Corporate Finance
Review Questions
Course Introduction
Corporate Finance focuses on the principles and techniques used by organizations to manage financial resources and create value for stakeholders. The course covers key topics such as financial statement analysis, capital budgeting, risk and return, cost of capital, capital structure, dividend policy, and working capital management. Through case studies and practical problem-solving, students will learn how managers make investment and financing decisions, evaluate financial performance, and strategize to maximize firm value in a global and competitive environment.
Recommended Textbook
Contemporary Financial Management 13th Edition by R. Charles Moyer
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Chapter 1: The Role and Objective of Financial Management
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Q1) The objective of maximizing shareholder wealth, as measured by the market value of the firm's stock
A)does not consider the timing of the benefits received
B)provides a way to consider the risk of the returns being offered
C)benefits only certain stockholders
D)neither considers the timing of the benefits received nor benefits only certain stockholders
Answer: B
Q2) are largely outside of the direct control of managers.
A)investment strategies
B)economic environment factors
C)major policy decisions
D)dividend policies
Answer: B
Q3) There are five competitive forces that influence an industry's structure.
Answer: 1.The threat of new entrants.
2.The threat of substitute products
3.The bargaining power of buyers
4.The bargaining power of suppliers
5.The rivalry among current competitors
Page 3
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Chapter 2: The Domestic and International Financial Marketplace
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Q1) The main purpose of an economy's financial system is to facilitate the transfer of funds from
A)financial middlemen to financial intermediaries
B)surplus spending units to deficit spending units
C)primary claimholders to secondary claimholders
D)lenders to financial intermediaries
Answer: B
Q2) You bought 100 shares of Risky Venture stock six months ago for $14 per share and sold it yesterday for $12.The company paid a total of $0.24 per share in dividends to you during the time you held the stock.What was your holding period return?
A)-25.14%
B)-16.67%
C)-12.57%
D)16.00%
Answer: C
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Page 4
Chapter 3: Evaluation of Financial Performance
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Q1) What is the market price per share of Big Whoop, Inc.if the firm had net income of $200,000, earnings per share of $2.70, total equity of $800,000, and a market to book ratio of 1.5?
A)$16.20
B)$10.80
C)$7.20
D)$12.40
Answer: A
Q2) Firms with a positive economic value added (EVA):
A)have increasing growth in earnings
B)have an increasing rate of return on investment
C)have a return on capital greater than their cost of capital
D)have a high return on book value
Answer: C
Q3) The fixed asset turnover ratio is influenced by
A)the age of the assets employed
B)the depreciation method used by the firm
C)the firm's choice of a production technology
D)all of these
Answer: D
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Chapter 4: Financial Planning and Forecasting
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Q1) In the percent-of-sales forecasting method, which of the following is (are) assumed to increase proportionately with sales?
A)cash
B)accounts receivable
C)accounts payable
D)all of the answers are correct
Q2) Pro forma financial statements are used to:
A)find the contribution margin
B)show the results of some assumed event
C)predict the sensitivity of different output variables
D)show the results of an actual event
Q3) In those industries where capacity can be added only in discrete or "lumpy" increments, fixed assets are increased in a manner as sales increase.
A)proportional
B)stepwise
C)direct relationship
D)discriminant
Q4) Why would a firm experience cash flow difficulties immediately after a good sales period?
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) Explain a perpetuity and list some investment vehicles that can be perpetuities.
Q2) Joe Brady just won a $450,000 lottery in Pennsylvania.Instead of receiving a lump sum, he found that he would receive $22,500 annually (end of year) for 20 years.Joe is 75 years old and wants his money now.He has been offered $140,827 to sell his ticket.What rate of return is the buyer expecting to make if Joe accepts the offer?
A)less than 1%
B)15%
C)18%
D12%
Q3) If your parents put $2,000 a year into an IRA account for you in each of your last 4 teenage years (age 16,17,18, and 19), how much would the IRA account have in it at your retirement 45 years later if the account earned 12% each year? (Assume end-of-year payments.)
A)$1,569,758
B)$68,613
C)$3,457,169
D)$1,148,958
Q4) Explain the concept of interest and compare it to rate of interest.
Q5) Explain the sinking fund problem.
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Chapter 5: A: The Time Value of Money
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Q1) City Bank offers a 7 year CD with a nominal rate of interest of 7.0%.If compounding occurs continuously, what is the effective annual rate?
A)7.25%
B)6.77%
C)7.32%
D)7.00%
Q2) What is the effective interest rate on 12% if interest is compounded continuously?
