Corporate Finance
Test Preparation
Course Introduction
Corporate Finance is a foundational course that examines the financial decisions made by firms and the tools used to support those decisions. The course focuses on topics such as capital budgeting, capital structure, cost of capital, dividend policy, financial analysis, and risk management. Students will learn to evaluate investment opportunities, assess financing options, and understand the impact of financial decisions on firm value. By integrating both theoretical frameworks and practical applications, the course prepares students to understand the strategic role of finance in guiding organizations towards their business objectives.
Recommended Textbook
Essentials of Corporate Finance 2nd Australia Edition by Stephen Ross
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18 Chapters
871 Verified Questions
871 Flashcards
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Page 2
Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) Which one of the following functions should be assigned to the treasurer rather than the controller?
A)data processing
B)cost accounting
C)tax management
D)cash management
E)financial accounting
Answer: D
Q2) The person responsible for managing a firm's cash flow,credits and CAPEX (capital expenditure)is called:
A)a broker
B)a stakeholder
C)a chief accountant
D)a controller
E)a treasurer
Answer: E
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Page 3
Chapter 2: Financial Statements, Taxes, and Cash Flow
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Sample Questions
Q1) The market value of land is equal to:
A)the anticipated selling price if the land were sold today
B)the cost of the land at the time the current owner acquired it
C)the initial cost plus the value of all improvements added
D)the book value as recorded on the latest financial statement
E)the historical cost adjusted for annual depreciation
Answer: A
Q2) The Manly Manufacturing Company Pty Ltd has net sales of $821 300 and costs of $698 500.The depreciation expense is $28 400 and the interest paid is $8400.What is the amount of the firm's operating cash flow if the tax rate is 30 per cent?
A)$99 520
B)$94 400
C)$94 480
D)$97 000
E)$95 240
Answer: D
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Chapter 3: Working With Financial Statements
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Sample Questions
Q1) The relationship between a firm's earnings and the multiple of those earnings which investors are willing to pay to purchase one share of stock is called the:
A)financial leverage ratio
B)debt-equity ratio
C)capital intensity ratio
D)market-to-book ratio
E)price-earnings ratio
Answer: E
Q2) Which of the following statements is correct?
A)Peer group analysis is easier when a firm is a conglomerate rather than a single line of business.
B)Australian listed companies can only be compared to other companies listed on the ASX.
C)Peer group analysis is easier when firms have different fiscal years.
D)GICS are useful in identifying companies for comparison purposes but some care must be taken.
E)Peer-group analysis is simplified when firms use different depreciation methods.
Answer: D
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Chapter 4: Introduction to Valuation: the Time Value of Money
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Sample Questions
Q1) Computing the present value of a future cash flow to determine what that cash flow is worth today is called:
A)compounding
B)factoring
C)time valuation
D)simple cash flow valuation
E)discounted cash flow valuation
Q2) By definition,a bank that pays simple interest on a savings account will pay interest:
A)only at the beginning of the investment period
B)on interest
C)only on the principal amount originally invested
D)on both the principal amount and the reinvested interest
E)only if all previous interest payments are reinvested
Q3) The present value of a lump sum future amount:
A)increases as the interest rate decreases
B)decreases as the time period decreases
C)is inversely related to the future value
D)is directly related to the interest rate
E)is directly related to the time period
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Chapter 5: Discounted Cash Flow Valuation
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Sample Questions
Q1) An annuity for which the cash flows occur at the beginning of each time period is called a(n):
A)ordinary annuity
B)beginning annuity
C)annuity due
D)perpetuity
E)perpetuity due
Q2) Peter borrowed $10 000 from his bank and agreed to pay $1000 on the principal plus interest each year.This is an example of a(n):
A)interest-only loan
B)amortised loan
C)perpetuity loan
D)pure discount loan
E)lump sum loan
Q3) In Canada and the United Kingdom,a perpetuity is also called a(n):
A)consol
B)infinite bond
C)infinity flow
D)dowry
E)preference stream
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) Bondi Beachwear Pty Ltd takes out a short term loan through Witch Bank using a bill of exchange.The face value of the bill is $100 000 and it will mature in 90 days.If the interest rate quoted by the bank is 7.00% per annum what is the amount that Bondi Beachwear will receive (to the nearest dollar)?
