Corporate Finance
Textbook Exam Questions
Course Introduction
Corporate Finance explores the fundamental principles and strategies that underpin financial decision-making within corporations. The course covers key topics such as capital budgeting, risk and return analysis, cost of capital, capital structure, dividend policy, and valuation of financial assets. Students learn how corporations raise funds, allocate resources, manage financial risks, and create value for shareholders. Emphasis is placed on both theoretical frameworks and practical applications, preparing students to analyze financial data, assess investment opportunities, and make informed decisions that maximize firm value in a dynamic business environment.
Recommended Textbook
CFIN 6th Edition by Scott Besley
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Page 2
Chapter 1: An Overview of Managerial Finance
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Sample Questions
Q1) Which of the following is true of a firm that tries to coordinate and control the worldwide operations of its subsidiaries?
A)The management personnel of its subsidiaries need to be fluent only in English.
B)The subsidiaries based in different countries never face any constraints on the transfer of corporate resources.
C)Cash flows in different subsidiaries are denominated in different currencies.
D)The terms of trade determined after negotiation with the host government and the multinational corporation are always well aligned to the firm's policies.
E)All the subsidiaries are based only in countries that have homogeneous cultural heritages.
Answer: C
Q2) Financial managers should seek the combination of assets, liabilities, and capital that generate the largest expected projected income in the current accounting period. A)True
B)False
Answer: False
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3
Chapter 2: Analysis of Financial Statements
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Sample Questions
Q1) The equity section of a firm's balance sheet contains _____.
A)retained earnings
B)current assets
C)corporate bonds
D)dividends
E)noncash assets
Answer: A
Q2) _____ is an example of a long-term investment of a firm.
A)Retained earnings
B)Equipment
C)Accounts receivable
D)Common stock
E)Long-term bonds
Answer: B
Q3) The degree to which the managers of a firm attempt to magnify the returns to owners' capital through the use of financial leverage is captured in debt management ratios.
A)True
B)False Answer: True
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Chapter 3: The Financial Environment: Markets, Institutions, and Investment Banking
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Sample Questions
Q1) An agreement for the sale of securities in which the investment bank handling the transaction gives no assurance that the entire issue will be sold is called a(n) _____.
A)private placement
B)guaranteed issue arrangement
C)underwritten arrangement
D)best-efforts arrangement
E)shelf registration
Answer: D
Q2) The provision of dual listing of stocks has defeated the efforts made to increase competition in the stock markets.
A)True
B)False
Answer: False
Q3) Dual listing of stocks and the mandatory use of the trade-through rule when trading in securities have made the stock markets extremely competitive.
A)True
B)False
Answer: True
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Chapter 4: Time Value of Money
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Sample Questions
Q1) Ordinary annuity is an annuity with payments that occur at the beginning of each period.
A)True
B)False
Q2) Mike is considering investing $18,500 in an investment that will have a maturity value of $32,500 in eight years. If the interest is compounded monthly, what is the effective annual rate of return earned on the investment?
A)4.3%
B)5.7%
C)6.5%
D)7.3%
E)8.8%
Q3) Which of the following is the rate of return on the best available alternative investment of equal risk?
A)Amortization rate
B)Risk adjusted rate
C)Required rate of return
D)Opportunity cost rate
E)Expected rate of return
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Page 6
Chapter 5: The Cost of Money Interest Rates
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Sample Questions
Q1) Inflation leads to an increase in the purchasing power of investors.
A)True
B)False
Q2) A bond purchased for $950 was sold for $980 after one year. The interest received during the year is $25. Which of the following is the bond's yield?
A)2.23%
B)5.79%
C)8.12%
D)5.25%
E)9.36%
Q3) Everything else equal, which of the following actions would tend to increase interest rates in the financial markets?
A)Investors' time preferences for consumption increase.
B)Investors are exposed to fewer economic risks.
C)Production opportunities decrease throughout the economy.
D)The overall creditworthiness of borrowers improves significantly.
E)The default probabilities of corporations decline substantially.
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Chapter 6: Bonds Debt Characteristics and Valuation
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Q1) The percentage rate of return that investors earn on a bond consists of a(n):
A)interest yield plus a capital gains yield.
