Fundamentals of Corporate Finance
Exam Answer Key
Course Introduction
Fundamentals of Corporate Finance introduces students to the essential concepts and principles underlying corporate financial management. The course covers key topics such as the time value of money, risk and return, valuation of stocks and bonds, capital budgeting, cost of capital, and financial statement analysis. Through real-world examples and case studies, students gain an understanding of how financial decisions are made within corporations and learn to apply analytical tools to assess investment opportunities, manage corporate resources, and maximize shareholder value. This foundation prepares students for more advanced finance courses and professional roles in financial management.
Recommended Textbook
Essentials of Corporate Finance 2nd Australia Edition by Stephen Ross
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Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) In a general partnership,each partner is personally liable for:
A)the partnership debts that he or she created
B)his or her proportionate share of all partnership debts regardless of which partner incurred that debt
C)the total debts of the partnership,even if he or she was unaware of those debts
D)the debts of the partnership up to the amount he or she invested in the firm
E)all personal and partnership debts incurred by any partner,even if he or she was unaware of those debts
Answer: C
Q2) Financial institutions are:
A)institutions that primarily invest in real estate
B)institutions that primarily deal in financial matters
C)institutions that deal in second-hand equipment
D)institutions that engage in manufacturing
E)None of these
Answer: E
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3
Chapter 2: Financial Statements, Taxes, and Cash Flow
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Q1) The Whitehorse Bookshop Company has non-current assets with a book value of $8000 dollars and an appraised market value of $15 000.Net working capital is $5000 on the books,but if liquidated about $7000 would be realised.The company has recently issued 100 long-term maturity debentures with a face value of $100 each.Current market price of one debenture is equal to $100.What is the book value of the equity?
A)$3000
B)$5000
C)$12 000
D)$13 000
E)$10 000
Answer: A
Q2) The book value of an asset is equal to:
A)the initial cost less depreciation plus interest earned.
B)the initial cost plus depreciation minus the interest charges
C)the initial cost minus the depreciation to date
D)the higher of the original cost or the current market value
E)the lower of the original cost or the current market value
Answer: C
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Chapter 3: Working With Financial Statements
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Sample Questions
Q1) The internal growth rate is best described as the __________ growth rate achievable:
A)minimum;if the firm does not pay out any dividends
B)minimum;if the firm maintains a constant equity multiplier
C)maximum;without external financing of any kind
D)maximum;without using any external equity financing,while maintaining a constant debt-equity ratio
E)maximum;without any limits on the amount of debt financing used by the firm
Answer: C
Q2) Donovan Brothers,Inc.would like to increase its internal rate of growth.Decreasing which one of the following will help the firm achieve its goal?
A)return on assets
B)net income
C)retention ratio
D)dividend payout ratio
E)return on equity
Answer: D
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Chapter 4: Introduction to Valuation: the Time Value of Money
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Q1) Today,Courtney wants to invest less than $5000 with the goal of receiving $5000 back some time in the future.Which one of the following statements is correct?
A)The period of time she has to wait until she reaches her goal is unaffected by the compounding of interest.
B)The lower the rate of interest she earns,the shorter the time she will have to wait to reach her goal.
C)She will have to wait longer if she earns 6 per cent compound interest instead of 6 per cent simple interest.
D)The length of time she has to wait to reach her goal is directly related to the interest rate she earns.
E)The period of time she has to wait decreases as the amount she invests today increases.
Q2) The present value of a lump sum future amount:
A)increases as the interest rate decreases
B)decreases as the time period decreases
C)is inversely related to the future value
D)is directly related to the interest rate
E)is directly related to the time period
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Chapter 5: Discounted Cash Flow Valuation
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Q1) Jake owes $3400 on his credit card.He is not charging any additional purchases because he wants to get this debt paid in full.The card has an APR of 13.9 per cent.How much longer will it take him to pay off this balance if he makes monthly payments of $50 rather than $60?
A)28.24 months
B)31.33 months
C)36.74 months
D)39.20 months
E)41.79 months
Q2) The Food Store is planning a major expansion for 4 years from today.In preparation for this,the company is setting aside $35 000 each quarter,starting today,for the next 4 years.How much money will the firm have when it is ready to expand if it can earn an average of 6.25 per cent on its savings?
A)$528 409.29
B)$540 288.16
C)$610 411.20
D)$640 516.63
E)$662 009.14
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Chapter 6: Interest Rates and Bond Valuation
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Q1) A bond that pays no regular interest payments is called a(n)_____ bond.