A)15.11%
B)16.25%
C)14.11%
D)12.75%
Q3) What is the future value of $20,000 invested for 20 years at a nominal interest rate of 9 percent compounded continuously?
A)$112,088
B)$120,993
C)$108,894
D)$147,781
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Chapter 6: Fixed-Income Securities: Characteristics and Valuation
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Q1) A General Electric 7½25 bond closed at 98.What is the current yield?
A)7.65%
B)7.81%
C)7.50%
D)7.34%
Q2) The yield-to-maturity of a bond with a finite maturity date is a function of all of the following variables except:
A)the current price
B)the required rate of return on the bond
C)the uniform annual interest payments
D)the maturity value
Q3) The basic relationship in bond valuation is for a given percentage point change in the required rate of return, the the time to maturity, the the change in value.
A)shorter, greater
B)longer, smaller
C)longer, greater
D)shorter, smaller
Q4) What is a "paymentinkind" bond and why is it considered a "weak security"?
Q5) List the advantages and disadvantages of long-term debt financing:
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Chapter 7: Common Stock: Characteristics, Valuation, and Issuance
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Sample Questions
Q1) Stock splits are:
A)a sign that the company is in need of more financial capital
B)a sign that the company's stock price is too low.
C)a sign that the company wants to get its stock price to a more desirable trading level.
D)a sign that the company cannot pay its stock dividend.
Q2) A common stock's book value is calculated
A)as a multiple of the stock's price/earning ratio
B)on the basis of income statement ratios
C)on the basis of balance sheet figures
D)on the value of income statement figures
Q3) In the constant growth dividend valuation model, the required rate of return on a common stock is equal to the sum of the ____.
A)capital gains yield and cost of capital
B)present value yield and dividend yield
C)cost of capital and dividend yield
D)capital gains yield and dividend yield
Q4) What are some of the costs associated with new security offerings?
Q5) List the various rights of common stockholders.
Q6) What are the advantages and disadvantages of common stock financing?
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Chapter 8: Analysis of Risk and Return
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Sample Questions
Q1) Richtex Brick has a current dividend of $1.70 and the market value of its common stock is $28.The expected market return is 13 percent and the risk-free rate is 9 percent.If Richtex stock is half as volatile as the market, and the market is in equilibrium, what rate of growth is expected for Richtex's dividends assuming a constant growth valuation model is appropriate for Richtex?
A)4.93%
B)4.65%
C)5.37%
D)5.41%
Q2) Recalling the meaning and calculation of beta, a security that is completely uncorrelated ( j,m = 0) with the market portfolio would have a beta of A)-1
B)0 C)+1 D)-100
Q3) List the various risk elements that are considered when determining the risk premium.
Q4) What is an efficient portfolio?
Q5) Why is risk an increasing function of time?
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Chapter 9: Capital Budgeting and Cash Flow Analysis
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Q1) Adler is replacing its old packing line with a more efficient line.The old line was being depreciated on a straight-line basis at a rate of $20,000 per year.The old machine has a current book value of $100,000.The new line, which costs $910,000, will be depreciated on a 10-year MACRS schedule.The more efficient operation is expected to increase revenues by $50,000 per year and reduce annual operating costs by $80,000.Compute the net cash flows for Adler in year 2.Assume Adler has a marginal tax rate of 40%.Use the rounded MACRS schedule listed below: (10-Year Depreciation Schedule: 10%, 18%, 14%, 12%, 9%, 7%, 7%, 7%, 7%, 6%, 3%)
A)$143,520
B)$135,520
C)$39,520
D)$47,520
Q2) When managers knowingly bias estimates of cash flows from investment projects in order to serve their personal objectives, they are .
A)performing management by exception
B)increasing their total compensation
C)departing from the shareholder wealth maximization goal
D)increasing their confidence level
Q3) List the steps that a firm uses in the capital budgeting process:
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Chapter 10: Capital Budgeting: Decision Criteria and Real Option Considerations
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Q1) The profitability index would be if the present value of the net cash flows (NCF) over the life of a project were ____.
A)negative;less than zero
B)negative;less than the net investment
C)zero;equal to the net investment
D)none of these
Q2) A project requires a net investment of $450,000.It has a profitability index of 1.25 based on the firm's 12 percent cost of capital.Determine the net present value of the project.
A)$112,500
B)$562,500
C)$1,012,500
D)$140,625
Q3) Why are there differences in the capital expenditure analysis practice between large and entrepreneurial firms?
