Corporate Financial Policy
Exam Practice Tests
Course Introduction
Corporate Financial Policy examines the strategic decisions firms make regarding their capital structure, dividend policy, and methods of financing growth. The course explores how companies balance debt and equity, manage risk, and interact with capital markets to maximize shareholder value. Students analyze real-world cases, review key theoretical frameworks, and assess the implications of mergers, acquisitions, and restructuring on financial policy. Emphasis is placed on understanding how market conditions, taxation, regulation, and corporate governance shape financial decisions in a global context.
Recommended Textbook
Corporate Finance A Focused Approach 6th Edition by Michael C. Ehrhardt
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16 Chapters
1341 Verified Questions
1341 Flashcards
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Sample Questions
Q1) Cheers Inc. operates as a partnership. Now the partners have decided to convert the business into a regular corporation. Which of the following statements is CORRECT?
A) Assuming Cheers is profitable, less of its income will be subject to federal income taxes.
B) Cheers will now be subject to fewer regulations.
C) Cheers' shareholders (the ex-partners) will now be exposed to less liability.
D) Cheers' investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.
E) Cheers will find it more difficult to raise additional capital.
Answer: C
Q2) If Firm A's business is to obtain savings from individuals and then invest them in financial assets issued by other firms or individuals, Firm A is a financial intermediary.
A)True
B)False
Answer: True
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Chapter 3: Analysis of Financial Statements
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Sample Questions
Q1) Suppose firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. Under these conditions, then firms that have high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.
A)True
B)False
Answer: False
Q2) LeCompte Corp. has $312,900 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $620,000, and its net income after taxes was $24,655. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. What profit margin would LeCompte need in order to achieve the 15% ROE, holding everything else constant?
A) 7.57%
B) 7.95%
C) 8.35%
D) 8.76%
E) 9.20%
Answer: A
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Page 4
Chapter 4: Time Value of Money
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) A time line is not meaningful unless all cash flows occur annually.
B) Time lines are not useful for visualizing complex problems prior to doing actual calculations.
C) Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.
D) Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.
E) Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.
Q2) The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date.
A)True B)False
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Chapter 5: Bonds, Bond Valuation, and Interest Rates
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Sample Questions
Q1) Jerome Corporation's bonds have 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,050. What is the bond's nominal yield to call?
A) 5.01%
B) 5.27%
C) 5.54%
D) 5.81%
E) 6.10%
Q2) Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?
A) A 1-year bond with a 15% coupon.
B) A 3-year bond with a 10% coupon.
C) A 10-year zero coupon bond.
D) A 10-year bond with a 10% coupon.
E) An 8-year bond with a 9% coupon.
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Chapter 6: Risk, Return, and the Capital Asset Pricing Model
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Sample Questions
Q1) If you plotted the returns on a given stock against those of the market, and if you found that the slope of the regression line was negative, the CAPM would indicate that the required rate of return on the stock should be greater than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue into the future.
A)True
B)False
Q2) We would generally find that the beta of a single security is more stable over time than the beta of a diversified portfolio.
A)True
B)False
Q3) Any change in its beta is likely to affect the required rate of return on a stock, which implies that a change in beta will likely have an impact on the stock's price, other things held constant.
A)True
B)False
Q4) The slope of the SML is determined by the value of beta.
A)True
B)False
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Chapter 7: Stocks, Stock Valuation, and Stock Market
Equilibrium
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Sample Questions
Q1) The required returns of Stocks X and Y are r<sub>X</sub> = 10% and r<sub>Y</sub> = 12%. Which of the following statements is CORRECT?
A) If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains yield than Stock X.
B) If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then Stock Y must sell for a higher price.
C) The stocks must sell for the same price.
D) Stock Y must have a higher dividend yield than Stock X.
E) If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate.
Q2) The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.
A)True
B)False
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Page 8
Chapter 8: Financial Options and Applications in Corporate Finance
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Sample Questions
Q1) As the price of a stock rises above the strike price, the value investors are willing to pay for a call option increases because both (1) the immediate capital gain that can be realized by exercising the option and (2) the likely exercise value of the option when it expires have both increased.
A)True
B)False
Q2) An option that gives the holder the right to sell a stock at a specified price at some future time is
A) a put option.
B) an out-of-the-money option.
C) a naked option.
D) a covered option.
E) a call option.
Q3) If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy, this action could be expected to increase the value of long-term options (say 5-year options) on the firm's stock.
A)True
B)False
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation.
B) Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock as measured by the CAPM.
C) If a company's beta increases, this will increase the cost of equity used to calculate the WACC, but only if the company does not have enough reinvested earnings to take care of its equity financing and hence must issue new stock.
D) Higher flotation costs reduce investors' expected returns, and that leads to a reduction in a company's WACC.
E) When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.
Q2) The cost of debt is equal to one minus the marginal tax rate multiplied by the interest rate on new debt.
A)True
B)False
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Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Sample Questions
Q1) Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
A) A project's regular IRR is found by compounding the cash inflows at the cost of capital to find the present value (PV), then discounting the TV to find the IRR.
