Introduction to Corporate Finance Exam Practice Tests
Course Introduction
Introduction to Corporate Finance provides students with a foundational understanding of the financial principles and analytical tools used by firms to make strategic business decisions. The course covers essential topics such as time value of money, capital budgeting, valuation of stocks and bonds, risk and return analysis, cost of capital, and capital structure decisions. Students will also explore dividend policies, working capital management, and the role of financial markets, gaining insights into how corporations raise and allocate financial resources to maximize value. The course combines theoretical frameworks with real-world applications, preparing students for more advanced finance studies or entry-level roles in finance and business 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) Which one of the following is most likely to create a situation where an agency conflict could arise?
A)increasing the size of a firm's operations
B)downsizing a firm
C)separating management from ownership
D)decreasing employee turnover
E)reducing both management and non-management salaries
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) A tangible asset:
A)is defined as any asset which adds value to a firm
B)by definition includes both equipment and patents
C)is another term for a fixed asset
D)is defined as an asset with a market value that exceeds the book value
E)is a fixed asset with a physical existence
Answer: E
Q2) Liquidity is best defined as:
A)the ability to access the cash balances of a firm on a daily basis
B)the option of a firm to sell its inventory at a greatly reduced price
C)the ability of a firm to sell its fixed assets quickly by greatly reducing the price
D)the market value of an asset minus the book value of that same asset
E)the ease and speed with which an asset can be converted to cash
Answer: E
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4
Chapter 3: Working With Financial Statements
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Sample Questions
Q1) The Noodle Place has total assets of $123 800,a debt-equity ratio of 0.65,and net income of $7100.What is the return on equity?
A)3.48 per cent
B)3.73 per cent
C)8.01 per cent
D)9.46 per cent
E)13.61 percent
Answer: D
Q2) Short-term solvency ratios are also referred to as:
A)leverage ratios
B)liquidity measures
C)utilisation ratios
D)profitability ratios
E)turnover rates
Answer: B
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Chapter 4: Introduction to Valuation: the Time Value of Money
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Sample Questions
Q1) Thirteen years ago,you deposited $2400 into a superannuation fund.Eight years ago,you added an additional $1000 to this account.You earned 8 per cent,compounded annually,for the first 5 years,and 5.5 per cent,compounded annually,for the last 8 years.How much money do you have in your account today?
A)$4666.67
B)$4717.29
C)$5411.90
D)$6708.15
E)$6946.59
Q2) A financially wise individual would prefer a loan based on __________ interest and an investment earning __________ interest.
A)compound;compound
B)compound;simple
C)simple;compound
D)simple;simple
E)complex;compound
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6
Chapter 5: Discounted Cash Flow Valuation
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Sample Questions
Q1) Kurt wants to have $25 000 in an investment account 4 years from now.The account will pay 0.2 per cent interest per month.If he saves money every month,starting one month from now,how much will he have to save each month to reach his goal?
A)$496.75
B)$497.03
C)$497.75
D)$501.03
E)$502.14
Q2) An annuity for which the cash flows occur at the beginning of each time period is called a(n):
A)ordinary annuity
B)beginning annuity
C)annuity due
D)perpetuity
E)perpetuity due
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Chapter 6: Interest Rates and Bond Valuation
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Q1) An unsecured note is:
A)long-term debt secured by part,or all,of the assets of the borrower
B)debt that is secured by a borrower's accounts receivables
C)unsecured debt that is generally payable within the next ten years
D)a formal type of loan that is secured by real estate
E)the written agreement which details the information relative to a bond issue
Q2) Bondi Beachwear Pty Ltd takes out a short-term loan through Witch Bank using a bill of exchange.The face value of the bill is $200 000 and it will mature in 60 days.If the interest rate quoted by the bank is 6.50% per annum what is the amount that Bondi Beachwear will receive (to the nearest dollar)?
