Corporate Finance
Test Questions
Course Introduction
Corporate Finance examines the fundamental concepts and techniques used in making financial decisions within corporations. The course covers topics such as capital budgeting, capital structure, working capital management, cost of capital, dividend policy, and valuation of businesses. Students will analyze real-world case studies to understand how financial managers maximize shareholder value, evaluate investment opportunities, manage financial risk, and make strategic funding decisions. Emphasis is placed on developing quantitative and analytical skills needed to solve practical financial problems and understand the impacts of financial decisions in a dynamic business environment.
Recommended Textbook
Principles of Managerial Finance Brief 8th Edition by Chad J. Zutter
15 Chapters
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Page 2
Chapter 1: The Role of Managerial Finance
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Sample Questions
Q1) The average tax rate of a corporation with ordinary income of $105,000 and a tax liability of $24,200 is ________.
A)46 percent
B)23 percent
C)34 percent
D)15 percent
Answer: B
Q2) Which of the following is TRUE of stakeholders?
A)They are the owners of a firm.
B)They are groups to whom a firm has financial obligations.
C)They are groups having a direct economic link to a firm.
D)They include only the bondholders,common stockholders,and preferred stockholders.
Answer: C
Q3) The marginal tax rate paid on a firm's ordinary income can be calculated by dividing its taxes by its net income.
A)True
B)False
Answer: False
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Chapter 2: The Financial Market Environment
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Sample Questions
Q1) One difference between angel investors and venture capitalists is ________.
A)venture capitalists are typically businesses,whereas angel investors are usually individuals
B)venture capitalists invest in risky startups,whereas angel investors put their money into more mature businesses
C)venture capitalists make private equity investments whereas angel investors buy shares in companies in the same way that the rest of the investing public does
D)angel investors are active and typically take a seat of the board of directors of any firm that they provide financing for,whereas venture capital investors are more passive
Answer: A
Q2) The Glass-Steagall Act ________.
A)was intended to regulate the activities in the secondary market
B)created the Securities Exchange Commission
C)separated the activities of commercial and investment banks
D)was intended to regulate the activities in the primary market
Answer: C
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4
Chapter 3: Financial Statements and Ratio Analysis
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Sample Questions
Q1) Market ratios only measure a firm's risk.
A)True
B)False
Answer: False
Q2) The financial leverage multiplier is an indicator of how much ________ a corporation is utilizing.
A)operating leverage
B)long-term debt
C)total debt
D)total assets
Answer: C
Q3) A(n)________ provides a financial summary of a firm's operating results during a specified period.
A)income statement
B)balance sheet
C)statement of cash flows
D)statement of retained earnings
Answer: A
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Page 5
Chapter 4: Long- and Short-Term Financial Planning
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Sample Questions
Q1) If a pro forma balance sheet dated at the end of May was prepared from the information presented,the marketable securities would total ________.(See Table 4.3)
A)$9,000
B)$9,500
C)$12,000
D)$16,750
Q2) The cash flows from financing activities section of the statement of cash flows includes ________.
A)labour expense
B)cost of raw materials
C)purchase of long-term assets
D)dividends paid
Q3) If the Tax Cuts and Jobs Act requires a firm to fully deduct the cost of new equipment when it is purchased rather than depreciating that cost over several years,the investment becomes less attractive financially.
A)True
B)False
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Chapter 5: Time Value of Money
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Sample Questions
Q1) If a United States Savings bond can be purchased for $14.60 and has a maturity value at the end of 25 years of $100,what is the annual rate of return on the bond?
A)6 percent
B)7 percent
C)8 percent
D)9 percent
Q2) A wealthy industrialist wishes to establish a $2,000,000 trust fund which will provide income for his grandchild into perpetuity.He stipulates in the trust agreement that the principal may not be distributed.The grandchild may only receive the interest earned.If the interest rate earned on the trust is expected to be at least 7 percent in all future periods,how much income will the grandchild receive each year?
Q3) The future value of an ordinary annuity of $1,000 each year for 10 years,deposited at 3 percent,is ________.
