Corporate Financial Management
Practice Questions
Course Introduction
Corporate Financial Management explores the principles and practices involved in the financial decision-making processes within corporations. This course covers essential topics such as capital budgeting, financial analysis, risk assessment, capital structure, dividend policy, and working capital management. Students will learn how financial managers use analytical tools and techniques to evaluate investment opportunities, optimize funding sources, and enhance shareholder value. Through case studies and real-world applications, the course emphasizes strategic financial planning and the impact of financial decisions on an organization's overall performance.
Recommended Textbook
Fundamentals of Corporate Finance 2nd Edition by Jonathan Berk
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Page 2
Chapter 1: Corporate Finance and the Financial Manager
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Q1) How much money would a stock exchange make from buying and selling 500 shares of the stock under the conditions shown above?
A)$250
B)$3000
C)$5875
D)$210,375
Answer: A
Q2) A C corporation earns $7.40 per share before taxes.The corporate tax rate is 39%,the personal tax rate on dividends is 15%,and the personal tax rate on non-dividend income is 36%.What is the total amount of taxes paid if the company pays a $5.00 dividend?
A)$0.75
B)$2.89
C)$3.64
D)$4.00
Answer: C
Q3) Stock markets provide liquidity for a firm's shares.
A)True
B)False
Answer: True
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) A printing company prints a brochure for a client,and then bills them for this service.At the time the printing company's financial disclosure statements are prepared,the client has not yet paid the bill for this service.How will this transaction be recorded?
A)The sale will be added to Net Income on the income statement and retained in Net Income on the statement of cash flows.
B)The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows.
C)The sale will not be added to Net Income on the income statement but added to Net Income on the statement of cash flows.
D)The sale will neither be added to Net Income on the income statement nor used to adjust Net Income on the statement of cash flows.
Answer: B
Q2) What role do external auditors play in the firm's financial reporting process?
Answer: As the name implies,external auditors act as third party monitors to the firms' financial reporting process.
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Chapter 3: Time Value of Money: An Introduction
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Q1) Why should you approach every problem by drawing a timeline?
A)Timelines allow you to quickly sum cash flows over time.
B)Timelines eliminate the majority of flawed financial decisions.
C)Timelines can be used to schedule events which are yet to occur.
D)Timelines identify events in a transaction or investment which might otherwise be easily overlooked.
Answer: D
Q2) How can we convert the value of money from one point in time to another?
A)using the current exchange rate
B)using a cost benefit analysis
C)using the Valuation Principle
D)using the current interest rate
Answer: D
Q3) If $15,000 is invested at 10% per year,in approximately how many years will the investment double?
A)7.3 years
B)8.4 years
C)10.6 years
D)14.8 years
Answer: A
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Chapter 4: Time Value of Money: Valuing Cash Flow
Streams
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Q1) You are saving money to buy a car.If you save $300 per month starting one month from now at an interest rate of 4%,how much will you be able to spend on the car after saving for 4 years?
A)$41,778.96
B)$15,287.27
C)$15,587.88
D)$13,286.65
Q2) A rich donor gives a hospital $100,000 one year from today.Each year after that,the hospital will receive a payment 5% larger than the previous payment,with the last payment occurring in ten years' time.What is the present value (PV)of this donation,given that the interest rate is 9%?
A)$467,922.22
B)$585,987.27
C)$772,173.49
D)$779,843.27
Q3) Cash flows from an annuity occur every year in the future.
A)True
B)False
Q4) Can we apply the growth perpetuity equation for negative growth as well?
Page 6
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Chapter 5: Interest Rates
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Q1) Consider an investment that pays $1000 certain at the end of each of the next four years.If the investment costs $3,500 and has a net present value (NPV)of $74.26,then the four year risk-free interest rate is closest to:
A)4.5%
B)4.58%
C)4.55%
D)4.53%
Q2) Assuming that you have made all of the first 24 payments on time,then the outstanding principal balance on your SUV loan is closest to:
A)$31,250
B)$20,300
C)$19,200
D)$32,000
Q3) The effective annual rate on your firm's borrowings is closest to:
A)6.00%
B)6.24%
C)6.17%
D)6.14%
Q4) How are interest and return of principal handled in an amortizing loan payment?
