Corporate Financial Policy
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Course Introduction
Corporate Financial Policy explores the frameworks and strategic decisions that shape a corporation's financial landscape, focusing on capital structure, dividend policy, risk management, and financing choices. Students examine how firms determine their optimal mix of debt and equity, the implications of financial policy on firm value, and the role of external factors such as market conditions and regulation. The course integrates theoretical models with real-world case studies, emphasizing the interplay between managerial incentives, corporate governance, and shareholder interests in the formulation of effective financial strategies.
Recommended Textbook
Fundamentals of Corporate Finance 10th Alternate Edition by Stephen A. Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) Which one of the following parties has ultimate control of a corporation?
A) chairman of the Board
B) board of directors
C) chief executive officer
D) chief operating office
E) shareholders
Answer: E
Q2) Which one of the following is defined as a firm's short-term assets and its short-term liabilities?
A) working capital
B) debt
C) investment capital
D) net capital
E) capital structure
Answer: A
Q3) Describe the key advantages associated with the corporate form of organization.
Answer: The advantages of the corporate form of organization are the ease of transferring ownership,the owners' limited liability for business debts,the ability to raise large amounts of capital,and the potential for an unlimited life for the organization.
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Page 3
Chapter
Two: Financial Statements and Long-Term Financial Planning
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Q1) A firm has common stock of $6,200,paid-in surplus of $9,100,total liabilities of $8,400,current assets of $5,900,and fixed assets of $21,200.What is the amount of the shareholders' equity?
A) $6,900
B) $15,300
C) $18,700
D) $23,700
E) $35,500
Answer: C
Q2) Which one of the following statements concerning net working capital is correct?
A) The lower the value of net working capital the greater the ability of a firm to meet its current obligations.
B) An increase in net working capital must also increase current assets.
C) Net working capital increases when inventory is sold for cash at a profit.
D) Firms with equal amounts of net working capital are also equally liquid.
E) Net working capital is a part of the operating cash flow.
Answer: C
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Chapter 3: Working With Financial Statements
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Q1) Coulter Supply has a total debt ratio of 0.52.What is the equity multiplier?
A) 0.89
B) 1.13
C) 1.47
D) 2.08
E) 2.13
Answer: D
Q2) The price-sales ratio is especially useful when analyzing firms that have which one of the following?
A) volatile market prices
B) negative earnings
C) positive PEG ratios
D) a negative Tobin's Q
E) increasing sales
Answer: B
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Page 5
Chapter 4: Long-Term Financial Planning and Growthpart
Three: Valuation of Future Cash Flows
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Sample Questions
Q1) A firm is operating at 90 percent of capacity.This information is primarily needed to project which one of the following account values when compiling pro forma statements?
A) sales
B) costs of goods sold
C) accounts receivable
D) fixed assets
E) long-term debt
Q2) The plowback ratio is:
A) equal to net income divided by the change in total equity.
B) the percentage of net income available to the firm to fund future growth.
C) equal to one minus the retention ratio.
D) the change in retained earnings divided by the dividends paid.
E) the dollar increase in net income divided by the dollar increase in sales.
Q3) Nelson's Landscaping Services just completed a pro forma statement using the percentage of sales approach.The pro forma has a projected external financing need of -$5,500.What are the firm's options in this case?
Q4) Why do financial managers need to understand the implications of both the internal and the sustainable rates of growth?
Page 6
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Chapter 5: Introduction to Valuation: the Time Value of Money
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Q1) Theo needs $40,000 as a down payment for a house 6 years from now.He earns 2.5 percent on his savings.Theo can either deposit one lump sum today for this purpose or he can wait a year and deposit a lump sum.How much additional money must he deposit if he waits for one year rather than making the deposit today?
A) $778.98
B) $811.13
C) $862.30
D) $948.03
E) $1,020.18
Q2) You want to deposit sufficient money today into a savings account so that you will have $1,000 in the account three years from today.Explain why you could deposit less money today if you could earn 3.5 percent interest rather than 3 percent interest.
Q3) At 8 percent interest,how long would it take to quadruple your money?
A) 16.55 years
B) 16.64 years
C) 17.09 years
D) 18.01 years
E) 18.56 years
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Chapter 6: Discounted Cash Flow Valuation
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Q1) Theresa adds $1,500 to her savings account on the first day of each year.Marcus adds $1,500 to his savings account on the last day of each year.They both earn 6.5 percent annual interest.What is the difference in their savings account balances at the end of 35 years?
