Corporate Finance
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Course Introduction
Corporate Finance examines the principles and practices underlying financial management in businesses. The course covers key topics such as capital budgeting, risk and return analysis, cost of capital, financial statement analysis, capital structure decisions, dividend policy, mergers and acquisitions, and working capital management. Students will learn how financial managers assess investment opportunities, raise capital, and optimize firm value. Emphasis is placed on problem-solving and analytical skills through case studies and real-world financial scenarios, preparing students for careers in finance, banking, consulting, and corporate financial planning.
Recommended Textbook Financial Management Principles and Applications 11th Edition by Sheridan Titman
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Page 2
Chapter 1: Getting Started-Principles of Finance
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Q1) Which of the following is NOT a principle of basic financial management?
A)Risk/return tradeoff
B)Incremental cash flow counts
C)Efficient capital markets
D)Profit is king
Answer: D
Q2) The corporation is the most effective form of organization in terms of raising capital.
A)True
B)False
Answer: True
Q3) Briefly discuss why financial decision makers must focus on incremental cash flows when evaluating new projects.
Answer: Incremental cash flows describe the total cash effect on the company,looking at the difference between total cash flow to the company with the cash flow,and without the cash flow.The company can then value these cash flows and see if the company is worth more with the project or without the project.
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Chapter 2: Firms and the Financial Market
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Sample Questions
Q1) Organized security exchanges do not physically occupy space.
A)True
B)False Answer: False
Q2) Financial intermediaries help bring savers and borrowers together.
A)True
B)False Answer: True
Q3) Which of the following is true about bonds?
A)They are obligations from the investor to the corporation.
B)Their interest rate always varies with the Consumer Price Index
C)They have a fixed maturity,and they pay an amount equal to the maturity value times the coupon rate each year.
D)At maturity of the bond,the investor receives the market price of the bond.
Answer: C
Q4) Owners of common stock are the owners of the firm.
A)True
B)False Answer: True
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Chapter 3: Understanding Financial Statements, taxes, and Cash Flows
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Sample Questions
Q1) Under current accounting rules,plant and equipment appear on a company's balance sheet valued at replacement value.
A)True
B)False
Answer: False
Q2) The income statement describes the financial position of a firm on a given date. A)True
B)False Answer: False
Q3) The income statement provides a statement of results for the firm's operations. A)True
B)False
Answer: True
Q4) Which of the following best describes a balance sheet?
A)Reports cash receipts and cash disbursements for a specific accounting period
B)Reports investment activities for a specified accounting period
C)Reports revenues and expenses for a specific accounting period
D)Reports the amount and composition of assets and liabilities at a specified point in time
Answer: D
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Chapter 4: Financial Analysis-Sizing up Firm Performance
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Sample Questions
Q1) Wireless Communications has a total asset turnover of 2.66,total liabilities of $1,004,162,and sales revenues of $7,025,000.What is Wireless's debt ratio?
A)38.0%
B)14.3%
C)26.7%
D)81.1%
Q2) Discuss the limitations of ratio analysis.
Q3) Which of the following financial ratios is the best measure of how effectively a firm's management is serving its stockholders?
A)Current ratio
B)Debt ratio
C)ACP
D)Return on equity
Q4) Since 1994,ABC's liquidity has:
A)improved.
B)deteriorated.
C)remained the same.
D)been variable across components of the liquidity measures.
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Chapter 5: Time Value of Money-The Basics
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Sample Questions
Q1) The same basic formula is used for computing both the computation of future value and of present value.
A)True
B)False
Q2) An increase in future value can be caused by an increase in the:
A)annual interest rate.
B)number of compounding periods.
C)original amount invested.
D)both A and B.
E)all of the above.
Q3) If you want to have $1,700 in seven years,how much money must you put in a savings account today? Assume that the savings account pays 6% and it is compounded quarterly (round to the nearest $10).
A)$1,120
B)$1,130
C)$1,110
D)$1,140
Q4) Briefly discuss how non-annual compounding (more than one compounding period per year)is preferable to annual compounding if you are an investor.