B)interest yield plus the maturity value of the bond.
C)expected interest yield plus the principal value of the bond.
D)expected capital gains yield plus the future value of coupon payments.
E)market interest rate plus the coupon interest rate.
Q2) Zero coupon bonds are offered at substantial discounts below their par values.
A)True
B)False
Q3) Call provisions on corporate bonds are generally included to protect the issuer against large increases in interest rates. They affect the actual maturity of the bond but not its price.
A)True
B)False
Q4) The greater a bond's default risk, the greater the:
A)maturity value of the bond.
B)chance the firm will exercise the call provision on the bond.
C)interest rate stability of the bond in the long run.
D)investment in the bond by risk-averse investors.
E)default risk premium (DRP) associated with the bond.
Page 8
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Chapter 7: Stocks Equity Characteristics and Valuation
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Sample Questions
Q1) The economic value added (EVA) of a firm is $6.25 million, and the firm has 2.78 million outstanding shares. What is the maximum amount of dividend that can be paid to shareholders without threatening the firm's current value?
A)$1.65
B)$2.25
C)$3.12
D)$3.89
E)$4.41
Q2) Which of the following types of securities is referred to as a hybrid security?
A)Corporate bonds
B)Preferred stock
C)Founders' shares
D)Foreign equity
E)Growth stock
Q3) A typical common stock issue has a maturity period of 10 years.
A)True
B)False
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9
Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) The part of a security's risk associated with economic factors that affect all firms to some extent is known as the _____.
A)diversifiable risk
B)unsystematic risk
C)stand-alone risk
D)market risk
E)business risk
Q2) Which of the following measures captures the effects of both risk and return, which makes it a better measure than standard deviation for evaluating stand-alone risk in situations where investments differ with respect to both their amounts of total risk and their expected returns?
A)Probability distribution of the investment's returns
B)Expected average rate of returns of the investment
C)Correlation coefficient of one investment with another investment
D)Coefficient of variation
E)Beta coefficient
Q3) Economic risk is an unsystematic risk that can be diversified by the investors.
A)True
B)False
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Page 10
Chapter 9: Capital Budgeting Techniques
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Q1) If a project's discounted payback period is less than its useful life, _____.
A)the terminal value of its future cash inflows is less than the future value of its initial cost
B)its future cash inflows are less than its initial cost
C)the present value of its future cash flows exceeds its initial cost
D)the present value of its future cash inflows is greater that the future value of its initial cost
E)its cost-recovery time should exceed the maximum cost-recovery time established by the firm
Q2) When determining a project's true profitability, it is normally better to compute the project's modified internal rate of return (MIRR) rather than its internal rate of return (IRR) because the MIRR technique:
A)considers only the cash flows after the project's payback period.
B)has a decision rule that is easier to apply than the IRR decision rule.
C)assumes that the project's cash flows are reinvested at the firm's required rate of return, whereas IRR assumes the cash flows are reinvested at the project's IRR.
D)assumes that the project's cash flows are reinvested at the risk-free rate.
E)assumes that the project's cash flows are discounted at its IRR.
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Chapter 10: Project Cash Flows and Risk
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Sample Questions
Q1) When evaluating capital budgeting projects, how do most firms incorporate risk in their decision-making analyses?
A)Most firms do not consider risk when making capital budgeting decisions; that is, they ignore it.
B)Most firms increase the required rate of return used in their capital budgeting analyses when evaluating projects with higher-than-average risks.
C)Most firms decrease the required rate of return used in their capital budgeting analyses when evaluating projects with higher-than-average risks.
D)Most firms use the same required rate of return to evaluate all capital budgeting projects, because the risk associated with an individual capital budgeting project is not important when determining the overall riskiness of the firm.
E)Most firms decrease the required rate of return used in their capital budgeting analyses by 6 percent when evaluating projects with lower-than-average risks.
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Chapter 11: The Cost of Capital
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Sample Questions
Q1) To determine the actual cost of using debt, a firm must adjust its bonds' average yield to maturity for the fact that _____.
