Corporate Finance
Question Bank
Course Introduction
Corporate Finance explores the fundamental principles and practices that underpin financial decision-making within corporations. The course covers key topics such as capital budgeting, risk and return analysis, capital structure, cost of capital, dividend policy, and working capital management. Students will learn how financial managers evaluate investment opportunities, optimize financing choices, and align financial strategies with corporate objectives to maximize shareholder value. The curriculum integrates theoretical frameworks with real-world case studies, providing students with the analytical tools and practical insights needed to navigate complex financial environments and make informed business decisions.
Recommended Textbook Fundamentals of Financial Management 15th Edition by Eugene F. Brigham
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Page 2
Chapter 1: An Overview of Financial Management
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Sample Questions
Q1) In order to maximize its shareholders' value,a firm's management must attempt to maximize the stock price in the long run,or the stock's "intrinsic value."
A)True
B)False
Answer: True
Q2) Assume that the corporate tax rate is 34% and the personal tax rate is 30%.The founders of a newly formed business are debating between setting up the firm as a partnership versus a corporation.The firm will not need to retain any earnings,so all of its after-tax income will be paid out to its investors,who will have to pay personal taxes on whatever they receive.What is the difference in the percentage of the firm's pre-tax income that investors actually receive and can spend under the corporate and partnership forms of organization ?
A) 22.61%
B) 23.80%
C) 21.90%
D) 23.56%
E) 28.56%
Answer: B
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Page 3
Chapter 2: Financial Markets and Institutions
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) The NYSE does not exist as a physical location.Rather it represents a loose collection of dealers who trade stock electronically.
B) An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift.
C) Capital market instruments include both long-term debt and common stocks.
D) If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles,this would be a primary market transaction.
E) While the two frequently perform similar functions,investment banks generally specialize in lending money,whereas commercial banks generally help companies raise large blocks of capital from investors.
Answer: C
Q2) The term IPO stands for "individual purchase order," as when an individual (as opposed to an institution)places an order to buy a stock.
A)True
B)False
Answer: False
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Chapter 3: Financial Statements,cash Flow and Taxes
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Sample Questions
Q1) A loss incurred by a corporation
A) must be carried forward unless the company has had 2 loss years in a row.
B) can be carried back 2 years,then carried forward up to 20 years following the loss.
C) can be carried back 5 years and forward 3 years.
D) cannot be used to reduce taxes in other years except with special permission from the IRS.
E) can be carried back 3 years or forward 10 years,whichever is more advantageous to the firm.
Answer: B
Q2) Free cash flow (FCF)is,essentially,the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations.
A)True
B)False
Answer: True
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Chapter 4: Analysis of Financial Statements
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Sample Questions
Q1) Refer to Exhibit 4.1.What is the firm's total debt to total capital ratio? Do not round your intermediate calculations.
A) 44.09%
B) 39.09%
C) 39.55%
D) 38.18%
E) 45.45%
Q2) Refer to Exhibit 4.1.What is the firm's current ratio? Do not round your intermediate calculations.
A) 0.87
B) 0.85
C) 1.23
D) 1.09
E) 1.17
Q3) The market/book (M/B)ratio tells us how much investors are willing to pay for a dollar of accounting book value.In general,investors regard companies with higher M/B ratios as less risky and/or more likely to enjoy higher growth in the future.
A)True
B)False
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Page 6
Chapter 5: Time Value of Money
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Sample Questions
Q1) How much would $5,000 due in 20 years be worth today if the discount rate were 5.5%?
A) $2,004.96
B) $1,713.64
C) $2,039.24
D) $2,073.51
E) $1,353.78
Q2) If a bank compounds savings accounts quarterly,the effective annual rate will exceed the nominal rate.
A)True
B)False
Q3) You have a chance to buy an annuity that pays $13,700 at the end of each year for 3 years.You could earn 5.5% on your money in other investments with equal risk.What is the most you should pay for the annuity?