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Chapter 6: Bonds
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Q1) A risk-free,zero-coupon bond with a face value of $1,000 has 15 years to maturity.If the YTM is 5.8%,which of the following would be closest to the price this bond will trade at?
A)$721
B)$686
C)$525
D)$429
Q2) Which of the following bonds will be most sensitive to a change in interest rates if all bonds have the same initial yield to maturity?
A)a ten-year bond with a $1000 face value whose coupon rate is 5.8% APR paid semiannually
B)a ten-year bond with a $1000 face value whose coupon rate is 7.4% APR paid semiannually
C)a 20-year bond with a $1000 face value whose coupon rate is 5.8% APR paid semiannually
D)a 20-year bond with a $1000 face value whose coupon rate is 7.4% APR paid semiannually
Q3) Under what situation can a zero-coupon bond be selling at a premium?
Q4) How are the cash flows of a coupon bond different from an amortizing loan?
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Chapter 7: Stock Valuation
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Q1) Sultan Services has 1.2 million shares outstanding.It expects earnings at the end of the year of $5.6 million.Sultan pays out 60% of its earnings in total - 40% paid out as dividends and 20% used to repurchase shares.If Sultan's earnings are expected to grow by 7% per year,these payout rates do not change,and Sultan's equity cost of capital is 9%,what is Sultan's share price?
A)$22.40
B)$56.00
C)$93.33
D)$140.00
Q2) Valorous Corporation will pay a dividend of $1.80 per share at this year's end and a dividend of $2.40 per share at the end of next year.It is expected that the price of Valorous' stock will be $44 per share after two years.If Valorous has an equity cost of capital of 8%,what is the maximum price that a prudent investor would be willing to pay for a share of Valorous stock today?
A)$39.27
B)$40.22
C)$41.45
D)$42.40
Q3) Can the dividend-discount model handle negative growth rates?
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Chapter 8: Investment Decision Rules
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Q1) The following show four mutually exclusive investments.Which is the best investment?
A)Initial investment: $1.1 million;Cash flow in year 1: $160,000;Annual Growth Rate: 2%;Cost of Capital: 9.0%
B)Initial investment: $1.2 million;Cash flow in year 1: $150,000;Annual Growth Rate: 2%;Cost of Capital:7.0%
C)Initial investment: $1.3 million;Cash flow in year 1: $160,000;Annual Growth Rate: 1%;Cost of Capital: 6%
D)Initial investment: $1.4 million;Cash flow in year 1: $150,000;Annual Growth Rate: 2%;Cost of Capital: 8%
Q2) Net present value (NPV)is usefully supplemented by internal rate of return (IRR),since IRR gives a good indication of the sensitivity of any decision made to changes in the discount rate.
A)True B)False
Q3) If your new strip mall will have 15,000 square feet of retail space available to be leased,to which businesses should you lease and why?
Q4) What is a safe method to use when confronted with mutually exclusive projects?
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Chapter 9: Fundamentals of Capital Budgeting
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Q1) To evaluate a capital budgeting decision,it is sufficient to determine its consequences for the firm's earnings.
A)True
B)False
Q2) Firms should use the most accelerated depreciation scheme allowable.
A)True
B)False
Q3) Luther Industries has outstanding tax loss carryforwards of $70 million from losses over the past four years.If Luther earns $15 million per year in pretax income from now on,in how many years will Luther first pay taxes?
A)7 years
B)2 years
C)4 years
D)5 years
Q4) An announcement by the government that they will decrease corporate marginal tax rates in the future would increase the attractiveness of MACRS depreciation.
A)True
B)False
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Chapter 10: Stock Valuation: A Second Look
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Q1) The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry.Which of the following ratios would most likely be the most reliable in determining the stock price of a comparable firm?
A)P/E
B)Price/Book
C)Enterprise Value/Sales
D)Enterprise Value/EBITDA
Q2) Valuation models use the relationship between share value,future cash flows,and the cost of capital to estimate these quantities for a given firm.Realistically,for a publicly traded firm,what can we reliably use such models to determine?
I.the firm's future cash flows
II the firm's cost of capital
III the firm's stock price
A)I only
B)II only
C)III only
D)I and II
Q3) Which is the best valuation technique when using comparables?
