Corporate Financial Analysis
Textbook Exam Questions
Course Introduction
Corporate Financial Analysis explores the principles, techniques, and tools used to evaluate a company's financial health and performance. The course covers the interpretation of financial statements, the use of financial ratios, trend analysis, and benchmarking against industry peers. Students will learn how to assess profitability, liquidity, solvency, and operational efficiency, and understand the implications of financial data for business decision-making. Emphasis is placed on practical skills for scrutinizing financial reports, identifying potential risks, and supporting strategic planning in a corporate context.
Recommended Textbook
Introduction to Corporate Finance 4th Edition by Sean Cleary
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Page 2
Chapter 1: An Introduction to Finance
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Q1) The three intermediation channels that transfer money from lenders to borrowers are
A) direct, indirect, and financial intermediation.
B) direct, indirect, and monetary intermediation.
C) direct, financial, and monetary intermediation.
D) indirect, financial, and monetary intermediation.
Answer: A
Q2) Which of the following is NOT a component of debt securities?
A) maturity
B) repayment
C) dividends
D) interest payments
Answer: C
Q3) An example of a non-marketable financial asset is a A) demand deposit.
B) T-bill.
C) commercial paper.
D) common share.
Answer: A
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Chapter 2: Business Corporatefinance
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Q1) Johan,a corporate manager,often takes significant business and financial risks because of the company's compensation structure,which provides him with a comfortable base salary and large bonuses when the business does well.Johan does not suffer in any way when the company performs poorly,even if the performance is a result of his decisions.What is the term that describes this situation?
A) moral hazard
B) agency monitoring problem
C) asymmetric risk structure
D) stakeholder snubbing
Answer: A
Q2) Which of the following is NOT an example of a trust?
A) a mutual fund
B) an estate
C) a royalty trust
D) a bank
Answer: D
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Chapter 3: Financial Statements
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Q1) On March 15 of year 1 XYZ bought a machine for $50,000.The machine is in class 43 with a CCA rate of 30%.Assuming that the machine is the only asset in that class,what is the CCA that XYZ can claim for the fiscal year ended at the end of year 1?
A) $7,500
B) $11,250
C) $12,750
D) $15,000
Answer: A
Q2) The sale of depreciable assets cannot result in ____________.
A) capital gains
B) capital losses
C) CCA recapture
D) terminal losses
Answer: B
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Chapter 4: Financial Statement Analysis and Forecasting
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Q1) What does a coverage ratio measure?
A) The company's ability to pay the interest on its debt
B) The company's ability to pay the principal amount of its debt
C) The company's ability to "cover" (pay) its operating expenses
D) The company's ability to "cover" (meet) shareholder return expectations
Q2) The dividend payout ratio aids investors by:
A) providing information about the sustainability of the dividend
B) providing information about the company's future revenue growth
C) measuring the company's dividend yield
D) reporting the company's net income margin
Q3) Which of the following is not a step in the financial planning process?
A) Deciding on how additional required assets will be financed
B) Estimating various cost categories as per the income statement
C) Preparing projected funds-flow statement
D) Ordering supplies in anticipation of future sales
Q4) Which one of the following is FALSE?
A) A high leverage ratio increases ROE.
B) A low leverage ratio decreases the risk of bankruptcy.
C) A leverage ratio is a stock ratio.
D) A low leverage ratio reduces the size of the balance sheet.
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Chapter 5: Time Value of Money
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Q1) Ingrid has invested $10,000 in a Guaranteed Investment Certificate that promises her 12% per year for the first 5 years and 4% per year for the next 10 years.The interest is compounded annually.At the end of the 15 years,the value of the investment will be closest to which value? (Round your answer to two decimals.)
A) $26,086.96
B) $31,721.69
C) $32,425.86
D) $36,372.55
Q2) The interest earned on both the original investment and the accumulated interest,over time is called
A) growth rate.
B) compound interest.
C) simple interest.
D) cost of capital.
Q3) As interest rates rise,future values
A) increase.
B) decrease.
C) stay the same.
D) cannot be determined, need compounding frequency.
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Chapter 6: Bond Valuation and Interest Rates
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Q1) Suppose a one-year zero-coupon bond is sold at $980,a two-year zero-coupon bond is sold at $950,and a three-year zero-coupon bond is sold at $920.What is the price of a 3-year 5% annual coupon bond? What is its YTM?
