Financial Strategy
Study Guide Questions
Course Introduction
Financial Strategy examines the principles and practices involved in making strategic financial decisions within organizations. The course covers key topics such as capital structure, funding sources, investment analysis, risk management, and value creation with a focus on aligning financial decisions to broader organizational objectives. Students will develop an understanding of how to evaluate financial performance, assess market opportunities, and implement strategies that optimize long-term financial health, including mergers and acquisitions, dividend policies, and corporate restructuring. Through case studies and real-world applications, learners will gain the skills necessary to formulate and execute effective financial strategies in dynamic business environments.
Recommended Textbook
Corporate Finance Asia 1st Global Edition by Stephen Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) The division of profits and losses among the members of a partnership is formalized in the:
A)indemnity clause.
B)indenture contract.
C)statement of purpose.
D)partnership agreement.
E)group charter.
Answer: D
Q2) The Chief Executive Officer typically reports to the A)Board of Director's
B)Granting authority
C)President
D)CFO
E)None of the above
Answer: A
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Page 3
Chapter 2: Financial Statements and Cash Flow
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Sample Questions
Q1) Total assets are $1000,fixed assets are $700,long-term debt is $250,and short-term debt is $300.What is the amount of net working capital?
A)$0
B)$50
C)$300
D)$650
E)$700
Answer: A
Q2) What is the cash flow to creditors for 2011?
A)-$405
B)-$225
C)$225
D)$405
E)$630
Answer: D
Q3) Why is interest expense excluded from the operating cash flow calculation?
Answer: Operating cash flow is designed to represent the cash flow a firm generates from its day-to-day operating activities.Interest expense arises from a financing decision and thus should be considered as a cash flow to creditors.
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Page 4
Chapter 3: Financial Statements Analysis and Long-Term Planning
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Sample Questions
Q1) The financial ratio measured as net income divided by total equity is known as the firm's:
A)profit margin.
B)return on assets.
C)return on equity.
D)asset turnover.
E)earnings before interest and taxes.
Answer: C
Q2) Jupiter Explorers has $6,400 in sales.The profit margin is 4%.There are 6,400 shares of stock outstanding.The market price per share is $1.20.What is the price-earnings ratio?
A)13
B)14
C)21
D)30
E)48
Answer: D
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Chapter 5: Net Present Value and Other Investment Rules
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Sample Questions
Q1) Which of the following methods of project analysis are biased towards short-term projects?
I.internal rate of return
II.net present value
III.payback
IV.discounted payback
A)I and II only
B)III and IV only
C)II and III only
D)I and IV only
E)II and IV only
Q2) Graphing the NPVs of mutually exclusive projects over different discount rates helps demonstrate:
A)how the incremental IRR varies with changes in the discount rate.
B)how decisions concerning mutually exclusive projects are derived.
C)how the duration of a project affects the decision as to which project to accept.
D)how the payback period and the initial cash outflow of a project are related.
E)how the profitability index and the net present value are related.
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6
Chapter 8: Interest Rates and Bond Valuation
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Sample Questions
Q1) The yield to maturity is:
A)the rate that equates the price of the bond with the discounted cash flows.
B)the expected rate to be earned if held to maturity.
C)the rate that is used to determine the market price of the bond.
D)equal to the current yield for bonds priced at par.
E)All of the above.
Q2) Why do corporations issue 100-year bonds,knowing that interest rate risk is highest for very long-term bonds? How does the interest rate risk affect the issuer?
Q3) The _____ premium is that portion of a nominal interest rate or bond yield that represents compensation for expected future overall price appreciation.
A)default risk
B)taxability
C)liquidity
D)inflation
E)interest rate risk
Q4) Sometimes it is not clear if a particular security is debt or equity.Explain the basic difference between debt and equity.
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Chapter 10: Risk and Return: Lessons From Market History
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Sample Questions
Q1) Over the period of 1926 to 2012,small company stocks had an average return of __%.