A)income
B)convertible
C)exotic
D)put
E)zero coupon
Q2) The inflation premium:
A)compensates investors for expected price increases
B)increases the real return
C)rewards investors for accepting interest rate risk
D)is inversely related to the time to maturity
E)remains constant over time
Q3) The primary purpose of protective covenants is to help:
A)convert bearer bonds into registered form
B)reduce interest rate risk
C)the issuer in case of default
D)protect bondholders from issuer actions
E)bondholders whose bonds are called
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8
Chapter 7: Equity Markets and Stock Valuation
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Q1) The authority granted by a shareholder that permits another individual to vote that shareholder's shares is called a:
A)statement
B)straight vote
C)proxy
D)preference
E)cumulative vote
Q2) A firm expects to increase its annual dividend by 20 per cent per year for the next two years and by 15 per cent per year for the following two years.After that,the company plans to pay a constant annual dividend of $3.00 a share.The last dividend paid was $1.00 a share.What is the current value of this stock if the required rate of return is 12 per cent?
A)$20.50
B)$21.69
C)$18.97
D)$21.08
E)$17.71
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Page 9
Chapter 8: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) Manly Manufacturing Ltd is evaluating an expansion of its business by purchasing new manufacturing equipment.The equipment has an installation cost of $26 million,which will be depreciated straight-line to zero over its three-year life.If the plant has projected net income of $2 348 000,$2 680 000,and $1 920 000 over these three years,what is the project's average accounting return (AAR)?
A)11.69 per cent
B)14.14 per cent
C)15.08 per cent
D)17.82 per cent
E)19.21 per cent
Q2) Discounted cash flow valuation is the process of discounting an investment's: A)assets
B)future profits
C)liabilities
D)costs
E)future cash flows
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Chapter 9: Making Capital Investment Decisions
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Sample Questions
Q1) Aussie Home Entertainment Pty Ltd is setting up a new franchised store in an outer suburb of Sydney.This project has an initial requirement of $261 000 for fixed assets and $27 000 for net working capital.The fixed assets will be depreciated to a zero book value over the four-year life of the project and have an estimated salvage value of $78 000.All of the net working capital will be recouped at the end of the project.The annual operating cash flow is $96 200 and the discount rate is 13 per cent.What is the project's net present value if the tax rate is 30 per cent?
A)$41 011
B)$45 725
C)$48 191
D)$50 880
E)$50 991
Q2) The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:
A)tax shield
B)credit
C)erosion
D)opportunity cost
E)adjustment
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Page 11
Chapter 10: Some Lessons From Capital Market History
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Q1) Over the past ten years,large-company stocks have returned 11.2 per cent.The risk premium on these stocks was 4.8 per cent and the inflation rate was 3.7 per cent.What was the risk-free rate of return?
A)2.7 per cent
B)6.4 per cent
C)7.5 per cent
D)8.5 per cent
E)10.1 per cent
Q2) Which of the following statements are correct?
I.The risk-free rate of return generally earns a risk premium of about one per cent.
II.The reward for bearing risk is called the standard deviation.
III.Based on historical returns,there are rewards for bearing risk.
IV.In general,the higher the risk,the higher the expected return.
A)I and II only
B)III 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 11: Risk and Return
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Sample Questions
Q1) Suppose an investor created the following portfolio: What is the portfolio beta?
A)0.71
B)0.60
C)0.95
D)0
E)1.00
Q2) Which one of the following is the best example of unsystematic risk?
A)a decrease in the value of the dollar
B)inflation exceeding market expectations
C)a warehouse fire
D)a decrease in corporate tax rates
E)an increase in consumer spending
Q3) The slope of the security market line is equal to:
A)the return on the market
B)the market risk premium
C)1 minus the risk-free rate of return
D)the risk-free rate plus the market risk premium
E)the risk-free rate of return,plus beta times the market risk premium
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Page 13
Chapter 12: Long-Term Financing
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Q1) A firm has a cost of equity of 13 per cent,a cost of preferred of 11 per cent,and an after-tax cost of debt of 6 per cent.Given this,which one of the following will increase the firm's weighted average cost of capital?
A)redeeming shares of common stock
B)increasing the firm's beta
C)increasing the firm's tax rate
D)increasing the debt-equity ratio
E)issuing new bonds at par
Q2) The 7 per cent preferred stock of Winslow and Winslow is selling for $54 a share.What is the firm's cost of preferred shares (face value $100)?
A)12.96 per cent
B)17.56 per cent
C)3.78 per cent
D)7.71 per cent
E)18.52 per cent
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14
Chapter 13: Leverage and Capital Structure
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Q1) Which one of the following represents the present value of the interest tax shield?
