Corporate Finance
Question Bank
Course Introduction
Corporate Finance explores the fundamental principles and practices involved in the financial management of corporations. The course covers key concepts such as capital budgeting, financial analysis, valuation, risk management, cost of capital, and capital structure decisions. Students examine how corporations raise and allocate funds, assess investment opportunities, and maximize shareholder value while considering market imperfections and regulatory environments. Through case studies and practical applications, the course provides a comprehensive understanding of financial strategies used by managers to ensure the long-term financial health and growth of an organization.
Recommended Textbook
Investments An Introduction 9th Edition by Herbert
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Page 2
B. Mayo
Chapter 1: An Introduction to Investments
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Sample Questions
Q1) Many investments have common characteristics including
1)existence of secondary markets
2)risk
3)potential for capital gains
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Answer: D
Q2) Diversification reduces
A) systematic risk
B) unsystematic risk
C) market risk
D) purchasing power risk
Answer: B
Q3) Investors seek to minimize risk for a given return.
A)True
B)False
Answer: True
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Page 3
Chapter 2: The Creation of Financial Assets
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Sample Questions
Q1) Commercial paper is
A) a short-term unsecured debt of a corporation
B) a short-term secured debt of a corporation
C) a long-term unsecured debt of a corporation
D) a long-term secured debt of a corporation
Answer: A
Q2) Money market mutual funds acquire short-term money market instruments such as commercial paper.
A)True
B)False Answer: True
Q3) A commercial bank is an example of a financial intermediary.
A)True
B)False Answer: True
Q4) If the price of an initial public offering of stock rises,the windfall gain goes to the underwriter.
A)True
B)False Answer: False
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Chapter 3: Securities Markets
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60 Flashcards
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Sample Questions
Q1) Daily securities transactions that are reported in the financial press often include 1)the volume of transactions
2)the high and low prices for the day
3)the net change in price from the previous day
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Answer: D
Q2) The cost of investing includes 1)commissions
2)the spread
3)dividends
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Answer: A
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Page 5
Chapter 4: The Time Value of Money
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Sample Questions
Q1) The future value of an annuity is
1)larger the higher the rate of interest
2)smaller the higher the rate of interest
3)larger the greater the number of years
4)smaller the greater the number of years
A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4
Q2) Worker A annually invests $1,000 in an IRA for nine years (ages 27 through 35)and never makes another contribution.Worker B annually invests $1,000 in an IRA for thirty years (ages 36 through 65).Which worker will have more in his or her account when he or she retires if they both earn 8 percent on their investments?
Q3) If the first payment made by an annuity is today,that is an ordinary annuity and not an annuity due.
A)True
B)False
Q4) An investor expects the price of a stock to double after eight years.What is the expected annual rate of growth?
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Chapter 5: The Tax Environment
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Sample Questions
Q1) The traditional IRA is
A) a tax-deferred retirement account for individuals not covered by a corporate pension plan
B) a taxable retirement account for individuals not covered by a corporate pension plan
C) a means to generate tax-free income
D) a means to increase current income
Q2) Capital losses may not be used to offset capital gains.
A)True
B)False
Q3) Securities must be sold before capital gains taxation applies.
A)True
B)False
Q4) Income earned on savings in a life insurance policy is exempt from current income taxation.
A)True B)False
Q5) An IRA is a tax-deferred pension plan for the self-employed. A)True
B)False
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Chapter 6: Risk and Portfolio Management
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Sample Questions
Q1) Sources of unsystematic risk include
1)the firm's financing decisions
2)the firm's operations
3)fluctuating market prices
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Q2) Portfolio risk encompasses
1)a firm's financing decisions
2)interest rate risk
3)loss of purchasing power
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Q3) In a world of certainty,there would be no risk.
A)True
B)False
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Page 8
Chapter 7: Investment Companies: Mutual Funds
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Sample Questions
Q1) A small cap fund has total assets of less than $100 million.
A)True
B)False
Q2) If the individual seeks to reduce risk,that investor should not acquire which of the following types of funds?
A) money market mutual fund
B) sector fund
C) balanced fund
D) index fund
Q3) Index funds tend to track
A) the stock market as a whole
B) the bond market
C) a specific measure of the market
D) the return on other index funds
Q4) Rates of return reported by mutual funds
A) are reported after taxes
B) consider the impact of loading fees
C) are based on change in net asset value and the fund's distributions
D) are adjusted for the systematic risk the fund bears
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Chapter 8: Closed-End Investment Companies
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Sample Questions
Q1) If an investor believes that financial markets are inefficient,this argues for the individual to pursue a more active portfolio strategy and purchase exchange-traded funds.
A)True
B)False
Q2) As a result of arbitrage,ETFs tend to sell for their net asset value.
A)True
B)False
Q3) The first exchange-traded funds were a type of index fund.
A)True
B)False
Q4) The only costs of investing in a closed-end investment company are the commissions to buy and sell the shares.