Q2) What is the major concern about the liquidity preference theory of the yield curve?
Q3) A ten-year annual pay bond with a 5% coupon rate is trading with a market yield of 7.75 percent.What is the percentage change in price if the market yield decreases by 75 basis points?
A) 5.37%
B) 5.61%
C) 5.67%
D) 5.77%
Q4) Which one of the following will occur during an increase in the supply of loanable funds?
A) A decrease in interest rates.
B) A decrease of the money supply in the economy.
C) A decrease in insured deposit amounts.
D) A decrease in the saving rate in the economy.
Q5) Explain the difference between the coupon rate and the current yield.
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Chapter 7: Equity Valuation
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Q1) What is the sustainable growth rate?
Q2) A bond and a preferred share_________________________
A) both have a fixed payment.
B) both have the same risk profile.
C) always have a maturity date.
D) are claims on the debt of the firm.
Q3) Which of the following is not a correct statement about equity securities?
A) No fixed maturity date.
B) Dividends are a tax-deductible expense for the issuer.
C) Shareholders pay lower taxes on dividends than they would on interest payments.
D) Ownership interests in an underlying entity.
Q4) Explain how earnings are implicitly considered in the DDM model.
Q5) Toronto Skates Inc.is paying dividends on a regular basis with a constant growth rate.The dividend last year was $ 1.00 and this year is $1.25.If the required rate of return is 12%,what is the price of the stock?
A) $10.42
B) $8.33
C) 5.00
D) Cannot be calculated
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Chapter 8: Risk, return, and Portfolio Theory
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Q1) Which of the following statements is TRUE?
A) The more stable the possible returns, the greater the risk.
B) Risk means the probability that the actual return from an investment is less than the expected return.
C) The range is a more accurate measure of risk than the standard deviation, because the range uses the maximum and minimum values, whereas the standard deviation uses all the observations.
D) Securities offering lower expected rates of return tend to be riskier.
Q2) Calculate the correlation between the two stocks.
A) -0.99
B) 0
C) 0.99
D) -1.00
Q3) Use the following two statements to answer this question:
A) I and II are correct.
B) I and II are incorrect.
C) I is correct, II is incorrect.
D) I is incorrect, II is correct.
i.Ex post returns are expected returns while ex ante returns are future returns.
i.Risk is the possibility of incurring harm.
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Chapter 9: The Capital Asset Pricing Model Capm
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Q1) What is the beta of a portfolio if 30 percent of the funds are invested in a risk-free asset,40 percent in the market portfolio,and the balance in a portfolio that has three times the risk of the market portfolio?
A) 0.4
B) 0.7
C) 1.3
D) 1.8
Q2) What are the expected return and standard deviation for a portfolio that has $2,000 invested in a risk-free asset with 5.25 percent rate of return,and $8,000 invested in a risky asset with a 21 percent rate of return and a 35 percent standard deviation?
A) Expected return = 17.85%; standard deviation = 28.00%
B) Expected return = 28.00%; standard deviation = 17.85%
C) Expected return = 7.00%; standard deviation = 8.40%
D) Expected return = 8.40%; standard deviation = 7.00%
Q3) What is the main criticism of the CAPM referred to as Roll's critique?
A) The stock market is not efficient.
B) The CAPM does not hold because beta is not a good measure of risk.
C) The market portfolio is impossible to estimate.
D) The CAPM does not hold empirically.
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Chapter 10: Market Efficiency
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Q1) Use the following statements to answer the question:
A) I is incorrect, II is correct.
B) I is correct, II is incorrect.
C) I and II are incorrect.
D) I and II are correct.
I.Increasing disclosure of information about the firm enhances transparency in the market.
II.Disclosure enhances the understanding of a firm's actions,hence it increases the efficiency of the market.
Q2) What does the concept of an efficient market imply?
A) All shares of stock have the same market beta.
B) Selecting stocks by throwing darts at a page of stocks will yield the same return as a carefully selected portfolio.
C) Prices reflect all available information.
D) Stock prices do not fluctuate.
Q3) What does operational efficiency refer to?
A) Prices that quickly reflect important information
B) Low transaction costs
C) Sufficient securities to efficiently allocate risk
D) Both A and B are correct.
