Corporate Financial Policy
Exam Bank
Course Introduction
Corporate Financial Policy examines the strategic financial decisions corporations make to create value and achieve their long-term objectives. The course explores topics such as capital structure, dividend policy, debt versus equity financing, mergers and acquisitions, risk management, and the implications of financial policies on firm valuation. Through case studies and real-world examples, students analyze how corporate managers align financial strategies with business goals while considering market conditions, regulatory frameworks, and stakeholder interests. The course integrates theoretical concepts with practical applications to provide a comprehensive understanding of how financial policies shape the success and sustainability of corporations.
Recommended Textbook
Corporate Finance The Core 4th Edition by
Jonathan Berk
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Page 2
Chapter 1: The Corporation
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Q1) Which of the following are subject to double taxation?
A)Corporation
B)Partnership
C)Sole proprietorship
D)A and B
Answer: A
Q2) An agency problem can be alleviated by:
A)requiring all firms to be sole proprietorships.
B)compensating managers in such a way that acting in the best interest of shareholders is also in the best interest of managers.
C)asking managers to take on more risk than they are comfortable taking.
D)A and B.
Answer: D
Q3) What strategies are available to shareholders to help ensure that managers are motivated to act in the interest of the shareholders rather than their own interest?
Answer: 1.The threat of a hostile takeover 2.Shareholder initiatives 3.Performance based compensation
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) Zoe Dental Implements has gross property,plant and equipment totaling $1.4 million,depreciation expense this year of $200,000,and accumulated depreciation of $750,000.What is the book value of Zoe's property,plant and equipment?
A)$1.4 million
B)$1.2 million
C)$550,000
D)$650,000
Answer: D
Q2) If ECE's return on assets (ROA)is 12%,then ECE's return on equity (ROE)is:
A)10%
B)12%
C)18%
D)22%
Answer: D
Q3) Luther's Operating Margin for the year ending December 31,2008 is closest to:
A)0.5%
B)0.7%
C)5.4%
D)6.8%
Answer: C
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Chapter 3: Financial Decision Making and the Law of One
Price
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Q1) If the interest rate is 7%,the NPV of alternative #3 is closest to:
A)$350,000
B)$357,196
C)$370,561
D)$401,121
Answer: B
Q2) Which of the following statements regarding the valuing of costs and benefits is NOT correct?
A)The first step in evaluating a project is to identify its costs and benefits.
B)In the absence of competitive markets,we can use one-sided prices to determine exact cash values.
C)Competitive market prices allow us to calculate the value of a decision without worrying about the tastes or opinions of the decision maker.
D)Because competitive markets exist for most commodities and financial assets,we can use them to determine cash values and evaluate decisions in most situations.
Answer: B
Q3) The price per share of the ETF in a normal market is:
Answer: Value of ETF = 2 × 121.57 + 3 × 36.59 + 3 × 3.15 = $362.36
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Chapter 4: The Time Value of Money
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Q1) How do you calculate (mathematically)the present value of a(n):
(a)perpetuity
(b)annuity
(c)growing perpetuity
(d)growing annuity
Q2) Assuming that college costs continue to increase an average of 4% per year and that all her college savings are invested in an account paying 7% interest,then the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education is closest to:
Q3) Taggart Transcontinental currently has a bank loan outstanding that requires it to make three annual payments at the end of the next three years or to skip making the next two payments in lieu of making one large payment at the end of the loan's term in three years in the amount of $3,184,000.If the interest rate on the loan is 6%,then the annual payment the bank will require to make Taggart Transcontinental indifferent between the two forms of payments is closest to:
A)$2,673,000
B)$2,000,000
C)$1,673,000
D)$1,000,000
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Page 6
Chapter 5: Interest Rates
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Q1) The present value of an investment that pays $1000 in two years and $5000 in ten years for certain is closest to:
A)$3660
B)$3687
C)$3707
D)$4292
Q2) Dagny's monthly payments are closest to:
A)$1110
B)$1800
C)$2215
D)$2245
Q3) Which of the following statements is FALSE?
A)When we refer to the "risk-free interest rate," we mean the rate on U.S.Treasuries.
B)Interest rates vary with the investment horizon.
C)All borrowers,besides the U.S.Treasury,have some risk of default.
D)When interest on a loan is tax deductible,the effective after-tax interest rate is × (1 - r).
Q4) Should the nominal interest rate ever be negative? Can the real interest rate ever be negative? Explain.
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Chapter 6: Valuing Bonds
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Q1) The forward rate for year 2 (the forward rate quoted today for an investment that begins in one year and matures in two years)is closest to:
A)5.80%
B)5.50%
C)5.20%
D)5.65%
Q2) If the YTM of these bonds decreases to 7%,which bond's price would be most sensitive to this change in YTM?
A)#1
B)#2
C)#3
D)#4
E)#3 and #4
Q3) Which of the following statements is FALSE?
A)Bonds are a securities sold by governments and corporations to raise money from investors today in exchange for promised future payments.
