Course Introduction
Corporate Finance Review
Questions
Corporate Finance explores the financial decisions that businesses make to maximize shareholder value. The course covers fundamental concepts such as capital budgeting, capital structure, dividend policy, and financial analysis. Students learn how to evaluate investment opportunities, determine cost of capital, analyze financial statements, and understand the principles of risk and return. Emphasis is placed on both theoretical models and practical applications, enabling students to assess real-world corporate financial strategies and challenges faced by managers in a dynamic economic environment.
Recommended Textbook
Foundations of Finance 8th Edition by Arthur J. Keown
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17 Chapters
2473 Verified Questions
2473 Flashcards
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Page 2
Chapter 1: An Introduction to the Foundations of Financial Management
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Sample Questions
Q1) Short-term United States Treasury Bills are widely used as proxies for risk-free assets,yet the returns on these T-bills are consistently greater than zero.Is this consistent with the concept of a risk-return tradeoff?
Answer: Yes.Investors also require a return for delaying consumption as well as a return for taking on risk.
Q2) The expected return on a riskless asset is greater than zero due to
A)an expected return for delaying consumption.
B)an expected return for opportunity costs.
C)an expected return for taxes.
D)irrational investors who believe risk is always present.
Answer: A
Q3) Maximization of shareholder wealth
A)represents a zero sum game in which one corporation gains at the expense of others. B)provides benefits to society as scarce resources are directed to their most productive use.
C)is not a practical goal since it cannot be measured effectively.
D)is achieved only if cash flows exceed accounting profits.
Answer: A
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Chapter 2: The Financial Markets and Interest Rates
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152 Verified Questions
152 Flashcards
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Sample Questions
Q1) Investment banking firms offer to facilitate the sale of securities to the public in a variety of ways.Which of the following methods guarantees the corporation with a pre-determined price for the securities?
A)a best efforts basis
B)a commission basis
C)a competitive bid
D)an underwriting
Answer: D
Q2) Suppose the following rates are averages for banks in your area: interest checking accounts pay 1%,savings accounts pay 2%,and one-year certificates of deposit pay 3%.All accounts are federally insured by the FDIC.The difference in rates can be explained mainly by
A)liquidity premiums.
B)default risk premiums.
C)maturity premiums.
D)inflation risk premiums.
Answer: A
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Chapter 3: Understanding Financial Statements and Cash Flows
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Sample Questions
Q1) Which of the following statements about Generally Accepted Accounting Principles (GAAP)is NOT true?
A)GAAP is a set of rule-based accounting standards established by the Financial Accounting Standards Board (FASB).
B)GAAP sets out the standards,conventions,and rules that accountants must follow when preparing audited financial statements.
C)GAAP is complex,providing more than 150 "pronouncements" as to how to account for different types of transactions.
D)All of the statements above are true.
Answer: D
Q2) All of the following statements about balance sheets are true EXCEPT
A)Assets - Liabilities = Shareholders' Equity.
B)assets are reported at historical cost.
C)balance sheets show average asset balances over a one-year period.
D)a balance sheet reports a company's financial position at a specific point in time.
Answer: C
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5
Chapter 4: Evaluating a Firms Financial Performance
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Sample Questions
Q1) In addition to the information contained in Table 4-4,you know that the current ratio for 2010 is 4 and that the corporation paid $11,600 in dividends in 2010.What is Wes Donnell's total asset balance for 2010?
A)$42,500
B)$36,500
C)$38,500
D)$26,900
Q2) If company A has a lower average collection period than company B,then company A will have a higher accounts receivable turnover.
A)True
B)False
Q3) Based on the information in Table 4-1,the accounts receivable turnover is A)10.00.
B)11.11.
C)8.11.
D)9.50.
Q4) How could an analyst determine whether a company's ratio is good or bad?
Q5) Discuss five limitations to ratio analysis.
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) How much would you be willing to pay (rounded to the nearest dollar)for a 20-year annuity due if the payments are $4,500 per year and you want to earn a rate of return equal to 5.5% per year?
A)$84,500
B)$63,445
C)$56,734
D)$53,777
Q2) You have just purchased a share of preferred stock for $50.00.The preferred stock pays an annual dividend of $5.50 per share forever.What is the rate of return on your investment?
A)0.055
B)0.010
C)0.110
D)0.220
Q3) The same underlying formula is used for computing both the future value and present value.
A)True
B)False
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7
Chapter 6: The Meaning and Measurement of Risk and Return
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Sample Questions
Q1) Green Company stock has a beta of 2 and a required return of 23%,while Gold Company stock has a beta of 1.0 and a required return of 14%.The standard deviation of returns for Green Company is 10% more than the standard deviation for Gold Company.The expected return on the market portfolio according to the CAPM is A)9%.