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Chapter 11: Forwards,futures,and Swaps
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Q1) Profit from a short position in a forward is:
A) (X - S<sub>T</sub>)
B) [S<sub>T</sub> - F] × n
C) (S<sub>T</sub> - X)
D) [F - S<sub>T</sub>] × n
Q2) Credit default swap is classified as:
A) an exchange-traded transaction.
B) an over-the-counter transaction.
C) none of the above.
Q3) Use the following statements to answer this question:
A) I is correct, II is incorrect
B) I and II are correct
C) I and II are incorrect
D) I is incorrect, and II is correct
I.Credit default swaps (CDS)is a default premium on debt issue.
II.Credit default swaps (CDS)are insurance on the default of issuers of the debt.
Q4) What are the differences between forwards and futures contracts?
Q5) Explain how derivatives led to the worst recession in the post second world war era.
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Chapter 12: Options
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Q1) ____________is the relationship between the price of a call option and a put option.
A) The binomial option pricing model
B) The Black-Scholes option pricing model
C) Put-call parity
D) A swap
Q2) Which of the "Greeks" measures the change in option value with a change in volatility of the underlying asset?
A) Delta
B) Theta
C) Gamma
D) Vega
Q3) The time value on call option A is $5 and the option premium is $8.What is the intrinsic value of call option A?
A) $40
B) $13
C) $3
D) $3
Q4) Briefly explain how to replicate the payoff of a risk-free asset using put-call parity.
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Chapter 13: Capital Budgeting, risk Considerations, and Other Special Issues
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Q1) Capital budgeting is:
A) the process through which a firm makes capital expenditure decisions.
B) the process through which a firm makes investment in stocks.
C) the process of raising capital in the financial markets.
Q2) If a firm uses a constant WACC to select investments projects,it will:
A) always make appropriate decisions.
B) not accept negative NPV high-risk projects.
C) not reject positive NPV low-risk projects.
D) cause the market price of its debt and equity securities to decline.
Q3) Capital expenditures are
A) a firm's investments in net working capital.
B) a firm's investments in long-lived tangible and non-tangible assets.
C) a firm's investments in financial securities.
D) all of the above.
Q4) Name the five practical difficulties that firms may encounter in applying the NPV evaluation process to foreign direct investments.
Q5) Rationing may be used to give an incentive to management to maximize the value of the firm
A) True
B) False
Page 15
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Chapter 14: Cash Flow Estimation and Capital Budgeting
Decisions
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Q1) Canadian Auto Shop Services has an opportunity to invest $550,000 in a new project that will generate additional operating profit of $200,000 per year.The asset has a six-year life,a CCA rate of 30 percent,and an expected salvage value of $60,000.The project has a beta of 1.5.The company's cost of capital is 12 percent and marginal tax rate is 35 percent.The risk-free rate is 4.5 percent and the market risk premium is 6 percent.Assume the asset class remains open after the asset is sold.What is the project's NPV?
A) $108,680
B) $137,415
C) $384,655
D) $425,214
Q2) An analysis of the degree to which a project's NPV depends on the underlying variables is called:
A) a scenario analysis
B) a sensitivity analysis
C) an optimality analysis
D) a break-even analysis
Q3) Explain what externalities are and give an example.
Q4) Explain why the CCA tax savings are discounted at the firm's cost of capital.
Q5) Discuss the two ways inflation impacts capital budgeting.
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Chapter 15: Mergers and Acquisitions
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Q1) An acquiring firm can increase its earnings per share (EPS)by:
A) Acquiring a firm with a lower P/E ratio than its own P/E ratio.
B) Acquiring a firm with a higher P/E ratio than its own P/E ratio.
C) Acquiring a firm with a higher leverage ratio than its own leverage ratio.
D) Acquiring a firm with a lower leverage ratio than its own leverage ratio.
Q2) The valuation approach that uses ratios such as market-to-book (M/B),price-earnings (P/E),and price-to-cash flow (P/CF)is called:
A) Liquidation valuation
B) Discounted cash flow (DCF) valuation
C) Multiples valuation
D) All of the above
Q3) Use the following statements to answer this question:
A) I is correct and II is correct.
B) I is incorrect and II is incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.
I.The white knight is a strategy to avoid being acquired by another firm.