A) $43,614.79
B) $31,417.43
C) $39,918.62
D) $39,549.01
E) $36,961.69
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Page 7
Chapter 6: Interest Rates
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Sample Questions
Q1) Koy Corporation's 5-year bonds yield 8.00%,and 5-year T-bonds yield 5.15%.The real risk-free rate is r* = 3.0%,the inflation premium for 5-year bonds is IP = 1.75%,the liquidity premium for Koy's bonds is LP = 0.75% versus zero for T-bonds,and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) \(\times\) 0)1%,where t = number of years to maturity.What is the default risk premium (DRP)on Koy's bonds?
A) 2.16%
B) 2.10%
C) 2.12%
D) 2.48%
E) 2.18%
Q2) One of the four most fundamental factors that affect the cost of money as discussed in the text is the current state of the weather.If the weather is dark and stormy,the cost of money will be higher than if it is bright and sunny,other things held constant.
A)True B)False
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Page 8
Chapter 7: Bonds and Their Valuation
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Sample Questions
Q1) Dyl Inc.'s bonds currently sell for $870 and have a par value of $1,000.They pay a $65 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,100.What is their yield to maturity (YTM)?
A) 8.02%
B) 9.71%
C) 6.66%
D) 7.38%
E) 8.66%
Q2) The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond's remaining maturity.
A)True
B)False
Q3) If its yield to maturity declined by 1%,which of the following bonds would have the largest percentage increase in value?
A) A 1-year zero coupon bond.
B) A 1-year bond with an 8% coupon.
C) A 10-year bond with an 8% coupon.
D) A 10-year bond with a 12% coupon.
E) A 10-year zero coupon bond.
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Page 9
Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) Returns for the Dayton Company over the last 3 years are shown below.What's the standard deviation of the firm's returns? (Hint: This is a sample,not a complete population,so the sample standard deviation formula should be used. )Do not round your intermediate calculations. \(\begin{array}{rr}\text { Year }& \text { Return }\\ 2013 & 21.00 \% \\ 2012 &-12.50 \% \\ 2011 & 35.00 \% \end{array}\) ?
A) 30.02%
B) 18.79%
C) 23.43%
D) 27.09%
E) 24.41%
Q2) A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.
A)True
B)False
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Page 10
Chapter 9: Stocks and Their Valuation
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Sample Questions
Q1) Nachman Industries just paid a dividend of D<sub>0</sub> = $3.75.Analysts expect the company's dividend to grow by 30% this year,by 10% in Year 2,and at a constant rate of 5% in Year 3 and thereafter.The required return on this low-risk stock is 9.00%.What is the best estimate of the stock's current market value? Do not round intermediate calculations.
A) $144.04
B) $135.11
C) $127.47
D) $151.68
E) $130.01
Q2) Reddick Enterprises' stock currently sells for $24.50 per share.The dividend is projected to increase at a constant rate of 5.50% per year.The required rate of return on the stock,r<sub>s</sub>,is 9.00%.What is the stock's expected price 3 years from today?
A) $31.65
B) $24.45
C) $28.77
D) $33.66
E) $26.76
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Page 11
Chapter 10: The Cost of Capital
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Sample
Questions
Q1) Weaver Chocolate Co.expects to earn $3.50 per share during the current year,its expected dividend payout ratio is 65%,its expected constant dividend growth rate is 6.0%,and its common stock currently sells for $30.00 per share.New stock can be sold to the public at the current price,but a flotation cost of 5% would be incurred.What would be the cost of equity from new common stock? Do not round your intermediate calculations.
A) 13.98%
B) 16.36%
C) 13.70%
D) 11.33%
E) 11.47%
Q2) The before-tax cost of debt,which is lower than the after-tax cost,is used as the component cost of debt for purposes of developing the firm's WACC.
A)True
B)False
Q3) The lower the firm's tax rate,the lower will be its after-tax cost of debt and also its WACC,other things held constant.
A)True
B)False
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Page 12
Chapter 11: The Basics of Capital Budgeting
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) One defect of the IRR method is that it does not take account of cash flows over a project's full life.