B)10%.
C)12%.
D)14%.
Q2) Anchor Incorporated has a beta of 1.0.If the expected return on the market is 15%,what is the expected return on Anchor Incorporated's stock?
A)15%
B)14%
C)18%
D)cannot be determined without the risk free rate
Q3) According to the CAPM,for each unit of Beta an asset's required rate of return increases by the market's return.
A)True
B)False
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Chapter 7: The Valuation and Characteristics of Bonds
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Sample Questions
Q1) Federal regulations make it impossible for rating agencies to drop a company's credit rating more than two notches at a time in order to prevent panic in bond markets.
A)True
B)False
Q2) Junk bonds typically have an interest rate of between 3 and 5 percent more than AAA-rated long-term debt.
A)True B)False
Q3) A bond rating of "BB" indicates that the company's financial position is above average and hence the default risk on the bonds is very low.
A)True
B)False
Q4) If the market price of a bond decreases,then
A)the yield to maturity decreases.
B)the coupon rate increases.
C)the yield to maturity increases.
D)the coupon rate decreases.
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Chapter 8: The Valuation and Characteristics of Stock
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Sample Questions
Q1) Bensen Co.paid a dividend of $5.25 on its common stock yesterday.The company's dividends are expected to grow at a constant rate of 8.5% indefinitely.The required rate of return on this stock is 15.5%.You observe a market price of $78.50 for the stock.Should you purchase this stock?
A)No,the market price is above the intrinsic value of the stock.
B)Yes,the market price is below the intrinsic value of the stock.
C)No,the growth rate in dividends is too far below the required return.
D)Yes,but only if you can keep the stock for at least 5 years.
Q2) How is preferred stock similar to common stock?
A)Preferred dividend payments usually have unlimited growth potential.
B)Investors cannot sue a corporation for the non-payment of dividends.
C)Both preferred and common stockholders have voting control of a firm.
D)Preferred stock dividends and common stock dividends are fixed.
Q3) Because common stock represents a residual interest in the corporation,the value of common stock is equal to the total firm value less the firm's outstanding debt.
A)True
B)False
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) The after-tax cost of equity equals one minus the marginal tax rate times the required rate of return on common stock.
A)True
B)False
Q2) Blammo,Inc.has a target capital structure of 30% debt and 70% equity.The firm is planning to invest in a project that will necessitate raising new capital.New debt will be issued at a before-tax yield of 14%,with a coupon rate of 10%.The equity will be provided by internally generated funds so no new outside equity will be issued.If the required rate of return on the firm's stock is 22% and its marginal tax rate is 35%,compute the firm's cost of capital.
A)18.00%
B)18.13%
C)19.68%
D)15.55%
Q3) Toto and Associates' preferred stock is selling for $27.50 a share.The firm nets $25.60 after issuance costs.The stock pays an annual dividend of $3.00 per share.What is the cost of existing,and new,preferred stock respectively?
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Page 11
Chapter 10: Capital-Budgeting Techniques and Practice
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Sample Questions
Q1) A project's net present value profile shows how sensitive the project is to the choice of a discount rate.
A)True
B)False
Q2) Lithium,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Lithium,Inc.'s required rate of return for these projects is 10%.The modified internal rate of return for Project B is
A)17.84%.
B)18.52%.
C)19.75%.
D)22.80%.
Q3) When reviewing the net present profile for a project
A)the higher the discount rate,the higher the NPV.
B)the higher the discount rate,the higher the IRR.
C)the IRR will always be a point on the horizontal axis line where NPV = 0.
D)the IRR will always be a point on the horizontal axis equal to the required return.
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Page 12
Chapter 11: Cash Flows and Other Topics in Capital Budgeting
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Sample Questions
Q1) An opportunity cost is a relevant incremental cost for capital budgeting decisions. A)True
B)False
Q2) Toyota's capital budgeting analysis for the Prius,a gas-electric hybrid,was faulty because the car line has not made a profit to date.
A)True
B)False
Q3) Which of the following is NOT an acceptable method of measuring risk for capital budgeting purposes?
A)modified internal rate of return
B)sensitivity analysis
C)using a risk-adjusted discount rate
D)proxy,or pure play method for estimating a project's beta
Q4) In a replacement decision,the initial outlay is equal to the cost of the new asset less the reduction in depreciation from elimination of the old asset.
