Corporate Financial Management
Exam Practice Tests
Course Introduction
Corporate Financial Management explores the fundamental principles and strategic practices essential for effective financial decision-making within corporations. The course covers key topics such as capital budgeting, cost of capital, capital structure, dividend policy, risk management, and working capital management. Students will examine how financial managers analyze investment opportunities, raise capital, allocate resources, and maximize shareholder value while considering ethical, legal, and global factors. Through case studies and real-world examples, the course emphasizes the application of theoretical concepts to practical financial challenges faced by contemporary organizations.
Recommended Textbook
Corporate Finance Asia 1st Global Edition by Stephen Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) A proxy fight occurs when:
A)the board solicits renewal of current members.
B)a group solicits proxies to replace the board of directors.
C)a competitor offers to sell their ownership in the firm.
D)the firm files for bankruptcy.
E)the firm is declared insolvent.
Answer: B
Q2) Which one of the following statements is correct?
A)Both partnerships and corporations incur double taxation.
B)Both sole proprietorships and partnerships are taxed in a similar fashion.
C)Partnerships are the most complicated type of business to form.
D)Both partnerships and corporations have limited liability for general partners and shareholders.
E)All types of business formations have limited lives.
Answer: B
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Chapter 2: Financial Statements and Cash Flow
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Sample Questions
Q1) A firm has $450 in inventory,$700 in fixed assets,$210 in accounts receivable,$50 in accounts payable,and $60 in cash.What is the amount of the current assets?
A)$510
B)$560
C)$600
D)$660
E)$720
Answer: E
Q2) What is a liquid asset and why is it necessary for a firm to maintain a reasonable level of liquid assets?
Answer: Liquid assets are those that can be sold quickly with little or no loss in value.A firm that has sufficient liquidity will be less likely to experience financial distress.
Q3) Why is interest expense excluded from the operating cash flow calculation?
Answer: Operating cash flow is designed to represent the cash flow a firm generates from its day-to-day operating activities.Interest expense arises from a financing decision and thus should be considered as a cash flow to creditors.
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Chapter 3: Financial Statements Analysis and Long-Term Planning
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Sample Questions
Q1) The _____ breaks down return on equity into three component parts.
A)Du Pont identity
B)return on assets
C)statement of cash flows
D)asset turnover ratio
E)equity multiplier
Answer: A
Q2) Growth can be reconciled with the goal of maximizing firm value:
A)because greater growth always adds to value.
B)because growth must be an outcome of decisions that maximize NPV.
C)because growth and wealth maximization are the same.
D)because growth of any type cannot decrease value.
E)None of the above.
Answer: B
Q3) Which is a more meaningful measure of profitability for a firm,return on assets or return on equity? Why?
Answer: Most would argue ROE since it measures returns relative to the amount of money shareholders have invested in the firm.In addition,since shareholder wealth maximization is a firm's primary goal,it makes more sense to look at this measure.
Page 5
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Chapter 5: Net Present Value and Other Investment Rules
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Sample Questions
Q1) List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR)rule.
Q2) Given the goal of maximization of firm value and shareholder wealth,we have stressed the importance of net present value (NPV).And yet,many financial decision-makers at some of the most prominent firms in the world continue to use less desirable measures such as the payback period and the average accounting return (AAR).Why do you think this is the case?
Q3) Net present value:
A)cannot be used when deciding between two mutually exclusive projects.
B)is more useful to decision makers than the internal rate of return when comparing different sized projects.
C)is easy to explain to non-financial managers and thus is the primary method of analysis used by the lowest levels of management.
D)is not an as widely used tool as payback and discounted payback.
E)is very similar in its methodology to the average accounting return.
Q4) Explain the differences and similarities between net present value (NPV)and the profitability index (PI).
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Chapter 8: Interest Rates and Bond Valuation
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Sample Questions
Q1) Calculate the YTM on a bond priced at $1,036 which has 2 years to maturity,a 10% annual coupon rate,and a return of $1,000 at maturity.
Q2) The outstanding bonds of Boutelle,Inc.provide a real rate of return of 3.6%.The current rate of inflation is 2.5%.What is the nominal rate of return on these bonds?
A)6.10%
B)6.13%
C)6.16%
D)6.19%
E)6.22%
Q3) The nominal rate of return on the bonds of Steve's Boats is 8.75%.The real rate of return is 3.4%.What is the rate of inflation?