A)True
B)False
Q5) If a closed-end investment company is selling for a discount
A) its price exceeds the net asset value
B) its price is less than the net asset value
C) dividend income exceeds capital gains
D) capital gains exceed dividend income
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Chapter 9: The Valuation of Common Stock
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Sample Questions
Q1) Which of the following is not an example of an anomaly to the efficient market hypothesis?
A) the January effect
B) the small firm effect
C) insider purchases and sales
D) high beta stocks
Q2) According to the dividend-growth model,the valuation of common stock depends on
1)the firm's dividends
2)investors' required rate of return
3)the prior year's dividends
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Q3) If the ratio of price to book exceeds 1.0,
A) the stock is overvalued
B) the firm's assets are understated
C) the price of the stock is greater than the accounting value of the firm
D) the accounting value of the firm is greater than the market value of the firm
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Chapter 10: Investment Returns and Aggregate Measures
of Stock Markets
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Sample Questions
Q1) Aggregate securities prices may be measured by value-weighted or geometric averages.
A)True
B)False
Q2) If a stock rose from $10 to $30 over ten years,the annual rate of return
A) was 20 percent
B) was greater than 20 percent
C) was less than 20 percent
D) cannot be determined
Q3) To determine the realized return on an investment,the investor needs to know 1)income received
2)the cost of an investment
3)the sale price of the investment
A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices
Q4) Stock indices do not consider taxes on capital gains.
A)True B)False
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Chapter 11: Dividends: Past, present, and Future
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Sample Questions
Q1) A firm's stock sells for $100 a share.What will be the price after a a.two-for-one split
b.four-for-one split
c.one-for-two reverse split?
Q2) If an investor buys stock on the ex-dividend date,that individual will not receive the dividend.
A)True
B)False
Q3) The future value of an annuity may be used to help estimate a firm's historical growth rate.
A)True
B)False
Q4) Stock splits and stock dividends increase the earning capacity of the firm.
A)True
B)False
Q5) Which of the following occurs when a stock is split two-for-one?
A) the price of the stock doubles
B) the firm's assets increase
C) the firm's liabilities decrease
D) the par value of the stock is reduced
13
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Chapter 12: The Macroeconomic Environment for Investment Decisions
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Sample Questions
Q1) A tight monetary policy should generate a higher required return for common stock.
A)True
B)False
Q2) Economies go through regular,identifiable cycles that can be forecasted with accuracy.
A)True
B)False
Q3) The federal funds rate is the rate banks charge each other when they borrow reserves.
A)True
B)False
Q4) If an investor expects interest rates to fall,the individual should sell bonds and preferred stock.
A)True
B)False
Q5) The money supply,defined as M-1,includes currency,coins,and checking accounts. A)True
B)False
Page 14
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Chapter 13: Analysis of Financial Statements
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Sample Questions
Q1) An increase in assets financed by equity increases the debt ratio.
A)True
B)False
Q2) The return on equity
A) is the ratio of sales to equity
B) measures what the firm earns on assets
C) is the ratio of net income to total equity
D) measures what the firm earns on sales
Q3) The current ratio is unaffected by
A) using cash to retire an account payable
B) the collection of an account receivable
C) selling inventory for a profit
D) selling bonds and using the funds to finance inventory
Q4) Coverage ratios may be used to measure the safety of debt and other fixed obligations.
A)True
B)False
Q5) The return on equity measures earnings before interest and taxes.
A)True
B)False
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Chapter 14: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) The Dogs of the Dow strategy suggests buying the lowest dividend yields of the Dow stocks.
A)True
B)False
Q2) Behavioral finance suggests that
A) investors are not informed
B) individuals make rational investment decisions
C) investors may be subject to bias which leads to excessive buying or selling of stocks
D) emotion plays only a minor role in security selection
Q3) Which of the following is not used in technical analysis?
A) moving averages
B) bar graphs
C) point-and-figure charts
D) P/E ratios
Q4) Long dark candlesticks suggest
A) stock prices changed dramatically
B) stock prices rose
C) the daily price change was small
D) an investor should sell short
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Chapter 15: The Bond Market
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Sample Questions
Q1) Variable interest rate bonds
A) do not mature
B) are an example of a discount bond
C) have fluctuating coupons
D) are nonmarketable securities
Q2) Federal government bonds are the least risky bonds because the federal government has the power to tax and print money.
A)True
B)False
Q3) A firm will exercise its option to call a bond if interest rates rise.
A)True
B)False
Q4) The indenture specifies the terms of a bond.
A)True
B)False
Q5) Mortgage bonds are secured by property.
A)True
B)False
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Chapter 16: The Valuation of Fixed-Income Securities
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Sample Questions
Q1) The smaller a bond's coupon implies a longer duration.
A)True
B)False
Q2) The spread between the yields on AAA-rated bonds and B-rated bonds tends to rise when yields increase.
A)True
B)False
Q3) Since preferred stock is equity,it cannot have a sinking fund.
A)True
B)False
Q4) If interest rates in general were to fall,
1)the prices of existing bonds would rise
2)the prices of existing bonds would fall
3)yields to maturity would rise
4)yields to maturity would fall
A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4
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Chapter 17: Government Securities
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Sample Questions
Q1) The federal government only issues marketable securities such as treasury bills.