A) $12,093
B) $12,113
C) $12,127
D) $12,211
E) $12,219
Q2) Gene's Art Gallery is notoriously known as a slow-payer.The firm currently needs to borrow $27,500 and only one company will even deal with them.The terms of the loan call for daily payments of $100.The first payment is due today.The interest rate is 24 percent,compounded daily.What is the time period of this loan? Assume a 365 day year.
A) 264.36 days
B) 280.81 days
C) 303.22 days
D) 316.46 days
E) 341.09 days
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Chapter 7: Interest Rates and Bond Valuation
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Q1) Inflation has remained low for the past three years but you have come to the conclusion that trend is ending and inflation will increase significantly over the next 18 months.Assume you have reached this conclusion prior to other investors reaching the same conclusion.What adjustments should you make to your bond portfolio in light of your conclusions?
Q2) You want to have $1.04 million in real dollars in an account when you retire in 38 years.The nominal return on your investment is 8 percent and the inflation rate is 3.5 percent.What is the real amount you must deposit each year to achieve your goal?
A) $10,667.67
B) $10,878.49
C) $11,194.39
D) $11,515.09
E) $11,744.12
Q3) A zero coupon bond:
A) is sold at a large premium.
B) pays interest that is tax deductible to the issuer when paid.
C) can only be issued by the U.S.Treasury.
D) has more interest rate risk than a comparable coupon bond.
E) provides no taxable income to the bondholder until the bond matures.
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Page 9
Chapter 8: Stock Valuationpart Four: Capital Budgeting
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Q1) The current dividend yield on Clayton's Metals common stock is 3.2 percent.The company just paid a $1.48 annual dividend and announced plans to pay $1.54 next year.The dividend growth rate is expected to remain constant at the current level.What is the required rate of return on this stock?
A) 7.25 percent
B) 7.82 percent
C) 8.08 percent
D) 8.39 percent
E) 8.75 percent
Q2) Great Lakes Health Care common stock offers an expected total return of 9.2 percent.The last annual dividend was $2.10 a share.Dividends increase at a constant 2.6 percent per year.What is the dividend yield?
A) 3.75 percent
B) 4.20 percent
C) 4.55 percent
D) 5.25 percent
E) 6.60 percent
Q3) Using the dividend growth model,explain why a firm would be hesitant to reduce the growth rate of its dividends.
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Page 10
Chapter 9: Net Present Value and Other Investment Criteria
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Q1) Which one of the following will decrease the net present value of a project?
A) increasing the value of each of the project's discounted cash inflows
B) moving each of the cash inflows forward to a sooner time period
C) decreasing the required discount rate
D) increasing the project's initial cost at time zero
E) increasing the amount of the final cash inflow
Q2) Which one of the following increases the net present value of a project?
A) an increase in the required rate of return
B) an increase in the initial capital requirement
C) a deferment of some cash inflows until a later year
D) an increase in the aftertax salvage value of the fixed assets
E) a reduction in the final cash inflow
Q3) Explain how the internal rate of return (IRR)decision rule is applied to projects with financing type cash flows.
Q4) Mutually exclusive projects are best defined as competing projects which:
A) would commence on the same day.
B) have the same initial start-up costs.
C) both require the total use of the same limited resource.
D) both have negative cash outflows at time zero.
E) have the same life span.
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Chapter 10: Making Capital Investment Decisions
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Q1) The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following?
A) salvage value
B) wasted value
C) sunk cost
D) opportunity cost
E) erosion
Q2) Mason Farms purchased a building for $689,000 eight years ago.Six years ago,repairs were made to the building which cost $136,000.The annual taxes on the property are $11,000.The building has a current market value of $840,000 and a current book value of $494,000.The building is totally paid for and solely owned by the firm.If the company decides to use this building for a new project,what value,if any,should be included in the initial cash flow of the project for this building?
A) $494,000
B) $582,000
C) $840,000
D) $865,000
E) $953,000
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Chapter 11: Project Analysis and Evaluationpart Five: Risk and Return
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Q1) Assume you graph a project's net present value given various sales quantities.Which one of the following is correct regarding the resulting function?
A) The steepness of the function relates to the project's degree of operating leverage.
B) The steeper the function,the less sensitive the project is to changes in the sales quantity.
C) The resulting function will be a hyperbole.
D) The resulting function will include only positive values.
E) The slope of the function measures the sensitivity of the net present value to a change in sales quantity.