II.Selling the crown jewels can lead to a long-term decrease in the value of the firm.
Q4) Define synergy and explain what effect it can have on a merged company.
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Chapter 16: Leasing
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Q1) Before 1989,what was the benefit of the sale and leaseback agreement?
A) A loophole in the tax laws
B) An illegal transfer of costs between lessee and lessor
C) A mutual benefit between companies in different countries
D) More important in the 1990s
Q2) MontRec Company is considering a recycling project.The project will result in a decrease in their garbage disposal costs.The acquisition cost of the recycling machine is $100,000 and the present value of the net garbage disposal cost savings is calculated to be $25,000.The present value of the depreciation tax shield (CCA)is $35,000 and the machine is expected to have a zero salvage value.The firm can lease the machine instead of buying it - the present value of the before-tax lease payments is $60,000 and the present value of the tax savings from the lease payments is $50,000.Should the firm enter into the recycling project? Choose the most appropriate answer.
A) Yes, the NPV of the project is $15,000.
B) Yes, the NPV of the project is $55,000.
C) Yes, the NPV of the project is $80,000.
D) No, the NPV of the project is -$40,000.
Q3) How should a CFO decide between leasing and debt financing? What criteria should she use?
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Chapter 17: Investment Banking and Securities Law
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Q1) Use the following statements to answer this question:
A) I and II are correct.
B) I and II are incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.
I.Improvements in securities laws have helped in curbing fraudulent activities.
II.Asymmetry of information is the major source of frauds in financial markets.
Q2) Which of the following activities is allowed during the quiet period?
A) Hyping the stock to help sell it.
B) Issuing an analyst report recommending the shares.
C) Reducing the price.
D) Trading in the shares by the lead underwriter.
Q3) What are the main differences between a prospectus and an offering memorandum?
A) A prospectus is shorter and costs less to prepare than an offering memorandum.
B) Offering memorandums are shorter and cost less to prepare than prospectuses.
C) A prospectus costs less to prepare but is longer than an offering memorandum.
D) Prospectus and offering memorandum are two different names for the same document.
Q4) Discuss some challenges with initial public offerings (IPOs).
Page 19
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Chapter 18: Debt Instruments
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Q1) Investment-grade debt rating refers to which of the following?
A) The issuer is less likely to meet debt payment opbligations.
B) The issuer is more likely to increase dividend payments.
C) The issuer is likely to meet debt payment obligations.
D) None of the above.
Q2) Indicate important sources of finance available to corporations in the money market.
Q3) A Government of Canada T-bill with a face value of $1,000 and 45 days to maturity is trading for $985.22.The 45-day interest rate is ______ and the annual rate is ______.
A) 1.5%, 12.17%
B) 12.17%, 1.5%
C) 1.5%, 12.84%
D) 12.84%, 1.5%
Q4) Explain the implication of the failure of Lehman Brothers on short-term debt yields,and how it was remedied.
Q5) You have observed that the credit ratings of firms are very stable over time.However,you have also observed that the earnings of firms are cyclical.Explain how this is possible when credit ratings are supposed to reflect the credit risk of the firm's debt.
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Chapter 19: Equity and Hybrid Instruments
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Q1) Which of the following characteristics apply to floating rate preferred shares?
A) I and II
B) I, II, and III
C) III, IV, and V
D) I, III, and IV
I.Long maturity date
II.Pay a fixed dividend
III.Dividends are paid at regular intervals
IV.Have a positive yield spread (after tax)over bankers' acceptances
V.The right to sell them back to the issuer
Q2) If you are to allocate the amount of soft retractable preferred shares in the financial statements,where would they go?
A) Assets
B) Liabilities
C) Ownership equity
D) None of the above
Q3) Discuss how preferred shares have features of both debt and equity instruments.
Q4) Explain the differences and similarities between warrants and convertibles.
Q5) Explain an important implication of viewing a company's common shares as a call option.
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Chapter 20: Cost of Capital
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Q1) Use the following statements to answer this question:
A) I and II are correct.
B) I and II are incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.
I.Without taxes,the benefit of having debt on the WACC largely vanishes.
II.Preferred shares cost the same as common equity financing.
Q2) Which of the following statements is/are true about the marginal cost of capital?