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Chapter 11: Risk and Return in Capital Markets
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Q1) A portfolio of stocks can achieve diversification benefits if the stocks that comprise the portfolio are
A)not perfectly correlated.
B)perfectly correlated.
C)susceptible to common risks only.
D)both B and C
Q2) You purchased Enron stock at a price of $30 per share.Its price was $20 after six months and the company declared bankruptcy at the end of the next six months.The realized return over the last year is:
A)-99%
B)-75%
C)-150%
D)-100%
Q3) Is volatility a reasonable measure of risk when evaluating large portfolios?
Q4) What are the two components of realized return from a stock investment?
Q5) What is the expected payoff for Big Cure's Blockbuster drug?
A)$100 million
B)$0
C)$1 billion
D)$500 million
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Chapter 12: Systematic Risk and the Equity Risk Premium
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Q1) For each 1% change in the market portfolio's excess return,the investment's excess return is expected to change by ________ percent due to risks that it has in common with the market.
A)beta
B)alpha
C)zero
D)cannot say for sure
Q2) A stock market comprises 2000 shares of stock A and 2000 shares of stock B.The share prices for stocks A and B are $20 and $10,respectively.What is the capitalization of the market portfolio?
A)$55,000
B)$60,000
C)$70,000
D)$65,000
Q3) While we are using historic return to estimate a stock's beta,why can't we use historic data to forecast the expected return for the stock?
Q4) What is the lowest risk possible by selecting two stocks that are perfectly negatively correlated?
Q5) Is it possible for a stock to have high total risk but low systematic risk?
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Chapter 13: The Cost of Capital
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Q1) When we compute the cost of equity capital for a project we assume that the ________ of the project is equivalent to the average risk of the firm's investments.
A)diversifiable risk
B)market risk
C)non-systematic risk
D)volatility
Q2) General Motors has a weighted average cost of capital of 10%.GM is considering investing in a new plant that will save the company $20 million over each of the first two years,and then $15 million each year thereafter.If the investment is $150 million,what is the net present value (NPV)of the project?
A)$6.6 million
B)$7.3 million
C)$7.9 million
D)$8.7 million
Q3) Why do we use leverage if it increases the risk of a firm?
Q4) Why do we use market values rather than book values in calculation of WACC?
Q5) The WACC does not depend on the risk of a company's line of business.
A)True
B)False
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Chapter 14: Raising Equity Capital
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Q1) Which of the following statements is FALSE?
A)Once the issue price (or offer price)is set,underwriters may invoke another mechanism to protect themselves against a loss - the over-allotment allocation.
B)Before the offer price is set,the underwriters work closely with the company to come up with a price range that they believe provides a reasonable valuation for the firm.
C)Before an IPO,the company prepares the final registration statement and final prospectus containing all the details of the IPO,including the number of shares offered and the offer price.
D)A "road trip" is where senior management and the lead underwriters travel around the country (and sometimes around the world)promoting the company and explaining their rationale for the offer price to the underwriters' largest customers - mainly institutional investors such as mutual funds and pension funds.
Q2) What are some of the advantages of going public?
Q3) The announcement of an SEO usually raises a stock's price.
A)True
B)False
Q4) How many types of seasoned equity offerings are there?
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Chapter 15: Debt Financing
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Q1) A company issues a callable (at par)ten-year,6% coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a price of $104 per $100 of face value.What is the yield to maturity of this bond when it is released?
A)0.60%
B)1.92%
C)4.00%
D)5.47%
Q2) A bond with a face value of $1000 is convertible to common stock at a conversion ratio of 60.If the stock is currently trading at $8.20 per share,the value of the bond is probably closest in value to which of the following?
A)less than $492
B)about $492
C)about $1000
D)above $1666
Q3) What are notes?
Q4) What are bond covenants?
Q5) What is yield to maturity?
Q6) What is an original issue discount bond?
Page 17
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Chapter 16: Capital Structure
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Questions
Q1) Suppose a project financed via an issue of debt requires six annual interest payments of $20 million each year.If the tax rate is 30% and the cost of debt is 8%,what is the value of the interest rate tax shield?
