Corporate Finance
Test Bank
Course Introduction
Corporate Finance explores the fundamental concepts and analytical tools necessary to understand the financial decisions faced by corporations. The course examines topics such as capital budgeting, risk management, the cost of capital, financial statement analysis, capital structure, dividend policy, and valuation of projects and companies.
Students will learn how firms raise capital, allocate resources, and create value for shareholders while considering the implications of risk, return, and market efficiency.
Real-world case studies and practical applications are used to illustrate key principles, preparing students to make strategic financial decisions within a dynamic business environment.
Recommended Textbook
Principles of Managerial Finance Brief 7th Edition by Lawrence
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15 Chapters
2748 Verified Questions
2748 Flashcards
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Page 2
J. Gitman
Chapter 1: The Role of Managerial Finance
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134 Verified Questions
134 Flashcards
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Sample Questions
Q1) The financial manager must look beyond financial statements to obtain insight into developing or existing problems since the accrual accounting data do not fully describe the circumstances of a firm.
A)True
B)False
Answer: True
Q2) When considering a firm's financial decision alternative,financial managers should accept only those actions that are expected to maximize shareholder value.
A)True
B)False Answer: True
Q3) The primary economic principle used in managerial finance is ________.
A) purchase power parity
B) asset pricing theory
C) Porter's theory of five forces
D) marginal cost-benefit analysis
Answer: D
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Chapter 2: The Financial Market Environment
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91 Flashcards
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Sample Questions
Q1) The Securities Act of 1933 focuses on regulating the sale of securities in the primary market,whereas the 1934 Act deals with the regulations governing the transactions in the secondary market.
A)True
B)False
Answer: True
Q2) Dividends received by a corporation on an investment in the common and preferred stock of another corporation,where ownership in the dividend paying corporation is less than 20%,is subject to 70 percent exclusion for tax purposes.
A)True
B)False
Answer: True
Q3) The tax deductibility of various expenses such as general and administrative expenses ________.
A) increases their pretax cost
B) reduces their after-tax cost
C) has no effect on their after-tax cost
D) has an unpredictable effect on their after-tax cost
Answer: B
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Page 4
Chapter 3: Financial Statements and Ratio Analysis
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208 Flashcards
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Sample Questions
Q1) Which of the following is a fixed asset?
A) land
B) accounts payable
C) accruals
D) notes payable
Answer: A
Q2) In the DuPont system of analysis,the return on equity is equal to ________.
A) (net profit margin) × (total asset turnover)
B) (stockholders' equity) × (financial leverage multiplier)
C) (return on total assets) × (financial leverage multiplier)
D) (return on total assets) × (total asset turnover)
Answer: C
Q3) Nico Corporation has cost of goods sold of $300,000 and inventory of $30,000,then the inventory turnover is ________ and the average age of inventory is ________.
A) 36.5; 10
B) 10; 36.5
C) 36.0; 10
D) 30; 36.0
Answer: B
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Page 5
Chapter 4: Cash Flow and Financial Planning
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185 Flashcards
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Sample Questions
Q1) Of the following components of a cash budget,generally the easiest to estimate would be the ________.
A) cash sales
B) cash receipts
C) cash disbursements
D) month-to-month short-term borrowing
Q2) In the month of August,a firm had total cash receipts of $10,000,total cash disbursements of $8,000,depreciation expense of $1,000,a minimum cash balance of $3,000,and a beginning cash balance of $500.At the end of August,the firm ________.
A) required total financing of $500
B) had an excess cash balance of $5,500
C) had an excess cash balance of $500
D) required total financing of $2,500
Q3) The cash flows from operating activities section of the statement of cash flows includes ________.
A) labor expense
B) proceeds from the sale of fixed assets
C) principal paid
D) dividends paid
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Page 6
Chapter 5: Time Value of Money
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172 Flashcards
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Sample Questions
Q1) The rate of interest agreed upon contractually charged by a lender or promised by a borrower is the ________ interest rate.
A) effective
B) nominal
C) discounted
D) continuous
Q2) Calculate the future value of an annuity of $5,000 each year for eight years,deposited at 6 percent.