B)By convention the coupon rate is expressed as an effective annual rate.
C)Bonds typically make two types of payments to their holders.
D)The time remaining until the repayment date is known as the term of the bond.
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Page 8
Chapter 7: Investment Decision Rules
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Q1) The IRR for this project is closest to:
A)15.60%
B)18.95%
C)20.00%
D)25.85%
Q2) Assume the appropriate discount rate for this project is 15%.The profitability index for this project is closest to:
A).14
B).22
C).60
D).15
Q3) Calculate the IRR for the snow board project and use it to determine the maximum deviation allowable in the cost of capital estimate that leaves the investment decision unchanged.The maximum deviation allowable is closest to:
A)11.0%
B)0.0%
C)2.5%
D)1.0%
Q4) If the discount rate for project A is 16%,then what is the NPV for project A?
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Chapter 8: Fundamentals of Capital Budgeting
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Q1) The incremental cash flow that Galt Motors will incur in year 4 if they elect to manufacture armatures in house is closest to:
A)25,000
B)350,000
C)375,000
D)1,250,000
Q2) The incremental unlevered net income in the first year for the Sisyphean Corporation's project is closest to:
A)$8000
B)$18,000
C)$5200
D)$11,700
Q3) Calculate the total Free Cash Flows for each of the three years for the Sisyphean Corporation's new project.
Q4) Epiphany would like to know how sensitive the project's NPV is to changes in the discount rate.How much can the discount rate vary before the NPV reaches zero?
Q5) What is sensitivity analysis?
Q6) What is the NPV of the Epiphany's project?
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Chapter 9: Valuing Stocks
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Q1) Growing Real Fast Company (GRF)is expected to have a 25 percent growth rate for the next four years (effecting D<sub>1</sub>,D<sub>2</sub>,D<sub>3</sub>,and D<sub>4</sub>).Beginning in year five,the growth rate is expected to drop to 7 percent per year and last indefinitely.If GRF just paid a $2.00 dividend and the appropriate discount rate is 15 percent,then what is the value of a share of GRE?
Q2) Wyatt's expected EPS in two years is closest to:
A)$4.48
B)$4.64
C)$5.04
D)$5.38
Q3) A firm's net investment is:
A)its capital expenditures in excess of depreciation.
B)its free cash flow net of increases in working capital.
C)its enterprise value in excess of debt owed.
D)the market value of equity plus debt.
Q4) Taggart's market capitalization is closest to:
A)$25 billion
B)$31 billion
C)$40 billion
D)$50 billion
Page 11
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Chapter 10: Capital Markets and the Pricing of Risk
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Q1) Suppose that you want to use the 10 year historical average return on the Market to forecast the expected future return on the Market.Calculate the 95% confidence interval for your estimate of the expect return.
Q2) Which of the following investments had the largest fluctuations in overall return over the past eighty years?
A)Small stocks
B)S&P 500
C)Corporate bonds
D)Treasury Bills
Q3) The expected return on security with a beta of 0 is closest to:
A)-4.0%
B)0.0%
C)3.2%
D)4.0%
Q4) What is the expected return for an individual firm?
A)14%
B)3%
C)5%
D)-5%
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Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model
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Q1) The expected return on the precious metals fund is closest to:
A)-3%
B)4%
C)1% D)10%
Q2) California Gold Mining's beta with the market is closest to:
A)0.9
B)1.25
C)-0.9 D)-1.25
Q3) The Correlation between Stock X's and Stock Y's returns is closest to:
A)0.58
B)0.29
C)0.69
D)0.10
Q4) Suppose that you want to maximize your expected return without increasing your risk.How can you achieve this goal? Without increasing your risk,what is the maximum expected return you can expect?
Q6) Calculate the covariance between Stock Y's and Stock Z's returns . Page 13
Q5) Calculate the correlation between Stock Y's and Stock Z's returns .
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Page 14
Chapter 12: Estimating the Cost of Capital
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Q1) Nielson Motors plans to issue 10-year bonds that it believes will have an BBB rating.Suppose AAA bonds with the same maturity have a 3.5% yield.Assume that the market risk premium is 5% and the expected loss rate in the event of default on the bonds is 60%.The yield that these bonds will have to pay during a recession is closest to:
A)3.50%
B)3.75%
C)4.00%
D)5.50%
Q2) Which of the following statements is FALSE?
A)If investors have homogeneous expectations,then each investor will identify the same portfolio as having the highest Sharpe ratio in the economy.
B)Homogeneous expectations are when all investors have the same estimates concerning future investments and returns.
C)There are many investors in the world,and each must have identical estimates of the volatilities,correlations,and expected returns of the available securities.
D)The combined portfolio of risky securities of all investors must equal the efficient portfolio.
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Chapter 13: Investor Behavior and Capital Market Efficiency
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Q1) A stock's alpha is defined as the stock's:
A)expected return minus its required return.
B)expected return minus its actual return.
C)nominal return minus its required return.
D)required return minus its actual return.