A)$93 803
B)$93 458
C)$92 889
D)$98 289
E)$98 303
Q2) The written agreement that contains the specific details related to a bond issue is called the bond:
A)registration statement
B)debenture
C)document
D)issue paper
E)trust deed
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Chapter 7: Equity Markets and Stock Valuation
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Sample Questions
Q1) The stream of customer instructions to buy and sell securities is called the:
A)buyer's stream
B)market maker
C)order flow
D)operations flow
E)execution stream
Q2) Kate could not attend the last shareholders' meeting and thus she granted the authority to vote on her behalf to the managers of the firm.Which one of the following terms is used to describe the method by which Kate's shares were voted?
A)consent-form
B)in absentia
C)cumulative
D)proxy
E)straight
Q3) The rate at which the value of an investment grows is called the:
A)required return
B)capital return
C)maturity yield
D)dividend yield
E)capital gains yield
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Chapter 8: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) Angie is evaluating a proposed project and wants to answer two questions.First,what is the market value of the project? Second,how much profit will the project produce in relation to its book value.To answer these two questions,Angie should use which one of the following sets of investment analysis methods?
A)internal rate of return and payback
B)payback and profitability index
C)net present value and average accounting return
D)net present value and payback
E)profitability index and net present value
Q2) Which one of the following best expresses two mutually exclusive investments?
A)constructing a theatre and a restaurant side by side
B)locating a restaurant inside a theatre building
C)building either a gas station or a restaurant on a corner lot
D)building both a restaurant and a parking lot on a vacant lot
E)building a parking lot for the benefit of both restaurant and theatre patrons
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10
Chapter 9: Making Capital Investment Decisions
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Sample Questions
Q1) The incremental cash flows of a project can best be defined as the difference between a firm's _____ with and without the project.
A)net worth
B)net income
C)present cash flows
D)future cash flows
E)operating cash flow
Q2) Shere Khan Corporation is currently evaluating a new project.Relatively inexpensive equipment with an estimated cost of $300 000 would be purchased,but shipping costs to move the equipment would total $25 000 and installation charges would add another $15 000 to the total equipment costs.Further,the company's inventories would have to be increased by $20 000 at the time of initial investment.The straight-line depreciation rate is 20% and corporate tax rate is 25%.What is the cash outflow in Year 0?
A)$20 000
B)$360 000
C)$325 000
D)$340 000
E)$300 000
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11
Chapter 10: Some Lessons From Capital Market History
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Sample Questions
Q1) The lower the standard deviation of returns on a security,the _____ the expected rate of return and the _____ the risk.
A)lower;lower B)lower;higher C)higher;lower D)higher;higher
E)You cannot determine anything about the expected rate of return from the standard deviation.
Q2) The higher the standard deviation of a security,the _____ the expected rate of return and the _____ the risk. A)lower;lower B)lower;higher C)higher;lower D)higher;higher E)more constant;more constant
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12
Chapter 11: Risk and Return
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Sample Questions
Q1) Which one of the following is the best example of an announcement that is most apt to result in an unexpected return?
A)the verification by senior management that the firm is being acquired as had been rumored
B)a statement by a firm that it has just discovered a manufacturing defect and is recalling its product
C)an announcement that a firm will continue its practice of paying a $3 a share annual dividend
D)an announcement that the CFO of the firm is retiring June 1<sup>st</sup> as previously announced
E)a news bulletin that the anticipated lay-offs in a firm will occur as expected on December 1
Q2) Which one of the following portfolios will have a beta of zero?
A)a portfolio that is equally as risky as the overall market
B)a portfolio with a zero variance of returns
C)no portfolio can have a beta of zero
D)a portfolio that consists of a single stock
E)a portfolio comprised solely of Australian Government Treasury notes
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Chapter 12: Long-Term Financing
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Sample Questions
Q1) Horseless Carriages issued twenty-year,7 per cent semi-annual bonds eleven years ago.The bonds currently sell at 101.3 per cent of face value.What is the firm's after tax cost of debt if the tax rate is 34 per cent?
