Corporate Finance
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Course Introduction
Corporate Finance explores the fundamental principles and practices related to financial management within corporations. The course covers topics such as capital budgeting, capital structure, cost of capital, financial planning, working capital management, and valuation of investment opportunities. Students will learn how financial managers make strategic decisions to maximize firm value, allocate resources efficiently, and assess risks and returns associated with various financing options. Emphasis is placed on understanding both theoretical frameworks and real-world applications, equipping students with the tools needed to analyze financial statements, manage corporate funds, and make informed investment and financing decisions.
Recommended Textbook
Foundations of Finance 9th Edition by Arthur J. Keown
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17 Chapters
2570 Verified Questions
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Chapter 1: An Introduction to the Foundations of Financial Management
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Sample Questions
Q1) Shareholders react to poor investment or dividend decisions by causing the total value of the firm's stock to fall,and they react to good decisions by bidding the price of the stock up.
A)True
B)False
Answer: True
Q2) John invested $1,000 in a risky investment and Bill invested $1,000 in a less risky investment.One year later,Bill's investment is worth $1,030.Which of the following statements is MOST correct?
A) If John's investment is worth less than $1,030, then John was irrational to invest in the risky project.
B) John's investment must be worth more than $1,030 because of the risk-return trade-off, given that John's investment was more risky.
C) If John's investment is worth more than $1,030, then Bill was irrational to invest in the less risky investment.
D) The worth of John's investment cannot be determined with the information given.
Answer: D
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Page 3
Chapter 2: The Financial Markets and Interest Rates
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Sample Questions
Q1) Stocks listed on the New York Stock Exchange must be traded exclusively on the NYSE in order to maintain the high standards set by the exchange.
A)True
B)False
Answer: False
Q2) Which of the following statements is MOST correct concerning flotation costs?
A) Flotation costs are the same for common stock, preferred stock and bonds because they reflect mainly printing costs and legal fees.
B) Flotation costs are generally higher for bonds rather than stocks because the dollar amounts involved are much higher, allowing for economies of scale.
C) Flotation costs as a percentage of gross proceeds increase as the size of the security issue increases.
D) Flotation costs are higher for common stocks than for preferred stocks and bonds due to the higher level of risk associated with owning common stock.
Answer: D
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4
Chapter 3: Understanding Financial Statements and Cash Flows
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Sample Questions
Q1) Which of the following accounts does NOT belong on the asset side of a balance sheet?
A) accounts receivable
B) marketable securities
C) cash
D) common stock
Answer: D
Q2) Based on the information in Table 3-1,calculate the amount of dividends paid by Jones Company in 2010 (no assets were disposed of during the year,and there was no change in interest payable or taxes payable).
A) $2,000
B) $2,500
C) $3,500
D) $4,000
Answer: A
Q3) Owners equity increases each period by the amount of the corporation's positive net cash flow.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Evaluating a Firms Financial Performance
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Sample Questions
Q1) Borrowing money causes a corporation's return on operating assets to decrease because of the interest that must be paid.
A)True
B)False
Q2) Based on the information in Table 4-2,the times interest earned ratio is
A) 11.48.
B) 5.25.
C) 4.88.
D) 8.65.
Q3) Beverly Corp.had total sales of $1,200,000 in 2010 (80 percent of its sales are credit).The company's gross profit margin is 25 percent,its ending inventory is $150,000,and its accounts receivable balance is $90,000.What additional amount of cash could the firm have generated if it had increased its inventory turnover ratio to 9.0 and reduced its average collection period to 28.21875 days?
Q4) All of the following will improve a firm's liquidity position EXCEPT
A) increase accounts receivable turnover.
B) increase inventory turnover.
C) increase the average collection period.
D) increase long-term debt and invest the money in marketable securities.
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) You have $25,000 in an investment account today.How much will be in the account in 30 years if the account earns (a)8% per year,(b)8% compounded semiannually,(c)8% compounded quarterly,(d)8% compounded monthly,and (e)8% compounded daily? Comment on the effect of more frequent compounding.
Q2) You have been accepted to study international economy at the European Central Bank (ECB)in Frankfurt.You will need $10,500 every 6 months (beginning today)for the next three years to cover tuition and living expenses.Mom and Dad have agreed to pay for your education,and want to make one deposit today in a bank account earning 6% interest,compounded semiannually.How much must they deposit now so that you can withdraw $10,500 at the beginning of each semester over the next 3 years?
A) $54,187
B) $55,797
C) $58,587
D) $56,639
Q3) When solving time value of money problems on a financial calculator,you must select the "end mode" when you enter the final year's cash flow.
A)True
B)False
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Chapter 6: The Meaning and Measurement of Risk and Return
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Sample Questions
Q1) The category of securities with the highest historical risk premium is
A) large company stocks.