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Chapter 6: The Time Value of Money-Annuities and Other Topics
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Sample Questions
Q1) Your investment goal is to have $3,000,000 in 40 years for retirement.You decide to invest in a mutual fund today that pays 12% per year compounded monthly.How much must you invest at the end of each month to meet your investment goal? Round to the nearest $1.
A)$245
B)$255
C)$285
D)$305
E)$315
Q2) Harold Hawkins bought a home for $320,000.He made a down payment of $45,000;the balance will be paid off over 30 years at a 6.775% rate of interest.How much will Harold's monthly payments be? Round off to the nearest $1.
A)$1,450
B)$1,788
C)$3,200
D)$1,682
Q3) You have borrowed $70,000 to buy a speed boat.You plan to make monthly payments over a 15-year period.The bank has offered you a 9% interest rate,compounded monthly.Create an amortization schedule for the first two months of the loan.
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Chapter 7: An Introduction to Risk and Return-History of
Financial Market Returns
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Q1) Investments in emerging markets have higher volatility than do U.S.Stocks.
A)True
B)False
Q2) What is the arithmetic average return of Roddy Richard's investment?
A)2.42%
B)3.96%
C)5.18%
D)15.1%
Q3) Stock prices go up when there is positive information about a company,and go down when there is negative information about the company.
A)True
B)False
Q4) Arithmetic average rate of return takes compounding into effect.
A)True
B)False
Q5) If an investor holds a stock for six years,the value at the end of six years will be the initial cost times (1 + geometric average return)to the sixth power.
A)True
B)False
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Chapter 8: Risk and Return-Capital Market Theory
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Sample Questions
Q1) Marjen stock has a required return of 20%.The expected market return is 15%,and the beta of Marjen's stock is 1.5.Calculate the risk-free rate.
A)4%
B)5%
C)6%
D)7%
Q2) According to the experts,a model portfolio should consist of a mix of securities that over the long run should look something like this: cash or money market accounts,5%;bonds,25%;domestic stocks,35%;international stocks,35%.What is the determination of the proportions of various securities within a portfolio referred to as?
A)Risk assessment
B)Capital asset modeling
C)Beta selection
D)Portfolio regression
E)Asset allocation
Q3) Total risk equals unique security risk times systematic risk.
A)True
B)False
Q4) Provide an intuitive discussion of beta and its importance for measuring risk.
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Chapter 9: Debt Valuation and Interest Rates
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Q1) Terminator Bug Company bonds have a 14% coupon rate.Interest is paid semiannually.The bonds have a par value of $1,000 and will mature 10 years from now.Compute the value of Terminator bonds if investors' required rate of return is 12%.
A)$1,114.70
B)$1,149.39
C)$894.06
D)$1,000.00
Q2) On any given day,a bond can be issued at:
A)a discount.
B)a premium.
C)par.
D)all of the above.
Q3) Junk bonds:
A)are high yield bonds.
B)have higher default risk.
C)were used to finance "fallen angels."
D)all of the above.
Q4) As market interest rates increase,bond prices decrease.
A)True
B)False
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Chapter 10: Stock Valuation
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Sample Questions
Q1) The growth rate of future earnings is determined by return on equity and the profit-retention rate.
A)True B)False
Q2) In order to determine the value of a share of preferred stock,the discount rate used is the annual dividend percent.
A)True B)False
Q3) A block trade is a trade involving 10,000 or more shares by a single holder.
A)True B)False
Q4) Expected cash flow for a preferred stock primarily consists of:
A)dividend payments .
B)changes in the price of the stock.
C)interest payments.
D)both A and B.
Q5) Distinguish between primary stock market transactions and secondary stock market transaction.
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Chapter 11: Investment Decision Criteria
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Sample Questions
Q1) Why is it so difficult for firms to find good investment ideas?
Q2) What is the NPV of a $45,000 project that is expected to have an after-tax cash flow of $14,000 for the first two years,$10,000 for the next two years,and $8,000 for the fifth year? Use a 10% discount rate.Would you accept the project?