A)D / T<sub>c</sub>
B)D ´(1 - T<sub>c</sub>)
C)D/(1 - T<sub>c</sub>)
D)D - D(T<sub>c</sub>)
E)T<sub>C</sub> ´D
Q2) A firm's optimal capital structure:
A)is the debt-equity ratio that results in the lowest possible weighted average cost of capital
B)exists when the debt-equity ratio is 0.50
C)is found by locating the mix of debt and equity which causes the earnings per share to equal exactly $1
D)is the debt-equity ratio that exists at the point where the firm's weighted after-tax cost of debt is minimised
E)is generally a mix of 40 per cent debt and 60 per cent equity
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Chapter 14: Dividends and Dividend Policy
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Q1) Nature's Escape sponsors outdoor adventures for people of all ages.The company has a cyclical dividend policy and a target payout ratio of 0.55.The estimated earnings per share for the next year,by quarter,are $1.20,$0.20,$1.80,and $1.40,respectively.Nature's Escape anticipates paying:
A)an annual dividend in the fourth quarter of $2.53 a share
B)an annual dividend in the fourth quarter of $2.07 a share
C)quarterly dividends of $0.66,$0.11,$0.99,and $0.77 per share,respectively over the next four quarters
D)a quarterly dividend of $0.6325 per share for each of the next four quarters
E)quarterly dividends of $0.54,$0.09,$0.81,and $0.63 per share,respectively over the next four quarters
Q2) Which one of the following will result from a stock repurchase?
A)decrease in the earnings per share
B)increase in the market value of equity per share
C)decrease in the market price per share
D)decrease in the PE ratio
E)increase in the number of shares outstanding
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Chapter 15: Raising Capital
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Q1) Hilltop Market is offering 60 000 shares of stock to the public in a general cash offer.The offer price is $30 a share and the underwriter's fee is 8 per cent.The administrative costs are estimated at $310 000.How much will Hilltop Market receive from this stock offering assuming the issue is completely sold?
A)$1 490 000
B)$1 346 000
C)$1 610 000
D)$1 370 800
E)$1 800 000
Q2) Bondi Bakery needs to raise $38 million to expand its operations nationally.The company will sell new shares using a general cash offering.The underwriters charge a 7.65 per cent fee,the administrative costs are $395 000,and the offer price is $26 per share.How many shares of stock must be sold for Bondi Bakery to receive the total funds it desires?
A)1 814 141 shares
B)1 638 311 shares
C)1 833 333 shares
D)1 599 059 shares
E)1 647 222 shares
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Page 17
Chapter 16: Short-Term Financial Planning
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Q1) Which one of the following is directly related to increases in a firm's current assets?
A)carrying costs
B)re-order costs
C)restocking costs
D)out-of-stock events
E)shortage costs
Q2) Generally speaking,which of the following situations will occur if a seasonal company adopts a compromise financial policy?
I.periods where short-term financing is required
II less long-term debt than if the firm followed a restrictive financial policy
III.periods of excess funds which can be invested in short-term marketable securities
IV.lower investment in fixed assets than if the firm adopted a flexible financial policy
A)I and III only
B)II and IV only
C)I only
D)I,III and IV only
E)II only
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18
Chapter 17: Working Capital Management
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Q1) Which one of the following best defines the term 'collection policy'?
A)process of determining which customers will be granted credit
B)daily process of handling cash inflows and outflows of cash
C)set of guidelines used by a firm to determine the cost of offering credit to its customers
D)process of determining the probability customers will not pay
E)set of procedures a firm follows in collecting accounts receivable
Q2) An increase in a firm's average collection period generally indicates that:
A)the cash flows of the firm have increased
B)the majority of a firm's receivables are delinquent
C)an increased number of customers are taking advantage of the cash discount offered
D)at least some customers are taking longer to pay
E)customers are paying more promptly
Q3) When are funds generally transferred into zero-balance accounts?
A)as needed
B)never
C)daily
D)monthly
E)weekly
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Chapter 18: International Aspects of Financial Management
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Q1) The concept that the difference in interest rates between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate is called:
A)exchange rate equilibrium
B)exchange rate parity
C)interest rate equilibrium
D)foreign equalisation
E)interest rate parity
Q2) Currently,you can exchange 100 for A$132.66.The inflation rate in Europe is expected to be 3.1 per cent as compared to 3.6 per cent in Australia.Assuming that relative purchasing power parity exists,what should the exchange rate be 5 years from now?
A) 0.7351
B) 0.7367
C) 0.7298
D) 0.7405
E) 0.7423
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