A)$31.35 million
B)$27.74 million
C)$23.20 million
D)$32.64 million
Q2) What is the capital structure of a firm?
Q3) Equity in a firm with no debt is called unlevered equity. A)True
B)False
Q4) After the repurchase how many shares will Luther have outstanding?
A)0.75 billion
B)1.0 billion
C)1.1 billion
D)1.2 billion
Q5) What considerations should managers have while deciding on their capital structure?
Q6) How does the interest paid by a firm affect its value to investors?
Q7) What are indirect costs of financial distress?
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Chapter 17: Payout Policy
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Q1) When a firm has excessive cash,managers may make use of the funds in an inefficient manner.This is also referred to as the ________ cost of retaining cash.
A)fixed
B)agency
C)interest
D)special
Q2) The typical reason for a stock split is to
A)allow for growth in the company assets.
B)allow liabilities to grow.
C)increase earnings per share.
D)keep the share price in a range.
Q3) The firm will pay the dividend to all shareholders who are registered owners on a specific date,set by the board,called the A)declaration date.
B)record date.
C)distribution date.
D)ex-dividend date.
Q4) What are the different ways a firm can repurchase shares?
Q5) What choices does a firm have in using its free cash flow?
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Chapter 18: Financial Modeling and Pro Forma Analysis
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Q1) What is the free cash flow to equity holders for a firm with free cash flow of $11000,after-tax interest expense of $2000,and an increase in debt of $2000?
A)$7000
B)$8000
C)$9000
D)$11,000
Q2) The amount of net working capital for Ideko in 2012 is closest to:
A)$35,195
B)$42,420
C)$22,170
D)$26,420
Q3) A firm has $70 million in equity and $30 million of debt,it pays dividends of 30% of net income,and has a net income of $10 million.What is the firm's internal growth rate?
A)6%
B)7%
C)8%
D)9%
Q4) What is net new financing?
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Chapter 19: Working Capital Management
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Q1) Effective inventory management builds up assets through increases in inventory and thus increases a firm's value.
A)True
B)False
Q2) What is meant by the term 1.5/14 net 30?
A)If the invoice is paid within 14 days a discount of 1.5 percent can be taken,otherwise the invoice is due in 30 days.
B)If the invoice is paid within 30 days a discount of 14 percent can be taken,otherwise the invoice is due 14 days after that days.
C)If the invoice is paid within 1.5 days a discount of 14 percent can be taken,otherwise the invoice is due in 30 days.
D)If the invoice is paid right away,a discount of 14 percent can be taken,otherwise a discount of 1.5 percent can be taken if paid within the next 30 days.
Q3) The three steps in establishing a credit policy are establishing credit standards,establishing credit terms,and establishing a collection policy.
A)True
B)False
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Chapter 20: Short-Term Financial Planning
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Q1) Which of the following best describes an conservative financing policy?
A)financing part or all of the permanent working capital with short-term debt
B)financing part or all of the permanent working capital with long-term debt
C)financing part or all of the temporary working capital with short-term debt
D)financing part or all of the temporary working capital with long-term debt
Q2) According to the matching principle,short-term needs for funds should be financed by short-term sources of funds;long-term need for funds should be financed by long-term sources of funds.
A)True
B)False
Q3) What is the maximum maturity of commercial paper?
A)60 days
B)90 days
C)180 days
D)270 days
Q4) What is permanent working capital?
Q5) The prime rate is the rate banks charge all but their largest customers,who can negotiate a sub-prime rate.
A)True
B)False
Page 22
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Chapter 21: Option Applications and Corporate Finance
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Q1) You pay $3.25 for a call option on Luther Industries that expires in three months with a strike price of $40.00.Three months later,at expiration,Luther Industries is trading at $41.00 per share.Your profit per share on this transaction is closest to:
A)-$1.00
B)$1.00
C)-$2.25
D)$2.25
Q2) A share of stock can be thought as the a call option on the assets of the firm with a strike price equal to the face value of debt.
A)True
B)False
Q3) The value of an otherwise identical call option is ________ if the stock price is ________.
A)higher,higher
B)lower,higher
C)higher,lower
D)none of the above
Q4) What are American options?
