Corporate Finance
Test Preparation
Course Introduction
Corporate Finance explores the fundamental principles and practices surrounding the financial management of organizations. This course covers key topics such as capital budgeting, risk and return analysis, cost of capital, funding sources, capital structure decisions, dividend policy, and working capital management. Students will learn to evaluate investment opportunities, assess financial performance, and make informed decisions that create value for shareholders. Emphasis is placed on both theoretical frameworks and real-world applications, equipping students with the analytical tools necessary to address financial challenges faced by businesses in dynamic environments.
Recommended Textbook
Fundamentals of Financial Management 15th Edition by Eugene F. Brigham
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21 Chapters
1827 Verified Questions
1827 Flashcards
Source URL: https://quizplus.com/study-set/3546
Page 2
Chapter 1: An Overview of Financial Management
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65 Verified Questions
65 Flashcards
Source URL: https://quizplus.com/quiz/131698
Sample Questions
Q1) In most corporations,the CFO ranks under the CEO.
A)True
B)False
Answer: True
Q2) If a corporation elects to be taxed as an S corporation,then both it and its stockholders can avoid all Federal taxes.This provision was put into the Federal Tax Code in order to encourage the formation of small businesses.
A)True
B)False
Answer: False
Q3) A stock's market price would equal its intrinsic value if all investors had all the information that is available about the stock.In this case the stock's market price would equal its intrinsic value.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Financial Markets and Institutions
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33 Verified Questions
33 Flashcards
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Sample Questions
Q1) A publicly owned corporation is a company whose shares are held by the investing public,which may include other corporations as well as institutional investors.
A)True
B)False
Answer: True
Q2) Financial institutions are more diversified today than they were in the past,when federal laws kept investment banks,commercial banks,insurance companies,and similar organizations quite separate.Today the larger financial services corporations offer a variety of services,ranging from checking accounts,to insurance,to underwriting securities,to stock brokerage.
A)True
B)False
Answer: True
Q3) A weighted average of those returns,using each stock's total market value,is then calculated,and that average return is often used as an indicator of the "return on the market."
A)True
B)False
Answer: True
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Page 4
Chapter 3: Financial Statements,cash Flow and Taxes
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138 Verified Questions
138 Flashcards
Source URL: https://quizplus.com/quiz/131700
Sample Questions
Q1) Your corporation has the following cash flows: \[\begin{array} { l r }
\text { Operating income } & \$ 250,000 \\
\text { Interest received } & \$ 10,000 \\
\text { Interest paid } & \$ 45,000 \\
\text { Dividends received } & \$ 17,000 \\
\text { Dividends paid } & \$ 50,000 \end{array}\]
?
If the applicable income tax rate is 40% (federal and state combined),and if 70% of dividends received are exempt from taxes,what is the corporation's tax liability?
A) $87,160
B) $88,040
C) $80,116
D) $108,289
E) $77,475
Answer: B
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Chapter 4: Analysis of Financial Statements
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133 Flashcards
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Sample Questions
Q1) Quigley Inc.is considering two financial plans for the coming year.Management expects sales to be $300,000,operating costs to be $265,000,assets (which is equal to its total invested capital)to be $200,000,and its tax rate to be 35%.Under Plan A it would finance the firm using 25% debt and 75% common equity.The interest rate on the debt would be 8.8%,but under a contract with existing bondholders the TIE ratio would have to be maintained at or above 5.5.Under Plan B,the maximum debt that met the TIE constraint would be employed.Assuming that sales,operating costs,assets,total invested capital,the interest rate,and the tax rate would all remain constant,by how much would the ROE change in response to the change in the capital structure? Do not round your intermediate calculations.
A) 1.04%
B) 1.32%
C) 1.52%
D) 1.11%
E) 1.13%
Q2) High current and quick ratios always indicate that the firm is managing its liquidity position well.
A)True
B)False
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Chapter 5: Time Value of Money
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163 Verified Questions
163 Flashcards
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Sample Questions
Q1) You deposit $825 today in a savings account that pays 6% interest,compounded annually.How much will your account be worth at the end of 25 years?
A) $4,213.54
B) $4,001.10
C) $3,965.69
D) $3,540.79
E) $3,257.53
Q2) Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.
A)True
B)False
Q3) You plan to borrow $47,400 at a 7.5% annual interest rate.The terms require you to amortize the loan with 7 equal end-of-year payments.How much interest would you be paying in Year 2?