A)4.49 per cent
B)6.71 per cent
C)4.87 per cent
D)6.80 per cent
E)6.83 per cent
Q2) The cost of capital for a project should:
A)be adjusted based on the size of the project
B)remain constant even if a decision on accepting the project is delayed for two years
C)meet or exceed the internal rate of return of the project
D)never exceed the cost of capital for the overall firm
E)be adjusted based on the risk of the project
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Chapter 13: Leverage and Capital Structure
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Sample Questions
Q1) Assume that you are comparing two firms which are identical,with one exception.Firm A is an all-equity firm and firm B has a debt-equity ratio of 0.60.All else equal,firm A will:
A)generate a higher EBIT,but lower net income than firm B
B)generate a lower EBIT,but higher net income than firm B
C)always have higher EPS than firm B,since it has no interest expense
D)have lower EPS than firm B when the level of earnings before interest and taxes (EBIT)is relatively high
E)have lower EPS than firm B when the level of EBIT is relatively low
Q2) Which one of the following is correct based on the static theory of capital structure?
A)A debt-equity ratio of 1 is considered to be the optimal capital structure.
B)The more debt a firm assumes,the greater the incentive to acquire even more debt until such time as the firm is financed with 100 per cent debt.
C)At the optimal level of debt a firm also optimises its tax shield on debt.
D)A firm receives the greatest benefit from debt financing when its tax rate is relatively low.
E)The costs of financial distress decrease the value of a firm.
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Chapter 14: Dividends and Dividend Policy
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Sample Questions
Q1) Which of the following would generally coincide with the overall priorities of a compromise dividend policy?
I.allowing the debt-equity ratio to increase temporarily to avoid a dividend cut
II.forgoing a major positive investment to avoid the issuance of new shares
III.maintaining a constant debt-equity ratio by selling additional shares as needed
IV.limiting positive net present value projects in order to reach a target dividend payout ratio
A)II and IV only
B)I and III only
C)III and IV only
D)II only
E)I only
Q2) On which one of the following dates are dividends direct deposited to shareholders bank accounts?
A)ex-dividend date
B)public announcement date
C)payment date
D)declaration date
E)date of record
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Page 16
Chapter 15: Raising Capital
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Sample Questions
Q1) The investment firms which act as intermediaries between the issuer of securities and the general public are called:
A)investment advisors
B)Green Shoe firms
C)brokers
D)underwriters
E)red herrings
Q2) Scott placed an order with his broker to purchase 1000 shares of each of three IPOs that are being released this month.Each IPO has an offer price of $24 a share.The number of shares allocated to Scott along with the closing stock price at the end of the first day of trading for each stock,are as follows: What is Scott's total profit or loss on these three stocks as of the end of the first day of trading for each stock?
A)-$10
B)-$240
C)$450
D)-$380
E)$220
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Page 17
Chapter 16: Short-Term Financial Planning
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Sample Questions
Q1) The Hot Potato Co.operates several mobile units which contract with construction companies to provide hot food and beverages to their workers.The company has annual sales of $167 200.Cost of goods sold average 45 per cent of sales and the profit margin is 6 per cent.The average accounts receivable balance is $23 400.On average,how long does it take Hot Potato to collect from its construction customers?
A)56 days
B)61 days
C)48 days
D)59 days
E)51 days
Q2) The time between the payment for inventory and the receipt of cash from the sale of that inventory is called the:
A)accounts payable period
B)inventory period
C)accounts receivable period
D)cash cycle
E)operating cycle
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Chapter 17: Working Capital Management
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Sample Questions
Q1) The economic order quantity approach states that inventory order sizes should be determined in which of the following manners?
A)computing the amount of the derived demand
B)dividing annual item sales by the carrying cost per item and multiplying by 2
C)dividing the inventory into various groups based on the value per item
D)computing the average number of items sold each month
E)equating restocking costs with carrying costs
Q2) You purchased an item costing $5700 on July 13.The terms of sale were 1/5,net
20.What is the last day you can pay the discounted price?
A)July 18
B)August 2
C)August 5
D)July 20
E)July 28
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Chapter 18: International Aspects of Financial Management
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Sample Questions
Q1) You are planning a trip to the UK and plan on spending 3600 pounds.How many dollars will this trip cost you if the exchange rate per one Australian dollar is 0.6789 pounds?
A)$2444.04
B)$5302.70
C)$6044.04
D)$3892.16
E)$5890.01
Q2) Which one of the following is the best definition of Eurocurrency?
A)any paper money used by a country that has adopted the euro as its common currency
B)both paper and coins officially adopted under the euro system of coinage
C)money deposited in a financial institution outside of the country whose currency is involved
D)US dollars owned by any country which has adopted the euro as its currency
E)any exchange of funds between two countries that have adopted the euro as their official currency
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