Corporate Finance
Question Bank
Course Introduction
Corporate Finance explores the fundamental principles and strategies that govern financial decision-making in corporations. The course covers topics such as capital budgeting, capital structure, dividend policy, valuation of financial assets, risk management, and working capital management. Students will learn how companies raise capital, invest in projects, manage day-to-day finances, and maximize shareholder value, applying financial theories and analytical tools to real-world business scenarios. Through a combination of case studies, quantitative analysis, and problem-solving exercises, the course aims to build a thorough understanding of how financial managers contribute to the overall success and sustainability of modern organizations.
Recommended Textbook Fundamentals of Corporate Finance 10th Alternate Edition by Stephen A. Ross
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Chapter 1: Introduction to Corporate Finance
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Q1) Which one of the following statements is generally correct?
A) Private placements must be registered with the SEC.
B) All secondary markets are auction markets.
C) Dealer markets have a physical trading floor.
D) Auction markets match buy and sell orders.
E) Dealers arrange trades but never own the securities traded.
Answer: D
Q2) Which of the following are results related to the enactment of the Sarbanes-Oxley Act of 2002?
I.increased foreign stock exchange listings of U.S.stocks
II.decreased compliance costs
III.increased privatization of public corporations
IV.increased public disclosure by all corporations
A) I and III only
B) II and IV only
C) I,II,and III only
D) II,III,and IV only
E) I,III,and IV only
Answer: A
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Page 3
Two: Financial Statements and Long-Term Financial Planning
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Q1) The cash flow related to interest payments less any net new borrowing is called the:
A) operating cash flow.
B) capital spending cash flow.
C) net working capital.
D) cash flow from assets.
E) cash flow to creditors.
Answer: E
Q2) Which one of these is most apt to be a fixed cost?
A) raw materials
B) manufacturing wages
C) management bonuses
D) office salaries
E) shipping and freight
Answer: D
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Chapter 3: Working With Financial Statements
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Q1) A firm has sales of $3,200,net income of $390,total assets of $4,500,and total equity of $2,750.Interest expense is $50.What is the common-size statement value of the interest expense?
A) 0.89 percent
B) 1.56 percent
C) 3.69 percent
D) 10.26 percent
E) 14.55 percent
Answer: B
Q2) Oscar's Dog House has a profit margin of 5.6 percent,a return on assets of 12.5 percent,and an equity multiplier of 1.49.What is the return on equity?
A) 17.14 percent
B) 18.63 percent
C) 19.67 percent
D) 21.69 percent
E) 22.30 percent
Answer: B
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Chapter 4: Long-Term Financial Planning and Growthpart
Three: Valuation of Future Cash Flows
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Q1) A firm's net working capital and all of its expenses vary directly with sales.The firm is operating currently at 96 percent of capacity.The firm wants no additional external financing of any kind.Which one of the following statements related to the firm's pro forma statements for next year must be correct?
A) Total liabilities will remain constant at this year's value.
B) The maximum rate of sales increase is 4 percent.
C) The firm cannot exceed its internal rate of growth.
D) The projected owners' equity will equal this year's ending equity balance.
E) Fixed assets must remain constant at the current level.
Q2) The Dog House has net income of $3,450 and total equity of $8,600.The debt-equity ratio is 0.60 and the payout ratio is 30 percent.What is the internal growth rate?
A) 14.47 percent
B) 17.78 percent
C) 21.29 percent
D) 29.40 percent
E) 33.33 percent
Q3) Why do financial managers need to understand the implications of both the internal and the sustainable rates of growth?
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Chapter 5: Introduction to Valuation: the Time Value of Money
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Q1) Andy deposited $3,000 this morning into an account that pays 5 percent interest,compounded annually.Barb also deposited $3,000 this morning into an account that pays 5 percent interest,compounded annually.Andy will withdraw his interest earnings and spend it as soon as possible.Barb will reinvest her interest earnings into her account.Given this,which one of the following statements is true?
A) Barb will earn more interest the first year than Andy will.
B) Andy will earn more interest in year three than Barb will.
C) Barb will earn interest on interest.
D) After five years,Andy and Barb will both have earned the same amount of interest.
E) Andy will earn compound interest.
Q2) One year ago,you invested $1,800.Today it is worth $1,924.62.What rate of interest did you earn?
A) 6.59 percent
B) 6.67 percent
C) 6.88 percent
D) 6.92 percent
E) 7.01 percent
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Page 7
Chapter 6: Discounted Cash Flow Valuation
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Q1) You have been investing $250 a month for the last 13 years.Today,your investment account is worth $73,262.What is your average rate of return on your investments?
