Corporate Finance
Test Preparation
Course Introduction
Corporate Finance is a foundational course that explores the principles and practices guiding the financial management of corporations. Students learn how firms make long-term investment decisions, raise capital to fund those investments, and manage their financial resources to maximize shareholder value. Topics include capital budgeting, risk and return, cost of capital, capital structure, dividend policy, corporate governance, and mergers and acquisitions. Through case studies and analytical tools, the course equips students with the skills to make informed, strategic financial decisions in a corporate environment.
Recommended Textbook
Foundations of Financial Management 17th Edition by Stanley B. Block
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21 Chapters
2363 Verified Questions
2363 Flashcards
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Page 2
Chapter 1: The Goals and Activities of Financial Management
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123 Verified Questions
123 Flashcards
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Sample Questions
Q1) The benefits of social responsibility often include A) a better reputation.
B) higher short-term earnings.
C) lower expenses.
D) None of the options
Answer: A
Q2) With the creation of Internet trading, trading through brokers became less profitable for investors mainly because of the higher fees.
A)True
B)False
Answer: False
Q3) The Internet impacts e-commerce by creating a mechanism for improved communications between a business, its customers, and its suppliers.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Review of Accounting
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116 Verified Questions
116 Flashcards
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Sample Questions
Q1) The corporate tax rate change of 2018 means that corporations are no longer responsible to pay state and foreign taxes.
A)True
B)False
Answer: False
Q2) Which of the following would indicate an accurate statement of cash flows?
A) Net cash flow is equal to marketable securities balance
B) Net cash flows from financing activities are equal to the change in stockholder's equity
C) Net cash flow is equal to the ending cash balance
D) Net cash flow is equal to the change in the cash balance
Answer: D
Q3) Dividing earnings after taxes (which includes all profits distributed to both preferred stockholders and common stockholders) by common shares outstanding produces earnings per share.
A)True
B)False
Answer: False
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4
Chapter 3: Financial Analysis
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131 Verified Questions
131 Flashcards
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Sample Questions
Q1) If fixed lease payments are reduced and everything else remains constant,
A) times interest earned goes up.
B) fixed charge coverage goes up.
C) fixed charge coverage stays the same.
D) debt to total assets goes down.
Answer: B
Q2) Liquidity ratios indicate how fast a firm can generate cash to pay bills.
A)True
B)False
Answer: True
Q3) All of the following are common examples of possible distortion in reported income except
A) inflation.
B) treatment of nonrecurring items.
C) reporting of cash.
D) reporting of revenue.
Answer: C
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Page 5
Chapter 4: Financial Forecasting
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93 Verified Questions
93 Flashcards
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Sample Questions
Q1) The generation of sales and profits ensures that there will be adequate cash on hand to meet financial obligations as they come due.
A)True
B)False
Q2) When using the percent-of-sales method in forecasting the funds needed, which of the following is not true?
A) Required new funds increase as sales decrease.
B) Required new funds decrease as profit margin increases.
C) Required new funds increase as assets increase.
D) As the tax rate increases, the required new funds increase.
Q3) The percent-of-sales method would not result in very accurate financials if used for a tourism company.
A)True
B)False
Q4) If Wiggle Corp has beginning inventory of 100 units, projected sales of 400 units, and desired ending inventory of 200 units, production must be planned for 300 units.
A)True
B)False
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Chapter 5: Operating and Financial Leverage
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102 Verified Questions
102 Flashcards
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Sample Questions
Q1) Use the below information to answer the following question.
\(\begin{array}{lr}
\text { Sales }(100,000 \text { units }) & \$ 1,000,000 \\
\text { Variable costs } & 300,000\\
\text { Contribution margin } & 700,000 \\
\text { Fixed manufacturing costs } & 200,000\\
\text { Operating income } & 500,000 \\
\text { Interest } & 75,000\\
\text { Earnings before taxes } & 425,000 \\
\text { Taxes }(30 \%) & 127,500\\
\text { Net income }&\$297,500
\end{array}\)
Refer to the table. The degree of combined leverage is ________.