B) small company stocks.
C) government bonds.
D) small company corporate bonds.
Q2) Which of the following statements is MOST correct concerning diversification and risk?
A) Diversification is mainly achieved by the selection of individual securities for each type of asset held in a portfolio.
B) Diversification is mainly achieved by the asset allocation decision, not the selection of individual securities within each asset category.
C) Large company stocks and small company stocks together in a portfolio lead to dramatic reductions in risk because their returns are negatively correlated.
D) Asset allocation is important for pension funds but not for individual investors.
Q3) Security A has an expected rate of return of 29.8 percent and a beta of 3.1.Security B has a beta of 1.70.If the Treasury bill rate is 5 percent,what is the expected rate of return for Security B?
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Page 8
Chapter 7: The Valuation and Characteristics of Bonds
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Sample Questions
Q1) If markets were entirely efficient (perfect),which of the following would we conclude?
A) There would be no inflation.
B) Book value would be the same as market value.
C) No firms would ever default on their bonds.
D) Market value and intrinsic value would be the same.
Q2) A $1,000 par value 14-year bond with a 10 percent coupon rate recently sold for $965.The yield to maturity is
A) 10.49%.
B) 10.00%.
C) 8.87%.
D) 6.50%.
Q3) A company with a bond rating of BBB is more likely to have which of the following qualities compared to a company with a bond rating of B?
A) greater reliance on equity financing
B) high variability in past earnings
C) little use of subordinated debt
D) small firm size
Q4) What are the three important elements of asset valuation?
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Chapter 8: The Valuation and Characteristics of Stock
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Sample Questions
Q1) How does internal growth versus the infusion of new capital affect the original shareholders?
Q2) An example of the growth factor in common stock is
A) acquiring a loan to fund an investment in Asia.
B) retaining profits in order to reinvest into the firm.
C) issuing new stock to provide capital for future growth.
D) two strong companies merging together to increase their economy of scale.
Q3) In terms of risk,preferred stock is safer than common stock because it has a prior claim on assets and income.
A)True
B)False
Q4) Bacon Signs Company preferred stock pays a perpetual annual dividend of 4.5% of its $100 par value.If investors' required rate of return on this stock is 12%,what is the value per share?
A) $37.50
B) $31.82
C) $8.50
D) $45.00
Q5) What provisions are available to protect a preferred stockholder?
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) Alarm Systems Corporation's preferred stock pays a dividend of $3.60 and sells for $28.00.Alarm Systems Corporation has a marginal tax rate of 35%.What is the cost of preferred financing?
Q2) Donner,Inc.will finance a proposed investment by issuing new securities while maintaining its optimal capital structure of 60% debt and 40% equity.The firm can issue bonds at a price of $950.00 before $15 flotation costs.The 10-year bonds will have an annual coupon rate of 8% and a face value of $1,000.The company can issue new equity at a before-tax cost of 16% and its marginal tax rate is 34%.What is the appropriate cost of capital to use in analyzing this project?
A) 3.63%
B) 8.77%
C) 9.97%
D) 11.81%
Q3) An increase in a corporation's marginal tax rate will decrease the corporation's cost of debt,but have no impact on its cost of preferred stock or cost of common equity.
A)True B)False
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Page 11
Chapter 10: Capital-Budgeting Techniques and Practice
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Sample Questions
Q1) Any project deemed acceptable using the discounted payback period will also be acceptable if using the traditional payback period.
A)True
B)False
Q2) The mutually exclusive project with the highest positive NPV will also have the highest IRR.
A)True
B)False
Q3) A project with a payback period of four years is acceptable as long as the company's target payback period is greater than or equal to four years.
A)True
B)False
Q4) Which of the following statements about the internal rate of return (IRR)is true?
A) It has the most conservative and realistic reinvestment assumption.
B) It never gives conflicting answers.
C) It fully considers the time value of money.
D) It is greater than the modified internal rate of return if the discount rate is higher than the IRR.
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Chapter 11: Cash Flows and Other Topics in Capital Budgeting
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Sample Questions
Q1) If a project uses an asset the corporation already owns,the cost of that asset for capital budgeting purposes is zero to reflect the advantage the project has over projects that require the purchase of new assets.
A)True
B)False
Q2) TRL,Inc.has spent $2,000,000 in nonrefundable engineering fees in contemplation of building a convention center and the additional costs to complete the project are $18,000,000.The present value of all benefits the center will produce in its lifetime are $19,000,000,so TRL should not build the convention center.
A)True
B)False
Q3) Since stockholders are able to reduce their exposure to risk by efficiently diversifying their holdings of securities,there is no reason for individual firms to seek diversification of their holdings of assets.
