Introduction to Corporate Finance Exam Questions
Course Introduction
Introduction to Corporate Finance provides students with the foundational concepts and tools necessary to understand the financial decisions made by firms. The course covers topics such as the time value of money, valuation of cash flows, capital budgeting, risk and return, cost of capital, and the principles of capital structure and dividend policy. Through real-world examples and practical exercises, students gain insight into how companies raise, invest, and manage money to maximize shareholder value while considering both risk and reward. This course serves as a basis for more advanced study in financial management and investment analysis.
Recommended Textbook Fundamentals of Corporate Finance 10th Edition by Stephen Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Q1) Which form of business structure is most associated with agency problems?
A)sole proprietorship
B)general partnership
C)limited partnership
D)corporation
E)limited liability company
Answer: D
Q2) Public offerings of debt and equity must be registered with which one of the following?
A)New York Board of Governors
B)Federal Reserve
C)NYSE Registration Office
D)Securities and Exchange Commission
E)Market Dealers Exchange
Answer: D
Q3) Describe the key advantages associated with the corporate form of organization.
Answer: The advantages of the corporate form of organization are the ease of transferring ownership,the owners' limited liability for business debts,the ability to raise large amounts of capital,and the potential for an unlimited life for the organization.
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Page 3
Chapter 2: Financial Statements,Taxes,and Cash Flow
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Sample Questions
Q1) During 2011,RIT Corp.had sales of $565,600.Costs of goods sold,administrative and selling expenses,and depreciation expenses were $476,000,$58,800,and $58,800,respectively.In addition,the company had an interest expense of $112,000 and a tax rate of 32 percent.What is the operating cash flow for 2009? Ignore any tax loss carry-back or carry-forward provisions.
A)$17,920
B)$21,840
C)$30,800
D)$52,600
E)$77,840
Answer: C
Q2) Cash flow from assets is also known as the firm's:
A)capital structure.
B)equity structure.
C)hidden cash flow.
D)free cash flow.
E)historical cash flow.
Answer: D
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4
Chapter 3: Working With Financial Statements
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Sample Questions
Q1) Big Guy Subs has net income of $150,980,a price-earnings ratio of 12.8,and earnings per share of $0.87.How many shares of stock are outstanding?
A)13,558
B)14,407
C)165,523
D)171,000
E)173,540
Answer: E
Q2) The Home Supply Co.has a current accounts receivable balance of $280,000.Credit sales for the year just ended were $1,830,000.How many days on average did it take for credit customers to pay off their accounts during this past year?
A)54.29 days
B)55.01 days
C)55.50 days
D)55.85 days
E)61.00 days
Answer: D
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Chapter 4: Long-Term Financial Planning and Growth
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Q1) Fresno Salads has current sales of $6,000 and a profit margin of 6.5 percent.The firm estimates that sales will increase by 4 percent next year and that all costs will vary in direct relationship to sales.What is the pro forma net income?
A)$303.33
B)$327.18
C)$405.60
D)$438.70
E)$441.10
Q2) Financial planning accomplishes which of the following for a firm?
I.determination of asset requirements
II.development of plans to contend with unexpected events
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
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6
Chapter 5: Introduction to Valuation: The Time Value of Money
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Q1) At 8 percent interest,how long would it take to quadruple your money?
A)16.55 years
B)16.64 years
C)17.09 years
D)18.01 years
E)18.56 years
Q2) The process of determining the present value of future cash flows in order to know their worth today is called which one of the following?
A)compound interest valuation
B)interest on interest computation
C)discounted cash flow valuation
D)present value interest factoring
E)complex factoring
Q3) Which one of the following will produce the highest present value interest factor?
A)6 percent interest for five years
B)6 percent interest for eight years
C)6 percent interest for ten years
D)8 percent interest for five years
E)8 percent interest for ten years
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Chapter 6: Discounted Cash Flow Valuation
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Q1) Given an interest rate of 8 percent per year,what is the value at date t = 9 of a perpetual stream of $500 annual payments that begins at date t = 17?
A)$3,376.68
B)$4,109.19
C)$4,307.78
D)$6,250.00
E)$6,487.17
Q2) A monthly interest rate expressed as an annual rate would be an example of which one of the following rates?