B) One defect of the IRR method is that it does not take account of the time value of money.
C) One defect of the IRR method is that it does not take account of the cost of capital.
D) One defect of the IRR method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future.
E) One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself,and that assumption is often not valid.
Q2) Assume a project has normal cash flows.All else equal,which of the following statements is CORRECT?
A) A project's IRR increases as the WACC declines.
B) A project's NPV increases as the WACC declines.
C) A project's MIRR is unaffected by changes in the WACC.
D) A project's regular payback increases as the WACC declines.
E) A project's discounted payback increases as the WACC declines.
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Chapter 12: Cash Flow Estimation and Risk Analysis
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Sample Questions
Q1) Superior analytical techniques,such as NPV,used in combination with risk-adjusted cost of capital estimates,can overcome the problem of poor cash flow estimation and lead to generally correct accept/reject decisions for capital budgeting projects.
A)True
B)False
Q2) Changes in net operating working capital should not be reflected in a capital budgeting cash flow analysis because capital budgeting relates to fixed assets,not working capital.
A)True
B)False
Q3) Although it is extremely difficult to make accurate forecasts of the revenues that a project will generate,projects' initial outlays and subsequent costs can be forecasted with great accuracy.This is especially true for large product development projects.
A)True
B)False
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14
Chapter 13: Real Options and Other Topics in Capital
Budgeting
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Sample Questions
Q1) Real options are most valuable when the underlying source of risk--such as uncertainty about unit sales,or the sales price,or input costs--is very low.
A)True
B)False
Q2) Real options are options to buy real assets,especially stocks,rather than interest-bearing assets,like bonds.
A)True
B)False
Q3) An important part of the capital budgeting process is the post-audit,which involves comparing the actual results with those predicted by the project's sponsors and explaining why any differences occurred.
A)True
B)False
Q4) The option to abandon a project is a real option,but a call option on a stock is not a real option.
A)True
B)False
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Chapter 14: Capital Structure and Leverage
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Sample Questions
Q1) The Miller model begins with the Modigliani and Miller (MM)model without corporate taxes and then adds personal taxes.
A)True
B)False
Q2) According to Modigliani and Miller (MM),in a world with corporate income taxes the optimal capital structure calls for approximately 100% debt financing.
A)True B)False
Q3) If a firm borrows money,it is using financial leverage.
A)True
B)False
Q4) Other things held constant,firms that use assets that can be sold easily (like trucks)tend to use more debt than firms whose assets are harder to sell (like those engaged in research and development).
A)True B)False
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Page 16
Chapter 15: Distributions to Shareholders: Dividends and Share Repurchases
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Sample Questions
Q1) Your firm adheres strictly to the residual dividend model.All else equal,which of the following factors would be most likely to lead to an increase in the firm's dividend per share?
A) The firm's net income increases.
B) The company increases the percentage of equity in its target capital structure.
C) The number of profitable potential projects increases.
D) Congress lowers the tax rate on capital gains,leaving the rest of the tax code unchanged.
E) Earnings are unchanged,but the firm issues new shares of common stock.
Q2) Whited Products recently completed a 4-for-1 stock split.Prior to the split,its stock sold for $75 per share.If the firm's total market value increased by 6% as a result of increased liquidity and favorable signaling effects,what was the stock price following the split?
A) $19.28
B) $16.10
C) $16.89
D) $19.88
E) $21.86
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Chapter 16: Working Capital Management
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Sample Questions
Q1) Shorter-term cash budgets (such as a daily cash budget for the next month)are generally used for actual cash control while longer-term cash budgets (such as a monthly cash budgets for the next year)are generally used for planning purposes.
A)True
B)False
Q2) Trade credit can be separated into two components: free trade credit,which is credit received after the discount period ends,and costly trade credit,which is the cost of discounts not taken.
A)True
B)False
Q3) The concept of permanent current assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low.Thus,permanent current assets represent a minimum level of current assets that must be financed.