Q3) A machine costs $1,000,has a three-year life,and has an estimated salvage value of $100.It will generate after-tax annual cash flows (ACF)of $600 a year,starting next year.If your required rate of return for the project is 10%,what is the NPV of this investment? (Round your answer to the nearest $10. )
A)$490
B)$570
C)$900
D)-$150
Q4) A project has an initial outlay of $4,000.It has a single payoff at the end of Year 4 of $6,996.46.What is the IRR for the project (round to the nearest percent)?
A)16%
B)13%
C)21%
D)15%
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Chapter 12: Analyzing Project Cash Flows
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Sample Questions
Q1) Incremental cash flows from a project =
A)Firm cash flows without the project plus or minus changes in net income.
B)Firm cash flows with the project plus firm cash flows without the project.
C)Firm cash flows with the project minus firm cash flows without the project.
D)Firm cash flows without the project plus or minus changes in revenue with the project.
Q2) Kahnemann Kookies is evaluating the replacement of an old oven with a new,more energy efficient model.The old oven cost $50,000,is 5 years old and is being depreciated over a life of 10 years to a value of $0.00.The new oven costs $60,000 and will be depreciated over 5 years with no salvage value.Kahnemann uses straight line depreciation,its tax rate is 40%.If the old oven is sold for $10,000,compute the net cost of the new oven.
Q3) Sunk costs are a type of incremental cash flow that should be included in all capital-budgeting decisions.
A)True
B)False
Q4) By examining cash flows,we are correctly able to analyze the timing of the benefits.
A)True
B)False
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Chapter 13: Risk Analysis and Project Evaluation
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Sample Questions
Q1) An appropriate tool to analyze the interaction of various value drivers for Orange Electronics would be
A)simulation
B)sensitivity analysis
C)scenario analysis
D)either A or C
Q2) February sales for Ted's Variety Store equal $100,000,variable costs equal $60,000,fixed costs,including depreciation of $20,000,total $60,000.
A)Teds' Variety Store broke even with respect to net income.
B)Teds' Variety Store broke even with respect to cash.
C)Ted's Variety fell $20,000 short of cash break-even.
D)Teds' Variety Store broke even with a $20,000 surplus.
Q3) In reality,anticipated cash flows are only estimates and are thus uncertain.
A)True
B)False
Q4) When evaluating projects with real options,businesses must consider the probability that the option will be exercised.
A)True
B)False
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Chapter 14: The Cost of Capital
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Sample Questions
Q1) Which of the following would NOT be considered in calculating a firm's cost of capital?
A)Bonds
B)Accounts payable
C)Preferred Stock
D)common stock
Q2) The cost of common equity is already on an after-tax basis since dividends paid to common stockholders are not tax-deductible.
A)True
B)False
Q3) Sprite Communications will erect 20 new transmission towers at a total cost of $15,000,000.The expansion will increase after-tax operating cash flows by $2.3 million dollars per year for the next 20 years.Sprite's WACC is 12%.To raise the $15,000,000,Sprite will need to issue new securities at a weighted average flotation cost of 12%.What is the NPV of the expansion?
Q4) Sutter Corporation's common stock is selling for $16.80 a share.Last year,Sutter paid a dividend of $.80.Investors are expecting Sutter's dividends to grow at a rate of 5% per year.What is the cost of common equity?
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Chapter 15: Capital Structure Policy
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Sample Questions
Q1) The level of EBIT that will equate EPS between two different financing plans is called the:
A)indifference point.
B)optimal capital plan.
C)break-even point.
D)both A and C.
Q2) Comparative leverage ratio analysis does not involve the use of industry norms.
A)True
B)False
Q3) The indifference level of EBIT is:
A)$99,000.
B)$66,600.
C)$333,000.
D)$297,000.
Q4) Which of the following is a good reason for a company to have higher than average debt ratios.
A)The company's cash flows are difficult to predict.
B)The company generates little taxable income.
C)Customer support is an important aspect of the company's business.
D)The company faces high marginal tax rates.
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Chapter 16: Dividend Policy
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Q1) List the benefits of a firm repurchasing its own stock.