A)stated rate
B)discounted annual rate
C)effective annual rate
D)periodic monthly rate
E)consolidated monthly rate
Q3) Kristie owns a perpetuity which pays $12,000 at the end of each year.She comes to you and offers to sell you all of the payments to be received after the 10<sup>th</sup> year.Explain how you can determine the value of this offer.
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Chapter 7: Interest Rates and Bond Valuation
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Q1) Define liquidity risk,default risk,and taxability risk and explain how these risks relate to bonds and bond yields.
Q2) Describe the relationships that exist between the coupon rate,the yield to maturity,and the current yield for both a discount bond and a premium bond.
Q3) The items included in an indenture that limit certain actions of the issuer in order to protect bondholder's interests are referred to as the:
A)trustee relationships.
B)bylaws.
C)legal bounds.
D)"plain vanilla" conditions.
E)protective covenants.
Q4) Interest rates that include an inflation premium are referred to as:
A)annual percentage rates.
B)stripped rates.
C)effective annual rates.
D)real rates.
E)nominal rates.
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9
Chapter 8: Stock Valuation
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Sample Questions
Q1) The secondary market is best defined by which one of the following?
A)market in which subordinated shares are issued and resold
B)market conducted solely by brokers
C)market dominated by dealers
D)market where outstanding shares of stock are resold
E)market where warrants are offered and sold
Q2) Diets For You announced today that it will begin paying annual dividends next year.The first dividend will be $0.12 a share.The following dividends will be $0.15,$0.20,$0.50,and $0.75 a share annually for the following 4 years,respectively.After that,dividends are projected to increase by 4 percent per year.How much are you willing to pay to buy one share of this stock today if your desired rate of return is 8.5 percent?
A)$11.67
B)$11.94
C)$12.78
D)$13.50
E)$13.86
Q3) What are the primary differences and similarities between NASDAQ and the NYSE?
Q4) Explain the primary change that occurred in the structure of the NYSE in 2006 and how that change affected the exchange members.
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Chapter 9: Net Present Value and Other Investment Criteria
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Q1) A project has an initial cost of $18,400 and produces cash inflows of $7,200,$8,900,and $7,500 over three years,respectively.What is the discounted payback period if the required rate of return is 16 percent?
A)2.31 years
B)2.45 years
C)2.55 years
D)2.62 years
E)never
Q2) Kristi wants to start training her most junior assistant,Amy,in the art of project analysis.Amy has just started college and has no experience or background in business finance.To get her started,Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze.Which method is Kristi most apt to ask Amy to use in making her initial decisions?
A)discounted payback
B)profitability index
C)internal rate of return
D)payback
E)average accounting return
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11
Chapter 10: Making Capital Investment Decisions
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Q1) The bid price is:
A)an aftertax price.
B)the aftertax contribution margin.
C)the highest price you should charge if you want the project.
D)the only price you can bid if the project is to be profitable.
E)the minimum price you should charge if you want to earn a target return on investment.
Q2) Which one of the following statements is correct?
A)Project analysis should only include the cash flows that affect the income statement.
B)A project can create a positive operating cash flow without affecting sales.
C)The depreciation tax shield creates a cash outflow for a project.
D)Interest expense should always be included as a cash outflow when analyzing a project.
E)The opportunity cost of a company-owned building that is going to be used in a new project should be included as a cash inflow to the project.
Q3) Can the initial cash flow at time zero for a project ever be a positive value?
If yes,give an example.If no,explain why not.
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Page 12
Chapter 11: Project Analysis and Evaluation
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Q1) At the accounting break-even point,Swiss Mountain Gear sells 14,600 ski masks at a price of $12 each.At this level of production,the depreciation is $58,000 and the variable cost per unit is $4.What is the amount of the fixed costs at this production level?
A)$58,800
B)$59,400
C)$61,300
D)$87,600
E)$145,600
Q2) What is forecasting risk and why is it important to the analysis of capital expenditure projects? What methods can be used to reduce this risk?
Q3) The base case values used in scenario analysis are the ones considered the most: A)optimistic.
B)desired by management.
C)pessimistic.
D)conducive to creating a positive net present value.
E)likely to occur.
Q4) What is operating leverage and why is it important in the analysis of capital expenditure projects?
