Corporate Finance
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Course Introduction
Corporate Finance explores the fundamental principles and practices governing financial decision-making within corporations. This course covers topics such as capital budgeting, capital structure, cost of capital, dividend policy, financial analysis, and risk management. Students will learn how firms raise and allocate resources, assess investment opportunities, and maximize shareholder value while balancing risk and return. Real-world case studies and analytical tools are used to develop a comprehensive understanding of the financial strategies organizations use to achieve their long-term objectives.
Recommended Textbook
Principles of Finance 6th Edition by Scott Besley
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17 Chapters
1889 Verified Questions
1889 Flashcards
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Chapter 1: An Overview of Finance
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Sample Questions
Q1) The study of finance consists of three areas financial markets, investments, and managerial finance that are basically independent of each other, because you can be an expert in one area without having knowledge of the other two.
A)True
B)False
Answer: False
Q2) A basic knowledge of finance will help you with your personal investments by helping you understand
A) how to accurately predict changes in the short term interest rates.
B) how to determine the optimal dividend policy for each firm.
C) how to determine which technology is most likely to be accepted by consumers.
D) how to review companies and industries to determine their prospects for future growth and the risk inherent in those companies and industries.
E) how to predict the growth in sales for the firm.
Answer: D
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Chapter 2: Financial Assets Instruments
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Sample Questions
Q1) A French firm is buying $1,000,000 of optical cable from a firm in the United States.The French firm will pay for the cable in thirty days.To protect itself from changes in the exchange rate between the Euro and dollar, the French firm enters into a futures contract to purchase $1,000,000 at a price of $1.25/ .How many Euros will it cost the French firm to purchase $1,000,000 using the futures contract?
A) 125,000,000
B) 2,500,000
C) 1,250,000
D) 1,000,000
E) 800,000
Answer: E
Q2) Which of the following is NOT a source of equity on a firm's balance sheet?
A) additional paid-in capital
B) retained earnings
C) common stock
D) property, plant, and equipment
Answer: D
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Chapter 3: Financial Markets and the Investment Banking Process
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Sample Questions
Q1) When stock in a closely held corporation is offered to the public for the first time the transaction is called "going public" and the market for such stock is called the initial public offering, or IPO, market.
A)True
B)False
Answer: True
Q2) The derivatives market allows for
A) investors to speculate on price movements.
B) the purchase corporate debt.
C) the hedging of exposure to price movements
D) two of the above
E) all of the above
Answer: D
Q3) If an individual investor buys and sells existing stocks through a broker, these are primary market transactions.
A)True
B)False
Answer: False
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Chapter 4: Financial Intermediaries and the Banking System
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Sample Questions
Q1) The Federal Reserve's most influential policy is its reserve requirement policy.
A)True
B)False
Q2) Suppose the reserve requirement for transaction deposits is 10% and it is 5% for nontransaction deposits.What is the total reserve requirement for a bank with total deposits equal to $800 million, if $600 million of these deposits are classified as transaction deposits?
A) $80 million
B) $60 million
C) $70 million
D) $100 million
E) None of the above.
Q3) Pension funds whose contributions are not large enough to actually cover the benefits to be paid out when all employees retire are termed
A) divested.
B) vested.
C) unfunded, or underfunded.
D) funded.
E) None of the above.
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Chapter 5: The Cost of Money Interest Rates
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Sample Questions
Q1) Your uncle would like to restrict his interest rate risk and his default risk, but he still would like to invest in corporate bonds.Which of the possible bonds listed below best satisfies your uncle's criteria?
A) AAA bond with 10 years to maturity.
B) BBB perpetual bond.
C) BBB bond with 10 years to maturity.
D) AAA bond with 5 years to maturity.
E) BBB bond with 5 years to maturity.
Q2) If the Federal Reserve sells $50 billion of short-term U.S.Treasury securities to the public, other things held constant, what will this tend to do to short-term security prices and interest rates?
A) Prices and interest rates will both rise.
B) Prices will rise and interest rates will decline.
C) Prices and interest rates will both decline.
D) Prices will decline and interest rates will rise.
E) There will be no changes in either prices or interest rates.
Q3) If the Fed increases the money supply interest rates will generally increase.