A)$11,808.
B)$11,464.
C)$8,530.
D)$8,786.
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Page 7
Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) Payment of interest required only when earnings are made available from which to make a payment is characteristic of a(n)________.
A)floating rate bond
B)income bond
C)mortgage bond
D)equipment trust certificate
Q2) ________ mainly explains the tendency for the yield curve to be upward sloping.
A)Expectations theory
B)Liquidity preference theory
C)Market segmentation theory
D)Investor perception theory
Q3) The value of an asset depends on the historical cash flow(s)up to the present time.
A)True
B)False
Q4) With subordinated debentures,payment of interest by a firm is required only when earnings are available.
A)True
B)False
Q5) Explain liquidity risk,default risk,and interest rate risk.
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Chapter 7: Stock Valuation
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Sample Questions
Q1) Julie's X-Ray Company paid $2.00 per share in common stock dividends last year.The company will allow its dividend to grow at 5 percent for 4 years,and after that the rate of growth will be 3 percent forever.What is the value of the stock if the required rate of return is 8 percent?
Q2) Ride World has estimated the market value of its assets to be $1,250,000.What is the value of Ride World's common stock if it has $900,000 in liabilities,$50,000 in preferred stock,and 7,500 shares of common stock outstanding?
Q3) From a corporation's point of view,a disadvantage of issuing preferred stock is
A)that it increases financial leverage
B)that it has to give fixed payments as well as voting rights to the holders
C)its excellent merger security
D)that the dividends are not tax-deductible
Q4) The board of directors of Ride World,Inc.has declared $5.00 common stock dividend,payable one year from today,and accepted a plan to freeze the dividend at $5 per year indefinitely.What is the value of the Ride World's common stock if the required rate of interest is 15 percent?
Q5) Calculate the estimated dividend for 2020.(See Table 7.1)
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Chapter 8: Risk and Return
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Sample Questions
Q1) If an investor prefers investments with greater risk even if they have lower expected returns,then he is following a ________ strategy.
A)risk-seeking
B)risk-indifferent
C)risk-averse
D)risk-neutral
Q2) A change in inflationary expectations resulting from events such as international trade embargoes or major changes in Federal Reserve policy will result in a shift in the SML.
A)True
B)False
Q3) The beta associated with a risk-free asset ________.
A)is greater than 1
B)is less than 1
C)is equal to 0
D)is between 0 and 1
Q4) The required return on an asset is an increasing function of its nondiversifiable risk.
A)True
B)False
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) The firm's cost of a new issue of common stock is ________.(See Table 9.2)
A)10.2 percent
B)14.3 percent
C)16.7 percent
D)15.2 percent
Q2) A firm has issued preferred stock at its $125 per share par value.The stock will pay a $15 annual dividend.The cost of issuing and selling the stock was $4 per share.The cost of the preferred stock is ________.
A)7.2 percent
B)12 percent
C)12.4 percent
D)15 percent
Q3) The cost of retained earnings is generally higher than both the cost of debt and cost of preferred stock.
A)True
B)False
Q4) The cost of retained earnings will always equal the cost of preferred stock.
A)True
B)False
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Chapter 10: Capital Budgeting Techniques
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Sample Questions
Q1) An outlay for advertising and management consulting is considered to be a fixed asset expenditure.
A)True B)False
Q2) A nonconventional cash flow pattern is one in which an initial inflow is followed by a series of inflows and outflows.
A)True B)False
Q3) Tangshan Mining Company is considering investing in a new mining project.The firm's cost of capital is 12 percent and the project is expected to have an initial after-tax cost of $5,000,000.Furthermore,the project is expected to provide after-tax operating cash flows of $2,500,000 in year 1,$2,300,000 in year 2,$2,200,000 in year 3,and ($1,300,000)in year 4?
(a)Calculate the project's NPV.
(b)Calculate the project's IRR.
(c)Should the firm make the investment?
Q4) If the NPV is greater than $0,a project should be accepted.