A)8.8
B)10.2
C)12.4
D)14.6
E)16.5
Q2) One year ago,you purchased a stock at a price of $60 a share.Today,you sold the stock and realized a total return of 30%.Your capital gain was $8 a share.What was your dividend yield on this stock?
A)4.5%
B)5.0%
C)5.5%
D)6.0%
E)6.5%
Q3) Little John Industries sold for $1.90 on January 1 and ended the year at a price of $2.50.In addition,the stock paid dividends of $0.20 per share.Calculate Little John's dividend yield,capital gains yield,and total rate of return for the year.
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Chapter 11: Return and Risk: the Capital Asset Pricing Model
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Sample Questions
Q1) The amount of systematic risk present in a particular risky asset,relative to the systematic risk present in an average risky asset,is called the particular asset's:
A)beta coefficient.
B)reward-to-risk ratio.
C)total risk.
D)diversifiable risk.
E)Treynor index.
Q2) The measure of beta associates most closely with:
A)idiosyncratic risk.
B)risk-free return.
C)systematic risk.
D)unexpected risk.
E)unsystematic risk.
Q3) A stock with a beta of zero would be expected to have a rate of return equal to:
A)the risk-free rate.
B)the market rate.
C)the prime rate.
D)the average AAA bond.
E)None of the above.
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Chapter 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory
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Sample Questions
Q1) Parametric or empirical models rely on:
A)security betas explaining systematic factor relationships.
B)finding regularities and relations in past market data.
C)there being no true explanations of pricing relationships.
D)always being able to find the exception to the rule.
E)None of the above
Q2) In the one factor (APT)model,the characteristic line to estimate \(\beta\)i passes through the origin,unlike the estimate used in the CAPM because:
A)the relationship is between the actual return on a security and the market index.
B)the relationship measures the change in the security return over time versus the change in the market return.
C)the relationship measures the change in excess return on a security versus GNP.
D)the relationship measures the change in excess return on a security versus the return on the factor about its mean of zero.
E)Cannot be determined without actual data.
Q3) Explain the conceptual differences in the theoretical development of the CAPM and APT.
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Page 10
Chapter 14: Efficient Capital Markets and Behavioral Challenges
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Sample Questions
Q1) Which form of the efficient market hypothesis implies that security prices reflect only information contained in past prices?
A)Weak form
B)Semistrong form
C)Strong form
D)Hard form
E)Past form
Q2) The market price of a stock moves or fluctuates daily.This fluctuation is:
A)inconsistent with the semistrong efficient market hypothesis because prices should be stable.
B)inconsistent with the weak form efficient market hypothesis because all past information should be priced in.
C)consistent with the semistrong form of the efficient market hypothesis because as new information arrives daily prices will adjust to it.
D)consistent with the strong form because prices are controlled by insiders.
E)None of the above.
Q3) 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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Sample Questions
Q1) The market-to-book value ratio is implies growth and success when it is:
A)greater than 0.
B)less than 10.
C)less than 0.
D)less than 1.
E)greater than 1.
Q2) If you own 1,000 shares of stock and you can cast only 1,000 votes for a particular director,then the stock features:
A)cumulative voting.
B)absolute priority voting.
C)sequential voting.
D)straight voting.
E)None of the above.
Q3) Financial deficits are created when:
A)profits and retained earnings are greater than the capital-spending requirement.
B)profits and retained earnings are less than the capital-spending requirement.
C)profits and retained earnings are equal to the capital-spending requirement.
D)All of the above.
E)None of the above.
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Chapter 20: Raising Capital
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Sample Questions
Q1) A firm commitment arrangement with an investment banker occurs when:
A)the syndicate is in place to handle the issue.
B)the spread between the buying and selling price is less than one percent.
C)the issue is solidly accepted in the market evidenced by a large price increase.
D)when the investment banker buys the securities for less than the offering price and accepts the risk of not being able to sell them.
E)when the investment banker sells as much of the security as the market can bear without a price decrease.
Q2) Assuming everything else is constant,when a stock goes ex-rights its price should:
A)decrease since the stockholder is losing an option.