A)interest payments on debt represent taxable income to the firm
B)interest payments on debt represent a tax deductible expense to the firm
C)the average yield to maturity on its debt is a positive return that the firm receives (earns)
D)the average yield to maturity on the firm's debt determines the tax rate that it pays on its operating income
E)the firm's bondholders do not have to pay taxes on the interest they receive from the firm
Q2) Everything else equal, an asset's value is:
A)inversely related to the rate of return investors require to purchase it.
B)directly proportional to the cost of debt used in the capital budgeting process of the firm.
C)not related to the cash flows that the asset is expected to generate during its life.
D)inversely related to the cost of debt used in the capital budgeting process of the firm.
E)directly proportional to the rate of return investors require to purchase it.
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Page 13
Chapter 12: Capital Structure
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Sample Questions
Q1) The optimal capital structure is the capital structure that strikes a balance between risk and return such that the firm's stock price is maximized.
A)True
B)False
Q2) At its optimal capital structure, the firm's debt/assets ratio will always be lower than the one that maximizes its _____.
A)expected earnings per share (EPS)
B)weighted average cost of capital
C)beta coefficient
D)degree of financial leverage
E)net operating income
Q3) The situation in which managers have different (better) information about their firm's prospects than outside investors is known as _____ information.
A)symmetric
B)contingent
C)asymmetric
D)favorable
E)unfavorable
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14
Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
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Q1) According to the free cash flow hypothesis that has been proposed to explain how dividend policies affect stock prices, cash flows that cannot be reinvested in positive net present value projects should be retained and reinvested by the firm.
A)True
B)False
Q2) Which of the following hypotheses/theories suggests that investors regard a change in dividend payments as a signal that the firm's management expects future earnings to also change?
A)Information content hypothesis
B)Clientele effect theory
C)Constant payout ratio hypothesis
D)Dividend modification hypothesis
E)Projected earnings hypothesis
Q3) The clientele effect hypothesis that has been proposed to explain how dividend policies affect stock prices suggests that a firm's dividend policy can provide information about management's behavior with respect to wealth maximization.
A)True
B)False
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Chapter 14: Managing Short-Term Financing Liabilities
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Sample Questions
Q1) Gale Corporation recently issued 270-day commercial paper with a face value of $100,000 and a simple interest rate of 11 percent. Assuming there are 360 days in a year, what is the commercial paper's annual percentage rate (APR)? The firm incurs no transaction costs to issue the commercial paper.
A)11.99%
B)6.74%
C)11.00%
D)8.25%
E)8.99%
Q2) The three main working capital strategies-aggressive, conservative, and moderate-differ primarily in the:
A)relative amounts of short-term debt a firm uses.
B)minimum level of permanent current assets a firm maintains.
C)relative amount of long-term debt versus equity that a firm uses to finance its permanent current assets.
D)average level of temporary current assets a firm maintains.
E)amount of trade credit a firm uses.
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Chapter 15: Managing Short-Term Assets
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Q1) The primary reason that companies provide cash discounts to customers who pay for their credit purchases on or before a specified date is to speed up the collection period.
A)True
B)False
Q2) A ______ balance is cash that a firm holds in reserve for unforeseen fluctuations in its cash flows.
A)transactions
B)compensating
C)precautionary
D)speculative
E)lockbox
Q3) The threat of expropriation creates an incentive for a multinational firm to minimize inventory holdings and to bring goods into a foreign country only as needed.
A)True
B)False
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Chapter 16: Financial Planning and Control
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Sample Questions
Q1) Which of the following mathematical expressions is used to compute the degree of financial leverage (DFL) at a particular level of earnings before interest and taxes (EBIT)?
Assume the firm has no preferred stock.
A)DFL = Earnings before interest and taxes ÷ Earnings per share (EPS)
B)DFL = Gross profit ÷ Earnings before interest and taxes
C)DFL = Sales ÷ (Earnings before interest and taxes - Interest)
D)DFL = Earnings before interest and taxes ÷ (Earnings before interest and taxesInterest)
E)DFL = (Earnings before interest and taxes - Interest - Taxes) ÷ Number of shares
Q2) When economies of scale exist, a firm's _____ ratio is likely to decrease if the size of the firm increases substantially.
A)days sales outstanding
B)total assets turnover
C)variable cost of goods sold
D)times interest earned
E)price earnings (P/E)
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