A)True
B)False
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Chapter 12: Determining the Financing Mix
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Sample Questions
Q1) Premium Lodging,Inc.,is financed entirely with 3 million shares of common stock selling for $50 a share.Capital of $10 million is needed for this year's capital budget.Additional funds can be raised with new stock (ignore dilution)or with 11 percent 12-year bonds.Premium Lodging's tax rate is 35 percent. a.Calculate the financing plan's EBIT indifference point.
b. The expected level of EBIT is $10,320,000 with a standard deviation of $2,000,000. What is the probability that EBIT will be above the indifference point?
c. Does the "indifference point" calculated in question (a) above truly represent a point where stockholders are indifferent between stock and debt financing? Explain your answer.
Q2) Operating leverage contributes ultimately to the variability of a firm's earnings per share.
A)True
B)False
Q3) In break-even analysis,semivariable costs are segregated into their fixed and variable components over the relevant range of output.
A)True
B)False
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Page 14
Chapter 13: Dividend Policy and Internal Financing
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Sample Questions
Q1) AFB,Inc.declared a dividend of $2 per share,which was an increase of 25% from the prior year,yet AFB,Inc.stock declined by 3% the day of the announcement.DAS,Inc.declared a dividend of $2 per share,which was the same as the prior year,and its stock increased in value by 2% on the day of the announcement.These events could be most readily explained by the
A)information effect.
B)clientele effect.
C)expectations theory.
D)residual dividend theory.
Q2) Dividends per share divided by earnings per share equal the dividend payout ratio. A)True
B)False
Q3) All of the following may influence a firm's dividend payment EXCEPT A)investment opportunities.
B)investor transaction costs.
C)common stock par value.
D)flotation costs.
Q4) Describe the types of dividend policies that corporations frequently use.Which is most common? Why?
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Chapter 14: Short-Term Financial Planning
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Sample Questions
Q1) Which of the following is a spontaneous source of financing?
A)accrued expenses
B)notes payable
C)common stock
D)paid-in-capital
Q2) The key ingredient in a firm's financial planning is an accurate sales forecast.
A)True
B)False
Q3) The percent of sales method provides a more detailed plan for future financing needs than the cash budget because both pro forma income statements and balance sheets are used in the analysis.
A)True
B)False
Q4) Budgets should not be used for performance evaluation because there is too much uncertainty involved and this makes it unfair to the person being evaluated.
A)True
B)False
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Chapter 15: Working-Capital Management
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Sample Questions
Q1) The risk of illiquidity is increased if either cash and marketable securities are decreased,or if the firm relies more heavily of long-term debt.
A)True
B)False
Q2) Which of the following is NOT a source of unsecured short-term credit?
A)trade credit
B)a line of credit
C)floating lien
D)commercial paper
Q3) The effective cost to the borrower of an unsecured bank loan is increased if a compensating balance is required.
A)True
B)False
Q4) In a chattel mortgage,specific items of inventory are identified in the security agreement.
A)True
B)False
Q5) Discuss the similarities and differences between a line of credit and a revolving credit agreement.
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Chapter 16: International Business Finance
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Sample Questions
Q1) WSM Wine Importers,Inc.purchased 75,000 cases of French wine at a cost of 6,000,000 Euros.If the current exchange rate is 0.7576 Euros to the U.S.dollar,what is the purchase price of the wine in U.S.dollars?
A)$9,684,148
B)$9,328,651
C)$8,350,012
D)$ 7,919,747
Q2) Which of the following is true regarding the correct price of the forward contract?
A)If the quote is less than the computed price,the forward contract is undervalued.
B)If the quote is greater than the computed price,the forward contract is overvalued.
C)Both A and B.
D)Neither A nor B.
Q3) The current direct quote in New York is .01075 dollars per yen.Suppose the current direct quote in Tokyo is 91 yen per dollar.What is the appropriate indirect quote in New York? What will arbitrageurs do to eliminate the differential rates in these markets?
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Page 18
Chapter 17: Cash,receivables,and Inventory Management
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Sample Questions
Q1) Generally,the least important motive for holding liquid assets for a typical company is the speculative motive.
A)True
B)False
Q2) SteelCo Production,Inc.is considering the use of a lock-box collection system.SteelCo's average check receipt is $1,350.The company invests excess cash in money market certificates and receives an average of 3.5% annual interest.The lock-box system will speed up SteelCo's collections by 2.5 days.What is the maximum per check processing cost that SteelCo should be willing to pay for the lock-box system?
A)$0.1871
B)$0.2987
C)$0.3236
D)$0.4519
Q3) Accounts receivable is an asset representing sales made on credit.
A)True
B)False
Q4) The EOQ model assumes constant demand and constant unit price.
A)True
B)False
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