A) $2,520.35
B) $2,835.40
C) $2,992.92
D) $3,150.44
E) $3,623.01
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Page 7
Chapter 6: Interest Rates
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Sample Questions
Q1) The real risk-free rate of interest is expected to remain constant at 3% for the foreseeable future.However,inflation is expected to increase steadily over the next 30 years,so the Treasury yield curve has an upward slope.Assume that the pure expectations theory holds.You are also considering two corporate bonds,one with a 5-year maturity and one with a 10-year maturity.Both have the same default and liquidity risks.Given these assumptions,which of these statements is CORRECT?
A) Since the pure expectations theory holds,the 10-year corporate bond must have the same yield as the 5-year corporate bond.
B) Since the pure expectations theory holds,all 5-year Treasury bonds must have higher yields than all 10-year Treasury bonds.
C) Since the pure expectations theory holds,all 10-year corporate bonds must have the same yield as 10-year Treasury bonds.
D) The 10-year Treasury bond must have a higher yield than the 5-year corporate bond.
E) The 10-year corporate bond must have a higher yield than the 5-year corporate bond.
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Page 8
Chapter 7: Bonds and Their Valuation
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92 Verified Questions
92 Flashcards
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Sample Questions
Q1) Tucker Corporation is planning to issue new 20-year bonds.The current plan is to make the bonds non-callable,but this may be changed.If the bonds are made callable after 5 years at a 5% call premium,how would this affect their required rate of return?
A) Because of the call premium,the required rate of return would decline.
B) There is no reason to expect a change in the required rate of return.
C) The required rate of return would decline because the bond would then be less risky to a bondholder.
D) The required rate of return would increase because the bond would then be more risky to a bondholder.
E) It is impossible to say without more information.
Q2) A 25-year,$1,000 par value bond has an 8.5% annual payment coupon.The bond currently sells for $925.If the yield to maturity remains at its current rate,what will the price be 5 years from now?
A) $883.61
B) $744.09
C) $976.62
D) $930.11
E) $865.00
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Chapter 8: Risk and Rates of Return
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147 Flashcards
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Sample Questions
Q1) Mulherin's stock has a beta of 1.23,its required return is 11.75%,and the risk-free rate is 2.30%.What is the required rate of return on the market? (Hint: First find the market risk premium. )Do not round your intermediate calculations.
A) 7.69%
B) 8.19%
C) 9.98%
D) 12.38%
E) 10.58%
Q2) Company A has a beta of 0.70,while Company B's beta is 1.45.The required return on the stock market is 9.00%,and the risk-free rate is 2.25%.What is the difference between A's and B's required rates of return? (Hint: First find the market risk premium,then find the required returns on the stocks. )Do not round your intermediate calculations.
A) 5.06%
B) 5.01%
C) 4.71%
D) 4.30%
E) 4.25%
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Chapter 9: Stocks and Their Valuation
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89 Verified Questions
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Sample Questions
Q1) Stocks A and B have the following data.Assuming the stock market is efficient and the stocks are in equilibrium,which of the following statements is CORRECT? \[\begin{array} { l r r }
& \mathrm { A } & \mathrm { B } \\
\text { Price } & \$ 25 & \$ 40 \\
\text { Expected growth } & 7 \% & 9 \% \\
\text { Expected return } & 10 \% & 12 \%
\end{array}\]
?
A) The two stocks should have the same expected dividend.
B) The two stocks could not be in equilibrium with the numbers given in the question.
C) A's expected dividend is $0.50.
D) B's expected dividend is $0.75.
E) A's expected dividend is $0.75 and B's expected dividend is $1.20.
Q2) The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.
A)True
B)False
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Page 11
Chapter 10: The Cost of Capital
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94 Flashcards
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Sample Questions
Q1) Duval Inc.uses only equity capital,and it has two equally-sized divisions.Division A's cost of capital is 10.0%,Division B's cost is 14.0%,and the corporate (composite)WACC is 12.0%.All of Division A's projects are equally risky,as are all of Division B's projects.However,the projects of Division A are less risky than those of Division B.Which of the following projects should the firm accept?
A) A Division B project with a 13% return.
B) A Division B project with a 12% return.
C) A Division A project with an 11% return.
D) A Division A project with a 9% return.
E) A Division B project with an 11% return.
Q2) Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC)for use in capital budgeting?
A) Long-term debt.
B) Accounts payable.
C) Retained earnings.
D) Common stock.
E) Preferred stock.
