Corporate Financial Strategy
Textbook Exam Questions
Course Introduction
Corporate Financial Strategy examines how organizations make critical financial decisions to achieve their long-term goals and maximize shareholder value. The course explores topics such as capital structure, dividend policy, financing options, mergers and acquisitions, risk management, and value creation. Students will analyze real-world case studies and utilize financial tools to assess strategic alternatives, understand the implications of financial choices, and design comprehensive strategies aligned with corporate objectives and market dynamics.
Recommended Textbook Fundamentals of Corporate Finance 12th Edition by Stephen Ross
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Chapter 1: Introduction to Corporate Finance
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Q1) Which one of the following actions by a financial manager is most apt to create an agency problem?
A) Refusing to borrow money when doing so will create losses for the firm
B) Refusing to lower selling prices if doing so will reduce the net profits
C) Refusing to expand the company if doing so will lower the value of the equity
D) Agreeing to pay bonuses based on the market value of the company's stock rather than on its level of sales
E) Increasing current profits when doing so lowers the value of the company's equity
Answer: E
Q2) Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management?
A) An increase in the amount of the quarterly dividend
B) A decrease in the per unit production costs
C) An increase in the number of shares outstanding
D) A decrease in the net working capital
E) An increase in the market value per share
Answer: E
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Chapter 2: Financial Statements, Taxes, and Cash Flow
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Q1) Beach Front Industries has sales of $546,000, costs of $295,000, depreciation expense of $37,000, interest expense of $15,000, and a tax rate of 21 percent. The firm paid $59,000 in cash dividends. What is the addition to retained earnings?
A) $98,210
B) $81,700
C) $95,200
D) $103,460
E) $121,680
Answer: A
Q2) JJ Enterprises has inventory of $11,600, fixed assets of $22,400, total liabilities of $12,900, cash of $1,900, accounts receivable of $8,700, and long-term debt of $6,500. What is the net working capital?
A) $44,600
B) $15,700
C) $12,600
D) $15,800
E) $9,300
Answer: D
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Chapter 3: Working with Financial Statements
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Q1) Coulter Supply has a total debt ratio of .46. What is the equity multiplier?
A) 0.89
B) 1.17
C) 1.47
D) 1.85
E) 2.17
Answer: D
Q2) Which one of the following statements is correct?
A) If the total debt ratio is greater than .50, then the debt-equity ratio must be less than 1.0.
B) Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5.
C) The debt-equity ratio can be computed as 1 plus the equity multiplier.
D) An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity.
E) An increase in the depreciation expense will not affect the cash coverage ratio.
Answer: E
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Chapter 4: Long-Term Financial Planning and Growth
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Q1) Financial planning includes the:
I. determination of asset requirements.
II. development of contingency plans.
III. establishment of priorities.
IV. analysis of funding options.
A) I and III only
B) II and IV only
C) I, III, and IV only
D) I, II, and III only
E) I, II, III, and IV
Q2) Buster's Market earns a profit and has a dividend payout ratio of 30 percent. The firm does not want to issue additional equity shares nor increase its long-term debt at this time. Which one of the following defines the maximum rate at which this firm can currently grow?
A) Internal growth rate (1 .30)
B) Sustainable growth rate (1 .30)
C) Internal growth rate
D) Sustainable growth rate
E) Zero percent
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6
Chapter 5: Introduction to Valuation: The Time Value of Money
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Q1) Kurt won a lottery and will receive $1,000 a year for the next 50 years. The current value of these winnings is called the:
A) single amount.
B) future value.
C) present value.
D) simple amount.
E) compounded value.
Q2) What is the present value of $45,000 to be received 50 years from today if the discount rate is 8 percent?
A) $959.46
B) $1,147.07
C) $841.41
D) $1,106.18
E) $1,291.06
Q3) At 5 percent interest, how long would it take to triple your money?
A) 26.55 years
B) 25.64 years
C) 24.87 years
D) 22.52 years
E) 20.01 years
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Chapter 6: Discounted Cash Flow Valuation
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Q1) You are considering a project with cash flows of $16,500, $25,700, and $18,000 at the end of each year for the next three years, respectively. What is the present value of these cash flows, given a discount rate of 7.9 percent?