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Chapter 12: Some Lessons From Capital Market History
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Q1) Suppose a stock had an initial price of $80 per share,paid a dividend of $1.35 per share during the year,and had an ending share price of $87.What was the capital gains yield?
A)1.55 percent
B)1.69 percent
C)8.05 percent
D)8.75 percent
E)10.44 percent
Q2) Based on past 23 years,Westerfield Industrial Supply's common stock has yielded an arithmetic average rate of return of 10.5 percent.The geometric average return for the same period was 8.57 percent.What is the estimated return on this stock for the next 4 years according to Blume's formula?
A)8.70 percent
B)8.92 percent
C)9.13 percent
D)9.38 percent
E)10.24 percent
Q3) What are the two primary lessons learned from capital market history?
Use historical information to justify that these lessons are correct.
Q4) Define and explain the three forms of market efficiency.
Page 14
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Chapter 13: Return,Risk,and the Security Market Line
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Q1) Which one of the following statements related to risk is correct?
A)The beta of a portfolio must increase when a stock with a high standard deviation is added to the portfolio.
B)Every portfolio that contains 25 or more securities is free of unsystematic risk.
C)The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio.
D)Adding five additional stocks to a diversified portfolio will lower the portfolio's beta.
E)Stocks that move in tandem with the overall market have zero betas.
Q2) The expected return on JK stock is 15.78 percent while the expected return on the market is 11.34 percent.The stock's beta is 1.51.What is the risk-free rate of return?
A)2.22 percent
B)2.31 percent
C)2.42 percent
D)2.50 percent
E)2.63 percent
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Chapter 14: Cost of Capital
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Q1) Phil's is a sit-down restaurant that specializes in home-cooked meals.Theresa's is a walk-in deli that specializes in specialty soups and sandwiches.Both firms are currently considering expanding their operations during the summer months by offering pre-wrapped donuts,sandwiches,and wraps at a local beach.Phil's currently has a WACC of 14 percent while Theresa's WACC is 10 percent.The expansion project has a projected net present value of $12,600 at a 10 percent discount rate and a net present value of -$2,080 at a 14 percent discount rate.Which firm or firms should expand and offer food at the local beach during the summer months?
A)Phil's only
B)Theresa's only
C)both Phil's and Theresa's
D)neither Phil's nor Theresa's
E)cannot be determined from the information provided
Q2) Explain how the use of internal equity rather than external equity affects the analysis of a project.
Q3) What are some advantages of the subjective approach to determining the cost of capital and why do you think that approach is utilized?
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Page 16
Chapter 15: Raising Capital
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Q1) Which one of the following is probably the most successful means of finding venture capital?
A)internet searches
B)Dutch auctions
C)newspaper advertisements
D)personal contacts
E)personal letters to venture capital firms
Q2) Barstow Industrial Supply has decided to raise $27.52 million in additional funding via a rights offering.The firm will issue one right for each share of stock outstanding.The offering consists of a total of 860,000 new shares.The current market price of the stock is $38.Currently,there are 5.16 million shares outstanding.What is the value of one right?
A)$0.97
B)$0.86
C)$0.48
D)$0.52
E)$0.60
Q3) Firms encounter several costs when issuing new securities.Identify and describe at least four of these costs.
Q4) Explain both a rights offering and the basic characteristics of a right.
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Chapter 16: Financial Leverage and Capital Structure Policy
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Q1) Explain how a firm loses value during the bankruptcy process from both a creditors and a shareholders perspective.
Q2) The Jean Outlet is an all equity firm that has 146,000 shares of stock outstanding.The company has decided to borrow the $1.1 million to repurchase 7,500 shares of its stock from the estate of a deceased shareholder.What is the total value of the firm if you ignore taxes?
A)$18,387,702
B)$18,500,000
C)$19,666,667
D)$21,413,333
E)$22,293,333
Q3) Douglass & Frank has a debt-equity ratio of 0.35.The pre-tax cost of debt is 8.2 percent while the unlevered cost of capital is 13.3 percent.What is the cost of equity if the tax rate is 39 percent?
A)13.79 percent
B)14.39 percent
C)14.86 percent
D)18.40 percent
E)18.87 percent
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Page 18
Chapter 17: Dividends and Payout Policy
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Q1) Which one of the following statements related to stock repurchases is correct?