Q4) List the advantages and disadvantages of the payback method.
Q5) How does the profitability index differ from the net present value and when would each method be preferred?
Q6) In working with capital budgeting, what does a post-audit do?
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Chapter 10: A: Capital Budgeting: Decision Criteria and Real
Option Considerations
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Sample Questions
Q1) Marvec needs to replace an extruder and two replacements look good.Extruder A costs $102,000 and has a 10 year life.Extruder B costs only $56,000 but its expected life is 6 years.Extruder A will generate net cash flows of $17,600 per year for 10 years and B will generate net cash flows of $13,800 per year for 6 years.If Marvec's cost of capital is 11%, which extruder should be chosen and what is its NPV? Use equivalent annual annuities.
A)B, $564
B)B, $2,388
C)A, $1,646
D)A, $280
Q2) How does the equivalent annual annuity approach solve the time discrepancy problem?
Q3) What does a firm ignore if it chooses the longer-lived project based solely on the net present value or internal rate of return data?
Q4) The best way to measure projects with unequal lives is:
A)the Gordon Model
B)the payback period
C)the net present value method
D)equivalent annual annuity approach
Page 14
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Chapter 11: Capital Budgeting and Risk
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Q1) Which of the following is/are a risk associated with projects that must be considered when determining the net present value?
A)Only statement I is correct
B)Only statement II is correct
C)Both statements I and II are correct
D)Neither statement I nor II is correct
Q2) The use of sensitivity analysis requires that
A)a model of a project's cash flows be developed
B)probability distributions of the determinants of a project's cash flows be estimated C)the firms have access to a very large computer
D)the firm is greatly interested in the portfolio risk reduction characteristics of a project
Q3) Determine the pure project beta of a project that has 30% debt and 70% equity.The beta for the company is 1.4 and a tax rate of 40%.
A)1.11
B)1.56
C)1.83
D)1.05
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Chapter 12: The Cost of Capital, Capital Structure, and Dividend Policy
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Q1) The cost of external equity is greater than the cost of internal equity because
A)it decreases the earnings per share
B)it increases the market price of the stock
C)of the flotation costs
D)dividends are increased
Q2) For firms subject to the 34% marginal tax rate, the after-tax cost of is roughly two-thirds the cost of preferred stock.
A)retained earnings
B)new common stock
C)long-term debt
D)retained earnings and new common stock
Q3) For a company that is not planning to change its target capital structure, the proportions of debt and equity used in calculating the weighted cost of capital should be based on the current weights of the individual components.
A)book value
B)market value
C)replacement value
D)accounting value
Q4) How is the marginal cost of the various component capital sources determined?
Page 16
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Chapter 13: Capital Structure Concepts
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Q1) How do signaling effects impact the firm's capital structure decision?
Q2) In analyzing the value of the firm as a function of capital structure, the present value of the tax shield benefit is offset by the present value of the expected , resulting in an interior optimal capital structure.
A)financial distress costs
B)agency costs
C)holding costs
D)financial distress costs and agency costs
Q3) What is optimal capital structure?
A)It is the mix of debt, preferred stock and common equity that maximizes profits.
B)It is the mix of debt, preferred stock and common equity that minimizes risk.
C)It is the mix of debt, preferred stock and common equity that minimizes the weighted cost of the firm's employed capital.
D)It is the mix of common and preferred stock that maximizes dividends to the stockholders.
Q4) There are many factors that influence a firm's business risk.List them.
Q5) What is the pecking order theory with regard to managerial preferences for financing alternatives?
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Chapter 14: Capital Structure Management in Practice
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Q1) A negative DOL indicates the percentage in operating losses that occurs as the result of a 1% increase in output.
A)increase
B)reduction
C)change
D)none of these
Q2) What is the degree of operating leverage for Flippin' Out Company, a maker of scuba flippers, if the firm sells its finished product for $50 per unit with variable costs per unit of $15? The company has fixed operating costs of $2,000,000 and sells 200,000 units (the answer is rounded).
A)2.0
B)3.7
C)6.5
D)1.4
Q3) Explain the difference between short-run costs and long-run costs.
Q4) Some firms prefer to use debt or preferred stock for financing to retain control.Explain the rationale behind this method.
Q5) What are the effects of leverage on shareholder wealth and the cost of capital?
Q6) In what way does management's willingness to assume risk impact the firm?