A)True
B)False
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Page 7
Chapter 6: Business Organizations and the Tax Environment
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Sample Questions
Q1) Although corporations only represent 18% of the number of businesses they account for about 82% of the dollar value of sales.
A)True
B)False
Q2) The text makes the point that due to competitive pressures and the continuing need of firms to attract capital, most socially beneficial but cost increasing actions will have to be made mandatory by government.
A)True
B)False
Q3) Most firms today use executive stock options, as opposed to other incentive methods, to induce management to act in the best interests of stockholders.
A)True
B)False
Q4) By maximizing the earnings of the firm we will ensure that the price per share of common stock is maximized, hence shareholders' wealth also will be maximized.
A)True B)False
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Chapter 7: Analysis of Financial Statements
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Sample Questions
Q1) Selzer Inc.sells all its merchandise on credit.It has a profit margin of 4 percent, days sales outstanding equal to 60 days, receivables of $150,000, total assets of $3 million, and a debt ratio of 0.64.What is the firm's return on equity (ROE)?
A) 7.1%
Q2) A decline in the inventory turnover ratio suggests that the firm's liquidity position is improving.
A)True
B)False
Q3) The inventory turnover ratio and days sales outstanding (DSO) are two ratios that can be used to assess how effectively the firm is managing its assets in consideration of current and projected operating levels.
A)True B)False
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Chapter 8: Financial Planning and Control
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Sample Questions
Q1) Refer to Trident Food Corporation.What is the degree of operating leverage for Trident Foods?
A) 2.78
B) 10.71
C) 3.86
D) 3.00
E) 4.00
Q2) Refer to Trident Food Corporation.How many units of inventory must Trident Foods sell if it wants to operate at its financial breakeven point?
A) 2,000
B) 500
C) 4,800
D) 2,280
E) 6,800
Q3) The closer a firm is to its operating breakeven point, the greater is the absolute value of the degree of operating leverage.
A)True
B)False
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Chapter 9: Time Value of Money
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Sample Questions
Q1) If you presently have $6,000 invested at a rate of 15 percent, how many years will it take for your investment to triple? (Round up to obtain a whole number of years if necessary.)
A) 2 years
B) 4 years
C) 6 years
D) 8 years
E) 10 years
Q2) Assume that you will receive $2,000 a year in Years 1 through 5, $3,000 a year in Years 6 through 8, and $4,000 in Year 9, with all cash flows to be received at the end of the year.If you require a 14 percent rate of return, what is the present value of these cash flows?
A) $9,851
B) $13,250
C) $11,714
D) $15,129
E) $17,353
Q3) The effective annual rate of 5% compounded monthly is approximately 5.12%.
A)True
B)False
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Chapter 10: Valuation Concepts
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Sample Questions
Q1) The coupon rate and the required rate for a specific issue of bonds, such as IBM's 7% bonds that were issued in 2011, both vary over time as economic factors change.
A)True
B)False
Q2) A share of stock has a dividend of D<sub>0</sub> = $5.The dividend is expected to grow at a 20 percent annual rate for the next 10 years, then at a 15 percent rate for 10 more years, and then at a long-run normal growth rate of 10 percent forever.If investors require a 10 percent return on this stock, what is its current price?
A) $100.00
B) $82.35
C) $195.50
D) $212.62
E) The data given in the problem are internally inconsistent, i.e., the situation described is impossible in that no equilibrium price can be produced.
Q3) A newly issued bond generally sells at, or very close to, its par value.
A)True
B)False
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Page 12
Chapter 11: Risk and Rates of Return
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Sample Questions
Q1) We will generally find that the beta of a diversified portfolio is more stable over time than the beta of a single security.
A)True
B)False
Q2) Which of the following statements is most correct?
A) A portfolio with a beta of minus 2 has the same degree of risk to its holder, relative to the market, as a portfolio with a beta of plus 2.However, the holder of either portfolio could lower his or her risk exposure by buying some "normal" stocks.
B) A stock with a beta of 1.0 has zero systematic (or market) risk.
C) It is possible for a stock to have a positive beta even in situations where the correlation between the returns on it and those on another stock are negative.
D) Diversifiable risk, which is measured by beta, can be lowered by adding more stocks to a portfolio.
E) Statements a and c are both correct.
Q3) Risk is the chance that the actual outcome is different from the expected outcome.