A)$198 786
B)$197 875
C)$187 793
D)$178 793
E)$197 886
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8
Chapter 7: Equity Markets and Stock Valuation
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Q1) The common stock of Wetmore Industries is valued at $10.08 a share.The company increases their dividend by 3.5 per cent annually and expects their next dividend to be $1.24.What is the required rate of return on this stock?
A)16.23 per cent
B)16.53 per cent
C)16.35 per cent
D)16.49 per cent
E)15.80 per cent
Q2) The Market Place recently announced that it will pay its first annual dividend two years from today.The first dividend will be $0.50 a share with that amount doubling each year for the following two years.After that,the dividend is expected to increase by 4 per cent annually.What is the value of this stock today if the required return is 15 per cent?
A)$12.47
B)$14.02
C)$11.68
D)$12.99
E)$14.94
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Chapter 8: Net Present Value and Other Investment Criteria
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Q1) Which one of the following methods of analysis is most similar to computing the return on assets (ROA)?
A)internal rate of return
B)profitability index
C)average accounting return
D)net present value
E)payback
Q2) Calculate the approximate internal rate of return given the following series of cash flows.
A)14.47%
B)15.80%
C)19.67%
D)17.92%
E)16.83%
Q3) Which one of the following best expresses two mutually exclusive investments?
A)constructing a theatre and a restaurant side by side
B)locating a restaurant inside a theatre building
C)building either a gas station or a restaurant on a corner lot
D)building both a restaurant and a parking lot on a vacant lot
E)building a parking lot for the benefit of both restaurant and theatre patrons
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Chapter 9: Making Capital Investment Decisions
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Sample Questions
Q1) Forecasting risk is best defined as:
A)reality risk
B)value risk
C)potential risk
D)management risk
E)estimation risk
Q2) Shere Khan Corporation is currently evaluating a new project.Relatively inexpensive equipment with an estimated cost of $300 000 would be purchased,but shipping costs to move the equipment would total $25 000 and installation charges would add another $15 000 to the total equipment costs.Further,the company's inventories would have to be increased by $20 000 at the time of initial investment.The straight-line depreciation rate is 20% and corporate tax rate is 25%.
Calculate the annual depreciation.
A)$60 000
B)$45 000
C)$72 000
D)$75 000
E)$68 000
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Chapter 10: Some Lessons From Capital Market History
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Q1) Home Grown Grains stock returned 28.7 per cent,2.6 per cent,13.1 per cent,and 11.8 per cent over the past four years,respectively.What is the arithmetic average return for this period?
A)14.05 per cent
B)14.62 per cent
C)15.10 per cent
D)15.93 per cent
E)16.01 per cent
Q2) A year ago,Fred purchased 300 shares of RPJ stock for $14 400.The stock is currently selling for $36 a share and Fred has decided to sell all of his shares.What is the total return that Fred has earned on this investment if he received a special dividend of $5 a share?
A)-25.00 per cent
B)-19.44 per cent
C)-14.58 per cent
D)-8.89 per cent
E)-1.38 per cent
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12
Chapter 11: Risk and Return
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Q1) Which one of the following is the best example of an event related to an expected return?
A)an announcement that a firm will meet its sales projections
B)a GDP growth rate that surpassed predictions
C)a market decline due to increased tensions in the world
D)a news release that a firm is going to be acquired at a premium
E)a sudden increase in the inflation rate
Q2) The principle of diversification tells us that:
A)there is no risk in investing in a portfolio of shares
B)spreading your investment across many assets will eliminate some risk
C)all risk can be eliminated
D)unsystematic risk cannot be reduced
E)systematic risk can always be eliminated by diversification
Q3) Suppose an investor created the following portfolio: What is the expected return on this portfolio?
A)9.7%
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Chapter 12: Long-Term Financing
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Q1) Which one of the following represents the rate of return a firm must earn on its assets if it is to maintain the current value of its securities?
A)debt-equity ratio
B)after-tax cost of debt
C)internal rate of return
D)cost of equity
E)weighted average cost of capital
Q2) Which one of the following statements is correct? Assume the pre-tax cost of debt is less than the cost of equity.
A)A firm may change its capital structure if the government changes its tax policies.