Q3) Last Christmas,Danny received an annual bonus of $1,500.These annual bonuses are expected to grow by 5 percent for the next 5 years.How much will Danny have at the end of the fifth year if he invests his Christmas bonuses (including the most recent bonus)in a project paying 8 percent per year?
Q4) The future value of $200 received today and deposited at 8 percent for three years is
A) $248
B) $252
C) $158
D) $200
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Chapter 6: Interest Rates and Bond Valuation
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223 Flashcards
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Sample Questions
Q1) In the valuation process,the higher the risk,the greater is the required return.
A)True
B)False
Q2) The inflation risk premium on a bond is 2 percent,the U.S.T-bill rate is 5 percent,the maturity risk premium on the bond is 3 percent,the default risk premium on the bond is 2 percent,and the liquidity risk premium on the bond is 1 percent.Calculate its nominal rate of return.
A) 16%
B) 13%
C) 11%
D) 9%
Q3) Bonds are ________.
A) a series of perpetual short-term debt instruments
B) a form of equity financing that pays interest
C) long-term debt instruments used to raise large sums of money
D) a hybrid form of financing used to raise large sums of money from a diverse group of lenders
Q4) The lower a bond's default risk,the higher is the interest rate.
A)True
B)False
Page 8
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Chapter 7: Stock Valuation
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Sample Questions
Q1) A firm has the balance sheet accounts,Common Stock and Paid-in Capital in Excess of Par,with values of $10,000 and $250,000,respectively.The firm has 10,000 common shares outstanding.If the firm had a par value of $1,the stock originally sold for
A) $24/share
B) $25/share
C) $26/share
D) $30/share
Q2) A firm has an outstanding issue of 1,000 shares of preferred stock with a $100 par value and an 8 percent annual dividend.The firm also has 5,000 shares of common stock outstanding.If the stock is cumulative and the board of directors has passed the preferred dividend for the prior two years,how much must the preferred stockholders be paid prior to paying dividends to common stockholders at the end of third year?
A) $ 8,000
B) $16,000
C) $24,000
D) $25,000
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Page 9
Chapter 8: Risk and Return
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Sample Questions
Q1) On average in U.S.,during the past 75 years,the return on U.S.Treasury bills has exceeded the return on long-term government bonds.
A)True
B)False
Q2) The interest rate risk associated with Treasury bonds is much higher than with bills.
A)True
B)False
Q3) The portion of an asset's risk that is attributable to firm-specific,random causes is called ________.
A) unsystematic risk
B) nondiversifiable risk
C) market risk
D) political risk
Q4) The higher an asset's beta,________.
A) the more responsive it is to changing market returns
B) the less responsive it is to changing market returns
C) the higher the expected return will be in a down market
D) the lower the expected return will be in an up market
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) Generally,the order of cost,from the least expensive to the most expensive,for long-term capital of a corporation is ________.
A) new common stock, retained earnings, preferred stock, long-term debt
B) common stock, preferred stock, long-term debt, short-term debt
C) preferred stock, new common stocks, common stock, retained earnings
D) long-term debt, preferred stock, retained earnings, new common stock
Q2) The cost of capital reflects the cost of funds ________.
A) that makes the net present value of a project equal zero
B) at a given point in time
C) over a long-run time period
D) at current book values
Q3) The weighted average cost of capital refers to the cost of capital required for one additional dollar of financing.
A)True
B)False
Q4) The marginal cost of capital is a relevant cost of capital for evaluating a firm's future investment opportunities.
A)True
B)False
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Chapter 10: Capital Budgeting Techniques
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Sample Questions
Q1) The payback period of a project that costs $1,000 initially and promises after-tax cash inflows of $300 each year for the next three years is 0.333 years.
A)True
B)False
Q2) The purchase of additional physical facilities,such as additional property or a new factory,is an example of a capital expenditure.
A)True
B)False
Q3) The IRR method assumes the cash flows are reinvested at the internal rate of return rather than the required rate of return.
A)True
B)False
Q4) In general,projects with similar-sized investments and lower cash inflows in the early years tend to be preferred at higher discount rates.