Page 18
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Chapter 14: A: Capital Structure Management in Practice
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Q1) The uses of breakeven analysis are all of the following EXCEPT:
A)forecasting the profitability of the firm
B)forecasting the impact of certain economic conditions on the firm's profitability
C)analyzing the impact of substituting fixed costs for variable costs in production
D)analyzing the profit impact of a firm's restructuring efforts.
Q2) What are the possible uses for breakeven analysis?
Q3) The Foggy Futures Weather Network offers an annual almanac for sale each year with information about predicted weather patterns, severe storm safety tips and a tracking chart.The finished product sells for $35 with a variable cost per unit of $21.The company has operating costs of $1,050,000.What is the probability of the firm having operating losses if the firm has a standard deviation of 4,000 units and the firm expects to sell 80,000 almanacs? (A normal distribution table - Table V - must accompany this problem)
A)10.56%
B)11.12%
C)14.92%
D)13.57%
Q4) List the limitations of breakeven analysis:
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Chapter 15: Dividend Policy
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Q1) All of the following are alternative dividend policies EXCEPT:
A)constant payout
B)stable dollar
C)constant earnings
D)passive residual
Q2) Most states limit dividend policy by requiring
A)that dividends may not be paid unless the firm generates net earnings during the most recent year
B)that dividends may only be paid out of retained earnings
C)that dividends may not be paid when the firm is insolvent
D)the firm's capital to be used to pay dividends
Q3) Which of the following would be considered an alternative dividend policy?
A)I only
B)II only
C)Both I and II
D)Neither I nor II
Q4) What are the factors that determine the dividend policy of a firm?
Q5) What effect does a stock split have on outstanding shares of stock and what is its purpose?
Q6) What is the signaling effect of dividend payments?
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Chapter 16: Working Capital Management
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Q1) Last year Bizmart had credit sales of $32 million and a net profit margin of 8%.If Bizmart had accounts receivable of $4.5 million, what was the length of the receivables conversion period?
A)51.3 days
B)56.3 days
C)54.9 days
D)47.2 days
Q2) The shows the time interval over which additional non-spontaneous sources of working capital financing must be obtained to carry out the firm's activities.
A)inventory conversion period
B)cash conversion cycle
C)payables deferral period
D)receivables conversion period
Q3) In examining the term structure of interest rates, the interest rates of have exceeded short-term rates.
A)Commercial paper
B)Notes payable
C)Corporate bonds
D)Marketable securities
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Chapter 17: The Management of Cash and Marketable Securities
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Q1) Cash management involves the determination of:
A)the best locations for lockboxes
B)setting up decentralized collection centers
C)both a and b
D)neither a nor b
Q2) Drafts are:
A)payable on demand
B)legally paid on the third business day
C)requires the firm to keep large balances in its disbursement accounts
D)more expensive than checks
Q3) Which of the following criteria is generally least important in selecting marketable securities for inclusion in the firm's portfolio?
A)length of maturity
B)yield
C)marketability
D)default risk
Q4) Name the three primary components (or sources) of float:
Q5) Banks use depository transfer checks to move surplus funds from bank accounts to its concentration bank account or accounts.Explain how this is done.
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Chapter 18: The Management of Accounts Receivable and Inventories
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Q1) Which of the following is not a cost related to the extension of credit to customers?
A)bad-debt losses
B)cash discounts
C)quantity discounts
D)collection costs
Q2) The objective of offering seasonal datings to customers is to
A)encourage customers to place their orders prior to the peak selling period
B)speed up the collection of accounts receivable
C)increase the firm's inventory storage costs
D)reduce the number of bad checks received from customers
Q3) are the criteria the firm uses to screen credit applicants in order to determine which of its customers should be offered credit and how much.
A)Credit terms
B)Credit standards
C)Seasonal datings
D)Credit extension policies
Q4) How can a company use its credit period to affect sales and inventory?
Q5) What information could be used to judge the credit worthiness of a customer?
Q6) What are seasonal datings as it applies to credit terms?
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Chapter 19: Lease and Intermediate-Term Financing
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Q1) Contech (lessee) wishes to lease a printing press valued at $60,000 from Wrenn Capital (lessor) for a period of 4 years.Wrenn expects to depreciate the asset on a straight-line basis to a salvage value of $0.Actual salvage value is expected to be $8,000 at the end of 4 years.If Wrenn requires a 12 percent after-tax rate of return on the lease, what is the lessor's amount to be amortized? Assume Wrenn's marginal tax rate is 40%.