A)True
B)False
Q4) Give an example of an option to delay a project.Why might this be of value?
Q5) Give an example of an option to abandon a project.Why might this be of value?
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Chapter 12: Determining the Financing Mix
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Sample Questions
Q1) Corporations utilize external financing either because they do not have sufficient earnings to reinvest or they want to rebalance their capital structures.
A)True B)False
Q2) Break-even analysis is a short-term concept because,in the long run,all costs are variable.
A)True B)False
Q3) Operating leverage means financing a portion of a firm's earnings per share with debt.
A)True B)False
Q4) Describe the sources of business risk.
Q5) When is it useful or sometimes necessary to compute the break-even point in terms of sales dollars rather than units of output?
Q6) What are the three determinants of the volatility of a firm's earnings?
Q7) How do operating and financial leverage interact to affect the volatility of a firm's earnings per share?
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Chapter 13: Dividend Policy and Internal Financing
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Sample Questions
Q1) What managerial logic might lie behind a stock split or a stock dividend?
Q2) The president of Smith Brothers,Inc.wants a dividend policy that minimizes the likelihood of decreasing the company's dividend per share.Which of the following policies should the CEO select?
A) constant dividend payout ratio
B) stable dollar dividend per share
C) regular dividend plus a year-end extra
D) All policies have the same likelihood of a dividend decrease because dividend changes are dependent on changes in earnings.
Q3) Which of the following transactions will decrease a corporation's retained earnings?
A) The corporation declares and pays a $2 per share cash dividend.
B) The company completes a 2 for 1 stock split.
C) The company pays a 20% stock dividend.
D) Both A and C
Q4) A stock split is defined as a stock dividend exceeding 25%.
A)True
B)False
Q5) Identify some practical considerations that affect a firm's payout policy.
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Chapter 14: Short-Term Financial Planning
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Sample Questions
Q1) Potential sources of financing to support an increase in sales include all of the following EXCEPT
A) increase in the dividend payout ratio.
B) increase in spontaneous liabilities.
C) increase in accounts payable.
D) issuance of bonds and/or common stock.
Q2) If the sales growth rate is greater than zero,then the discretionary financing needed will also be greater than zero.
A)True
B)False
Q3) Forecasts of revenues and their related expenses are the basis on which firms forecast their future financing needs.
A)True
B)False
Q4) Discretionary financing needed is equal to the predicted change in total assets minus the change in retained earnings.
A)True
B)False
Q5) What is the percent of sales method of financial forecasting?
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Chapter 15: Working-Capital Management
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Sample Questions
Q1) What is the difference between a line of credit and a revolving credit agreement?
Q2) Trade credit appears on a company's balance sheet as accounts payable. A)True
B)False
Q3) Total assets must always equal the sum of temporary,permanent,and spontaneous sources of financing.
A)True
B)False
Q4) Short-term debt has a greater risk of illiquidity than long-term debt because it must be rolled over more frequently and its use creates more uncertainty concerning future interest rates.
A)True
B)False
Q5) Spontaneous sources of financing include
A) marketable securities.
B) wages payable.
C) accounts receivable.
D) common stock.
Q6) What is the hedging principle or principle of self-liquidating debt?
Page 17
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Chapter 16: International Business Finance
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Sample Questions
Q1) Exchange rate risk is the risk that exchange rates will be lower in the future than they are today.
A)True
B)False
Q2) The bid rate is the rate at which the bank buys the foreign currency from the customer by paying in home currency.
A)True
B)False
Q3) Forward contracts benefit only the customer due to a reduction in uncertainty.
A)True
B)False
Q4) Short-term daily fluctuations in exchange rates are caused by supply and demand conditions in the foreign exchange market.
A)True
B)False
Q5) The Eurodollar market is larger than any financial market in the United States.
A)True
B)False
Q6) What is a forward exchange rate?
Page 18
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Chapter 17: Cash,receivables,and Inventory Management
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Sample Questions
Q1) The objectives of a zero balance account system for the firm include
A) reduce disbursing float.
B) achieve better control over its cash payments.
C) increase cash balances in regional rather than national banks.
D) All of the above are correct.
Q2) Krause Precision Tools,Inc.will use an estimated 700,000 small processors in its manufacturing process next year.The carrying cost of processor inventory is $3.00 per unit and the cost of reordering processors is $100 per order.What is Krause's economic ordering quantity for small processors?
A) 6,340
B) 6,831
C) 7,118
D) 7,300
Q3) The EOQ model calculates the size of the firm's inventory given its expected usage,carrying costs,and ordering costs.
A)True
B)False
Q4) Describe the relationship between the firm's cash management program and the firm's risk of insolvency.
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