A) It is the weighted average cost of the next dollar of financing raised.
B) For most levels of financing, it equals the weighted average cost of capital.
C) It exceeds the weighted average cost of capital due to flotation costs.
D) All of the above are true.
Q3) Which of the following is most relevant for estimating a firm's cost of debt?
A) The yield to maturity at issuance.
B) The return bondholders would demand for new debt.
C) The coupon rate on existing debt.
D) None of the above is relevant.
Q4) What is the cost of internally generated funds?
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Chapter 21: Capital Structure Decisions
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Q1) The indifference analysis refers to the indifference of:
A) earnings with respect to two alternative financing plans.
B) sales with respect to the cost of debt.
C) cost of equity with respect to debt structure.
D) risk of bankruptcy with respect to debt structure.
Q2) Explain the importance of debt in minimizing the agency cost problem between the managers and the shareholders.
Q3) In a world with corporate taxes and no bankruptcy costs,
A) leverage can affect firm value by an amount that is equal to the present value of the interest tax shield.
B) leverage lower the taxes of the firm and increase its total value.
C) the firm uses maximum debt.
D) all of the above
Q4) If a corporation needs to raise money,where will it try to raise the funds? What is the order?
Q5) Explain the concept of M&M's homemade leverage and why it is not equivalent to a firm's debt.
Q6) Give two reasons why an investor may NOT be able to undo a corporation's capital structure to achieve their desired level of leverage.
Page 23
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Chapter 22: Dividend Policy
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Q1) Which of the following is not a motivation for a share repurchase?
A) Offsetting the exercise of executive stock options
B) Repurchase of shares from dissident shareholders
C) Pay free cash flows to shareholders without generating an expectation of continued dividends
D) To indicate that the management feels the stock is overvalued
Q2) Which of the following is not a side effect of a stock dividend?
A) In terms of accounting, it is treated like a regular cash dividend.
B) Investors may ascribe an informational content to a stock dividend.
C) Investors pay the same amount of tax on stock dividends.
D) The stock price will increase.
Q3) Use the following statements to answer this question:
A) I and II are correct.
B) I and II are incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.
I.A DRIP is an investment plan that investors cannot choose to opt out from.
II.DRIPs and stock dividends are exactly the same thing.
Q4) Describe the similarities and differences between stock dividends and dividend reinvestment plans.
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Chapter 23: Working Capital Management: General Issues
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Q1) On April 1 Montreal Salsa Dance School had $1,750 in cash,and no receivables or payables.It also had 100 students whose classes finished on April 30.Thirty-five of those students paid their tuition of $500 on time (before April 30).During the month the school incurred costs associated with its operations of instructor salaries $25,000,rent $4,000,and $1,000 utilities.If the school's policy of paying all bills in cash at the end of each month is respected,how much does the school have to borrow to pay its bills?
A) $30,000
B) $12,500
C) $10,750
D) $0
Q2) Why is it better to use sales rather than cost of goods sold when calculating the average days sales in inventory value?
A) The values for COGS are not always comparable across firms
B) COGS is not the driving variable behind the accumulation of inventory
C) Inventory is accumulated regardless of its COGS
D) There are three types of COGS, raw materials, work in progress, and finished goods, and since all are slightly different, using one or the other would make the calculations inaccurate.
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Chapter 24: Working Capital Management: Current Assets and
Current Liabilities
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Q1) Poutine Cheez Company has yearly sales of $550,000 and an average collection period of 35 days.A factoring company is offering a 35-day receivables loan equal to 85% of the accounts receivable at 9% along with a commission fee of .45% of the receivables.The firm estimates that by taking the offer,it could save $300 in collection costs and a full half of one percent in bad debt costs,as a percentage of sales.What is the annual cost (in percent)of the arrangement to Poutine Cheez?
Q2) An open account credit occurs when a firm grants:
A) trade credit to customers who have an account with the firm.
B) trade credit to customers who have depository accounts.
C) trade credit to customers by collateralizing the assets sold to the customer.
D) credit to customers who have an open bank account.
Q3) Can trade credit be labelled as a financing strategy? Provide an example of a firm that uses this strategy in their business model.
Q4) The most common benchmark used for pricing a bank loan is:
A) LIBOR.
B) bankers' acceptance rate.
C) the prime rate.
D) all of the above
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