Corporate Financial Strategy
Textbook Exam Questions
Course Introduction
Corporate Financial Strategy explores the principles and practices involved in formulating and implementing financial strategies to maximize shareholder value in dynamic business environments. The course examines topics such as capital structure decisions, dividend policy, corporate valuation, mergers and acquisitions, risk management, and the alignment of financial policy with overall corporate strategy. Students gain analytical skills to evaluate financial options, assess the impact of market forces on corporate decisions, and develop strategies for sustainable growth and competitive advantage within global markets.
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Corporate Finance Asia 1st Global Edition by Stephen Ross
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Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) Suppose you own 100 shares of Apple stock which you intend to sell today.Since you will sell it in the secondary market,Apple will receive no direct cash flows as a consequence of your sale.Why,then,should Apple's management care about the price you get for your shares?
Answer: The current market price of Apple stock reflects,among other things,market opinion about the quality of firm management.If the shareholder's sale price is low,this indirectly reflects on the reputation of the managers,as well as potentially impacting their standing in the employment market.Alternatively,if the sale price is high,this indicates that the market believes current management is increasing firm value and therefore doing a good job.
Q2) Which form of business structure faces the greatest agency problems?
A)sole proprietorship
B)general partnership
C)limited partnership
D)corporation
E)limited liability company
Answer: D
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Chapter 2: Financial Statements and Cash Flow
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Q1) Sometimes when businesses are critically delinquent on their tax liabilities,the tax authority comes in and literally seizes the business by chasing all of the employees out of the building and changing the locks.What does this tell you about the importance of taxes relative to our discussion of cash flow? Why might a business owner want to avoid such an occurrence?
Answer: Taxes must be paid in cash,and in this case,they are one of the most important components of cash flow.The reputation of a business can undergo irreparable harm if word gets out that the tax authorities have confiscated the business,even if only for a couple of hours until the business owner can come up with the money to clear up the tax problem.The bottom line is if the owner can't come up with the cash,the tax authority has effectively put them out of business.
Q2) The cash flow to creditors includes the cash:
A)received by the firm when payments are paid to suppliers.
B)outflow of the firm when new debt is acquired.
C)outflow when interest is paid on outstanding debt.
D)inflow when accounts payable decreases.
E)received when long-term debt is paid off.
Answer: C
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Chapter 3: Financial Statements Analysis and Long-Term Planning
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Q1) Turner's Inc.has a price-earnings ratio of 16.Alfred's Co.has a price-earnings ratio of 19.Thus,you can state with certainty that one share of stock in Alfred's:
A)has a higher market price than one share of stock in Turner's.
B)has a higher market price per dollar of earnings than does one share of Turner's.
C)sells at a lower price per share than one share of Turner's.
D)represents a larger percentage of firm ownership than does one share of Turner's stock.
E)earns a greater profit per share than does one share of Turner's stock.
Answer: B
Q2) A firm's market capitalization is equal to:
A)total book value of assets less book value of debt.
B)par value of common equity.
C)firm's stock price multiplied by number of shares outstanding.
D)firm's stock price multiplied by the number of shares authorized.
E)the maximum value an acquirer would pay for a firm in an acquisition.
Answer: C
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Chapter 5: Net Present Value and Other Investment Rules
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Q1) Which one of the following statements concerning net present value (NPV)is correct?
A)An investment should be accepted if,and only if,the NPV is exactly equal to zero.
B)An investment should be accepted only if the NPV is equal to the initial cash flow.
C)An investment should be accepted if the NPV is positive and rejected if it is negative.
D)An investment with greater cash inflows than cash outflows,regardless of when the cash flows occur,will always have a positive NPV and therefore should always be accepted.
E)Any project that has positive cash flows for every time period after the initial investment should be accepted.
Q2) The IRR rule is said to be a special case of the NPV rule.Explain why this is so and why it has some limitations NPV does not?
Q3) Explain the differences and similarities between net present value (NPV)and the profitability index (PI).
Q4) List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR)rule.
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Chapter 8: Interest Rates and Bond Valuation
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Q1) Interest rate risk is often explained by using the concept of a teeter-totter.Explain interest rate risk and how it is related to the movements of a teeter-totter.
Q2) A corporate bond with a face value of $1,000 matures in 4 years and has an 8% coupon paid at the end of each year.The current price of the bond is $932.What is the yield to maturity for this bond?