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Page 12
Chapter 11: The Basics of Capital Budgeting
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107 Verified Questions
107 Flashcards
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Sample Questions
Q1) Simms Corp.is considering a project that has the following cash flow data.What is the project's IRR? Note that a project's projected IRR can be less than the WACC or negative,in both cases it will be rejected. \[\begin{array} { l c c c c } \text { Year } & 0 & 1 & 2 & 3 \\ \hline \text { Cash flows } & - \$ 1,025 & \$ 425 & \$ 425 & \$ 425 \end{array}\]
A) 9.64%
B) 10.82%
C) 12.58%
D) 11.29%
E) 11.76%
Q2) The NPV and IRR methods,when used to evaluate two independent and equally risky projects,will lead to different accept/reject decisions and thus capital budgets if the projects' IRRs are greater than their costs of capital.
A)True
B)False
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Chapter 12: Cash Flow Estimation and Risk Analysis
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80 Verified Questions
80 Flashcards
Source URL: https://quizplus.com/quiz/131712
Sample Questions
Q1) A firm is considering a new project whose risk is greater than the risk of the firm's average project,based on all methods for assessing risk.In evaluating this project,it would be reasonable for management to do which of the following?
A) Increase the estimated IRR of the project to reflect its greater risk.
B) Increase the estimated NPV of the project to reflect its greater risk.
C) Reject the project,since its acceptance would increase the firm's risk.
D) Ignore the risk differential if the project would amount to only a small fraction of the firm's total assets.
E) Increase the cost of capital used to evaluate the project to reflect its higher-than-average risk.
Q2) Suppose Walker Publishing Company is considering bringing out a new finance text whose projected revenues include some revenues that will be taken away from another of Walker's books.The lost sales on the older book are a sunk cost and as such should not be considered in the analysis for the new book.
A)True
B)False
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Chapter 13: Real Options and Other Topics in Capital
Budgeting
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41 Verified Questions
41 Flashcards
Source URL: https://quizplus.com/quiz/131713
Sample Questions
Q1) Which one of the following is NOT a real option?
A) The option to expand production if the product is successful.
B) The option to buy shares of stock if its price is expected to increase.
C) The option to expand into a new geographic region.
D) The option to abandon a project if cash flows turn out to be lower than expected.
E) The option to switch the type of fuel used in an industrial furnace to lower the cost of production.
Q2) Traditionally,an NPV analysis assumes that projects will be accepted or rejected,which implies that they will be undertaken now or never.However,in practice,companies sometimes have a third choice--delay the decision until later,when more information will be available.Because the analysis extends out at least one additional year from the original analysis,it is unlikely that the firm would ever delay a project--particularly given the loss of the "first mover advantage."
A)True
B)False
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Page 15
Chapter 14: Capital Structure and Leverage
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88 Verified Questions
88 Flashcards
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) Since debt financing raises the firm's financial risk,increasing the target debt ratio will always increase the WACC.
B) Since debt financing is cheaper than equity financing,raising a company's debt ratio will always reduce its WACC.
C) Increasing a company's debt ratio will typically reduce the marginal costs of both debt and equity financing.However,this action still may raise the company's WACC.
D) Increasing a company's debt ratio will typically increase the marginal costs of both debt and equity financing.However,this action still may lower the company's WACC.
E) Since a firm's beta coefficient is not affected by its use of financial leverage,leverage does not affect the cost of equity.
Q2) The trade-off theory states that capital structure decisions involve a tradeoff between the costs and benefits of debt financing.
A)True B)False
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Chapter 15: Distributions to Shareholders: Dividends and Share Repurchases
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75 Verified Questions
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Sample Questions
Q1) Toombs Media Corp.recently completed a 3-for-1 stock split.Prior to the split,its stock sold for $170 per share.The firm's total market value was unchanged by the split.Other things held constant,what is the best estimate of the stock's post-split price?
A) $57.23
B) $65.73
C) $64.60
D) $63.47
E) $56.67
Q2) Keys Financial has done extremely well in recent years,and its stock now sells for $65 per share.Management wants to get the price down to a more typical level,which it thinks is $40.00 per share.What stock split would be required to get to this price,assuming the transaction has no effect on the total market value? Put another way,how many new shares should be given per one old share?
A) 1.54
B) 1.30
C) 1.63
D) 1.46
E) 2.11
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Chapter 16: Working Capital Management
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Sample Questions
Q1) Refer to Exhibit 15.1.If the firm adopts a restricted policy,how much lower would its interest expense be than under the relaxed policy? Do not round intermediate calculations.