A) $54,877.02
B) $51,695.15
C) $55,429.08
D) $46,388.78
E) $53,566.67
Q2) A proposed project has cash flows of $2,000, $?, $1,750, and $1,250 at the end of Years 1 to 4. The discount rate is 7.2 percent and the present value of the four cash flows is $6,669.25. What is the value of the Year 2 cash flow?
A) $2,450
B) $2,750
C) $2,500
D) $2,250
E) $2,800
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8
Chapter 7: Interest Rates and Bond Valuation
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Q1) A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?
A) Par value
B) Callable
C) Senior
D) Subordinated
E) Unsecured
Q2) Which one of the following statements is correct?
A) The risk-free rate represents the change in purchasing power.
B) Any return greater than the inflation rate represents the risk premium.
C) Historical real rates of return must be positive.
D) Nominal rates exceed real rates by the amount of the risk-free rate.
E) The real rate must be less than the nominal rate given a positive rate of inflation.
Q3) The interest rate risk premium is the:
A) additional compensation paid to investors to offset rising prices.
B) compensation investors demand for accepting interest rate risk.
C) difference between the yield to maturity and the current yield.
D) difference between the market interest rate and the coupon rate.
E) difference between the coupon rate and the current yield.
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Chapter 8: Stock Valuation
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Q1) The common stock of Dayton Repair sells for $47.92 a share. The stock is expected to pay $2.28 per share next year when the annual dividend is distributed. The company increases its dividends by 1.65 percent annually. What is the market rate of return on this stock?
A) 4.84 percent
B) 6.41 percent
C) 9.92 percent
D) 6.14 percent
E) 7.28 percent
Q2) Home Products common stock sells for $36.84 a share and has a market rate of return of 15.8 percent. The company just paid an annual dividend of $1.61 per share. What is the dividend growth rate?
A) 11.43 percent
B) 11.06 percent
C) 10.87 percent
D) 11.18 percent
E) 10.95 percent
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Chapter 9: Net Present Value and Other Investment Criteria
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Q1) Which one of the following methods of project analysis is defined as computing the value of a project based on the present value of the project's anticipated cash flows?
A) Constant dividend growth model
B) Discounted cash flow valuation
C) Average accounting return
D) Expected earnings model
E) Internal rate of return
Q2) Which one of these statements related to discounted payback is correct?
A) Payback is a better method of analysis than discounted payback.
B) Discounted payback is used more frequently in business than payback.
C) Discounted payback does not require a cutoff point.
D) Discounted payback is biased towards short-term projects.
E) The discounted payback period increases as the discount rate decreases.
Q3) The net present value of a project will increase if:
A) the required rate of return increases.
B) the initial capital requirement increases.
C) some of the cash inflows are deferred until a later year.
D) the aftertax salvage value of the fixed assets increases.
E) the final cash inflow decreases.
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Page 11
Chapter 10: Making Capital Investment Decisions
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Q1) W&M paid $179,000, in cash, for equipment three years ago and spent $18,000 for equipment upgrades last year. The company no longer uses this equipment and has received a cash offer of $68,000 from a buyer. The current book value of the equipment, including all updates, is $54,500. What value, if any, should the company assign to this equipment should it decide to use the equipment for a new project?
A) $0
B) $54,500
C) $68,000
D) $74,500
E) $129,000
Q2) Houston's is considering a project that will produce incremental annual sales of $361,000 and increase cash expenses by $198,000. If the project is implemented, taxes will increase from $31,000 to $47,000. The company is debt-free. What is the amount of the operating cash flow using the top-down approach?
A) $172,000
B) $147,000
C) $122,000
D) $138,000
E) $163,000
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Chapter 11: Project Analysis and Evaluation
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Q1) When you assign the lowest anticipated sales price and the highest anticipated costs to a project, you are analyzing the project under the condition known as:
A) best-case sensitivity analysis.
B) worst-case sensitivity analysis.
C) best-case scenario analysis.
D) worst-case scenario analysis.
