Corporate Finance
Test Bank
Course Introduction
Corporate Finance explores the principles and methods by which corporations make vital financial decisions, including the acquisition and allocation of funds, capital budgeting, risk assessment, and valuation. This course covers topics such as financial statement analysis, time value of money, capital structure, dividend policy, working capital management, and the use of financial markets for raising capital. Students will develop critical understanding of the tools and techniques used in corporate financial management to maximize firm value, while considering the impact of market forces, corporate governance, and ethical considerations.
Recommended Textbook
Principles of Finance 6th Edition by Scott Besley Eugene F. Brigham
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17 Chapters
1876 Verified Questions
1876 Flashcards
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Page 2
Chapter 1: An Overview of Finance
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42 Verified Questions
42 Flashcards
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Sample Questions
Q1) In the early 1900s,the investments arena was dominated by a small group of very wealthy investors and opulent corporations.
A)True
B)False
Answer: True
Q2) At the beginning of the twentieth century,for the most part,the only investments available to individual investors were corporate stocks and bonds;but,today,there are a significantly greater number of investment choices because investors' demands have changed.
A)True
B)False
Answer: False
Q3) During the depression era of the 1930s,the emphasis of managerial finance was developing sophisticated analytical models used to determine the liquidity and value of firms.
A)True
B)False
Answer: False
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Chapter 2: Financial Assets Instruments
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111 Verified Questions
111 Flashcards
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Sample Questions
Q1) Which of the following statements is correct?
A) A warrant is basically a long-term option that enables the holder to sell common stock back to the firm at an agreed upon price,at a specified time in the future.
B) Generally,warrants are distributed along with preferred stock in order to make the preferred stock less risky.
C) If a company issuing coupon paying debt wanted to reduce the cash outflows associated with the coupon payments,it could issue warrants with the debt to accomplish this.
D) One of the disadvantages of warrants to the issuing firm is that they can be detachable and can be traded separately from the debt with which they are issued.
E) Warrants are attractive to investors because when they are issued with stock,investors receive dividends on the warrants they own as well as on the underlying stock.
Answer: C
Q2) A financial asset is tangible;it is a physically observable and touchable item.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Financial Markets and the Investment Banking Process
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47 Verified Questions
47 Flashcards
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Sample Questions
Q1) If you purchase commercial paper that matures in 180 days from the issuing firm this transaction will take place in ____ markets and ____ markets.
A) capital;primary
B) capital;secondary
C) money;primary
D) money;secondary
Answer: C
Q2) ____ efficiency states that all information contained in past price movements only is fully reflected in the current market prices.
A) Weak-form
B) Semistrong-form
C) Strong-form
D) Economic Answer: A
Q3) One reason investment bankers form syndicates is to spread the risk of potential losses.
A)True
B)False
Answer: True
Page 5
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Chapter 4: Financial Intermediaries and the Banking System
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Sample Questions
Q1) While the Treasury collects most of its receipts through commercial banks,its expenditures (checks)are drawn upon
A) the Federal Reserve Board of Governors.
B) national banks.
C) Federal Reserve banks.
D) federal financing banks.
E) None of the above.
Q2) The percentage of financial assets held by individuals located in banks has doubled over the past thirty-five years.
A)True
B)False
Q3) The primary function of the Federal Reserve is economic stabilization through control of the level and growth of the money supply.
A)True
B)False
Q4) With 100 percent reserve banking,little or no lending is possible.
A)True
B)False
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Chapter 5: The Cost of Money Interest Rates
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65 Verified Questions
65 Flashcards
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Sample Questions
Q1) Which of the following statements is most correct? Other things held constant, A) the "liquidity preference theory" would generally lead to an upward sloping yield curve.
B) the "market segmentation theory" would generally lead to an upward sloping yield curve.
C) the "expectations theory" would generally lead to an upward sloping yield curve.
D) the yield curve under "normal" conditions should be horizontal (i.e. ,flat. )
E) a downward sloping yield curve would suggest that investors expect interest rates to increase in the future.
Q2) If the Fed increases the money supply interest rates will generally increase. A)True B)False
Q3) During recessions the demand for funds typically ____. A) increases
B) stays the same
C) decreases D) doubles
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Chapter 6: Business Organizations and the Tax Environment
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96 Verified Questions
96 Flashcards
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Sample Questions
Q1) The riskiness inherent in a firm's earnings per share (EPS)depends on both the types of projects the firm takes on and the manner in which the projects are financed.
