Corporate Finance
Test Preparation
Course Introduction
Corporate Finance explores the fundamental principles and techniques used by companies to manage their financial resources. The course covers key topics such as capital budgeting, capital structure, risk and return, valuation of financial assets, working capital management, and dividend policy. Students will analyze financial statements, evaluate investment opportunities, and assess strategies for raising capital in global markets. Through case studies and real-world applications, the course equips learners with the knowledge to make informed financial decisions that maximize firm value and address contemporary corporate financial challenges.
Recommended Textbook
Fundamentals of Corporate Finance 10th Alternate Edition by Stephen A. Ross
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27 Chapters
2547 Verified Questions
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) Decisions made by financial managers should primarily focus on increasing which one of the following?
A) size of the firm
B) growth rate of the firm
C) gross profit per unit produced
D) market value per share of outstanding stock
E) total sales
Answer: D
Q2) Which one of the following statements is generally correct?
A) Private placements must be registered with the SEC.
B) All secondary markets are auction markets.
C) Dealer markets have a physical trading floor.
D) Auction markets match buy and sell orders.
E) Dealers arrange trades but never own the securities traded.
Answer: D
Q3) Describe the key advantages associated with the corporate form of organization.
Answer: The advantages of the corporate form of organization are the ease of transferring ownership,the owners' limited liability for business debts,the ability to raise large amounts of capital,and the potential for an unlimited life for the organization.
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Page 3
Two: Financial Statements and Long-Term Financial Planning
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Sample Questions
Q1) Which one of the following costs is most apt to be a fixed cost?
A) production labor cost
B) depreciation
C) raw materials
D) utilities
E) sales commissions
Answer: B
Q2) Adelson's Electric had beginning long-term debt of $42,511 and ending long-term debt of $48,919.The beginning and ending total debt balances were $84,652 and $78,613,respectively.The interest paid was $4,767.What is the amount of the cash flow to creditors?
A) -$1,641
B) -$1,272
C) $1,272
D) $7,418
E) $11,175
Answer: A
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Page 4
Chapter 3: Working With Financial Statements
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Sample Questions
Q1) Which one of the following is a use of cash?
A) increase in notes payable
B) decrease in inventory
C) increase in long-term debt
D) decrease in accounts receivables
E) decrease in common stock
Answer: E
Q2) A firm uses 2011 as the base year for its financial statements.The common-size,base-year statement for 2012 has an inventory value of 1.08.This is interpreted to mean that the 2012 inventory is equal to 108 percent of which one of the following?
A) 2011 inventory
B) 2011 total assets
C) 2012 total assets
D) 2011 inventory expressed as a percent of 2011 total assets
E) 2012 inventory expressed as a percent of 2012 total assets
Answer: D
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Page 5
Chapter 4: Long-Term Financial Planning and Growthpart
Three: Valuation of Future Cash Flows
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Sample Questions
Q1) The plowback ratio is:
A) equal to net income divided by the change in total equity.
B) the percentage of net income available to the firm to fund future growth.
C) equal to one minus the retention ratio.
D) the change in retained earnings divided by the dividends paid.
E) the dollar increase in net income divided by the dollar increase in sales.
Q2) When utilizing the percentage of sales approach,managers:
I.estimate company sales based on a desired level of net income and the current profit margin.
II.consider only those assets that vary directly with sales.
III.consider the current production capacity level.
IV.can project both net income and net cash flows.
A) I and II only
B) II and III only
C) III and IV only
D) I,III,and IV only
E) II,III,and IV only
Q3) A)What are the assumptions that underlie the internal growth rate and B)what are the implications of this rate?
Page 6
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Chapter 5: Introduction to Valuation: the Time Value of Money
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Sample Questions
Q1) Luis is going to receive $20,000 six years from now.Soo Lee is going to receive $20,000 nine years from now.Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts?
A) The present values of Luis and Soo Lee's monies are equal.
B) In future dollars,Soo Lee's money is worth more than Luis' money.
C) In today's dollars,Luis' money is worth more than Soo Lee's.
D) Twenty years from now,the value of Luis' money will be equal to the value of Soo Lee's money.
E) Soo Lee's money is worth more than Luis' money given the 7 percent discount rate.
Q2) Steve invested $100 two years ago at 10 percent interest.The first year,he earned $10 interest on his $100 investment.He reinvested the $10.The second year,he earned $11 interest on his $110 investment.The extra $1 he earned in interest the second year is referred to as:
A) free interest.
B) bonus income.
C) simple interest.
D) interest on interest.