A) 2.22x
B) 1.90x
C) 2.95x
D) 1.65x
Q2) Financial leverage emphasizes the impact of using debt in the business.
A)True
B)False
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Page 7
Chapter 6: Working Capital and the Financing Decision
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129 Verified Questions
129 Flashcards
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Sample Questions
Q1) U.S. government securities are used to construct yield curves because
A) they are free of default risk.
B) the large number of maturities form a continuous curve.
C) they are free of default risk and the large number of maturities form a continuous curve.
D) None of the options are correct.
Q2) Short-term interest rates are more dependent upon inflation than on current demand for money.
A)True
B)False
Q3) When the term structure of interest rates is downward sloping and interest rates are expected to decline, the
A) financial manager generally borrows short-term.
B) financial manager borrows at the lower long-term rates.
C) corporation's ratio of short-term to long-term debt is low.
D) None of the options are true.
Q4) One of the primary benefits of implementing supply chain management is reducing inventory on hand.
A)True
B)False
Page 8
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Chapter 7: Current Asset Management
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140 Verified Questions
140 Flashcards
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Sample Questions
Q1) When selecting marketable securities, the company should always select securities with longer maturities if they offer higher yields.
A)True
B)False
Q2) Bankers' acceptances are short-term securities that arise from foreign trade.
A)True
B)False
Q3) International cash management systems are more complex than domestic cash management systems because of
A) the risk involved in currency fluctuations.
B) the changing interest rates across countries.
C) varying time zones across countries.
D) All of the options are true.
Q4) Which of the following is not a method of speeding up collections of cash?
A) Lock-box system.
B) Regional collection centers.
C) Extended disbursement float.
D) All of the options are methods for speeding up collections.
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Chapter 8: Sources of Short-Term Financing
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117 Verified Questions
117 Flashcards
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Sample Questions
Q1) General Rent-All's officers arrange a $50,000 loan for the company. The company is required to maintain a minimum checking account balance of 10% of the outstanding loan. This practice is called
A) an installment loan.
B) a compensating balance.
C) a discounted loan.
D) a balloon payment.
Q2) Trade credit is considered what type of loan?
A) when a firm owes money to a supplier.
B) when a firm owes money to a customer.
C) when a firm owes money to a bank.
D) all of the answers are true.
Q3) Approximately 40% of all short-term financing is in the form of accounts payable or trade credit.
A)True
B)False
Q4) A cash discount calls for a reduction in price if payment cannot be made within a specified time period.
A)True
B)False
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Chapter 9: The Time Value of Money
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105 Verified Questions
105 Flashcards
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Sample Questions
Q1) Time value of money considers which of the following item(s) that change the value of money?
A) Inflation
B) Interest
C) Currency changes
D) All of the options are true
Q2) After 10 years, some shares of stock originally purchased for $500 total were sold for $900 total. What was the yield on the investment? Choose the closest answer.
A) 10%
B) 4%
C) 8%
D) 6%
Q3) In determining the future value of an ordinary annuity, the final payment is not compounded at all.
A)True
B)False
Q4) Higher interest rates reduce the present value amount.
A)True
B)False
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Chapter 10: Valuation and Rates of Return
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110 Verified Questions
110 Flashcards
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Sample Questions
Q1) The coupon rate is used to calculate the bond's interest amount, while the yield is used to calculate the present value of both the interest amount and principal amount of the bond.
A)True
B)False
Q2) The variable growth dividend model can be used for both constant and variable growth stocks.
A)True
B)False
Q3) The return measure that an investor demands for giving up current use of funds, without adjusting for purchasing power changes or the real rate of return, is the A) risk premium.
B) inflation premium.
C) dividend yield.
D) discount rate.
Q4) The required rate of return is the payment demanded by the investors for foregoing their ability to use the funds themselves.