E) base-case scenario analysis.
Q2) Cool Shades manufactures biotech sunglasses. The variable materials cost is $1.38 per unit, and the variable labor cost is $.92 per unit. Suppose the firm incurs fixed costs of $348,000 during a year in which total production is 136,000 units and the selling price is $19.50 per unit. What is the cash break-even point?
A) 16,453 units
B) 22,435 units
C) 20,233 units
D) 18,907 units
E) 14,768 units
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Chapter 12: Some Lessons from Capital Market History
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Q1) Based on the past 13 years, Westerfield Industrial Supply's common stock has yielded an arithmetic average rate of return of 12.6 percent. The geometric average return for the same period was 11.8 percent. What is the estimated return on this stock for the next three years according to Blume's formula?
A) 11.74 percent
B) 11.92 percent
C) 12.13 percent
D) 11.38 percent
E) 12.47 percent
Q2) Which one of the following statements best defines the efficient market hypothesis?
A) Efficient markets limit competition.
B) Security prices in efficient markets remain steady as new information becomes available.
C) Mispriced securities are common in efficient markets.
D) All securities in an efficient market are zero net present value investments.
E) All securities provide the same positive rate of return when the market is efficient.
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Chapter 13: Return, Risk, and the Security Market Line
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Q1) Which one of the following is an example of systematic risk?
A) Investors panic causing security prices around the globe to fall precipitously
B) A flood washes away a firm's warehouse
C) A city imposes an additional one percent sales tax on all products
D) A toymaker has to recall its top-selling toy
E) Corn prices increase due to increased demand for alternative fuels
Q2) At a minimum, which of the following would you need to know to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset?
I. Asset's standard deviation
II. Asset's beta
III. Risk-free rate of return
IV. Market risk premium
A) I and III only
B) II and IV only
C) III and IV only
D) I, III, and IV only
E) I, II, III, and IV
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15
Chapter 14: Cost of Capital
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Q1) Chelsea Fashions is expected to pay an annual dividend of $1.26 a share next year. The market price of the stock is $24.09 and the growth rate is 2.6 percent. What is the cost of equity?
A) 9.77 percent
B) 7.91 percent
C) 9.24 percent
D) 7.83 percent
E) 7.54 percent
Q2) When computing the adjusted cash flow from assets, the tax amount is calculated as:
A) EBT(TC).
B) (EBT Depreciation)(TC).
C) (EBIT + Depreciation Change in NWC Capital spending)(TC).
D) EBIT(TC).
E) (EBIT Depreciation Change in NWC Capital spending)(TC).
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Chapter 15: Raising Capital
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Q1) Equity financing of new, non-public companies is broadly referred to as:
A) singular-risk financing.
B) mezzanine-level stock.
C) stylized financing.
D) private equity.
E) exit funding.
Q2) With Dutch auction underwriting:
A) each winning bidder pays the minimum price offered by any bidder.
B) all successful bidders pay the same price per share.
C) all bidders receive at least a portion of the quantity for which they bid.
D) the selling firm receives the maximum possible price for each security sold.
E) the bidder for the largest quantity receives the first allocation of securities.
Q3) When selecting a venture capitalist, which one of the following characteristics is probably the least important?
A) Financial strength
B) Level of involvement
C) Contacts
D) Exit strategy
E) Underwriting experience
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Chapter 16: Financial Leverage and Capital Structure Policy
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Q1) LP Gas has a cost of equity of 16.31 percent and a pretax cost of debt of 7.8 percent. The debt-equity ratio is .56 and the tax rate is 21 percent. What is the unlevered cost of capital?
A) 13.70 percent
B) 13.85 percent
C) 14.01 percent
D) 14.26 percent
E) 14.08 percent
Q2) Homemade leverage is:
A) the incurrence of debt by a corporation in order to pay dividends to shareholders.
B) the exclusive use of debt to fund a corporate expansion project.
C) the use of personal borrowing to alter an individual's exposure to financial leverage.
D) best defined as an increase in a company's debt level.
E) the term used to describe the capital structure of a levered firm.