A) 8.94 percent
B) 9.23 percent
C) 9.36 percent
D) 9.41 percent
E) 9.78 percent
Q2) You just signed a consulting contract that will pay you $38,000,$52,000,and $85,000 annually at the end of the next three years,respectively.What is the present value of these cash flows given a 10.5 percent discount rate?
A) $139,975
B) $148,307
C) $154,880
D) $157,131
E) $162,910
Q3) Kristie owns a perpetuity which pays $12,000 at the end of each year.She comes to you and offers to sell you all of the payments to be received after the 10<sup>th</sup> year.Explain how you can determine the value of this offer.
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Chapter 7: Interest Rates and Bond Valuation
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Q1) Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity.What is the $1,000 called?
A) coupon
B) face value
C) discount
D) yield
E) dirty price
Q2) Last year,you purchased a "TIPS" at par.Since that time,both market interest rates and the inflation rate have increased by 0.25 percent.Your bond has most likely done which one of the following since last year?
A) decreased in value due to the change in inflation rates
B) experienced an increase in its bond rating
C) maintained a fixed real rate of return
D) increased in value in response to the change in market rates
E) increased in value due to a decrease in time to maturity
Q3) Define liquidity risk,default risk,and taxability risk and explain how these risks relate to bonds and bond yields.
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Chapter 8: Stock Valuationpart Four: Capital Budgeting
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Q1) Combined Communications is a new firm in a rapidly growing industry.The company is planning on increasing its annual dividend by 15 percent a year for the next 4 years and then decreasing the growth rate to 3.5 percent per year.The company just paid its annual dividend in the amount of $0.20 per share.What is the current value of one share of this stock if the required rate of return is 15.5 percent?
A) $1.82
B) $2.04
C) $2.49
D) $2.71
E) $3.05
Q2) Bechtel Machinery stock currently sells for $65 per share.The market requires a 14 percent return on the firm's stock.The company maintains a constant 8 percent growth rate in dividends.What was the most recent annual dividend per share paid on this stock?
A) $3.00
B) $3.61
C) $3.67
D) $3.75
E) $3.91
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Chapter 9: Net Present Value and Other Investment Criteria
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Q1) Which of the following are advantages of the payback method of project analysis?
I.works well for research and development projects
II.liquidity bias
III.ease of use
IV.arbitrary cutoff point
A) I and II only
B) I and III only
C) II and III only
D) II and IV only
E) II,III,and IV only
Q2) A project has average net income of $5,900 a year over its 6-year life.The initial cost of the project is $98,000 which will be depreciated using straight-line depreciation to a book value of zero over the life of the project.The firm wants to earn a minimum average accounting return of 11.5 percent.The firm should _____ the project because the AAR is _____ percent.
A) accept;5.71
B) accept;9.90
C) accept;12.04
D) reject;5.71
E) reject;12.04
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Page 11
Chapter 10: Making Capital Investment Decisions
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Q1) Which one of the following statements is correct concerning bid prices?
A) The bid price is the maximum price that a firm should bid.
B) A firm can submit a bid that is higher than the computed bid price and still break even.
C) A bid price ignores taxes.
D) A bid price should be computed based solely on the operating cash flows of the project.
E) A bid price should be computed based on a zero percent required rate of return.
Q2) The Beach House has sales of $784,000 and a profit margin of 8 percent.The annual depreciation expense is $14,000.What is the amount of the operating cash flow if the company has no long-term debt?
A) $68,760
B) $72,240
C) $74,240
D) $76,720
E) $81,760
Q3) What is the formula for the tax-shield approach to OCF? Explain the two key points the formula illustrates.
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Chapter 11: Project Analysis and Evaluationpart Five: Risk and Return
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Q1) Steele Insulators is analyzing a new type of insulation for interior walls.Management has compiled the following information to determine whether or not this new insulation should be manufactured.The insulation project has an initial fixed asset requirement of $1.3 million,which would be depreciated straight-line to zero over the 12-year life of the project.Projected fixed costs are $769,000 and the anticipated annual operating cash flow is $241,000.What is the degree of operating leverage for this project?
A) 3.78
B) 3.92
C) 4.19
D) 4.27
E) 4.53
Q2) What is operating leverage and why is it important in the analysis of capital expenditure projects?
Q3) The contribution margin per unit is equal to the:
A) sales price per unit minus the total costs per unit.
B) variable cost per unit minus the fixed cost per unit.
C) sales price per unit minus the variable cost per unit.
D) pre-tax profit per unit.
E) aftertax profit per unit.