E) present value interest.
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Chapter 6: Discounted Cash Flow Valuation
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Sample Questions
Q1) This morning,you borrowed $150,000 to buy a house.The mortgage rate is 7.35 percent.The loan is to be repaid in equal monthly payments over 20 years.The first payment is due one month from today.How much of the second payment applies to the principal balance? (Assume that each month is equal to 1/12 of a year. )
A) $268.84
B) $277.61
C) $917.06
D) $925.83
E) $1,194.67
Q2) Atlas Insurance wants to sell you an annuity which will pay you $1,600 per quarter for 25 years.You want to earn a minimum rate of return of 6.5 percent.What is the most you are willing to pay as a lump sum today to buy this annuity?
A) $72,008.24
B) $74,208.16
C) $78,818.41
D) $83,008.80
E) $88,927.59
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Page 8
Chapter 7: Interest Rates and Bond Valuation
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Sample Questions
Q1) A Treasury bond is quoted at a price of 105:10.What is the market price of this bond if the face value is $5,000?
A) $5,005.15
B) $5,105.15
C) $5,265.63
D) $5,273.44
E) $5,515.00
Q2) You are purchasing a 20-year,zero-coupon bond.The yield to maturity is 8.68 percent and the face value is $1,000.What is the current market price?
A) $106.67
B) $108.18
C) $182.80
D) $221.50
E) $228.47
Q3) Inflation has remained low for the past three years but you have come to the conclusion that trend is ending and inflation will increase significantly over the next 18 months.Assume you have reached this conclusion prior to other investors reaching the same conclusion.What adjustments should you make to your bond portfolio in light of your conclusions?
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Page 9
Chapter 8: Stock Valuationpart Four: Capital Budgeting
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Sample Questions
Q1) You own one share of a cumulative preferred stock which pays quarterly dividends.The firm has recently suffered some financial setbacks and has failed to pay the last two dividends.However,new funding has been arranged and the firm intends to restore all dividends,both common and preferred,this quarter.As a preferred shareholder,you should expect to receive the equivalent of ____ quarter(s)of dividends when the next dividend is paid.
A) 0
B) 1
C) 2
D) 3
E) either 1,2,or 3
Q2) Marie owns shares of Deltona Productions preferred stock which she says provides her with a constant 14.3 percent rate of return.The stock is currently priced at $45.45 a share.What is the amount of the dividend per share?
A) $6.00
B) $6.25
C) $6.50
D) $6.60
E) $7.00
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Chapter 9: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) In actual practice,managers frequently use the:
I.average accounting return method because the information is so readily available.
II.internal rate of return because the results are easy to communicate and understand.
III.discounted payback because of its simplicity.
IV.net present value because it is considered by many to be the best method of analysis.
A) I and III only
B) II and III only
C) I,II,and IV only
D) II,III,and IV only
E) I,II,III,and IV
Q2) Mutually exclusive projects are best defined as competing projects which:
A) would commence on the same day.
B) have the same initial start-up costs.
C) both require the total use of the same limited resource.
D) both have negative cash outflows at time zero.
E) have the same life span.
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Chapter 10: Making Capital Investment Decisions
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Sample Questions
Q1) Can the initial cash flow at time zero for a project ever be a positive value? If yes,give an example.If no,explain why not.
Q2) Keyser Mining is considering a project that will require the purchase of $980,000 in new equipment.The equipment will be depreciated straight-line to a zero book value over the 7-year life of the project.The equipment can be scraped at the end of the project for 5 percent of its original cost.Annual sales from this project are estimated at $420,000.Net working capital equal to 20 percent of sales will be required to support the project.All of the net working capital will be recouped.The required return is 16 percent and the tax rate is 35 percent.What is the amount of the aftertax salvage value of the equipment?
A) $17,150
B) $31,850
C) $118,800
D) $237,600
E) $343,000
Q3) How can two firms arrive at two different bid prices when bidding for the same job and given the same bid specifications?
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Chapter 11: Project Analysis and Evaluationpart Five: Risk and Return
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Sample Questions
Q1) Variable costs can be defined as the costs that:
A) remain constant for all time periods.
B) remain constant over the short run.
C) vary directly with sales.
D) are classified as non-cash expenses.
E) are inversely related to the number of units sold.
Q2) You are the manager of a project that has a 2.8 degree of operating leverage and a required return of 14 percent.Due to the current state of the economy,you expect sales to decrease by 7 percent next year.What change should you expect in the operating cash flows next year given your sales prediction?