A)True
B)False
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Chapter 11: Cost of Capital
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105 Verified Questions
105 Flashcards
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Sample Questions
Q1) In determining the cost of debt, a firm could use its yields and prices of outstanding bonds.
A)True B)False
Q2) The amount of debt capital used by a corporation is not related to the availability of equity funds from retained earnings and new common stock.
A)True B)False
Q3) The calculation of the cost of capital depends upon the historical cost of funds. A)True B)False
Q4) The weighted average cost of capital is used as a discount rate because A) it is an indication of how much the firm is earning overall.
B) as long as the cost of capital is earned, the common stock value of the firm will be maintained.
C) it is comparable to the prevailing market interest rates.
D) returns below the cost of capital will cover all fixed costs associated with capital and provide an excess return to stockholders.
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Chapter 12: The Capital Budgeting Decision
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114 Verified Questions
114 Flashcards
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Sample Questions
Q1) The Wet Corp. has an investment project that will reduce expenses by $25,000 per year for three years. The project's cost is $55,000. If the asset is part of the three-year MACRS category (33% first year depreciation) and the company's combined tax rate is 25%, what is the cash flow from the project in year 1?
A) $4,521
B) $15,100
C) $23,287
D) $16,667
Q2) Cash flow is used for a net present value analysis, while earnings are used for the internal rate of return and payback analysis.
A)True
B)False
Q3) Capital rationing is generally a positive action for a firm because it prevents rapid growth, which can drive up the cost of capital.
A)True
B)False
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14
Chapter 13: Risk and Capital Budgeting
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90 Verified Questions
90 Flashcards
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Sample Questions
Q1) If three investment alternatives all have some degree of risk and different expected returns, which of the following measures could best be used to rank the risk levels of the projects?
A) The coefficient of correlation
B) The coefficient of variation
C) The standard deviation of returns
D) The net present value
Q2) A project's cash flows have a beta of 1.2, a standard deviation of $340, and a coefficient of variation of 0.40. What is the expected cash flow?
A) $850
B) $167
C) $2,400
D) $500
Q3) Which of the following is a characteristic of beta?
A) Beta measures only the volatility of returns on an individual bond relative to a bond market index.
B) A beta of 1.0 has zero risk.
C) A beta of less than 1.0 has less risk than the market.
D) A beta is always equal to 1.0.
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Page 15
Chapter 14: Capital Markets
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103 Verified Questions
103 Flashcards
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Sample Questions
Q1) Which federally supported credit agency was established to trade student loan debt?
A) Fannie Mae
B) Freddie Mac
C) Farmer Mac
D) Sallie Mae
Q2) The NYSE purchased Archipelago (an ECN) in order to expand its floor-trading capabilities.
A)True
B)False
Q3) The NASDAQ Small-Cap Market is composed of smaller regionally based companies that often remain controlled by their founders so that fewer shares are available to the public.
A)True
B)False
Q4) The size of the common stock market is larger than the size of the corporate bond market.
A)True
B)False
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Chapter 15: Investment Banking: Public and Private
Placement
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123 Verified Questions
123 Flashcards
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Sample Questions
Q1) Only the stronger investment bankers are in a position to benefit from the shelf registration process.
A)True
B)False
Q2) Which of the following is an advantage of going public?
A) The firm can more easily become active in mergers and acquisitions.
B) The company is owned by many entities/individuals, making it more diverse.
C) An erosion in value may take place after the initial offering.
D) There is low cost with going public.
Q3) One purpose of an underwriting syndicate is to distribute securities to the public.
A)True
B)False
Q4) If the retail price of a stock issuance is $17.50 and the syndicate members' price is $15.50, the total spread is 11.4%.
A)True
B)False
Q5) In 2011, IPOs rose tremendously since the market started to pick up.
A)True
B)False
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Chapter 16: Long-Term Debt and Lease Financing
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137 Verified Questions
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Sample Questions
Q1) The costs of bond refunding are the call premium and the underwriting cost on the new bond issue.