Page 13
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Chapter 12: Some Lessons From Capital Market History
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Q1) A stock has returns of 18 percent,15 percent,-21 percent,and 6 percent for the past four years.Based on this information,what is the 95 percent probability range of returns for any one given year?
A) -13.56 to 20.56 percent
B) -24.60 to 31.80 percent
C) -31.00 to 40.00 percent
D) -47.68 to 54.68 percent
E) -71.73 to 71.73 percent
Q2) One year ago,you purchased a stock at a price of $33.49.The stock pays quarterly dividends of $0.20 per share.Today,the stock is selling for $28.20 per share.What is your capital gain on this investment?
A) -$5.49
B) -$5.29
C) -$4.76
D) -$4.16
E) -$5.09
Q3) What are the two primary lessons learned from capital market history? Use historical information to justify that these lessons are correct.
Q4) Define and explain the three forms of market efficiency.
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Six: Cost of Capital and Long-Term Financial Policy
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Q1) If a stock portfolio is well diversified,then the portfolio variance: A) will equal the variance of the most volatile stock in the portfolio. B) may be less than the variance of the least risky stock in the portfolio. C) must be equal to or greater than the variance of the least risky stock in the portfolio. D) will be a weighted average of the variances of the individual securities in the portfolio. E) will be an arithmetic average of the variances of the individual securities in the portfolio.
Q2) You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy.Given the probabilities of each state of the economy occurring,you anticipate that your stock will earn 6.5 percent next year.Which one of the following terms applies to this 6.5 percent?
A) arithmetic return
B) historical return
C) expected return
D) geometric return
E) required return
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Chapter 14: Cost of Capital
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Q1) The Oil Derrick has an overall cost of equity of 13.6 percent and a beta of 1.28.The firm is financed solely with common stock.The risk-free rate of return is 3.4 percent.What is an appropriate cost of capital for a division within the firm that has an estimated beta of 1.18?
A) 12.37 percent
B) 12.41 percent
C) 12.54 percent
D) 12.67 percent
E) 12.80 percent
Q2) The cost of preferred stock:
A) is equal to the dividend yield. B) is equal to the yield to maturity.
C) is highly dependent on the dividend growth rate.
D) is independent of the stock's price.
E) decreases when tax rates increase.
Q3) Suppose your boss comes to you and asks you to re-evaluate a capital budgeting project.The first evaluation was in error,he explains,because it ignored flotation costs.To correct for this,he asks you to evaluate the project using a higher cost of capital which incorporates these costs.Is your boss' approach correct? Why or why not?
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Chapter 15: Raising Capital
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Q1) Kurt currently owns 3.4 percent of Northeastern Transportation.The company has a total of 438,000 shares outstanding with a current market price of $26.20 a share.At present,the firm is offering an additional 25,000 shares at a price of $25 a share.Kurt decides not to participate in this offering.What will his ownership position be after the offering is completed?
A) 3.06 percent
B) 3.22 percent
C) 3.27 percent
D) 3.40 percent
E) 3.51 percent
Q2) Explain both a rights offering and the basic characteristics of a right.
Q3) A group of five private investors recently loaned $6 million to Henderson Hardware for ten years at 9 percent interest.This loan is best described as a:
A) private placement.
B) debt SEO.
C) notes payable.
D) debt IPO.
E) term loan.
Q4) Explain why there is a tendency for IPOs to be underpriced.
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Chapter 16: Financial Leverage and Capital Structure Policy
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Q1) ABC Co.and XYZ Co.are identical firms in all respects except for their capital structure.ABC is all equity financed with $480,000 in stock.XYZ uses both stock and perpetual debt;its stock is worth $240,000 and the interest rate on its debt is 9 percent.Both firms expect EBIT to be $58,400.Ignore taxes.The cost of equity for ABC is _____ percent,and for XYZ it is ______ percent.
A) 12.17;12.68
B) 12.17;13.33
C) 12.17;15.33
D) 12.29;12.68
E) 12.29;13.33
Q2) The basic lesson of M & M Theory is that the value of a firm is dependent upon:
A) the firm's capital structure.
B) the total cash flow of the firm.
C) minimizing the marketed claims.
D) the amount of marketed claims to that firm.
E) size of the stockholders' claims.
Q3) Based on the M & M propositions with and without taxes,how much time should a financial manager spend analyzing the capital structure of a firm? What if the analysis is based on the static theory?
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Page 18
Financial Planning and Management
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Q1) Which two of the following are the best justifications for a reverse stock split?
I.combine a reverse stock split with a stock repurchase to enable a firm to go dark II.increase the respectability of the stock
III.avoid delisting
IV.reduce transaction costs for shareholders
A) I and II only
B) I and III only
C) II and III only
D) II and IV only
E) III and IV only
Q2) Which one of the following favors a low dividend policy?