A) 19.60 percent decrease
B) 16.03 percent decrease
C) 13.46 percent decrease
D) 5.60 percent decrease
E) 2.74 percent decrease
Q3) What are the key features of the accounting,cash,and financial break-even points?
Q4) What is operating leverage and why is it important in the analysis of capital expenditure projects?
Page 13
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Chapter 12: Some Lessons From Capital Market History
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Sample Questions
Q1) Which one of the following statements concerning U.S.Treasury bills is correct for the period 1926- 2010?
A) The annual rate of return always exceeded the annual inflation rate.
B) The average risk premium was 0.7 percent.
C) The annual rate of return was always positive.
D) The average excess return was 1.1 percent.
E) The average real rate of return was zero.
Q2) Which one of the following is most indicative of a totally efficient stock market?
A) extraordinary returns earned on a routine basis
B) positive net present values on stock investments over the long-term
C) zero net present values for all stock investments
D) arbitrage opportunities which develop on a routine basis
E) realizing negative returns on a routine basis
Q3) What was the highest annual rate of inflation during the period 1926-2010?
A) between 0 and 3 percent
B) between 3 and 5 percent
C) between 5 and 10 percent
D) between 10 and 15 percent
E) between 15 and 20 percent
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Page 14
Six: Cost of Capital and Long-Term Financial Policy
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Sample Questions
Q1) According to CAPM,the expected return on a risky asset depends on three components.Describe each component and explain its role in determining expected return.
Q2) The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.
A) efficient markets hypothesis
B) systematic risk principle
C) open markets theorem
D) law of one price
E) principle of diversification
Q3) The risk-free rate of return is 3.9 percent and the market risk premium is 6.2 percent.What is the expected rate of return on a stock with a beta of 1.21?
A) 10.92 percent
B) 11.40 percent
C) 12.22 percent
D) 12.47 percent
E) 12.79 percent
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Page 15
Chapter 14: Cost of Capital
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Sample Questions
Q1) Suppose your company needs $14 million to build a new assembly line.Your target debt-equity ratio is 0.84.The flotation cost for new equity is 9.5 percent,but the floatation cost for debt is only 2.5 percent.What is the true cost of building the new assembly line after taking flotation costs into account?
A) 14.82 million
B) 14.94 million
C) 15.07 million
D) 15.12 million
E) 15.23 million
Q2) Fama's Llamas has a weighted average cost of capital of 9.5 percent.The company's cost of equity is 15.5 percent,and its pretax cost of debt is 8.5 percent.The tax rate is 34 percent.What is the company's target debt-equity ratio?
A) 0.89
B) 0.92
C) 0.98
D) 1.01
E) 1.54
Q3) What role does the weighted average cost of capital play when determining a project's cost of capital?
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Page 16
Chapter 15: Raising Capital
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Sample Questions
Q1) Mountain Homes wishes to expand its facilities.The company currently has 7 million shares outstanding and no debt.The stock sells for $55 per share,but the book value per share is $43.The firm's net income is currently $9.1 million.The new facility will cost $30 million,and it will increase net income by $309,000.Assume the firm issues new equity to fund this expansion while maintaining a constant price-earnings ratio.What will be the EPS be after the new equity issue?
A) $1.25
B) $1.30
C) $1.35
D) $1.40
E) $1.45
Q2) What is the definition of a syndicate?
A) a venture capitalist
B) a group of attorneys providing services for an IPO
C) block of investors who control a firm
D) a bank that loans funds to finance the start-up of a new firm
E) a group of underwriters sharing the risk of selling a new issue of securities
Q3) Firms encounter several costs when issuing new securities.Identify and describe at least four of these costs.
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Page 17
Chapter 16: Financial Leverage and Capital Structure Policy
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Sample Questions
Q1) Exports Unlimited is an unlevered firm with an aftertax net income of $52,300.The unlevered cost of capital is 14.1 percent and the tax rate is 36 percent.What is the value of this firm?
A) $270,867
B) $339,007
C) $370,922
D) $378,444
E) $447,489
Q2) Which form of financing do firms prefer to use first according to the pecking-order theory?
A) regular debt
B) convertible debt
C) common stock
D) preferred stock
E) internal funds
Q3) Explain how a firm loses value during the bankruptcy process from both a creditors and a shareholders perspective.
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18
Chapter 17: Dividends and Payout Policypart Seven: Short-Term
Financial Planning and Management
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Sample Questions
Q1) Purvis Lawn Products has 18,000 shares of stock outstanding at a market price of $5.50 a share.What will the market price per share be if the company does a 1-for-4 reverse stock split?