A)5.17%
B)5.28%
C)5.35%
D)5.43%
E)5.49%
Q4) Sometimes it is not clear if a particular security is debt or equity.Explain the basic difference between debt and equity.
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Page 7
Chapter 10: Risk and Return: Lessons From Market History
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Sample Questions
Q1) Over the period of 1926 to 2012,small company stocks had an average return of __%.
A)8.8
B)10.2
C)12.4
D)14.6
E)16.5
Q2) Over the past five years,a stock produced returns of 14%,22%,-16%,2%,and 10%.What is the probability that an investor in this stock will NOT lose more than 8% nor earn more than 21% in any one given year?
A)34%
B)68%
C)95%
D)99%
E)100%
Q3) Suppose you have $30,000 invested in the stock market and your banker comes to you and tries to get you to move that money into the bank's certificates of deposit (CDs).He explains that the CDs are 100% government insured and that you are taking unnecessary risks by being in the stock market.How would you respond?
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Chapter 11: Return and Risk: the Capital Asset Pricing Model
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Sample Questions
Q1) According to the Capital Asset Pricing Model:
A)the expected return on a security is negatively and non-linearly related to the security's beta.
B)the expected return on a security is negatively and linearly related to the security's beta.
C)the expected return on a security is positively and linearly related to the security's variance.
D)the expected return on a security is positively and non-linearly related to the security's beta.
E)the expected return on a security is positively and linearly related to the security's beta.
Q2) Diversification will not lower the ____ risk:
A)total risk.
B)systematic risk.
C)unsystematic risk.
D)variance risk.
E)standard error.
Q3) Why are some risks diversifiable and some nondiversifiable? Give an example of each.
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9
Chapter 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory
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Sample Questions
Q1) Suppose the Binder Corporation's common stock has a return of 17%.Assume the risk-free rate is 5%,the expected market return is 8%,and no unsystematic influence affected Binder's return.The beta for Binder is:
A)0.
B)2.
C)3.
D)4.
E)It is impossible to calculate beta without the inflation rate.
Q2) Systematic risk is defined as:
A)a risk that specifically affects an asset or small group of assets.
B)any risk that affects a large number of assets.
C)any risk that has a huge impact on the return of a security.
D)the random component of return.
E)None of the above.
Q3) The term Corr(\(\varepsilon\) R,\(\varepsilon\) T)= 0 tells us that:
A)all error terms of company R and T are 0.
B)the unsystematic risk of companies R and T is unrelated or uncorrelated.
C)the correlation between the returns of companies R and T is -1.
D)the systematic risk of companies R and T is unrelated.
E)None of the above.
Page 10
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Chapter 14: Efficient Capital Markets and Behavioral Challenges
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Sample Questions
Q1) According to the efficient market hypothesis,financial markets fluctuate daily because they:
A)are inefficient.
B)slowly react to new information.
C)are continually reacting to new information.
D)offer tremendous arbitrage opportunities.
E)only reflect historical information.
Q2) The hypothesis that market prices reflect all publicly available information is called _____ form efficiency.
A)open
B)strong
C)semistrong
D)weak
E)stable
Q3) Do you think the lessons from capital market history will hold for each year in the future?
That is,as an example,if you buy small stocks will your investment always outperform U.S.Treasury bonds?
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Chapter 15: Long-Term Financing: an Introduction
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Sample Questions
Q1) If a debenture is subordinated,it:
A)has a higher priority status than specified creditors.
B)is secondary to equity.
C)must give preference to the specified creditor in the event of default.
D)has been issued because the company is in default.
E)None of the above.
Q2) Preferred stock has both a tax advantage and a tax disadvantage.These two are:
A)in default there are no taxes and dividends are taxed in corporate hands at 70%.
B)corporate dividends are taxed on 30% of the dividends received and expenses are deductible.
C)dividends are not a tax-deductible expense but are 70% exempt from corporate taxation.
D)dividends are fully tax deductible but are not equity capital.
E)None of the above.
Q3) Rework the shareholder's equity as it appears on the books if the company issues 40,000 new shares of common at $70 per share.
Q4) From this information,calculate Eaton's book value per share.
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Chapter 20: Raising Capital
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Sample Questions
Q1) A registration statement is effective on the 20<sup>th</sup>day after filing unless:
A)the SEC is backlogged with statements.
B)a tombstone ad is issued indicating its demise.
C)a letter of comment suggesting changes is issued by the SEC.