A)True
B)False
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Page 13
Chapter 12: The Cost of Capital
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Sample Questions
Q1) Which of the following is not considered a capital component for the purpose of calculating the weighted average cost of capital as it applies to capital budgeting?
A) Long-term debt.
B) Common stock.
C) Short-term debt.
D) Preferred stock.
E) All of the above are considered capital components for WACC and capital budgeting purposes.
Q2) Retained earnings have no cost since the firm does not have to issue securities to raise retained earnings.
A)True
B)False
Q3) The cost of capital used to evaluate investment opportunities should be calculated as a weighted average of the various types of funds generally used, regardless of the specific financing used to fund a particular project.
A)True
B)False
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14
Chapter 13: Capital Budgeting
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Sample Questions
Q1) Capital budgeting decisions must be based on net income to determine if the investment is to create value for the firm.
A)True B)False
Q2) Assume the following: (1) A firm is considering two projects, one with a 5-year life and the other with a 10-year life; (2) the cash flows of the two projects are equally risky by all definitions of the word "risky"; (3) the company uses 40 percent debt and 60 percent equity to finance the projects; (4) the debt used to finance any given project has a maturity equal to the life of the project; and (5) the term structure of interest rates has a sharp upward slope.This would suggest, other things held constant, that a lower discount rate should be used to find the NPV for the 5-year project than for the 10-year project.
A)True B)False
Q3) The depreciable base of an asset includes the purchase price and any additional expenditures required to make the asset operational, including shipping and installation. A)True B)False
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Page 15
Chapter 14: Capital Structure and Dividend Policy Decisions
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Sample Questions
Q1) Business risk is the single most important determinant of a firm's capital structure.
A)True
B)False
Q2) The "Pure Modigliani and Miller Result" establishes, under restrictive assumptions, that the firm's stock price will be maximized if it uses virtually 100 percent debt.Which of the following real world conditions does the most to limit real world corporate debt-to-assets ratios to far less than 100 percent?
A) There are brokerage costs.
B) At high levels of debt revenues decline.
C) Investors can't really borrow at the same rate as corporations.
D) Interest rates increase as the debt-to-assets ratio rises.
E) Dividends are relevant in the real world.
Q3) Business risk depends on all of the following factors except ____.
A) sales variability
B) interest rates
C) input price variability
D) change in output prices
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16
Chapter 15: Working Capital Management
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Sample
Questions
Q1) For the Prince Company, the average age of accounts receivable is 60 days, the average age of accounts payable is 45 days, and the average age of inventory is 72 days.Assume a 360-day year.If Prince's annual sales are $936,000, what is the firm's average accounts receivable balance?
A) $104,000
B) $118,000
C) $156,000
D) $212,000
E) $260,000
Q2) Refer to Berkeley Prints.What would be the cost to Berkeley of the discounts taken?
A) $116,750
B) $108,750
C) $155,000
D) $225,000
E) $260,500
Q3) Working capital needs typically decline during recessions and increase during booms in the economy.
A)True
B)False
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Page 17
Chapter 16: Investment Concepts
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Sample Questions
Q1) An investor who short sells a stock will receive a margin call if the price of the stock decreases substantially.
A)True
B)False
Q2) When the market is rising, it is called a bull market.
A)True
B)False
Q3) A long-term investment strategy where investors purchase securities with the intent to keep them for a long period before liquidation is called
A) Speculation.
B) Shorting the stock.
C) Buy-and-hold.
D) Margin trading.
E) Option trading.
Q4) Speculators are investors who view investments as instruments that produce growth over a long period of time.
A)True
B)False
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Chapter 17: Security Valuation and Selection
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Sample Questions
Q1) Industries that include durable goods manufacturers generally are more sensitive to interest rate changes than industries that include staple goods firms.
A)True
B)False
Q2) The dividend discount model (DDM) cannot be used to value the stock of a company that has never paid a dividend and does not expect to pay a dividend in the near term.
A)True
B)False
Q3) Economists define a recession as a contraction in the economy in at least three out of the last five quarters.
A)True
B)False
Q4) Which of the following measures is included in the index of leading indicators?
A) prime rate at banks
B) average length of unemployment
C) money supply
D) manufacturing and trade sales
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