A) $13,320
B) $14,520
C) $12,000
D) $11,400
E) $13,920
Q2) The risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt.Added risk stems from (1)the greater variability of interest costs on short-term than long-term debt and (2)the fact that even if its long-term prospects are good,the firm's lenders may not be willing to renew short-term loans if the firm is temporarily unable to repay those loans.
A)True
B)False
Q3) The calculated cost of trade credit can be reduced by paying late.
A)True
B)False
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Chapter 17: Financial Planning and Forecasting
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Sample Questions
Q1) When we use the AFN equation to forecast the additional funds needed (AFN),we are implicitly assuming that all financial ratios are constant.If financial ratios are not constant,regression techniques can be used to improve the financial forecast.
A)True
B)False
Q2) The term "additional funds needed (AFN)" is generally defined as follows:
A) Funds that are obtained automatically from routine business transactions.
B) Funds that a firm must raise externally from non-spontaneous sources,i.e. ,by borrowing or by selling new stock,to support operations.
C) The amount of assets required per dollar of sales.
D) The amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth.
E) A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.
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Chapter 18: Derivatives and Risk Management
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Sample Questions
Q1) Warnes Motors' stock is trading at $20 a share.Three-month call options with an exercise price of $20 have a price of $1.50.Which of the following will occur if the stock price increases 10% to $22 a share?
A) The price of the call option will increase by $2.
B) The price of the call option will increase by less than $2,but the percentage increase in price will be more than 10%.
C) The price of the call option will increase by less than $2,and the percentage increase in price will be less than 10%.
D) The price of the call option will increase by more than $2.
E) The price of the call option will increase by more than $2,but the percentage increase in price will be less than 10%.
Q2) A call option whose underlying stock value is less than the corresponding exercise price is an example of a(n)
A) Straddle option.
B) Put option.
C) Out-of-the-money option.
D) Naked option.
E) Covered option.
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Page 20
Chapter 19: Multinational Financial Management
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Sample Questions
Q1) A currency trader observes the following quotes in the spot market: \[\begin{array}
{ l l l }
1 \text { U.S. dollar } = & 10.875 & \text { Mexican pesos } \\
1 \text { British pound } = & 7.500 & \text { Danish krone } \\
1 \text { British pound } = & 1.65 & \text { U.S. dollars } \end{array}\]
Given this information,how many Mexican pesos can be purchased for 1 Danish krone?
A) 2.3446
B) 2.0097
C) 2.9188
D) 2.0815
E) 2.3925
Q2) The cash flows relevant for a foreign investment should,from the parent company's perspective,include the financial cash flows that the subsidiary can legally send back to the parent company plus the cash flows that must remain in the foreign country.
A)True
B)False
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Chapter 20: Hybrid Financing: Preferred Stock,leasing,warrants,and Convertibles
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Sample Questions
Q1) Its investment bankers have told Donner Corporation that it can issue a 25-year,7.6% annual payment bond at par.They also stated that the company can sell an issue of annual payment preferred stock to corporate investors who are in the 40% tax bracket.The corporate investors require an after-tax return on the preferred that exceeds their after-tax return on the bonds by 1.3%,which would represent an after-tax risk premium.What coupon rate must be set on the preferred in order to issue it at par? Do not round your intermediate calculations.
A) 6.66%
B) 4.99%
C) 5.99%
D) 7.33%
E) 7.66%
Q2) Refer to Exhibit 20.1.What is the bond's straight-debt value at the time of issue?
A) $703.32
B) $535.87
C) $502.37
D) $669.83
E) $803.80
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Chapter 21: Mergers and Acquisitions
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Sample Questions
Q1) Which of the following statements is most CORRECT?
A) A conglomerate merger is one where a firm combines with another firm in the same industry.
B) Regulations in the United States prohibit acquiring firms from using common stock to purchase another firm.
C) Defensive mergers are designed to make a company less vulnerable to a takeover.
D) The equity residual method values a target firm by discounting residual cash flows at the acquiring firm's overall cost of capital reflecting the combined firm's post-merger capital structure.
E) A financial merger occurs when the operations of the firms involved are integrated in the hope of achieving synergistic benefits.
Q2) A congeneric merger is one where the merging firms operate in related businesses but do not necessarily produce the same products or have a producer-supplier relationship.
A)True
B)False
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