B)The cost of preferred stock decreases when the tax rate increases.
C)A decrease in the systematic risk of a firm will increase the firm's cost of capital.
D)A decrease in a firm's debt-equity ratio will decrease the firm's cost of capital.
E)A decrease in the dividend growth rate increases the cost of equity.
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Chapter 13: Leverage and Capital Structure
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Q1) Which one of the following statements is the core principle of M&M Proposition I,without taxes?
A)A firm's WACC is directly related to the firm's debt-equity ratio.
B)Levered firms have greater value than unlevered firms.
C)The interest tax shield increases the value of a firm.
D)A firm's cost of equity is directly related to the firm's debt-equity ratio.
E)The capital structure of a firm is totally irrelevant.
Q2) Kelner's Nursery has 8000 bonds outstanding with a face value of $1000 each.The coupon rate is 6.5 per cent and the tax rate is 34 per cent.What is the present value of the interest tax shield?
A)$3.26 million
B)$2.72 million
C)$3.09 million
D)$3.13 million
E)$2.83 million
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Chapter 14: Dividends and Dividend Policy
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Q1) Which one of the following statements is correct?
A)Corporate investors tend to prefer low dividend payouts on securities they own.
B)Flotation costs are a good reason to support a high dividend payout.
C)Current tax laws favour low dividends for individual Australian investors.
D)Dividends are irrelevant.
E)Dividend policy is the time pattern of dividend payout.
Q2) George owns 20 000 shares in Australian Meat Snacks,Inc.A market price for 1 share is currently $17.In December 2007,the company declared a dividend of $0.51 per share.George decided to participate in the dividend reinvestment plan and received ____ new shares on 8 January 2008.He ____ include the dividend in his 2007-2008 assessable income in the same manner as cash dividends.
A)600;will
B)200;will not
C)1 177;will not
D)1 177;will
E)600;will not
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Page 16
Chapter 15: Raising Capital
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Sample Questions
Q1) If an offer of issued securities is made only to institutional investors,such as life insurance offices and superannuation funds,the method is called:
A)private placement
B)subordinated debt
C)public issue
D)matching principle
E)family issue
Q2) 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
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Chapter 16: Short-Term Financial Planning
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Q1) Tri-City Grocers is a chain of grocery stores that just hired a new CFO.Which of the following actions would you expect this CFO to adopt given her statement that she wants to implement a more flexible financing policy for the firm?
I.easing the credit terms given to customers
II.increasing the amount of inventory carried by each grocery store
III.borrowing funds to keep more cash available for store operations
IV.decreasing the firms' investments in marketable securities
A)I,II,III and IV
B)I and III only
C)I,II and III only
D)II and IV only
E)II,III and IV only
Q2) Which type of financing is generally used by new car dealers to finance their inventories?
A)trade credit financing
B)blanket inventory lien arrangement
C)committed line of credit
D)bailment financing
E)field warehousing financing
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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) What is the primary purpose of a cash discount?
A)inducement to pay promptly
B)customer compensation for an out-of-stock item
C)customer compensation for faulty goods or services
D)incentive to purchase a specialty item
E)means of offsetting the interest charges on an account receivable
Q3) The transaction motive for holding cash refers to the need to have cash for which one of the following purposes?
A)financial reserve
B)investment opportunities
C)bargain opportunities
D)safety margin
E)daily operations
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Chapter 18: International Aspects of Financial Management
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Q1) Which one of the following is the agreed-upon exchange rate that is to be used when currencies are exchanged at some point in the future based on an agreement made today?
A)ADR rate
B)cross-rate
C)forward exchange rate
D)spot rate
E)London Interbank Offer Rate
Q2) Relative purchasing power parity is based on the principle that the expected percentage change in the exchange rate between two countries is equal to which one of the following?
A)average inflation rate of the two countries
B)difference between the two countries' average inflation and interest rates
C)difference in the inflation rates of the two countries
D)difference in the risk-free interest rates in the two countries
E)average interest rate in the two countries
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