A)True
B)False
Q5) Which projects should the firm implement? (See Table 10.5)
Q6) Use the NPV approach to select the best group of projects.(See Table 10.5)
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Chapter 11: Capital Budgeting Cash Flows and Risk
Refinements
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Sample Questions
Q1) For Proposal 2,the tax effect on the sale of the existing asset at the end of the fifth year results in ________.(See Table 11.2)
A) $12,000 tax liability
B) $14,560 tax liability
C) $25,280 tax liability
D) $16,600 tax liability
Q2) Calculate the incremental earnings before depreciation and taxes.(See Table 11.4)
Q3) The risk-adjusted discount rate can be computed as the risk free rate plus the product of a project's beta and the credit risk premium.
A)True
B)False
Q4) When evaluating a capital budgeting project,installation costs of a new machine must be considered as part of ________.
A) the operating cash inflows
B) the initial investment
C) the incremental operating cash inflows
D) the operating cash outflows
Q5) Given the information in Table 11.4,compute the initial investment.
Page 13
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Chapter 12: Leverage and Capital Structure
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Sample Questions
Q1) The pecking order explanation of capital structure states that a hierarchy of financing exists for firms,in which new external debt financing is employed first,followed by retained earnings and finally by external equity financing.
A)True
B)False
Q2) The optimal capital structure is the one that balances ________.
A) return and risk factors in order to maximize profits
B) return and risk factors in order to maximize earnings per share
C) return and risk factors in order to maximize market value
D) return and risk factors in order to maximize dividends
Q3) Which plan has a higher degree of financial leverage and financial risk? (See Table 12.1)
Q4) The lower risk nature of long-term debt in a firm's capital structure is due to the fact that ________.
A) the debt holders are the true owners of the firm
B) equity capital has a fixed return
C) creditors have a higher position in the priority of claims
D) dividend payments are tax-deductible
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Page 14
Chapter 13: Payout Policy
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Sample Questions
Q1) According to the bird-in-the-hand argument,current dividend payments reduce investor uncertainty and result in a higher value for a firm's stock.
A)True
B)False
Q2) At a firm's quarterly dividend meeting held April 9,the directors declared a $0.50 per share cash dividend for the holders of record on Monday,May 1.The firm's stock will sell ex dividends on ________.
A) April 28
B) May 5
C) April 29
D) April 27
Q3) By purchasing shares through a firm's dividend reinvestment plan (or DRIP),shareholders typically can acquire shares at a value that is below the prevailing market price.
A)True
B)False
Q4) Rapidly growing firms pay high dividends to shareholders.
A)True
B)False
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Chapter 14: Working Capital and Current Assets Management
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Sample Questions
Q1) The basic strategies that should be employed by a business firm in managing cash includes ________.
A) paying accounts payable as early as possible
B) turning over inventory as quickly as possible, avoiding stockouts
C) operating in a fashion that requires maximum cash
D) extending the credit period allowed to customers
Q2) Net working capital is defined as ________.
A) total assets minus total liabilities
B) total liabilities minus total assets
C) current liabilities minus current assets
D) current assets minus current liabilities
Q3) Playing the float involves the strategic use of mailing points and bank accounts to lengthen mail float and clearing float,respectively.
A)True
B)False
Q4) As firms are unable to match cash inflows to outflows with certainty,most of them need current liabilities.
A)True
B)False
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Chapter 15: Current Liabilities Management
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170 Flashcards
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Sample Questions
Q1) Pledges of accounts receivable are made on ________ basis,respectively.
A) a nonrecourse and a notification
B) a nonnotification and a notification
C) a notification and a recourse
D) a notification and a nonrecourse
Q2) Factoring accounts receivable is not a form of secured short-term borrowing.It entails the sale of accounts receivable at a discount to obtain the required short-term funds.
A)True
B)False
Q3) A line of credit is an agreement between a commercial bank and a business,specifying the amount of unsecured short-term borrowing the bank will make available to the firm over a given period of time.
A)True
B)False
Q4) Tina's Apple Company would like to manufacture and market a new packaging.Tina's has sold an issue of commercial paper for $1,500,000 and maturity of 90 days to finance the new project.Compute the annual interest rate on the issue of commercial paper if the value of the commercial paper at maturity is $1,650,000 (assuming 360 days in a year).
Page 17
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