A)True
B)False
Q4) The calculated cost of trade credit can be reduced by paying late.
A)True
B)False
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Chapter 17: Financial Planning and Forecasting
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Sample Questions
Q1) Last year Godinho Corp.had $420 million of sales,and it had $75 million of fixed assets that were being operated at 80% of capacity.In millions,how large could sales have been if the company had operated at full capacity?
A) $551.3
B) $462.0
C) $509.3
D) $656.3
E) $525.0
Q2) Last year Jain Technologies had $250 million of sales and $100 million of fixed assets,so its Fixed Assets/Sales ratio was 40%.However,its fixed assets were used at only 40% of capacity.Now the company is developing its financial forecast for the coming year.As part of that process,the company wants to set its target Fixed Assets/Sales ratio at the level,it would have had,had it been operating at full capacity.What target Fixed Assets/Sales ratio should the company set?
A) 19.0%
B) 14.6%
C) 16.0%
D) 15.4%
E) 14.2%
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Chapter 18: Derivatives and Risk Management
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Sample Questions
Q1) Warnes Motors' stock is trading at $20 a share.Three-month call options with an exercise price of $20 have a price of $1.50.Which of the following will occur if the stock price increases 10% to $22 a share?
A) The price of the call option will increase by $2.
B) The price of the call option will increase by less than $2,but the percentage increase in price will be more than 10%.
C) The price of the call option will increase by less than $2,and the percentage increase in price will be less than 10%.
D) The price of the call option will increase by more than $2.
E) The price of the call option will increase by more than $2,but the percentage increase in price will be less than 10%.
Q2) An investor who "writes" a call option against stock held in his or her portfolio is selling a(n)
A) Straddle option.
B) Put option.
C) Out-of-the-money option.
D) Naked option.
E) Covered option.
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Page 20
Chapter 19: Multinational Financial Management
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Sample Questions
Q1) Suppose hockey skates sell in Canada for 113 Canadian dollars,and 1 Canadian dollar equals 0.71 U.S.dollar.If purchasing power parity (PPP)holds,what is the price of hockey skates in the United States?
A) $60.17
B) $90.66
C) $82.64
D) $93.07
E) $80.23
Q2) Which of the following statements is NOT CORRECT?
A) Any bond sold outside the country of the borrower is called an international bond. B) Foreign bonds and Eurobonds are two important types of international bonds.
C) Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold.
D) The term Eurobond applies only to foreign bonds denominated in U.S.currency.
E) A Eurodollar is a U.S.dollar deposited in a bank outside the U.S.
Q3) Exchange rate quotations consist solely of direct quotations.
A)True
B)False
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21
Chapter 20: Hybrid Financing: Preferred
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Sample Questions
Q1) Refer to Exhibit 20.1.What is the bond's initial conversion value when issued?
A) $672.09
B) $830.23
C) $593.02
D) $909.30
E) $790.70
Q2) If a leased asset has a negative residual value (e.g.as a result of a statutory requirement to dispose of an asset in an environmentally sound manner),then the lessee of the asset could reasonably expect to pay a lower lease rate because the asset does not have a positive residual value.
A)True
B)False
Q3) Corporations that invest surplus funds in floating-rate preferred stock benefit from a relatively stable price and from the 70% tax exemption on preferred dividends received.
A)True
B)False
Q4) A sale and leaseback arrangement is a type of financial,or capital,lease.
A)True
B)False
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Chapter 21: Mergers and Acquisitions
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Sample Questions
Q1) Firms use defensive tactics to fight off undesired mergers.These tactics do NOT include
A) raising antitrust issues.
B) developing poison pills.
C) getting white knights to bid for the firm.
D) repurchasing their own stock.
E) engaging in risk arbitrage.
Q2) Leveraged buyouts (LBOs)occur when a firm's managers,generally backed by private equity groups,try to gain control of a publicly owned company by buying shares in the company using large amounts of borrowed money.
A)True
B)False
Q3) Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.
A)True B)False
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