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18
Chapter 17: Dividends and Payout Policy
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Q1) The market value balance sheet for Cherry Pie Corp. reflects cash of $31,020, fixed assets of $539,750, and equity of $286,800. There are 6,000 shares of stock outstanding with a par value of $1 per share. The company has announced that it is going to repurchase $20,000 of stock. What will the price of the stock be after this repurchase?
A) $47.80
B) $46.60
C) $46.20
D) $47.60
E) $46.80
Q2) The market value balance sheet for Apple Pie Corp. reflects cash of $42,000, fixed assets of $319,000, and equity of $237,000. There are 7,500 shares of stock outstanding with a par value of $1 per share. The company has declared a dividend of $1.03 per share. The stock goes ex dividend tomorrow. Ignore any tax effects. What will be the price of the stock tomorrow morning?
A) $32.38
B) $32.20
C) $30.57
D) $32.15
E) $31.60
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Chapter 18: Short Term Finance and Planning
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Q1) \The Delta Fish Hatchery factors its accounts receivables immediately at a discount rate of 1.2 percent. The average collection period is 36 days. Assume all accounts are collected in full. What is the effective annual interest rate on this arrangement?
A) 13.02 percent
B) 13.68 percent
C) 12.09 percent
D) 11.78 percent
E) 12.79 percent
Q2) Juno Industrial Supply has a line of credit of $200,000 with an interest rate of 7.1 percent. The loan agreement requires a compensating balance of 3.3 percent of the total amount borrowed, which will be held in an interest-free account. What is the effective interest rate if the company requires $132,000 for operations for one year?
A) 7.27 percent
B) 7.21 percent
C) 7.38 percent
D) 7.53 percent
E) 7.34 percent
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Chapter 19: Cash and Liquidity Management
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Q1) Which of the following variables are included in the BAT model?
A) Fixed costs, upper cash limit, target cash limit
B) Total transaction need, upper limit, and lower limit
C) Target cash limit, upper limit, and lower limit
D) Rate of return on market securities, fixed costs, and total transaction need
E) Target cash limit, total transaction need, rate of return on market securities
Q2) If Merilee Industries installs a lockbox system it should reduce its average collection time by 2.2 days at a cost of $.75 per check. On an average day, 594 checks with an average value of $4,618 each are received. The daily interest rate on Treasury bills is .009 percent. What is the net present value of this lockbox arrangement?
A) $4,073,492
B) $2,011,575
C) $1,387,419
D) $1,084,802
E) $974,608
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21
Chapter 20: Credit and Inventory Management
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Q1) Sawyer's currently sells 70 units per month at a price of $412.50 a unit. The firm is considering switching to a 30 day credit policy with a credit sales price of $429.69 a unit and a cash price of $412.50. The monthly interest rate is 1.17 percent. What is the break-even default rate of the proposed switch?
A) 2.88 percent
B) 3.68 percent
C) 3.19 percent
D) 2.71 percent
E) 3.06 percent
Q2) Currently, Tanner's sells 69 units a month at an average price of $499 a unit. The company thinks it can increase sales by an additional 32 units a month if it switches to a net 30 credit policy. The monthly interest rate is .48 percent and the variable cost per unit is $216. What is the incremental cash inflow of the proposed credit policy switch?
A) $10,120
B) $9,056
C) $12,760
D) $17,810
E) $15,968
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Chapter 21: International Corporate Finance
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Q1) Party A has agreed to exchange $1 million U.S. for $1.02 million Canadian. What is this agreement called?
A) Gilt
B) LIBOR
C) SWIFT
D) Yankee agreements
E) Swap
Q2) The price of one euro expressed in U.S. dollars is referred to as a(n):
A) ADR rate.
B) cross inflation rate.
C) depository rate.
D) exchange rate.
E) foreign interest rate.
Q3) Currently, $1 will buy C$1.1028 while $1.2334 will buy 1. What is the exchange rate between the Canadian dollar and the euro?
A) C$1 = .8941
B) C$1 = .6539
C) C$1 = 1.3602
D) C$1.3602 = 1
E) C$.8941 = 1
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Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) A tendency to be overly conservative when faced with new information is referred to as:
A) anchoring and adjustment.