A)$60,000
B)$38,725
C)$41,778
D)$36,690
Q2) What are the disadvantages of leasing?
Q3) Explain a leveraged lease.
Q4) In a(n) , the lessor receives the entire accelerated depreciation tax shield while making a relatively small equity investment.
A)operating lease
B)capital lease
C)leveraged lease
D)term lease
Q5) What are the advantages of leasing?
Q6) In a leveraged lease, what items secure the mortgage bonds of the lender?
Page 24
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Chapter 20: Financing with Derivatives
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Q1) Why would a company issue convertible securities instead of straight bonds?
Q2) Jackson Electronics (40% marginal tax rate) is considering issuing convertible debentures.Its investment banker tentatively has agreed to issue a 9.0 percent, 20-year convertible debenture ($1,000 par value).The conversion price will be $50 a share.Jackson's financial managers only want to issue the convertible if its after-tax component cost of capital is less than or equal to 8.0 percent.Otherwise, they plan to issue non-convertible debt.Jackson's current common stock price is $43 a share.The company expects to call the convertible issue 5 years from now when the common stock price is expected to be $60 a share.Under the conditions given in this problem, what is the minimum price per debenture that Jackson can receive and keep the after-tax cost of capital for the debentures at 8.0%?
A)about $1,033
B)about $946
C)about $897
D)$1,200
Q3) What is the difference between a conversion price and a conversion ratio?
Q4) List some securities that have option features.
Q5) What variables affect the call option valuation?
Q6) What is an interest rate swap? Describe how they are used.
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Chapter 20: A: Financing with Derivatives
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Q1) Bond occurs when a firm exercises its option to redeem a callable bond issue and replaces it with a lower (interest) cost issue.
A)redemption
B)retirement
C)recall
D)refunding
Q2) Why would a corporation consider bond refunding?
Q3) Midget Digit Toe Doctors is planning to refund a 30 year bond issue.They will replace $1,500,000 of 10.25% bonds with 6.25% bonds.The firm is in the 40% tax bracket.What is the savings on the refunding?
A)$515,100
B)$646,310
C)$725,600
D)$815,170
Q4) Bond refunding occurs when a company redeems a callable issue and
A)sells an equity issue, thereby reducing outstanding debt
B)sells a new issue with a lower coupon rate
C)sells a preferred issue with a low dividend rate
D)none of these is correct
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Chapter 21: Risk Management
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Q1) A futures contract is a(n) contract.
A)implied
B)negotiated
C)standardized
D)variable
Q2) To offset the lack of marketing information which could result in corporate risk, a firm can do which of the following?
A)Manufacture the product overseas.
B)Develop more raw material suppliers.
C)Test-market a product.
D)Change advertising.
Q3) All of the following are derivative securities EXCEPT:
A)Forwards
B)Margins
C)Futures
D)Options
Q4) List several reasons why a firm may choose to employ risk management techniques.
Q5) How does hedging reduce or eliminate business risks?
Q6) What options does the buyer of a futures contract have at the time the futures contract matures?
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Chapter 22: International Financial Management
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Q1) Under current accounting procedures, all of the following balance sheet items are translated into dollars at the rate of exchange prevailing on the date of the balance sheet except:
A)stockholder's equity
B)fixed assets
C)current liabilities payable in a foreign currency
D)long-term liabilities payable in a foreign currency
Q2) Firms engaged in international transactions incur because of fluctuations in the exchange rates among currencies.
A)credit risk
B)political risk
C)market risk
D)exchange rate risk
Q3) According to Fisher, in the absence of government interference and holding risk constant, real rates of return across countries will be equalized through a process of .
A)margining accounts
B)transaction transference
C)arbitrage
D)equalization of costs
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Chapter 23: Corporate Restructuring
Available Study Resources on Quizplus for this Chatper
75 Verified Questions
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Sample Questions
Q1) A form of business combination in which two (unaffiliated) companies contribute financial and/or physical assets, as well as personnel, to a new company to engage in some economic activity is known as a .
A)joint venture
B)conglomerate merger
C)merger
D)consolidation
Q2) The most correct method of valuing a merger candidate is:
A)adjusted book value method
B)discounted cash flow method
C)pooling of interests method
D)comparative price-earnings ratio method
Q3) An alternative to a spin-off is a(n) which allows a large company to capture the value of a high-growth business buried within the organization.
A)equity carve out
B)holding company
C)tracking stock
D)stock synergy
Q4) A new takeover defense is boardmail.How does it work?
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