Q2) Ted is analyzing a project using simulation.His focus is limited to the short-term.To ease the simulation process,he is combining expenses into various categories.Which one of the following should he include in the fixed cost category?
A) production department payroll taxes
B) equipment insurance
C) sales tax
D) raw materials
E) product shipping costs
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13
Chapter 12: Some Lessons From Capital Market History
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Q1) The U.S.Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits.Given this,you would be most apt to argue that the markets are less than _____ form efficient.
A) weak
B) semiweak
C) semistrong
D) strong
E) perfect
Q2) A stock had returns of 12 percent,16 percent,10 percent,19 percent,15 percent,and -6 percent over the last six years.What is the geometric average return on the stock for this period?
A) 10.90 percent
B) 10.68 percent
C) 13.56 percent
D) 14.76 percent
E) 15.01 percent
Q3) What are the two primary lessons learned from capital market history? Use historical information to justify that these lessons are correct.
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14
Six: Cost of Capital and Long-Term Financial Policy
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Q1) The expected return on JK stock is 15.78 percent while the expected return on the market is 11.34 percent.The stock's beta is 1.51.What is the risk-free rate of return?
A) 2.22 percent
B) 2.31 percent
C) 2.42 percent
D) 2.50 percent
E) 2.63 percent
Q2) Treynor Industries is investing in a new project.The minimum rate of return the firm requires on this project is referred to as the:
A) average arithmetic return.
B) expected return.
C) market rate of return.
D) internal rate of return.
E) cost of capital.
Q3) Explain how the beta of a portfolio can equal the market beta if 50 percent of the portfolio is invested in a security that has twice the amount of systematic risk as an average risky security.
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Page 15
Chapter 14: Cost of Capital
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Q1) Jiminy's Cricket Farm issued a 30-year,8 percent,semiannual bond 6 years ago.The bond currently sells for 114 percent of its face value.What is the aftertax cost of debt if the company's tax rate is 31 percent?
A) 4.63 percent
B) 4.70 percent
C) 4.75 percent
D) 4.82 percent
E) 4.86 percent
Q2) Tidewater Fishing has a current beta of 1.21.The market risk premium is 8.9 percent and the risk-free rate of return is 3.2 percent.By how much will the cost of equity increase if the company expands its operations such that the company beta rises to 1.50?
A) 1.88 percent
B) 2.58 percent
C) 2.60 percent
D) 3.10 percent
E) 3.26 percent
Q3) Give an example of a situation where a firm should adopt the pure play approach for determining the cost of capital for a project.
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Page 16
Chapter 15: Raising Capital
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Q1) Nelson Paints recently went public by offering 65,000 shares of common stock to the public.The underwriters provided their services in a best efforts underwriting.The offering price was set at $16 a share and the gross spread was $2.After completing their sales efforts,the underwriters determined that they sold a total of 57,500 shares.How much cash did Nelson Paints receive from its IPO?
A) $805,000
B) $910,000
C) $920,000
D) $1,035,000
E) $1,040,000
Q2) It can be argued that the decision to accept venture capital is one of the most critical decisions an entrepreneur must make.Explain why.
Q3) The Securities and Exchange Commission:
A) verifies the accuracy of the information contained in the prospectus.
B) verifies the accuracy of the information contained in the red herring.
C) examines the registration statement during the Green Shoe period.
D) is concerned only that an issue complies with all rules and regulations.
E) determines the final offer price once they have approved the registration statement.
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Chapter 16: Financial Leverage and Capital Structure Policy
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Q1) New Schools,Inc.expects an EBIT of $7,000 every year forever.The firm currently has no debt,and its cost of equity is 15 percent.The firm can borrow at 8 percent and the corporate tax rate is 34 percent.What will the value of the firm be if it converts to 50 percent debt?
A) $31,796.47
B) $36,036.00
C) $37,407.16
D) $37,552.08
E) $38,119.30
Q2) Jefferson & Daughter has a cost of equity of 14.6 percent and a pre-tax cost of debt of 7.8 percent.The required return on the assets is 13.2 percent.What is the firm's debt-equity ratio based on M & M II with no taxes?
A) 0.26
B) 0.33
C) 0.37
D) 0.43
E) 0.45
Q3) Explain how a firm loses value during the bankruptcy process from both a creditors and a shareholders perspective.
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Page 18
Chapter 17: Dividends and Payout Policypart Seven: Short-Term
Financial Planning and Management
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Q1) The Peace River Corporation has 62,000 shares of stock outstanding at a market price of $48 a share.The company has just announced a 3-for-2 stock split.How many shares of stock will be outstanding after the split?