Q2) Which of the following is included in the Modigliani and Miller dividend indifference theorem?
A)Transaction costs
B)Personal taxes
C)Changes in the firm's investment policies
D)All of the above
Q3) Chandler Corporation has 1 million shares outstanding.The current price per share is $20.If the company decides to use $2 million dollars to repurchase shares at the market price,the company will have ________ shares outstanding worth approximately ________.Assume that the price does not change during the repurchase period.
A)900,000,$20 per share
B)1,000,000,$20 per share
C)900,000,$22.22 per share
D)1,000,000,$18 per share
Q4) We typically expect to find rapidly growing firms to have high payout ratios.
A)True
B)False
Q5) What is meant by "dividend clienteles"? Give specific examples.
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Chapter 17: Financial Forecasting and Planning
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Q1) Purchases of plant and equipment can be determined from the:
A)current cash budget.
B)previous period's balance sheet.
C)pro forma income statement.
D)use of ratio analysis.
Q2) An increase in projected ________ will increase discretionary funds needed.
A)cash dividends
B)sales
C)retained earnings
D)both A and B
Q3) Spontaneous sources of financing include:
A)accounts payable and accrued expenses.
B)notes payable and mortgages payable.
C)long-term debt and capital leases.
D)common stock and paid-in capital.
Q4) Why is financial planning important in a highly uncertain financial environment.
Q5) Holding all other variables constant,as the dividend payout ratio decreases,the sustainable growth rate increases.
A)True
B)False
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Chapter 18: Working Capital Management
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Sample Questions
Q1) Becker.com has an inventory turnover ratio of 52,an accounts receivable balance of $365,000,average daily credit sales of $36,500,accounts payable of $182,500 and cost of goods sold of $7,993,500.What is Becker's operating cycle to the nearest day?
A)17 days
B)61 days
C)27 days
D)-27 days
Q2) When faced with a surplus of cash,most firms should stretch their trade accounts.
A)True
B)False
Q3) Although CDs are slightly more risky than Treasury bills,the yield is usually slightly less.
A)True
B)False
Q4) Short-term debt is frequently less expensive because it provides the borrower more security.
A)True
B)False
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Page 20
Chapter 19: International Business Finance
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Q1) The current spot exchange rate between the Japanese yen and the U.S.dollar is 92.61 Y/US$.The yen is expected to appreciate by 4% against the dollar over the next year.What do you expect the spot exchange rate between the yen and the dollar to be one year from now?
A)92.61 Y/US$
B)98.18 Y/US$
C)89.05 Y/US$
D)103.08 Y/US$
Q2) You are leaving Mexico and have 3,000 pesos to change into dollars.The exchange rate is 10.2 pesos to the dollar.How many dollars will you receive?
A)You will receive 30,600 US$.
B)You will receive 294.12 US$.
C)You will lose money converting back into dollars.
D)This is not enough information to find the number of dollars.
Q3) Briefly discuss the factors that multinational firms consider in arriving at capital structure decisions.
Q4) What is the law of one price? How does it apply to foreign exchange rates?
Q5) What is the role of arbitrage in the foreign exchange markets?
Q6) What is meant by interest rate parity?
21
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Chapter 20: Corporate Risk Management
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Sample Questions
Q1) Hudson Valley Distributors wants to be sure it has 10,000 cases of Beaujolais Nouveau to sell next November.In January,they enters into an agreement to buy the wine at a price of 30 euros to the case.Payment will be due at the end of November.They expect to sell the wine to restaurants and retailers for $63 per case.Hudson Valley has hedged its foreign exchange risk by entering into a forward contract to purchase euros in November at $1.30/euro.If the spot exchange rate at the end of November is $1.50/euro,Hudson Valley's gross profit will be ________.
A)$180,000
B)($60,000)
C)$60,000
D)$240,000
Q2) Directors and officers insurance protects the company if key personnel die or leave the firm for other opportunities.
A)True B)False
Q3) Well managed firms will always seek to transfer as much risk as possible. A)True
B)False
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