B) heuristics.
C) self-attribution.
D) loss aversion.
E) regret aversion.
Q2) Kate tends to hold onto assets that have lost value in the hope that their values will increase in the future. Kate illustrates which one of the following?
A) Frame dependence
B) Self-attribution bias
C) Gambler's fallacy
D) Break-even effect
E) Regret aversion
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Chapter 23: Enterprise Risk Management
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Q1) A call option contract:
A) obligates both the buyer and the seller.
B) obligates the buyer but not the seller.
C) grants rights to the buyer and obligates the seller.
D) grants rights to the seller and obligates the buyer.
E) grants rights to both the buyer and the seller but does not obligate either party.
Q2) Which type of insurance helps replace a company's income during the time period the company is closed due to a major hurricane?
A) Business interruption insurance
B) Employer's liability insurance
C) Property insurance
D) Vehicle insurance
E) Commercial liability insurance
Q3) The first step in risk management is to:
A) purchase liability insurance.
B) create an emergency cash fund.
C) establish prevention programs.
D) eliminate all international risks.
E) identify and eliminate all strategic risks.
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Page 25
Chapter 24: Options and Corporate Finance
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Q1) Which one of the following describes the intrinsic value of a call option?
A) The call's upper bound value
B) The call's lower bound value
C) Market price of the underlying security
D) Zero, if the call is in-the-money
E) The strike price
Q2) Brad owns a convertible bond. Which one of the following terms would apply to the value of this bond if he were to convert it into shares of stock today?
A) Conversion premium
B) Straight bond value
C) Conversion value
D) Inverted value
E) Prescribed value
Q3) The conversion value of a convertible bond is equal to which one of the following?
A) Conversion ratio(Stock price)
B) Conversion ratio(Conversion price)
C) Face value/Conversion premium
D) Face value(1 + Conversion premium)
E) Stock price(1 + Conversion ratio)
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Chapter 25: Option Valuation
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Q1) Which one of the following statements is correct?
A) Mergers benefit shareholders but not creditors.
B) Positive NPV projects will automatically benefit both creditors and shareholders.
C) There may be conflicts between the interests of bondholders and shareholders.
D) Creditors prefer negative NPV projects while shareholders prefer positive NPV projects.
E) Mergers rarely affect bondholders.
Q2) You invest $2,500 today at 5.5 percent, compounded continuously. How much will this investment be worth 12 years from now?
A) $3,728
B) $4,837
C) $4,311
D) $3,422
E) $3,791
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Chapter 26: Mergers and Acquisitions
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Q1) Which one of the following statements correctly applies to a merger?
A) The acquiring firm does not have to seek approval for the merger from its shareholders.
B) The shareholders of the target firm must approve the merger.
C) The acquiring firm will acquire the assets but not the debt of the target firm.
D) The merged firm will have a new company name.
E) The titles to individual assets of the target firm must be transferred into the acquiring firm's name.
Q2) Firm A is being acquired by Firm B for $62,000 worth of Firm B stock. The incremental value of the acquisition is $4,300. Firm A has 2,700 shares of stock outstanding at a price of $22 a share. Firm B has 10,400 shares of stock outstanding at a price of $31 a share.
What is the actual cost of the acquisition using company stock?
A) $62,000
B) $62,076
C) $62,274
D) $63,780
E) $62,620
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Page 28
Chapter 27: Leasing
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Q1) Brentwood Industries is selling its tool and die equipment to Upward Financial and then leasing that equipment from Upward for a period of 10 years, which is the useful remaining life of the equipment. Which type of lease arrangement is this?
A) Leveraged lease
B) Sale and leaseback
C) Operating lease
D) Tax-oriented lease
E) Straight lease
Q2) Assume a lessor and a lessee can borrow at the same rate and also pay taxes at the same rate. Given this, then a lease between these parties:
A) will be a loss to both parties.
B) benefits both parties by the same amount.
C) is a zero-sum game.
D) will be disallowed by the IRS.
E) will always benefit the lessor at the expense of the lessee.
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