A) $1.38
B) $5.50
C) $11.00
D) $16.50
E) $22.00
Q2) Which of the following account balance changes occur as a result of a large stock dividend?
I.increase in common stock
II.decrease in capital in excess of par
III.increase in capital in excess of par
IV.decrease in retained earnings
A) I and III only
B) II and IV only
C) I and IV only
D) II and III only
E) I,III,and IV only
Q3) Explain the meaning of the dividend clientele effect and why it is important.
Page 19
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Chapter 18: Short-Term Finance and Planning
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Sample Questions
Q1) A compensating balance:
I.is required when a firm acquires any bank financing other than a line of credit. II.increases the cost of short-term bank financing. III.may be required even if a firm never borrows funds.
IV.is often used as a means of paying for banking services received.
A) I and III only
B) II and IV only
C) II and III only
D) I and IV only
E) II,III,and IV only
Q2) Using two separate graphs,illustrate a flexible and a restrictive short-term financing policy.Place costs on the vertical axis and current assets on the horizontal axis.On each graph,indicate the shortage costs,carrying costs,total costs,and indicate the optimal investment in current assets.
Q3) Compensating balances are frequently a part of revolving lending arrangements with banks,yet they add to the cost of financing for the borrower.Why,then,would borrowers agree to such terms? What other types of alternative financing are available?
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Page 20
Chapter 19: Cash and Liquidity Management
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Sample Questions
Q1) Collection float:
A) is more desirable to firms than disbursement float.
B) is totally eliminated by the installation of a lockbox system.
C) exists when a firm's available balance exceeds its book balance.
D) can be avoided by collecting payments electronically at the time of sale.
E) is eliminated by implementing a concentration banking system.
Q2) The Burger Stop spends $52,000 a week to pay bills and maintains a lower cash balance limit of $60,000.The standard deviation of the disbursements is $7,500.The applicable weekly interest rate is 0.04 percent and the fixed cost of transferring funds is $50.What is your optimal average cash balance based on the Miller-Orr model?
A) $79,116
B) $83,208
C) $110,315
D) $237,348
E) $249,624
Q3) Explain how a lockbox system operates and why a firm might consider implementing such a system.
Q4) Explain what a zero-balance account is,how it is used,and how it affects cash management.
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Topics in Corporate Finance
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Sample Questions
Q1) Which one of the following inventory items is probably the least liquid?
A) plywood held in inventory by a home builder
B) a wheel barrow held in inventory by a garden center
C) a partially assembled interior for a new vehicle
D) a set of tires owned by an automobile manufacturer
E) a toy owned by a retail toy store
Q2) Weisbrough United currently has a cash sales only policy.Under this policy,the firm sells 410 units a month at a price of $219 a unit.The variable cost per unit is $140 and the carrying cost per unit is $3.30.The monthly interest rate is 1.3 percent.The firm believes it can increase its sales to 475 units a month if it institutes a net 30 credit policy.What is the net present value of the switch using the one-shot approach?
A) $255,590
B) $296,110
C) $298,470
D) $302,233
E) $305,902
Q3) Why might firms forego discounts offered by their suppliers even though it is costly to do so? What steps might a firm pursue to be able to take these discounts?
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Chapter 21: International Corporate Finance
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Q1) You want to import $147,000 worth of rugs from India.How many rupees will you need to pay for this purchase if one rupee is worth $0.0203?
A) Rs 6,887,424
B) Rs 7,238,911
C) Rs 7,241,379
D) Rs 8,367,594
E) Rs 8,415,096
Q2) Relative purchasing power parity:
A) states that identical items should cost the same regardless of the currency used to make the purchase.
B) relates differences in inflation rates to differences in exchange rates.
C) compares the real rate of return to the nominal rate of return.
D) explains the differences in real rates across national boundaries.
E) relates future exchange rates to current spot rates.
Q3) Describe the foreign currency and home currency approaches to capital budgeting for a foreign project.Which is better? Which approach would you recommend a U.S.firm use? Justify your answer.
Q4) Using currencies A,B,and C construct an example in which triangle arbitrage exists and then show how to exploit it.
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Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) Explain 1)the concept of house money,2)why the house money concept is such a common behavior for so many individuals and 3)why house money is an irrational behavior.
Q2) Marzella Corp.is analyzing a project that involves expanding the firm into a new product line.The project includes the construction of a new manufacturing facility and the creation of a new distribution system.The project's financial projections will tend to have which one of the following characteristics if the person compiling those projections suffers from overoptimism?