A)U.S.industrial firms have increased their stock repurchases every year for each of the past twenty years.
B)A stock repurchase can be used as a means for incumbent officers to retain control of a firm.
C)A tender offer indicates that a firm is willing and able to purchase how ever many shares the current shareholders wish to sell.
D)All stock repurchases must be identified as such to the selling party.
E)Stock repurchases can be a relatively tax-efficient method of distributing cash to shareholders.
Q2) The Green Florist has 28,000 shares of stock outstanding with a par value of $1 per share and a market value of $7 a share.The company just announced a 2-for-5 reverse stock split.Currently,you own 300 shares of this stock.How many shares will you own after the reverse stock split?
A)60 shares
B)120 shares
C)480 shares
D)600 shares
E)750 shares
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Page 19
Chapter 18: Short-Term Finance and Planning
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Q1) The Harvester collects 25 percent of sales in the month of sale,60 percent of sales in the month following the month of sale,and 15 percent of sales in the second month following the month of sale.During the month of April,the firm will collect:
A)60 percent of February sales.
B)15 percent of April sales.
C)60 percent of March sales.
D)15 percent of March sales.
E)25 percent of February sales.
Q2) Which of the following are sources of cash?
I.decrease in inventory
II.increase in accounts receivable
III.repayment of a bond
IV.sale of preferred stock
A)I and III only
B)I and IV only
C)II and III only
D)I, II, and III only
E)I, III, and IV only
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Chapter 19: Cash and Liquidity Management
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Q1) A repurchase agreement generally has a maximum life of:
A)1 day.
B)a few days.
C)one month.
D)one to three months.
E)three to six months.
Q2) Travel Inn Express spends $109,000 a week to pay bills and maintains a lower cash balance limit of $125,000.The standard deviation of the disbursements is $14,400.The applicable weekly interest rate is 0.039 percent and the fixed cost of transferring funds is $58.What is the inn's cash balance target based on the Miller-Orr model?
A)$28,492
B)$31,359
C)$153,492
D)$156,359
E)$225,417
Q3) Explain how a lockbox system operates and why a firm might consider implementing such a system.
Q4) Explain how the unethical use of uncollected funds has been impacted by the growth of on-line retailing and banking.
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Chapter 20: Credit and Inventory Management
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Q1) Which one of the five Cs of credit refers to a firm's financial reserves?
A)character
B)capacity
C)collateral
D)conditions
E)capital
Q2) The terms of sale generally include which of the following?
I.type of credit instrument
II.cash discount
III.credit period
IV.discount period
A)I and III only
B)II and IV only
C)III and IV only
D)II, III, and IV only
E)I, II, III, and IV
Q3) All else equal,firms with (1)excess capacity,(2)low variable costs,and (3)repeat customers are more apt to offer liberal credit terms to their customers than are other firms.Explain why this tendency exists.
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Page 22
Chapter 21: International Corporate Finance
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Q1) In the spot market,$1 is currently equal to A$1.4910.Assume the expected inflation rate in Australia is 3.5 percent and in the U.S.4.0 percent.What is the expected exchange rate one year from now if relative purchasing power parity exists?
A)A$1.4810
B)A$1.4835
C)A$1.4875
D)A$1.4985
E)A$1.5005
Q2) The expected inflation rate in Finland is 2.8 percent while it is 3.2 percent in the U.S.A risk-free asset in the U.S.is yielding 4.9 percent.What approximate real rate of return should you expect on a risk-free Finnish security?
A)1.2 percent
B)1.7 percent
C)2.1 percent
D)2.5 percent
E)2.8 percent
Q3) Using currencies A,B,and C construct an example in which triangle arbitrage exists and then show how to exploit it.
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Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) You don't particularly like to shop so only go to the mall once a month.To help make the trek more enjoyable,you always have lunch at the restaurant located inside the mall.Since you are such a creature of habit,you always order the same meal.You've noticed that the price of that meal has increased every time you have been there over the past six months.Thus,you expect the meal to increase in price next month.This is an example of which one of the following?