B)increase since the corporation no longer has the right to force the stockholder to convert.
C)remain the same since an efficient market would anticipate this change.
D)move up or down depending on whether a small investor wanted to exercise his/his rights.
E)None of the above.
Q3) Discuss the stages of venture capital financing,defining each in detail.
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Page 13
Chapter 22: Options and Corporate Finance
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Sample Questions
Q1) You wrote ten call option contracts on JIG stock with a strike price of $40 and an option price of $.40.What is your net gain or loss on this investment if the price of JIG is $46.05 on the option expiration date?
A)-$6,450
B)-$5,650
C)$400
D)$5,650
E)$6,450
Q2) Jeff opted to exercise his August option on August 10 and received $2,500 in exchange for his shares.Jeff must have owned a (an): A)warrant.
B)American call.
C)American put.
D)European call.
E)European put.
Q3) How do options apply to capital budgeting? Explain and give an example.
Q4) What are the upper and lower bounds for an American call option? Explain what would happen in each case if the bound was violated.
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14
Chapter 23: Options and Corporate Finance: Extensions and Applications
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Sample Questions
Q1) What is d<sub>2</sub>?
A)0
B).0293
C).0386
D).0478
E).0565
Q2) A firm in the extraction industry whose major assets are cash,equipment and a closed facility may appear to have extraordinary value.This value can be primarily attributed to:
A)the potential sale of the company.
B)the low exercise price held by the shareholders.
C)the option to open the facility when prices rise dramatically.
D)All of the above.
E)None of the above.
Q3) What is the value of a call option?
A)$4.14
B)$4.86
C)$5.13
D)$5.62
E)$6.16
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Chapter 24: Warrants and Convertibles
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Sample Questions
Q1) A warrant gives the owner:
A)the obligation to sell securities directly to the firm at a fixed price for a specified time.
B)the right to purchase securities directly from the firm at a fixed price for a specified time.
C)the obligation to purchase securities directly from the firm at a fixed price for a specified time.
D)the right to sell securities directly to the firm at a fixed price for a specified time.
E)None of the above.
Q2) A firm has 100 shares of stock and 40 warrants outstanding.The warrants are about to expire,and all of them will be exercised.The market value of the firm's assets is $2,000,and the firm has no debt.Each warrant gives the owner the right to buy 2 shares at $15 per share.What is the price per share of the stock?
A)$11.11
B)$15.00
C)$17.78
D)$20.00
E)None of the above.
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Page 16
Chapter 25: Derivatives and Hedging Risk
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Sample Questions
Q1) On March 1,you contract to take delivery of 1 ounce of gold for $495.The agreement is good for any day up to April 1.Throughout March,the price of gold hit a low of $425 and hit a high of $535.The price settled on March 31 at $505,and on April 1<sup>st</sup> you settle your futures agreement at that price.Your net cash flow is:
A)-$30.
B)-$20.
C)-$15.
D)$10.
E)$20.
Q2) Which of the following is true about the user of derivatives?
A)Derivatives usually appear explicitly in the financial statements.
B)Academic surveys account for much of our knowledge of corporate derivatives use.
C)Smaller firms are more likely to use derivatives than large firms.
D)The most frequently used derivatives are commodity and equity futures.
E)None of the above are true.
Q3) What new asset duration will immunize the balance sheet?
Q4) Calculate the duration of Tiger State Bank's assets and liabilities.
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Chapter 31: International Corporate Finance
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Sample Questions
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 unbiased forward rate is a:
A)condition where a future spot rate is equal to the current spot rate.
B)guarantee of a future spot rate at one point in time.
C)condition where the spot rate is expected to remain constant over a period of time.
D)relationship between the future spot rate of two currencies at an equivalent point in time.
E)predictor of the future spot rate at the equivalent point in time.
Q3) Describe the foreign currency and home currency approaches to capital budgeting.Which is better? Which approach would you recommend a U.S.firm use? Justify your answer.
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