A) overestimated construction costs
B) overestimated expenses
C) overestimated net present values
D) underestimated profits
E) underestimated sales estimates
Q3) A sudden and severe decline in market prices is best described as a market:
A) crash.
B) revolver.
C) bubble.
D) limit.
E) mispricing.
24
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Chapter 23: Enterprise Risk Management
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Q1) For years,your family has operated a business that produces lawn mowers.Over the years,the industry has progressed and new mass production techniques have been developed.However,your firm cannot afford this new technology,nor can you compete against those firms that can.Thus,the family has decided to close its facility at the end of the year.Which one of the following describes the risks to which your family's firm succumbed?
A) forward risk
B) volatility exposure
C) economic exposure
D) transactions exposure
E) translation risk
Q2) Which one of the following methods of setting prices would reduce the transactions exposure for both the buyer and seller of a swap contract?
A) setting a permanent price at which a commodity will be traded
B) setting the price at the minimum spot price during a given period of time
C) setting the price equal to the spot price on the delivery date
D) using the average market price over a given period of time
E) setting the contract price equal to some percentage,less than 100 percent,of the market price on any given day
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Page 25
Chapter 24: Options and Corporate Finance
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Sample Questions
Q1) You wrote two put options on Xylo stock with an exercise price of $30 per share and an option price of $1.05 per share.Today,the contracts expire and the stock is selling for $31.15 a share.What is your net profit or loss on this investment? Ignore trading costs and taxes.
A) -$115
B) -$105
C) $20
D) $105
E) $210
Q2) You sold one call option contract with a strike price of $55 when the option was quoted at $0.80.The option expires today when the value of the underlying stock is $53.70.Ignoring trading costs and taxes,what is the net profit or loss on this investment?
A) -$250
B) -$80
C) $0
D) $50
E) $80
Q3) Explain how the floor and the ceiling prices for a convertible bond are determined.
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Chapter 25: Option Valuation
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Q1) Which one of the following statements related to the implied standard deviation (ISD)is correct?
A) The ISD is an estimate of the historical standard deviation of the underlying security.
B) ISD is equal to (1 - D<sub>1</sub>).
C) The ISD estimates the volatility of an option's price over the option's lifespan.
D) The value of ISD is dependent upon both the risk-free rate and the time to option expiration.
E) ISD confirms the observable volatility of the return on the underlying security.
Q2) Which one of the following acts like an insurance policy if the price of a stock you own suddenly decreases in value?
A) sale of a European call option
B) sale of an American put option
C) purchase of a protective put
D) purchase of a protective call
E) either the sale or purchase of a put
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Chapter 26: Mergers and Acquisitions
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Q1) If General Electric,a highly diversified company,were to acquire Ocean Freight Limited,the acquisition would be classified as a _____ acquisition.
A) horizontal
B) longitudinal
C) conglomerate
D) vertical
E) integrated
Q2) Rosie's has 1,800 shares outstanding at a market price per share of $23.50.Sandy's has 2,500 shares outstanding at a market price of $21 a share.Neither firm has any debt.Sandy's is acquiring Rosie's.The incremental value of the acquisition is $1,200.What is the value of Rosie's to Sandy's?
A) $41,100
B) $41,900
C) $42,300
D) $42,700
E) $43,500
Q3) Firms can frequently create synergy by merging and sharing complementary resources with another firm.Give two examples of situations where this would most likely occur.
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Chapter 27: Leasing
Available Study Resources on Quizplus for this Chatper
72 Verified Questions
72 Flashcards
Source URL: https://quizplus.com/quiz/74224
Sample Questions
Q1) Explain the "leasing paradox" and also explain why leasing is or is not a "zero sum game".
Q2) Daily Enterprises is contemplating the acquisition of some new equipment.The purchase price is $46,000.The company expects to sell the equipment at the end of year 4 for $2,500.The firm uses MACRS depreciation which allows for 33.33 percent,44.44 percent,14.82 percent,and 7.41 percent depreciation over years 1 to 4,respectively.The equipment can be leased for $12,300 a year for 4 years.The firm can borrow money at 7.5 percent and has a 35 percent tax rate.What is the incremental annual cash flow for year 4 if the company decides to lease the equipment rather than purchase it?
A) -$14,434
B) -$12,734
C) -$10,813
D) -$9,434
E) -$8,766
Q3) What are some "good" reasons for opting to lease rather than purchase an asset?
Q4) Explain the differences between purchasing an asset and leasing an asset.
Q5) Why might a firm opt to sell and leaseback an asset which it currently owns?
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