A)recency bias
B)anchoring and adjustment
C)frame dependence
D)aversion to ambiguity
E)clustering illusion
Q2) General rules used as the basis for decision making are referred to as:
A)a loss aversion technique.
B)heuristics.
C)self-attribution.
D)narrow framing.
E)confirmation bias.
Q3) Explain why a low-priced,low trading volume stock is more apt to present limits to arbitrage than is a high-priced,high trading volume stock.
Page 24
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Chapter 23: Enterprise Risk Management
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Q1) A hedge between which two of the following firms is most apt to reduce each firm's financial risk exposure?
A)wheat farmer and bakery
B)oil producer and coal miner
C)wheat grower and pharmaceutical firm
D)pastry bakery and cotton farmer
E)shoe manufacturer and coat manufacturer
Q2) A swap dealer in the U.S.:
A)acts solely as a seller of swap contracts.
B)matches buyers to sellers.
C)only deals if its book is matched.
D)is frequently a commercial bank.
E)trades electronically via NASDAQ.
Q3) By definition,which one of the following contracts is marked to the market on a daily basis?
A)forward contract
B)spot contract
C)hedge
D)swap
E)futures contract
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Chapter 24: Options and Corporate Finance
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Q1) Which of the following will decrease the value of a call option?
I.a decrease in the exercise price
II.a decrease in the value of the underlying security
III.an increase in the risk-free rate
IV.an increase in the time to expiration
A)II only
B)I and II only
C)III and IV only
D)I, II, and IV only
E)I, II, and III only
Q2) Southern Shores is considering a project that has an initial cost today of $13,000.The project has a two-year life with cash inflows of $7,500 a year.Should the firm opt to wait one year to commence this project,the initial cost will increase by 5 percent and the cash inflows will increase to $8,500 a year.What is the value of the option to wait if the applicable discount rate is 12 percent?
A)$614.52
B)$721.56
C)$963.40
D)$982.67
E)$1,021.66
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Chapter 25: Option Valuation
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Q1) You invest $4,500 today at 6.5 percent,compounded continuously.How much will this investment be worth 8 years from now?
A)$6,728
B)$7,569
C)$8,311
D)$8,422
E)$8,791
Q2) A stock is currently selling for $56 a share.The risk-free rate is 3 percent and the standard deviation is 18 percent.What is the value of d1 of a 9-month call option with a strike price of $57.50?
A)-0.01506
B)0.05271
C)0.05740
D)0.06420
E)0.06752
Q3) Explain why the equity ownership of a firm is equivalent to owning a call option on the firm's assets.
Q4) Explain why financial mergers tend to benefit bondholders more than shareholders.
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Chapter 26: Mergers and Acquisitions
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Q1) The primary purpose of a flip-in provision is to:
A)increase the number of shares outstanding while also increasing the value per share.
B)dilute a corporate raider's ownership position.
C)reduce the market value of each share of stock.
D)give the existing corporate directors the sole right to remove a poison pill.
E)provide additional compensation to any senior manager who loses his or her job as a result of a corporate takeover.
Q2) If Paul's Hardware were to acquire Suburban Hardware,the acquisition would be classified as a _____ acquisition.
A)horizontal
B)longitudinal
C)conglomerate
D)vertical
E)integrated
Q3) Firms can frequently create synergy by merging and sharing complementary resources with another firm.Give two examples of situations where this would most likely occur.
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Chapter 27: Leasing
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Q1) Daily Enterprises is contemplating the acquisition of some new equipment.The purchase price is $46,000.The company expects to sell the equipment at the end of year 4 for $2,500.The firm uses MACRS depreciation which allows for 33.33 percent,44.44 percent,14.82 percent,and 7.41 percent depreciation over years 1 to 4,respectively.The equipment can be leased for $12,300 a year for 4 years.The firm can borrow money at 7.5 percent and has a 35 percent tax rate.What is the incremental annual cash flow for year 4 if the company decides to lease the equipment rather than purchase it?
A)-$14,434
B)-$12,734
C)-$10,813
D)-$9,434
E)-$8,766
Q2) Explain the differences between purchasing an asset and leasing an asset.
Q3) The party who owns a leased asset is called the:
A)lessee.
B)lessor.
C)guarantor.
D)trustee.
E)manager.
To view all questions and flashcards with answers, click on the resource link above.
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