Q2) Portfolio "A":
A)has a relatively lower expected return than predicted.
B)has a positive alpha.
C)falls below the SML.
D)is overpriced.
Q3) Which of the following is NOT true regarding individual investor behavior?
A)Individual investors fail to diversify their portfolios adequately.
B)A vast majority of individual investors hold fewer than 10 stocks in their portfolio.
C)Employees tend to overinvest in their company's own stock.
D)Individual investors' portfolios consistently outperform the market averages.
Q4) What does the existence of a positive alpha investment strategy imply?
Q5) Explain why the market portfolio proxy may not be efficient.
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Page 16
Chapter 14: Capital Structure in a Perfect Market
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Q1) What is Luther's enterprise value?
A)$16 billion
B)$10.5 billion
C)$24 billion
D)$20 billion
Q2) The expected return for Nielson Motors stock without leverage is closest to:
A)-25.0%
B)-17.5%
C)-12.5%
D)12.5%
Q3) The market capitalization of d'Anconia Copper after this transaction takes place is closest to:
A)$800 million
B)$900 million
C)$1100 million
D)$1200 million
Q4) What is a market value balance sheet and how does it differ from a book value balance sheet?
Q5) What is the conservation of value principle?
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Chapter 15: Debt and Taxes
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Q1) Which of the following statements is FALSE?
A)A biotech firm might be developing drugs with tremendous potential,but it has yet to receive any revenue from these drugs.Such a firm will not have taxable earnings.In that case,a tax-optimal capital structure does not include debt.
B)No corporate tax benefit arises from incurring interest payments that regularly exceed EBIT.
C)The optimal level of leverage from a tax saving perspective is the level such that interest equals EBIT.
D)In general,as a firm's interest expense approaches its expected taxable earnings,the marginal tax advantage of debt increases,limiting the amount of equity the firm should use.
Q2) The interest rate tax shield for Kroger in 2004 is closest to:
A)$268 million
B)$393 million
C)$211 million
D)$94 million
Q3) If Flagstaff currently maintains a .8 debt to equity ratio,then calculate the value of Flagstaff's interest tax shield.
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Chapter 16: Financial Distress,managerial Incentives,and Information
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Q1) In order for Nielson Motor's to be willing to invest,project 3 must have an NPV greater than:
A)$12.5 million
B)$15.0 million
C)$22.5 million
D)$27.0 million
Q2) If in the event of distress,the present value of distress costs is equal to $10 million,then the optimal level of debt for d'Anconia Copper is:
A)$25 million
B)$50 million
C)$60 million
D)$70 million
Q3) Kinston's current share price is closest to:
A)$20.40
B)$9.40
C)$11.00
D)$10.00
Q4) List five general categories of indirect costs associated with bankruptcy.
Page 19
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Chapter 17: Payout Policy
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Q1) Using the available tax information for 2002,calculate the effective dividend tax rate for a:
(1)one-year individual investor
(2)buy and hold individual investor
(3)pension fund
Q2) The effective dividend tax rate for a one-year individual investor in 2006 is closest to:
A)20%
B)15%
C)35%
D)0%
Q3) Assume that management makes a surprise announcement that JRN will no longer pay dividends but will use the cash to repurchase stock instead.The price of a share of JRN's stock is now closest to:
A)$20.00
B)$25.00
C)$18.00
D)$24.00
Q4) Calculate the effective tax disadvantage for retaining cash in 1999,2001,and 2005.
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Chapter 18: Capital Budgeting and Valuation With Leverage
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Q1) Which of the following statements is FALSE?
A)In the flow-to-equity valuation method,the cash flows to equity holders are then discounted using the weighted average cost of capital.
B)In the WACC and APV methods,we value a project based on its free cash flow,which is computed ignoring interest and debt payments.
C)In the flow-to-equity (FTE)valuation method,we explicitly calculate the free cash flow available to equity holders taking into account all payments to and from debt holders.
D)The first step in the FTE method is to determine the project's free cash flow to equity (FCFE).
Q2) The Debt Capacity for Omicron's new project in year 0 is closest to:
A)$38.75
B)$75.50
C)$50.25
D)$10.25
Q3) Calculate the NPV for Iota's new project.
Q4) Based upon the three comparable firms,calculate that most appropriate unlevered cost of capital for Aardvark to use on this new product.
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21
Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) Based upon the average EV/EBITDA ratio of the comparable firms,if Ideko holds $6.5 million of cash in excess of its working capital needs,then Ideko's target market value of equity is closest to:
A)$155 million
B)$157 million
C)$165 million
D)$193 million
Q2) If the risk-free rate of interest is 6% and the market risk premium has historically averaged 5%,then the cost of capital for Nike is closest to:
A)14.7%
B)10.2%
C)9.1%
D)13.5%
Q3) Assuming that Ideko has a EBITDA multiple of 8.5,then the continuation unlevered P/E ratio of Ideko in 2010 is closest to:
A)17.6
B)16.4
C)14.5
D)19.0
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