A)True
B)False
Q2) A bond can only be easily refunded if it has a call feature.
A)True
B)False
Q3) The difference between the initial bond price and the maturity value is amortized for tax purposes over the life of a zero-coupon bond.
A)True
B)False
Q4) A bondholder is one that buys the bond, while the bond issuer is the one that sells the bond.
A)True
B)False
Q5) A capital lease has many of the characteristics of a long-term debt obligation.
A)True
B)False
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Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) Due to the 2017 Tax Cuts and Jobs Act, for companies owning less than 20 percent of another company, the tax exclusion was reduced from 70 to 50 percent.
A)True
B)False
Q2) "Dutch auction" preferred stock
A) is issued first to the bidder willing to accept the lowest yield.
B) matures periodically, and is then re-auctioned at a subsequent bidding.
C) allows corporate investors to take advantage of preferred stock tax benefits.
D) all of these options are true.
Q3) Coase Corp. has 10,000,000 outstanding shares. There are 11 directors on the firm's board. The Becker family owns 2,300,000 shares of Coase Corp. How many directors can the Becker family be assured of electing by themselves if Coase Corp. uses majority voting?
A) Zero
B) One
C) Two
D) Three
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19
Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) Generally, dividends should be changed when a corporation reaches a new level of permanent income.
A)True
B)False
Q2) CBA Inc. has 400,000 shares outstanding with a $5 par value. The shares were issued for $12. The stock is currently selling for $34. CBA has $5,000,000 in retained earnings and has declared a stock dividend that will increase the number of outstanding shares by 6%. How many shares will be outstanding after the stock dividend?
A) 376,000
B) 424,000
C) 400,000
D) 9,328,000
Q3) In the maturity stage, a firm
A) is growing about the same rate as the economy as a whole. B) has returns on assets lower than those of the industry norm.
C) loses market share and suffers a decline in profitability.
D) pays out all earnings in dividends.
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Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) For the most downside protection, an investor should search for convertibles trading below par value near their floor value.
A)True
B)False
Q2) The conversion premium is the greatest and the downside risk the smallest when
A) the conversion value equals the pure bond value.
B) the conversion value is greater than the pure bond value.
C) the conversion value is less than the pure bond value.
D) the stock price is expected to go up drastically.
Q3) Conversion premiums are influenced heavily by expectations of future stock performance.
A)True
B)False
Q4) A contract giving the owner the right to buy or sell an asset at a fixed price for a given period of time is A) a common stock.
B) an option.
C) a futures contract.
D) a capital investment.
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) The earnings-per-share impact of a merger is influenced by relative price-earnings ratios and the terms of exchange.
A)True
B)False
Q2) Antitrust policy can preclude the acquisition of a competitor.
A)True
B)False
Q3) Although corporate managers have a responsibility to act in the shareholders' best interest, management frequently opposes acquisitions due to personal motives.
A)True
B)False
Q4) If the purchasing firm's price earnings ratio is greater than the acquired firm's price earnings, the surviving firm will automatically get an increase in earnings per share.
A)True
B)False
Q5) One motivation to merge is through tax savings.
A)True
B)False
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Chapter 21: International Financial Management
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114 Verified Questions
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Sample Questions
Q1) A forward exchange rate can be used to help establish the value of a currency at a future point in time.
A)True
B)False
Q2) To minimize exposure to political risk, a multinational firm may:
A) establish a joint venture with a local entrepreneur or a group of multinationals
B) purchase an insurance policy from the Foreign Credit Insurance Association (FCIA).
C) hedge in the Eurodollar market.
D) purchase an insurance policy from any foreign company within the area that the corporation is doing business.
Q3) Which of the following statements about the International Finance Corporation (IFC) is false?
A) The decision to assist a venture depends on both the profitability of the project and the potential benefit to the host country's economy.
B) The IFC assumes no managerial responsibility and exercises no voting rights.
C) The IFC may either buy equity shares or provide long-term loans.
D) All of these options are true.
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