A) the tax on capital gains is deferred until the gain is realized
B) few,if any,positive net present value projects are available to a firm
C) a majority of the shareholders has a low relevant tax rate
D) a majority of the shareholders has better investment opportunities with similar risks
E) corporate tax rates exceed personal tax rates
Q3) Explain the meaning of the dividend clientele effect and why it is important.
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Page 19
Chapter 18: Short-Term Finance and Planning
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Q1) Denver Interiors,Inc. ,has sales of $836,000 and cost of goods sold of $601,000.The firm had a beginning inventory of $36,000 and an ending inventory of $47,000.What is the length of the inventory period?
A) 19.21 days
B) 20.89 days
C) 25.20 days
D) 30.53 days
E) 33.69 days
Q2) The Mish Mash Store has a beginning cash balance of $440 on March 1.The firm has projected sales of $610 in February,$680 in March,and $740 in April.The cost of goods sold is equal to 70 percent of sales.Goods are purchased one month prior to the month of sale.The accounts payable period is 30 days and the accounts receivable period is 10 days.The firm has monthly cash expenses of $125.What is the projected ending cash balance at the end of March? Assume every month has 30 days.
A) $461
B) $496
C) $507
D) $567
E) $621
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Page 20
Chapter 19: Cash and Liquidity Management
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Q1) Which one of the following collection times is correctly described?
A) The processing delay starts when a firm mails out a billing statement and ends when the payment is received from a customer.
B) Mailing time begins when a firm mails out a billing statement and ends when the payment is received.
C) Collection time begins when a firm mails out a billing statement and ends when the cash payment for that billing is available to the firm.
D) Availability delay begins when a firm deposits a customer's check into its bank account and ends when the cash from that payment is available to the firm.
E) Processing delay begins when a firm mails out billing statements and ends when the firm deposits the payment for that statement into its bank account.
Q2) Collection float:
A) is more desirable to firms than disbursement float.
B) is totally eliminated by the installation of a lockbox system.
C) exists when a firm's available balance exceeds its book balance.
D) can be avoided by collecting payments electronically at the time of sale.
E) is eliminated by implementing a concentration banking system.
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Page 21
Topics in Corporate Finance
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Q1) A firm sells 4,500 units of an item each year.The carrying cost per unit is $2.15 and the fixed costs per order are $69.What is the economic order quantity?
A) 374 units
B) 421 units
C) 497 units
D) 537 units
E) 623 units
Q2) The basic factors to be evaluated in the credit evaluation process,the five Cs of credit,are:
A) conditions,control,cessation,capital,and capacity.
B) conditions,character,capital,control,and capacity.
C) capital,collateral,control,character,and capacity.
D) character,capacity,control,cessation,and collateral.
E) character,capacity,capital,collateral,and conditions.
Q3) Why might firms forego discounts offered by their suppliers even though it is costly to do so? What steps might a firm pursue to be able to take these discounts?
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Chapter 21: International Corporate Finance
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Q1) Assume that ¥95.42 equal $1.Also assume that SKr7.7274 equal $1.How many Japanese yen can you acquire in exchange for 3,000 Swedish krone?
A) ¥235
B) ¥261
C) ¥37,045
D) ¥39,024
E) ¥39,520
Q2) Assume the euro is selling in the spot market for $1.33.Simultaneously,in the 3-month forward market the euro is selling for $1.35.Which one of the following statements correctly describes this situation?
A) The spot market is out of equilibrium.
B) The forward market is out of equilibrium.
C) The dollar is selling at a premium relative to the euro.
D) The euro is selling at a premium relative to the dollar.
E) The euro is expected to depreciate in value.
Q3) What conditions are necessary for absolute purchasing power parity (PPP)to exist? Is it realistic to believe PPP can exist within a country let alone across national borders?
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Page 23
Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) Stewart is a fellow finance student at your school who is addicted to day trading and thus buys and sells stocks between classes and over his lunch break.He never has time to really analyze a security so just trades the stock symbols that other investors appear to be trading.Stewart is which one of the following?
A) noise trader
B) arbitrageur
C) crasher
D) regret averter
E) myopic loss averter
Q2) Phyllis is planning for her retirement in fifteen years.She knows that she can currently live reasonably well on $38,000 a year given that she is debt-free.Based on her family history she expects to die ten years after she retires.Thus,she computes her retirement need as $38,000 a year for 10 years.Which one of the following behaviors applies to Phyllis?