A)True B)False
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Chapter 11: Capital Budgeting Cash Flows and Risk
Refinements
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Sample Questions
Q1) The initial outlay equals ________.(See Table 11.3)
A)$41,100
B)$44,100
C)$38,800
D)$38,960
Q2) In capital budgeting,risk refers to a high degree of variability of the initial investment of a project.
A)True
B)False
Q3) Calculate the incremental depreciation.(See Table 11.4)
Q4) The annualized NPV of Project B is ________.(See Table 11.11)
A)$11,673
B)$12,947
C)$38,227
D)$21,828
Q5) Calculate the incremental earnings before depreciation and taxes.(See Table 11.4)
Q6) The higher the risk-adjusted net present,the more viable the project.
A)True
B)False
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Chapter 12: Leverage and Capital Structure
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Sample Questions
Q1) At the operating breakeven point,________ equals zero.
A)sales revenue
B)fixed operating costs
C)variable operating costs
D)earnings before interest and taxes
Q2) The base level of EBIT must be held constant to compare the financial leverage associated with different levels of fixed financial costs.
A)True
B)False
Q3) A firm has interest expense of $145,000,preferred dividends of $25,000,and a tax rate of 21 percent.The firm's financial breakeven point is ________.
A)$25,000
B)$201,646
C)$176,646
D)$145,000
Q4) Which plan has a higher degree of financial leverage and financial risk? (See Table 13.1)
Q5) Assuming a 21 percent tax rate,what is the financial breakeven point for each plan? (See Table 13.1)
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Chapter 13: Payout Policy
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Sample Questions
Q1) In theory,when a stock begins to trade ex dividend,the price of the stock should drop by roughly the amount of the dividend.
A)True
B)False
Q2) Stock dividends are ________.
A)taxable at a higher level than dividend taxes
B)taxable at a lower level than dividend taxes
C)non taxable
D)taxable only to the shareholders
Q3) In the U.S.over the last 40 years or so,in the aggregate ________.
A)the dollar volume of share repurchases has been growing faster than the volume of dividend payments
B)the dollar volume of dividend payments has been growing faster than the volume of share repurchases
C)the dollar volume of dividend payments and share repurchases have been growing at about the same pace
D)firms have been cutting back on share repurchase activities
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Chapter 14: Working Capital and Current Assets Management
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Sample Questions
Q1) Which of the following is TRUE of a repurchase agreement?
A)It results from a bank guarantee of a business transaction; sold at discount from maturity value.
B)It provides a return slightly below that obtainable through outright purchase of similar marketable securities.
C)It is issued by professional portfolio management companies.
D)Its maturity period lies between 1 to 10 years.
Q2) The cash conversion cycle is the sum of average age of the inventory and average collection period minus average payment period.
A)True
B)False
Q3) The reorder point is an inventory management system that compares production needs to available inventory balances and determines when orders should be placed for various items on a firm's bill of materials.
A)True
B)False
Q4) Working capital refers to a firm's long-term capital.
A)True
B)False
16
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Chapter 15: Current Liabilities Management
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Sample Questions
Q1) The primary source of secured short-term loans to businesses are ________.
A)commercial banks and commercial finance companies
B)lines of credit and revolving lines of credit
C)commercial paper dealers and investment bankers
D)life insurance companies and government securities brokers
Q2) The effective interest rate for a discount loan is greater than the loan's stated interest rate.
A)True
B)False
Q3) Global Logistics purchased a new machine on October 20th,2019 for $1,000,000 on credit.The supplier has offered A&A terms of 2/10,net 45.The current interest rate the bank is offering is 16 percent.
(a)Compute the cost of giving up cash discount.
(b)Should the firm take or give up the cash discount?
(c)What is the effective rate of interest if the firm decides to take the cash discount by borrowing money on a discount basis?
Q4) Bessey Aviation has just sold an issue of 30-day commercial paper with a face value of $5,000,000.The firm has just received $4,958,000.What is the effective annual interest rate on the commercial paper?
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