A)5.05%
B)6.48%
C)8.58%
D)10.15%
E)11.92%
Q3) The value of a 25 year zero-coupon bond when the market required rate of return is 10% (semiannual)is ____.
A)$87.20
B)$92.30
C)$95.26
D)$98.31
E)None of the above
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Chapter 10: Risk and Return: Lessons From Market History
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Q1) What securities have offered the highest average annual returns over the last several decades? Can we conclude that return and risk are related in real life?
Q2) A stock has an expected rate of return of 8.3% and a standard deviation of 6.4%.Which one of the following best describes the probability that this stock will lose 11% or more in any one given year?
A)less than 0.5%
B)less than 1.0%
C)less than 1.5%
D)less than 2.5%
E)less than 5%
Q3) You purchased 200 shares of stock at a price of $36.72 per share.Over the last year,you have received total dividend income of $322.What is the dividend yield?
A)3.2%
B)4.4%
C)6.8%
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Chapter 11: Return and Risk: the Capital Asset Pricing Model
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Sample Questions
Q1) A typical investor is assumed to be:
A)a fair gambler.
B)a gambler.
C)a single security holder.
D)risk averse.
E)risk neutral.
Q2) Which one of the following statements is correct concerning the standard deviation of a portfolio?
A)The greater the diversification of a portfolio,the greater the standard deviation of that portfolio.
B)The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio.
C)Standard deviation is used to determine the amount of risk premium that should apply to a portfolio.
D)Standard deviation measures only the systematic risk of a portfolio.
E)The standard deviation of a portfolio is equal to a weighted average of the standard deviations of the individual securities held within the portfolio.
Q3) Explain in words what beta is and why it is important.
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Chapter 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory
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Q1) Suppose the Carz Corporation's common stock has a beta of 0.9.If the risk-free rate is 3.5% and the expected market return is 9%,the expected return for JumpStart's common stock is:
A)3.5%.
B)8.45%.
C)9.00%.
D)9.15%.
E)9.24%.
Q2) If company A,a medical research company,makes a new product discovery and their stock rises 5%,this will have:
A)no effect on Company B's,a newspaper,stock price because it is a systematic risk element.
B)no effect on Company B's,a newspaper,stock price because it is an unsystematic risk element.
C)a large effect on Company B's,a newspaper,stock price because it is a systematic risk element.
D)a large effect on Company B's,a newspaper,stock price because it is an unsystematic risk element.
E)None of the above.
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Chapter 14: Efficient Capital Markets and Behavioral Challenges
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Q1) The abnormal returns for initial public offerings over longer time periods seem to call market efficiency into question because:
A)the average returns at announcement are large and positive while the long-term results are much lower than the returns for seasoned equity offerings.
B)the average returns at announcement are small and negative while the long-term results are much lower than the returns for seasoned equity offerings.
C)the average returns at announcement are zero while the long-term results are much higher than the returns for seasoned equity offerings.
D)the average returns at announcement are large and positive while the long-term results are much higher than the returns for seasoned equity offerings.
E)the average returns at announcement are insignificant while the long-term results are much lower than the returns for seasoned equity offerings.
Q2) Why should a financial decision maker such as a corporate treasurer or CFO be concerned with market efficiency?
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Chapter 15: Long-Term Financing: an Introduction
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Q1) The Lory Bookstore used internal financing as a source of long-term financing for 80% of its total needs in 2013.The company borrowed an additional 27% of its total needs in the long-term debt markets in 2013.What were Lory's net new stock issues in that year?
A)-20%
B)-7%
C)7%
D)20%
E)27%
Q2) Financial economists prefer to use market values when measuring debt ratios because:
A)market values are more stable than book values.
B)market values are a better reflection of current value than historical value.
C)market values are readily available and do not have to be calculated like book values.
D)market values are more difficult to calculate which makes financial economists more valuable.
E)None of the above.
Q3) From this information,calculate Eaton's book value per share.
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Chapter 20: Raising Capital
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Q1) A group of investment bankers who pool their efforts to underwrite a security are known as a(n):
A)amalgamate.
B)conglomerate.
C)green shoe group.
D)klatch.
E)syndicate.
Q2) The evidence on IPO sales is varied from issue to issue,but there are three common themes;underpricing,underperformance,and the reasons for going public.Explain these three themes.