A) regret aversion
B) money illusion
C) self-attribution bias
D) endowment effect
E) myopic loss aversion
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Chapter 23: Enterprise Risk Management
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Q1) Which one of the following methods of setting prices would reduce the transactions exposure for both the buyer and seller of a swap contract?
A) setting a permanent price at which a commodity will be traded
B) setting the price at the minimum spot price during a given period of time
C) setting the price equal to the spot price on the delivery date
D) using the average market price over a given period of time
E) setting the contract price equal to some percentage,less than 100 percent,of the market price on any given day
Q2) If a firm creates an interest rate collar on a variable rate loan,then the rate the firm pays will always:
A) remain constant at the average of the floor and cap rates.
B) remain constant at the floor rate.
C) remain constant at the cap rate.
D) be higher than,or equal to,the cap but lower than,or equal to,the floor.
E) be higher than,or equal to,the floor but lower than,or equal to,the cap.
Q3) What are the primary motives for a hedger and a speculator in the derivatives market? If a wheat farmer sells wheat futures,is that hedging or speculating? Explain.
Q4) Explain why a swap is effectively a series of forward contracts.
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Chapter 24: Options and Corporate Finance
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Q1) When warrants are exercised,the:
A) earnings per share decrease.
B) earnings per share remain constant.
C) total equity in a firm remains constant.
D) total equity in a firm decreases.
E) number of bonds outstanding increases.
Q2) Felicia purchased an option which she can exercise anytime within the next six months.Which type of option did she purchase?
A) market-ready
B) portable
C) daily
D) European
E) American
Q3) Which one of the following describes the lower bound of a call's value?
A) strike price or zero,whichever is greater
B) stock price minus the exercise price or zero,whichever is greater
C) strike price or the stock price,whichever is lower
D) strike price or zero,whichever is lower
E) stock price minus the exercise price or zero,whichever is lower
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Chapter 25: Option Valuation
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Q1) Which of the following statements are correct?
I.As the standard deviation of the returns on a stock increase,the value of a put option increases.
II.The value of a call option decreases as the time to expiration increases.
III.A decrease in the risk-free rate increases the value of a put option.
IV.Increasing the strike price increases the value of a put option.
A) I and III only
B) II and IV only
C) I and II only
D) I,III,and IV only
E) I,II,and III only
Q2) Today,you purchased 100 shares of Lazy Z stock at a market price of $47 per share.You also bought a one year,$45 put option on Lazy Z stock at a cost of $0.15 per share.What is the maximum total amount you can lose on these purchases?
A) -$4,715
B) -$4,685
C) -$4,015
D) -$215
E) -$0
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Chapter 26: Mergers and Acquisitions
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Q1) Penn Corp.is analyzing the possible acquisition of Teller Company.Both firms have no debt.Penn believes the acquisition will increase its total aftertax annual cash flows by $3.7 million indefinitely.The current market value of Teller is $103 million,and that of Penn is $151.7 million.The appropriate discount rate for the incremental cash flows is 9 percent.Penn is trying to decide whether it should offer 40 percent of its stock of $127 million in cash to Teller's shareholders.The cost of the cash alternative is _____,while the cost of the stock alternative is _____.
A) $103,000,000;$118,324,444
B) $103,000,000;$127,000,000
C) $127,000,000;$103,000,000
D) $127,000,000;$118,324,444
E) $236,000,000;$103,000,000
Q2) Firms can frequently create synergy by merging and sharing complementary resources with another firm.Give two examples of situations where this would most likely occur.
Q3) Identify the three basic legal procedures that one firm can use to acquire another and briefly discuss the advantages and disadvantages of each.
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Chapter 27: Leasing
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Source URL: https://quizplus.com/quiz/74224
Sample Questions
Q1) The Wildcat Oil Company is trying to decide whether to lease or buy a new computer-assisted drilling system for its oil exploration business.Management has decided that it must use the system to stay competitive;it will provide $850,000 in annual pretax cost savings.The system costs $8 million and will be depreciated straight-line to zero over 5 years.Wildcat's tax rate is 34 percent,and the firm can borrow at 8 percent.Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $2,040,000 per year.Lambert's policy is to require its lessees to make payments at the start of the year.What is the maximum lease payment that would be acceptable to the company?
A) $1,893,231
B) $1,896,996
C) $1,904,506
D) $1,906,318
E) $1,911,472
Q2) A leveraged lease is a:
A) lease where the lessee is the owner of the asset for tax purposes.
B) sale and leaseback arrangement.
C) type of operating lease.
D) lease paid with money borrowed by the lessee.
E) lease where the lessor borrows on a nonrecourse basis.
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