A)True
B)False
Q2) In 2014,Craig and Kathy Koehler owned a small business which was held as a proprietorship in Kathy's name.They were thinking of incorporating if that would lower their total tax liability.The Koehlers expected the company to earn $100,000 before taxes next year.They planned to take out salaries of $45,000,and to reinvest the rest in the business.Their personal deductions total $8,150 and they will file a joint return for their personal income.(1)What is their expected total tax liability as a proprietorship? (2)As a corporation?
(3)Based on current taxes,should they incorporate?
A) $23,304.50;$14,675.00;Yes
B) $14,675.00;$13,427.50;Yes
C) $23,304.50;$13,427.50;Yes
D) $15,212.50;$23,450.00;No
E) $20,778.00;$23,450.00;No
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Page 8
Chapter 7: Analysis of Financial Statements
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123 Flashcards
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Sample Questions
Q1) The fixed charge coverage ratio recognizes that firms often lease equipment under contract and thus,some firms must meet more than just their scheduled interest payments out of earnings.Therefore,the fixed charge coverage is more inclusive than the TIE ratio.
A)True B)False
Q2) A firm has notes payable of $1,546,000,long-term debt of $13,000,000,and total interest expense of $1,300,000.If the firm pays 8 percent interest on its long-term debt,what rate of interest does it pay on its notes payable?
A) 8.2%
B) 13.1%
C) 16.8%
D) 18.0%
E) 15.3%
Q3) The times-interest-earned ratio is one indication of a firm's ability to meet both long-term and short-term obligations.
A)True B)False
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Chapter 8: Financial Planning and Control
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Sample Questions
Q1) The financial control phase of financial forecasting is concerned with implementing the financial plans,and with managing the feedback and adjustment process needed to ensure that the goals of the firm are pursued appropriately.
A)True
B)False
Q2) If firm A uses more operating leverage than firm B,firm A will probably have a greater percentage profit margin per unit than firm B,if both firms are otherwise identical and operating above their respective operating breakeven levels.
A)True
B)False
Q3) Other things held constant,if a firm is operating at a profit and then sales increase,the degree of operating leverage will decline.
A)True
B)False
Q4) 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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132 Verified Questions
132 Flashcards
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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) Disregarding risk,if money has time value,the future value of some amount of money always will be more than the amount originally invested,and the present value of some amount to be received in the future is always less than that future amount to be received.
A)True
B)False
Q3) The NPV method implicitly assumes that the rate at which cash flows can be reinvested is the required rate of return,whereas the IRR method implies that the firm has the opportunity to reinvest at the project's IRR.
A)True
B)False
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Page 11
Chapter 10: Valuation Concepts
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126 Flashcards
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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) If interest rates fall from 8 percent to 7 percent,which of the following bonds will have the largest percentage increase in its value?
A) A 10-year zero-coupon bond.
B) A 10-year bond with a 10 percent semiannual coupon.
C) A 10-year bond with a 10 percent annual coupon.
D) A 5-year zero-coupon bond.
E) A 5-year bond with a 12 percent annual coupon.
Q3) If interest rates remain below the coupon on a bond,the bond will sell at a premium right up through its maturity.The maturity value will include the bond's face value plus a maturity premium equal to the face value times the percentage of the bond's life during which it sold for a premium.
A)True
B)False
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Page 12
Chapter 11: Risk and Rates of Return
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104 Verified Questions
104 Flashcards
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Sample Questions
Q1) The correlation coefficient is a measure of the degree of relationship between two variables.
A)True
B)False
Q2) When considering stock and bond valuation models,we implicitly assume that the marginal investor is risk averse,which means that he or she requires a higher rate of return for a given level of risk than a risk neutral individual,other things held constant.
A)True
B)False
Q3) Because the market return represents the return on an average stock,that return carries risk with it.As a result,there exists a market risk premium which is the amount over and above the risk-free rate that is required to compensate an investor for assuming an average amount of risk.
A)True
B)False
Q4) Risk is the chance that the actual outcome is different from the expected outcome. A)True
B)False
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13
Chapter 12: The Cost of Capital
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Sample Questions
Q1) Even if a firm obtains all of its common equity from retained earnings,its MCC schedule might still increase if very large amounts of new capital are needed.