B) If a project's IRR is smaller than the cost of capital, then its NPV will be positive.
C) A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost.
D) If a project's IRR is positive, then its NPV must also be positive.
E) A project's regular IRR is found by compounding the initial cost at the cost of capital to find the terminal value (TV), then discounting the TV at the cost of capital.
Q2) The regular payback method is deficient in that it does not take account of cash flows beyond the payback period. The discounted payback method corrects this fault.
A)True
B)False
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Chapter 11: Cash Flow Estimation and Risk Analysis
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Sample Questions
Q1) Sensitivity analysis measures a project's stand-alone risk by showing how much the project's NPV (or IRR) is affected by a small change in one of the input variables, say sales. Other things held constant, with the size of the independent variable graphed on the horizontal axis and the NPV on the vertical axis, the steeper the graph of the relationship line, the more risky the project, other things held constant.
A)True
B)False
Q2) Suppose a firm's CFO thinks that an externality is present in a project, but that it cannot be quantified with any precision estimates of its effect would really just be guesses. In this case, the externality should be ignored i.e., not considered at all because if it were considered it would make the analysis appear more precise than it really is.
A)True
B)False
Q3) Changes in net working capital should not be reflected in a capital budgeting cash flow analysis because capital budgeting relates to fixed assets, not working capital.
A)True
B)False
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Page 12
Chapter 12: Financial Planning and Forecasting Financial Statements
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Sample Questions
Q1) Which of the following assumptions is embodied in the AFN equation?
A) Accounts payable and accruals are tied directly to sales.
B) Common stock and long-term debt are tied directly to sales.
C) Fixed assets, but not current assets, are tied directly to sales.
D) Last year's total assets were not optimal for last year's sales.
E) None of the firm's ratios will change.
Q2) A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset.
A)True
B)False
Q3) If a firm's capital intensity ratio (A<sub>0</sub>*/S<sub>0</sub>) decreases as sales increase, use of the AFN formula is likely to understate the amount of additional funds required, other things held constant.
A)True
B)False
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13
Chapter 13: Corporate Valuation, Value-Based
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Sample Questions
Q1) ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent hostile takeovers.
A)True
B)False
Q2) Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
A) To enable the firm to borrow at a below-market interest rate.
B) To make it easier to grant stock options to employees.
C) To help prevent a hostile takeover.
D) To help retain valued employees.
E) To increase worker productivity.
Q3) Which of the following is NOT normally regarded as being a barrier to hostile takeovers?
A) Targeted share repurchases.
B) Shareholder rights provisions.
C) Restricted voting rights.
D) Poison pills.
E) Abnormally high executive compensation.
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Chapter 14: Distributions to Shareholders: Dividends and Repurchases
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Sample Questions
Q1) Which of the following should not influence a firm's dividend policy decision?
A) A strong preference by most shareholders for current cash income versus capital gains.
B) Constraints imposed by the firm's bond indenture.
C) The fact that much of the firm's equipment has been leased rather than bought and owned.
D) The fact that Congress is considering changes in the tax law regarding the taxation of dividends versus capital gains.
E) The firm's ability to accelerate or delay investment projects.
Q2) MM's dividend irrelevance theory says that while dividend policy does not affect a firm's value, it can affect the cost of capital.
A)True
B)False
Q3) Even if a stock split has no information content, and even if the dividend per share adjusted for the split is not increased, there can still be a real benefit (i.e., a higher value for shareholders) from such a split, but any such benefit is probably small.
A)True
B)False
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Chapter 15: Capital Structure Decisions
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Sample Questions
Q1) Two firms, although they operate in different industries, have the same expected earnings per share and the same standard deviation of expected EPS. Thus, the two firms must have the same business risk.
A)True
B)False
Q2) Refer to the data for VanMannen Foundations, Inc. (VF). If this plan were carried out, what would be VF's new WACC and its new value of operations? WACC Value
A) 9.64% $497,925
B) 9.83% $507,884
C) 10.03% $518,041
D) 10.23% $528,402
E) 10.74% $538,970
Q3) A firm's capital structure does not affect its calculated free cash flows, because FCF reflects only operating cash flows.
A)True
B)False
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16
Chapter 16: Working Capital Management
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Sample Questions
Q1) Howes Inc. purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50. If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year.)
A) 20.11%
B) 21.17% C) 22.28% D) 23.45%
E) 24.63%
Q2) An informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower.
A)True
B)False
Q3) "Stretching" accounts payable is a widely accepted, entirely ethical, and costless financing technique.
A)True
B)False
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Chapter 17: Multinational Financial Management
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Sample Questions
Q1) If it takes $0.71 U.S. dollars to purchase one Swiss franc, how many Swiss francs can one U.S. dollar buy?
A) 0.50
B) 0.71
C) 1.00
D) 1.41
E) 2.81
Q2) A foreign currency will, on average, depreciate against the U.S. dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.
A)True
B)False
Q3) The United States and most other major industrialized nations currently operate under a system of floating exchange rates.
A)True
B)False
Q4) A Eurodollar is a U.S. dollar deposited in a bank outside the United States.
A)True
B)False
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