A) 41,333 shares
B) 54,333 shares
C) 89,333 shares
D) 93,000 shares
E) 100,500 shares
Q2) Josh's,Inc.has 7,000 shares of stock outstanding with a par value of $1.00 per share and a market value of $32 a share.The balance sheet shows $82,000 in the capital in excess of par account,$7,000 in the common stock account,and $64,800 in the retained earnings account.The firm just announced a 10 percent stock dividend.What is the value of the capital in excess of par account after the dividend?
A) $76,000
B) $82,000
C) $97,700
D) $103,700
E) $104,400
Q3) Explain the meaning of the dividend clientele effect and why it is important.
Page 19
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Chapter 18: Short-Term Finance and Planning
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Q1) As of the beginning of the quarter,Swenson's,Inc.had a cash balance of $460.During the quarter,the company collected $480 from customers and paid suppliers $360.The company also paid an interest payment of $20 and a tax payment of $110.In addition,the company repaid $140 on its long-term debt.What is Callahan's cash balance at the end of the quarter?
A) -$110
B) $290
C) $310
D) $350
E) $490
Q2) Which of the following determines the length of the operating cycle?
I.cash cycle
II.inventory period
III.accounts payable period
IV.accounts receivable period
A) I and III only
B) II and IV only
C) I,II,and IV only
D) II,III,and IV only
E) I,II,III,and IV
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Chapter 19: Cash and Liquidity Management
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Q1) The Miller-Orr model assumes that:
A) the cash balance is depleted at regular intervals.
B) all cash flows are known with certainty.
C) the average change in the daily cash flows is positive.
D) management will set both the lower and the upper desired levels of cash.
E) the cash balance fluctuates in a random manner.
Q2) Which one of the following statements is correct concerning zero-balance accounts?
A) Each zero-balance account is offset by a compensating balance account.
B) Zero-balance accounts are used for depositing incoming funds.
C) A master account must be used in conjunction with a zero-balance account.
D) Zero-balance accounts are used solely in conjunction with a lockbox system.
E) Zero-balance accounts are still required to maintain a minimal balance.
Q3) A repurchase agreement generally has a maximum life of:
A) 1 day.
B) a few days.
C) one month.
D) one to three months.
E) three to six months.
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Page 21
Topics in Corporate Finance
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Q1) The EOQ model is designed to minimize:
A) production costs.
B) inventory obsolescence.
C) the carrying costs of inventory.
D) the costs of replenishing inventory.
E) the total costs of holding inventory.
Q2) Saucier & Co.currently sells 2,100 units a month for total monthly sales of $86,500.The company is considering replacing its current cash only credit policy with a net 30 policy.The variable cost per unit is $18 and the monthly interest rate is 1.2 percent.What is the switch break-even level of sales? Assume the selling price per unit and the variable costs per unit remain constant.
A) 1,943 units
B) 2,117 units
C) 2,145 units
D) 2,406 units
E) 2,548 units
Q3) Why might firms forego discounts offered by their suppliers even though it is costly to do so? What steps might a firm pursue to be able to take these discounts?
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Chapter 21: International Corporate Finance
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Q1) The expected inflation rate in Finland is 2.8 percent while it is 3.2 percent in the U.S.A risk-free asset in the U.S.is yielding 4.9 percent.What approximate real rate of return should you expect on a risk-free Finnish security?
A) 1.2 percent
B) 1.7 percent
C) 2.1 percent
D) 2.5 percent
E) 2.8 percent
Q2) The market value of the Blackwell Corporation just declined by 5 percent.Analysts believe this decrease in value was caused by recent legislation passed by Congress.Which type of risk does this illustrate?
A) international risk
B) diversifiable risk
C) purchasing power risk
D) exchange rate risk
E) political risk
Q3) Using currencies A,B,and C construct an example in which triangle arbitrage exists and then show how to exploit it.
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23
Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) Most people would tend to agree that technology stocks were highly overvalued in the late 1990's.This time period is best described as a technology: A) crash.
B) circle.
C) bubble.
D) limit.
E) arbitrage.
Q2) Mike is a stock broker and financial planner.Phil is one of Mike's clients.Phil prefers to meet with Mike just once a year to review his investment portfolio.At their most recent meeting,Phil stated he believes the stock market is going to decline in value over the next six months.Thus,Phil instructed Mike to sell every stock he owns that is currently worth more than what he paid to purchase it.Phil also instructed Mike to retain any stock that would create a capital loss if sold.Phil is displaying the behavior known as: A) overconfidence.