A)True
B)False
Q2) The investment opportunity schedule is a graph of the firm's investment opportunities ranked in order of the projects' expected rates of return.
A)True
B)False
Q3) Refer to Rollins Corporation.What is Rollins' cost of retained earnings using the bond-yield-plus-risk-premium approach?
A) 13.6%
B) 14.1%
C) 16.0%
D) 16.6%
E) 16.9%
Q4) Capital refers to items on the right-hand side of a firm's balance sheet. A)True B)False
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Chapter 13: Capital Budgeting
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Sample Questions
Q1) Any capital budgeting investment rule should depend solely on forecasted cash flows and the opportunity rate of return.The rule itself should not be affected by managers' tastes,the choice of accounting method,or the profitability of other independent projects.
A)True
B)False
Q2) In its most general sense,capital budgeting is concerned both with the demand for and the supply of funds for long-term investment.
A)True
B)False
Q3) Risky projects can be evaluated by discounting expected cash flows using a risk-adjusted discount rate.
A)True
B)False
Q4) A firm should never undertake an investment if accepting the project would cause an increase in the firm's required rate of return.
A)True
B)False
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Chapter 14: Capital Structure and Dividend Policy Decisions
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Sample Questions
Q1) If a firm adheres strictly to the residual dividend model,then if its optimal capital budget requires the use of all earnings for that year (along with new debt according to the optimal debt/total assets ratio),the firm should pay
A) No dividends except out of past retained earnings.
B) No dividends to common stockholders.
C) Dividends,in effect,out of a new issue of common stock.
D) Dividends by borrowing the money (debt).
E) Either c or d above could be used.
Q2) Business risk,which is the risk inherent in a firm's assets if it uses less than its optimal amount of debt,is one important influence in the capital structure decision.
A)True
B)False
Q3) Using more debt in the firm's capital structure
A) decreases the probability of filing for bankruptcy.
B) raises the riskiness of the firm's earnings stream.
C) generally leads to a lower expected rate of return.
D) none of the above.
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Page 16
Chapter 15: Working Capital Management
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174 Flashcards
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Sample Questions
Q1) Temporary current assets are assets used specifically to finance particular projects in the firm's capital budget.
A)True
B)False
Q2) Porta Stadium,Inc.has annual sales of $50,000,000.Its cost of goods sold equals 80 percent of sales,and the company keeps $10,000,000 of inventory on hand.On average,the firm has accounts receivable of $7,500,000.The firm buys all raw materials on credit,its trade credit terms are net 30 days,and it pays on time.The firm's managers are searching for ways to shorten the cash conversion cycle.If sales can be maintained at existing levels,but inventory can be lowered by $2,000,000 and accounts receivable lowered by $833,333,what will be the net change in the cash conversion cycle? Use a 360-day year.
A) +114 days
B) 114 days
C) +24 days
D) 24 days
E) 90 days
Q3) Net working capital is defined as current assets divided by current liabilities.
A)True
B)False
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Chapter 16: Investment and Securities
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102 Flashcards
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Sample Questions
Q1) The proportion of funds invested in various categories of assets,such as money market instruments,long-term debt,stocks,and real estate is referred to as
A) Investment portfolio summation.
B) Asset allocation.
C) Risk tolerance level.
D) Expected return.
E) None of the above.
Q2) The total value of a firm's stock which can be computed by multiplying the number of shares outstanding by the market price per share is called what?
A) Market weighted
B) Market capitalization
C) Market beta
D) Market return
Q3) When an investor places a stop order,he or she is telling the broker to "stop" an order that was placed previously but hasn't been executed yet.
A)True
B)False
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Chapter 17: Investment Analysis and Valuation Techniques
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108 Flashcards
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Sample Questions
Q1) Davis Brothers Incorporated is an apparel manufacturer that paid a $1.50 dividend yesterday.Analysts expect dividends to grow at a constant 20 percent per year for the next four years.From that point forward,dividends are expected to grow at a constant rate of 12 percent forever.The discount rate for a firm of this risk is 15 percent.What should be the current stock price?
A) $65.96
B) $58.23
C) $103.68
D) $73.07
E) $106.79
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) A business cycle is the measure of all the goods and services produced in the economy during a specific time period.
A)True
B)False
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