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Chapter 13: Cost of Capital
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Sample Questions
Q1) The firm's cost of capital is the interest rate the firm should use to discount the cash flows of any proposed capital project.
A)True
B)False
Q2) Under the customary approach, firms strive to either maintain their present capital structure or achieve some target structure. Both the current and the target structures must be based on:
A) market values.
B) book values.
C) intrinsic values.
D) future values.
Q3) Which of the following would increase the WACC?
A) an increase in flotation costs
B) a decrease in tax rates
C) a decrease in preferred dividends
D) Both a & b
E) All of the above
Q4) The money paid to investors is a cost to the company and a return to the investor. Why then aren't component costs equal to investor returns?
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Chapter 14: Capital Structure and Leverage
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Sample Questions
Q1) Assume the following facts about a firm that sells just one product: \(\begin{array}{l}
\text { Selling price per unit}&=\$ 24.00 \\
\text { Variable costsper unit}&=\$ 18.00 \\
\text {Total monthly fuxed costs }&=\$ 2,500 \end{array}\) What is the firm's monthly breakeven volume in units?
A) 417 units
B) 1,250 units
C) 5,000 units
D) 1,667 units
Q2) Which of the following is accepted wisdom regarding the optimal capital structure?
A) For most firms, the optimal capital structure is somewhere between 30% and 50% debt.
B) A firm with good profit prospects and little to no debt is probably missing an opportunity by not using borrowed money if interest rates are reasonable.
C) Debt levels above 60% create excessive risk and should be avoided.
D) All of the above
Q3) Explain the breakeven analysis.
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Chapter 15: Dividends
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Sample Questions
Q1) Stock repurchases:
A) are perfectly okay with the IRS even though they convert ordinary dividend income into capital gains which are taxed at lower rates.
B) must be accomplished on the open market through brokers to comply with SEC regulations.
C) may be advisable after a stock market crash if management feels the company's stock price is temporarily depressed.
D) All of the above
Q2) Retained earnings should be used to provide equity financing if stockholders have preference for capital gains.
A)True
B)False
Q3) Under dividend preference investors prefer immediate cash to uncertain future benefits.
A)True
B)False
Q4) If neither stock splits nor stock dividends offer shareholders anything of economic value, why are both quite popular?
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Chapter 16: The Management of Working Capital Multiple
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Sample Questions
Q1) Why will banks extend short-term working capital financing to companies to which they would not extend long-term credit?
A) Conditions are unlikely to deteriorate too badly in the short term.
B) Working capital loans are "self-liquidating."
C) The working capital itself can be used to collateralize the loan.
D) All of the above
Q2) More aggressive collection procedures usually increases:
A) average collection period.
B) percentage of bad debts.
C) credit sales.
D) b and c
E) None of the above
Q3) ____ working capital arises from the seasonal or cyclical nature of a company's sales.
A) Current
B) Permanent current
C) Temporary
D) None of the above
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Chapter 17: The Management of Working Capital
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Q1) Unlike accruals, the volume of trade payables is controllable by the financial manager.
A)True
B)False
Q2) Banks like to make self-liquidating loans because they usually command higher interest rates than other loans.
A)True B)False
Q3) "Leaning on the trade" is an expression associated with a customer's insistence that vendors extend more liberal credit terms.
A)True
B)False
Q4) A firm can avoid excess funds at regional banking facilities by using zero balance accounts, or ZBAs.
A)True B)False
Q5) Explain the economic reasons for holding cash.
Q6) Explain the idea of spontaneous financing and explain why, in spite of it, we still have to fund working capital from outside sources.
Page 19
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Chapter 18: Corporate Restructuring
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Sample Questions
Q1) The emergence of the junk bond as a financing tool contributed significantly to the merger and acquisition activity of the 1980s. Describe the junk bond and explain the premise on which its popularity grew. What was the inherent flaw in the rationale?
Q2) Technical insolvency is a firm's inability to meet its current obligations. Legal insolvency means the firm's liabilities exceed its assets.
A)True
B)False
Q3) Generally, what minimum level of ownership guarantees control of a firm?
A) 10%
B) 25%
C) 40%
D) 51%
Q4) Although the long-term economic and political implications of the megamergers are as yet unclear, the massive accumulation of economic power currently taking place has no potential to change the open and competitive nature of the economy.
A)True
B)False
Q5) Contrast the merger negotiations in a friendly merger and a hostile merger.
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Chapter 19: International Finance
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Sample Questions
Q1) Short of expropriation foreign governments may act to diminish the value of direct investments within their country by:
A) requiring part ownership at bargain prices by their own citizens.
B) arbitrarily imposing taxes on the business.
C) limiting the amount of profit that can be taken out of the country.
D) All of the above
Q2) Under the current floating exchange rate system each foreign government:
A) is responsible for holding the exchange rate between its currency and the U.S. dollar nearly constant.
B) buys and sells its currency to support the value of the U.S. dollar.
C) buys and sells its currency to support a $35 per ounce international price of gold.
D) rarely intervenes in foreign exchange markets relying on market forces to set exchange rates.
Q3) Governments sometimes buy and sell their own currencies to express the purpose of keeping exchange rates in a desirable range.
A)True
B)False
Q4) Describe the difference between fixed and floating exchange rate systems.
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Page 21