Q5) When is an option out-the-money?
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Chapter 22: Mergers and Acquisitions
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Q1) Consider two firms,Thither and Yon.Both companies will either make $30 million or lose $10 million every year with equal probability.The companies' profits are perfectly negatively correlated.What are the expected after-tax profits of the combined company (Thither and Yon)in any year,assuming a corporate tax rate of 35% and no tax loss carry back or carry forward?
A)$19.5 million
B)$6.5 million
C)$4.75 million
D)$-6.5 million
Q2) This period is known for hostile,"bust-up" takeovers,in which the acquirer purchased a poorly performing conglomerate and sold off its individual business units for more than the purchase price:
A)1960s
B)1970s
C)1980s
D)1990s
Q3) Assume that Martin pays no premium to acquire Luther.Calculate Martin's price-earnings (P/E)ratio both pre and post merger.
Q4) What is a white knight?
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Chapter 23: International Corporate Finance
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Q1) Suppose the domestic cost of capital for a U.S.-based company is 9%.Also,the U.S.interest rate is 5% and the European interest rate is 5%.What is the foreign denominated cost of capital for the company?
A)7%
B)8%
C)9%
D)10%
Q2) Pooling of all foreign tax liabilities on earnings allows corporations to A)reduce income.
B)repatriate income.
C)reduce their overall taxes.
D)none of the above
Q3) ________ are one of the players in the foreign exchange market.
A)Global investment banks
B)Large multinational firms
C)Central Banks
D)all of the above
Q4) What is floating rate?
Q5) What is a currency timeline?
Q6) What are internationally segmented capital markets?
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Chapter 24: Leasing
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Q1) Which of the following statements is false?
A)In a leveraged lease the lessor borrows from a bank or other lender to obtain the initial capital for the purchase,using the lease payments to pay interest and principal on the loan.
B)In some circumstances,the lessor is not an independent company but rather a separate business partnership,called a special-purpose entity (SPE),which is created by the lessor for the sole purpose of obtaining the lease.
C)In a direct lease,the lessor is not the manufacturer,but is often an independent company that specializes in purchasing assets and leasing them to customers.
D)SPEs are commonly used in synthetic leases,which are designed to obtain specific accounting and tax treatment.
Q2) A lease where the lessee can purchase the asset at the minimum of its fair market value and a fixed price is called a
A)$1.00 out lease.
B)fixed price lease.
C)fair market value lease.
D)fair market value cap lease.
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Chapter 25: Insurance and Risk Management
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Q1) The risk that the firm will not have,or be able to raise,the cash required to meet the margin calls on its hedges is called
A)liquidity risk.
B)basis risk.
C)commodity price risk.
D)speculation risk.
Q2) An S&L owns mortgages hat have a current market value of $325 million.The duration of this
Portfolio of mortgages is 15.9 years.The S&L finances its mortgages by issuing CDs and the current value of these liabilities is $275 million.The duration of these liabilities is 4.6 years.What is the initial duration of the equity for the S&L?
A)103.25 years
B)78.05 years
C)25.30 years
D)53.00 years
Q3) What are some of the disadvantages of long-term supply contracts?
Q4) Assuming that your firm will purchase insurance,what is the minimum-size deductible that would leave your firm with an incentive to implement the new safety policies?
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Chapter 26: Corporate Governance
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Q1) The Sarbanes-Oxley Act requires all of the following except?
A)That audit partners rotate every five years to limit the likelihood that auditing relationships become too cozy over long periods of time.
B)Strict limits on the amount of non-audit fees (consulting or otherwise)that an accounting firm can earn from the same firm that it audits.
C)That senior management and the boards of public companies to be comfortable enough with the process through which funds are allocated and controlled,and outcomes monitored throughout the firm,to be willing to attest to their effectiveness and validity.
D)The Auditor must personally attest to the accuracy of the financial statements presented to shareholders and to sign a statement to that effect.
Q2) The costs and benefits of a corporate governance structure
A)are the same in all countries.
B)are the same for all companies within a country.
C)depend on cultural norms.
D)are not important in maximizing shareholder wealth.
Q3) What is the difference between Inside,gray,and outside directors?
Q4) What is corporate governance?
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