D)a syndicate can be formed sooner.
E)None of the above.
Q2) Discuss what a Dutch auction is and how it works.
Q3) Regional Power wants to raise $10 million in new equity.The subscription price is $20.There are currently 3 million shares outstanding,each with 1 right.How many rights are needed to purchase 1 share?
A)1
B)3
C)5
D)6
E)8
Q4) If the ex-rights price were set at $7.90,would you as a potential new stockholder choose to buy shares ex-rights or buy shares at the old price and exercise your rights?
Q5) Discuss the stages of venture capital financing,defining each in detail.
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Chapter 22: Options and Corporate Finance
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Sample Questions
Q1) The relationship between the prices of the underlying stock,a call option,a put option,and a riskless asset is referred to as the _____ relationship.
A)put-call parity
B)covered call
C)protective put
D)straddle
E)strangle
Q2) Suppose XYZ is priced at $125 a share,has a call with an exercise price of $150,has two months to expiration,and costs $0.125 per contract.Why do you suppose investors would be willing to purchase a call that is so far out of the money?
Q3) Tru-U stock is selling for $36 a share.A 3-month call on Tru-U stock with a strike price of $40 is priced at $1.Risk-free assets are currently returning 0.25% per month.What is the price of a 3-month put on Tru-U stock with a strike price of $40?
A)$2.98
B)$3.00
C)$4.03
D)$4.70
E)$4.90
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Page 14
Chapter 23: Options and Corporate Finance: Extensions and Applications
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Sample Questions
Q1) Calculate N(d<sub>1</sub>).
A).5089
B).6608
C).6882
D).6879
E).8096
Q2) Calculate N(d<sub>2</sub>).
A).5000
B).5988
C).6164
D).7468
E).7595
Q3) Calculate N(d<sub>2</sub>).
A).5130
B).5578
C).6085
D).7085
E).7142
Q4) If Mr.Maxim earned $500,000 in regular annual salary why might he prefer to have $1,500,000 in straight salary versus salary and options?
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Chapter 24: Warrants and Convertibles
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Sample Questions
Q1) If a corporate security can be exchanged for a fixed number of shares of stock,the security is said to be:
A)callable.
B)convertible.
C)protected.
D)putable.
E)None of the above.
Q2) What would the conversion price and conversion ratio be if Looper Industries had a 4 for 1 stock split?
A)$15.0;120
B)$12.5;80
C)$12.5;120
D)$15.0;80
E)None of the above.
Q3) What is the conversion value of the bond?
A)$25
B)$40
C)$770
D)$1,000
E)No conversion premium is given.
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Chapter 25: Derivatives and Hedging Risk
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Sample Questions
Q1) A financial institution has equity equal to one-tenth of its assets.If its asset duration is currently equal to its liability duration,then to immunize,the firm needs to:
A)decrease the duration of its assets.
B)increase the duration of its assets.
C)decrease the duration of its liabilities.
D)do nothing,i.e. ,keep the duration of its liabilities equal to the duration of its assets.
Q2) The futures markets are labeled as pure speculation and even gambling.Why is this an inaccurate portrayal of the market's function?
Q3) Which of the following is true about the user of derivatives?
A)Derivatives usually appear explicitly in the financial statements.
B)Academic surveys account for much of our knowledge of corporate derivatives use.
C)Smaller firms are more likely to use derivatives than large firms.
D)The most frequently used derivatives are commodity and equity futures.
E)None of the above are true.
Q4) Duration is defined as the weighted average time to maturity of a financial instrument.Explain how this knowledge can help protect against interest rate risk.
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Page 17
Chapter 31: International Corporate Finance
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Sample Questions
Q1) Triangular arbitrage would take place if the _____ rate between two currencies was not _____ to the ratio of the two direct rates.
A)cross;equal B)spot;equal C)cross;less than D)spot;less than E)cross;greater than
Q2) Are exchange rate changes between the U.S.dollar and the Japanese yen necessarily good or bad for Japanese automakers? Explain your reasoning.
Q3) Assume that the Euro is selling in the spot market for $1.10.Simultaneously,in the 3-month forward market the Euro is selling for $1.12.Which one of the following statements correctly describes this situation?
A)The spot market is out of equilibrium.
B)The forward market is out of equilibrium.
C)The dollar is selling at a premium relative to the euro.
D)The Euro is selling at a premium relative to the dollar.
E)None of the other four statements correctly describes this situation.
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