A)True
B)False
Q2) If an investor is in the 30 percent income tax bracket and can earn 6 percent on a corporate bond,then 4.1 percent on a municipal bond is attractive.
A)True
B)False
Q3) A portfolio manager is considering buying $100,000 worth of Treasury bills for $96,211 versus $100,000 worth of commercial paper for $95,897.Both securities will mature in nine months.How much additional return will the commercial paper generate over the Treasury bills?
Q4) The owner of a Ginnie Mae bond receives monthly both interest and principal repayments.
A)True
B)False
Q5) Treasury bonds may be bought and sold in the secondary markets like corporate bonds.
A)True
B)False
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Chapter 18: Convertible Bonds and Convertible Preferred Stock
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Sample Questions
Q1) If a convertible bond is called,the bondholder must convert the bond or lose the appreciation achieved by the stock.
A)True
B)False
Q2) A convertible bond may be converted at the firm's option into common stock. A)True
B)False
Q3) Put bonds tend to have lower coupons than bonds that lack the put feature.
A)True
B)False
Q4) If a $1,000 convertible bond may be converted into 25 shares,the exercise price is $40 a share.
A)True
B)False
Q5) The premium paid over a convertible bond's value as debt tends to decline as the price of the stock rises.
A)True
B)False
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Chapter 19: An Introduction to Options
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Sample Questions
Q1) The time premium paid for an option to buy stock is affected by
A) the length of time to expiration
B) the firm's credit rating
C) the existence of a rights offering
D) the firm's financial statements
Q2) A put is an option to
A) buy stock
B) receive stock
C) sell stock
D) receive dividends
Q3) The most the individual who buys a put option can lose is the cost of the option.
A)True
B)False
Q4) The value of a put rises as the price of
A) stock rises
B) a call falls
C) stock falls
D) a call rises
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Chapter 20: Option Valuation and Strategies
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Sample Questions
Q1) If the investor buys a bear spread,the individual anticipates
A) higher interest rates
B) higher option prices
C) lower stock prices
D) lower put prices
Q2) An investor buys a straddle in anticipation of stable stock prices.
A)True
B)False
Q3) Put-call parity suggests that the sum of the
A) prices of a stock and call equal zero
B) prices of a put and a call equal zero
C) sum of the prices of a stock, a call, a put, and a bond equal zero
D) sum of the prices of a stock and a put be equal to the prices of a call and a discounted bond
Q4) Since spreads involve buying or selling more than one option,commissions costs tend to increase.
A)True
B)False
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Chapter 21: Commodity and Financial Futures
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Sample Questions
Q1) A farmer hedges by simultaneously buying and selling futures contracts.
A)True
B)False
Q2) If the commodity's futures price declines 1.the long position profits
2)the short position profits
3)the buyer of the contract profits
4)the seller of the contract profits
A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4
Q3) Futures contracts are bought and sold in organized markets such as the Chicago Board of Trade.
A)True
B)False
Q4) If an investor has a short position in corn,the position is closed by buying corn.
A)True
B)False
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Page 23
Chapter 22: Investing in Foreign Securities
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Sample Questions
Q1) Returns on investments in foreign securities are unaffected by fluctuations in the value of foreign currencies.
A)True
B)False
Q2) If American investors buy German stocks,they may sustain losses if the Euro is devalued.
A)True
B)False
Q3) If you own British pounds and the American dollar is devalued,that implies American goods will be cheaper.
A)True
B)False
Q4) American investors seeking foreign investments are limited to foreign securities traded on the New York and American stock exchanges.
A)True
B)False
Q5) Foreign travel is recorded in the current account of the balance of payments. A)True B)False
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Chapter 23: Investing in Nonfinancial Assets: Collectibles, resources, and Real Estate
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Sample Questions
Q1) The valuation of land depends on its potential for future use (e.g.,development).
A)True
B)False
Q2) A real estate investment trust
A) pays federal income taxes
B) retains all of its earnings
C) invests in mortgages or rental properties
D) cannot use debt financing
Q3) Investing in collectibles avoids many of the costs (e.g.,commissions,the spread)associated with investing in stocks.
A)True
B)False
Q4) A newly married couple bought a house for $25,000 in 1975.They sold the house for $99,000 in 2000.What was the annual rate of growth in the value of the house? Did the house appreciate more rapidly than if they had invested $25,000 in a savings account that paid 5 percent?
Q5) The value of gold coins depends on their scarcity and their gold content.
A)True
B)False
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Chapter 24: Portfolio Planning and Management in an Efficient Market Context
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Sample Questions
Q1) If an investor believes that financial markets are inefficient,that argues for the individual to pursue a more active portfolio strategy.
A)True
B)False
Q2) If financial markets are efficient,that negates the importance of financial planning.
A)True
B)False
Q3) Contributions to an IRA appear on the individual's estimate of cash receipts and disbursements.
A)True
B)False
Q4) Since virtually all investments involve risk,the individual should develop a diversified portfolio.
A)True B)False
Q5) Interest earned and received appears on the individual's balance sheet. A)True B)False
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