B) arbitrage theory.
C) the disposition effect.
D) the house money effect.
E) a confirmation bias.
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Chapter 23: Enterprise Risk Management
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Q1) An option contract:
I.can be used to hedge risk.
II.can be used to speculate in the market.
III.can be based on a futures contract to create a futures option.
IV.cannot be based on a foreign currency.
A) II and III only
B) I and II only
C) I,II,and III only
D) II,III,and IV only
E) I,II,III,and IV
Q2) Long-run financial risk:
A) can frequently be hedged on a permanent basis.
B) is best hedged on a division by division basis within a conglomerate.
C) is related more to near-term transactions than to advancements in technology.
D) generally results from changes in the underlying economics of a business.
E) can generally be hedged such that the financial viability of a firm is protected.
Q3) What are the primary motives for a hedger and a speculator in the derivatives market? If a wheat farmer sells wheat futures,is that hedging or speculating? Explain.
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25
Chapter 24: Options and Corporate Finance
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Q1) The price of Dimension,Inc.stock will be either $65 or $87 at the end of the year.Call options are available with one year to expiration.T-bills currently yield 5 percent.Suppose the current price of Dimension stock is $70.What is the value of the call option if the exercise price is $70 per share?
A) $6.26
B) $8.48
C) $11.58
D) $15.39
E) $17.62
Q2) Employee stock options:
A) usually have a positive intrinsic value when issued.
B) must be backdated at least six months to comply with Sarbanes-Oxley.
C) are generally "underwater" when issued.
D) are frequently repriced if the options are in-the-money.
E) are generally issued with a zero intrinsic value.
Q3) What are the upper and lower bounds for an American call option? Explain what would happen in each case if the bound was violated.
Q4) What are the basic similarities and basic differences between warrants and call options?
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Chapter 25: Option Valuation
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Q1) To compute the value of a put using the Black-Scholes option pricing model,you:
A) first have to apply the put-call parity relationship.
B) first have to compute the value of the put as if it is a call.
C) compute the value of an equivalent call and then subtract that value from one.
D) compute the value of an equivalent call and then subtract that value from the market price of the stock.
E) compute the value of an equivalent call and then multiply that value by e<sup>-RT</sup>.
Q2) A put option that expires in eight months with an exercise price of $57 sells for $3.85.The stock is currently priced at $59,and the risk-free rate is 3.1 percent per year,compounded continuously.What is the price of a call option with the same exercise price and expiration date?
A) $6.67
B) $7.02
C) $7.34
D) $7.71
E) $7.80
Q3) Explain why financial mergers tend to benefit bondholders more than shareholders.
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Chapter 26: Mergers and Acquisitions
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Q1) Troyer Markets and Deb's Grocery are all-equity firms.Troyer Markets has 2,400 shares outstanding at a market price of $14.80 a share.Deb's Grocery has 3,200 shares outstanding at a price of $28 a share.Deb's Grocery is acquiring Troyer Markets for $37,500 in cash.What is the merger premium per share?
A) $0
B) $0.825
C) $1.108
D) $1.216
E) $1.320
Q2) Pearl,Inc.has offered $920 million cash for all of the common stock in Jam Corporation.Based on recent market information,Jam is worth $710 million as an independent operation.For the merger to make economic sense for Pearl,what would the minimum estimated value of the synergistic benefits from the merger have to be?
A) $0
B) $75 million
C) $210 million
D) $710 million
E) $920 million
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Chapter 27: Leasing
Available Study Resources on Quizplus for this Chatper
72 Verified Questions
72 Flashcards
Source URL: https://quizplus.com/quiz/74224
Sample Questions
Q1) A financial lease in which the lessor is the owner for tax purposes is called a(n)_____ lease.
A) open
B) straight
C) operating
D) tax-oriented
E) tax-exempt
Q2) An operating lease has which of the following characteristics?
I.lessee has responsibility for the maintenance and insurance
II.lease payments cover the full cost of the asset
III.economic life of the asset exceeds the lease term
IV.lessee can cancel the lease prior to the expiration date
A) I and III only
B) II and IV only
C) I and II only
D) III and IV only
E) I,II,and III only
Q3) What are some "good" reasons for opting to lease rather than purchase an asset?
Q4) Why might a firm opt to sell and leaseback an asset which it currently owns?
Q5) Explain the differences between purchasing an asset and leasing an asset.
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