Q3) The Shields Corporation intends to issue 100,000 new shares to raise funds for expansion of current plant facilities.The current share price is $20 and there are 500,000 shares outstanding.The number of rights needed to buy a share of stock should be:
A)1
B)5
C)20
D)50
E)indeterminate without the subscription price.
Q4) Discuss what a Dutch auction is and how it works.
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Chapter 22: Options and Corporate Finance
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Q1) Shareholders in a leveraged firm might wish to accept a negative net present value project if:
A)it increases the standard deviation of the returns on the firm's assets.
B)it lowers the variance of the returns on the firm's assets.
C)it lowers the risk level of the firm.
D)it diversifies the cash flows of the firm.
E)it decreases the risk that a firm will default on its debt.
Q2) The market price of ABC stock has been very volatile and you think this volatility will continue for a few weeks.Thus,you decide to purchase a one-month call option contract on ABC stock with a strike price of $25 and an option price of $1.30.You also purchase a one-month put option on ABC stock with a strike price of $25 and an option price of $.50.What will be your total profit or loss on these option positions if the stock price is $24.60 on the day the options expire?
A)-$180
B)-$140
C)-$100
D)$0
E)$180
Q3) How do options apply to capital budgeting? Explain and give an example.
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Chapter 23: Options and Corporate Finance: Extensions and Applications
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Q1) Which of the following is not part of the Black Scholes option pricing model?
A)Standard deviation
B)Time to maturity
C)Exercise price
D)Par value of the company's stock
E)Interest rate
Q2) What are the u,the up state multiplier,and d,the down state multiplier,if there are monthly intervals and the standard deviation is .38?
A)1.1159;.8961
B).0317;31.5789
C).0317;.9683
D).2193;.7807
E)None of the above
Q3) Rejecting an investment today forever may not be a good choice because:
A)the size of the firm will decline.
B)there are always errors in the estimation of NPVs.
C)the option value is negative.
D)the company's foregoing the future rights or option to the investment.
E)None of the above.
Q4) What is the value of Mr.Maxim's options?
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Chapter 24: Warrants and Convertibles
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Q1) A convertible preferred stock is similar to a convertible bond except:
A)the conversion ratio is fixed (given).
B)the conversion price is fixed (given).
C)the time to maturity is infinite.
D)All of the above.
E)None of the above.
Q2) Transfer or expropriation of wealth from bondholders to stockholders is less likely to occur when:
A)subordinated straight debt is issued because there are other senior bondholders to protect them.
B)convertible debt is issued because the equity component will reduce these agency costs when value is shared.
C)convertible debt is issued because the holders can more readily sue when a high-risk project is undertaken.
D)subordinated debt is issued because monitoring is much easier when subordinated straight debt is issued.
E)None of the above.
Q3) Explain why there is neither a "Free" nor "Expensive Lunch" when convertible bonds are issued?
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Chapter 25: Derivatives and Hedging Risk
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Q1) The duration of a 15 year zero coupon bond priced at $182.70 is:
A)2.74 years.
B)15 years.
C)17.74 years.
D)cannot determine without the interest rate.
E)None of the above.
Q2) Derivatives can be used to either hedge or speculate.These actions:
A)increase risk in both cases.
B)decrease risk in both cases.
C)spread or minimize risk in both cases.
D)offset risk by hedging and increase risk by speculating.
E)offset risks by speculating and increase risk by hedging.
Q3) Calculate the duration of Tiger State Bank's assets and liabilities.
Q4) Duration is defined as the weighted average time to maturity of a financial instrument.Explain how this knowledge can help protect against interest rate risk.
Q5) The futures markets are labeled as pure speculation and even gambling.Why is this an inaccurate portrayal of the market's function?
Q6) What new asset duration will immunize the balance sheet?
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Chapter 31: International Corporate Finance
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Q1) The implicit exchange rate between two currencies when both are quoted in some third currency is called a(n):
A)open exchange rate.
B)cross-rate.
C)backward rate.
D)forward rate.
E)interest rate.
Q2) The cross rate is the:
A)exchange rate between the U.S.dollar and another currency.
B)exchange rate between two currencies,neither of which is generally the U.S.dollar.
C)rate converting the direct rate into the indirect rate.
D)estimated based on the weighted average cost of capital by the agent at the exchange kiosk.
E)None of the above.
Q3) How well do you think relative purchasing power parity and uncovered interest parity behave? That is,do you think it's possible to forecast the expected future spot exchange rate accurately? What complications might you run into?
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