Introduction to Corporate Finance
Final Exam Questions
Course Introduction
Introduction to Corporate Finance provides students with a comprehensive understanding of the fundamental principles and concepts that underpin the financial management of corporations. The course covers key topics such as time value of money, risk and return, capital budgeting, valuation of financial assets, cost of capital, capital structure, and the basics of financial markets. Students will learn how financial managers make investment and financing decisions to maximize firm value, analyze financial information, and understand the practical implications of financial theories through case studies and real-world examples. This foundational course equips students with the essential tools and analytical skills needed for further study and a successful career in finance or business management.
Recommended Textbook
CFIN 3 3rd Edition by Scott Besley
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Chapter 1: An Overview of Managerial Finance
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Q1) Everything else equal,including firm size,dollar sales,type of product sold,and so forth,the primary difference between the proprietorship and partnership business forms is that
A) a partnership has more owners than a proprietorship.
B) the combined personal liability associated with a partnership is significantly less than the combined personal liability associated with a proprietorship.
C) a partnership generally is easier to form than a proprietorship.
D) the annual growth rate of a proprietorship is limited by law, whereas the growth rate of a partnership is always potentially unlimited.
E) there are many more businesses that are formed as partnerships than proprietorships.
Answer: A
Q2) The finance function is relatively independent of most other corporate functions.Marketing decisions,for example,might affect the firm's need for funds but are not affected by conditions in financial markets or other financing issues.
A)True
B)False
Answer: False
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Chapter 2: Analysis of Financial Statements
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Q1) A statement reporting the impact of a firm's operating,investing,and financing activities on cash flows over an accounting is the statement of cash flows.
A)True
B)False
Answer: True
Q2) In accounting,emphasis is placed on determining net income.In finance,the primary emphasis also is on net income because that is what investors use to value the firm.However,a secondary consideration is cash flow because that's what is used to run the business.
A)True
B)False
Answer: False
Q3) A firm's net income reported on its income statement must equal the operating cash flows on the statement of cash flows.
A)True
B)False
Answer: False
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Chapter 3: The Financial Environment: Markets, institutions, and Investment Banking
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Q1) An agreement for the sale of securities in which the investment bank handling the transaction gives no guarantee that the securities will be sold is a(n)__________.
A) best efforts arrangement
B) guaranteed issue arrangement
C) underwritten arrangement
D) private placement
E) None of the above
Answer: A
Q2) If a corporation that has been in business for many years (for example IBM)wants to raise funds by issuing new common stock,its stock will be sold in the __________ market.
A) primary
B) secondary
C) debt
D) money
E) In this case, the stock can be sold in more than one of the above markets.
Answer: A
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Chapter 4: The Time Value of Money
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Q1) As the discount rate increases without limit,the present value of the future cash inflows
A) Gets larger without limit.
B) Stays unchanged.
C) Approaches zero.
D) Gets smaller without limit, i.e., approaches minus infinity.
E) Goes to e<sup>r</sup><sup>n</sup>.
Q2) At an effective annual interest rate of 20 percent,how many years will it take a given amount to triple in value? (Round to the closest year.)
A) 5
B) 8
C) 6
D) 10
E) 9
Q3) Because we usually assume positive interest rates in time value analyses,the present value of a three-year annuity will always be less than the future value of a single lump sum,if the annuity payment equals the original lump sum investment.
A)True
B)False
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Chapter 5: The Cost of Money
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Q1) Which of the following statements is most correct? Other things held constant.
A) the "liquidity preference theory" would generally lead to an upward sloping yield curve.
B) the "market segmentation theory" would generally lead to an upward sloping yield curve.
C) the "expectations theory" would generally lead to an upward sloping yield curve.
D) the yield curve under "normal" conditions would be horizontal (i.e., flat).
E) a downward sloping yield curve would suggest that investors expect interest rates to increase in the future.
Q2) Bonds with higher liquidity will demand higher interest rates in the market since they can be easily converted into cash on short notice at or near the fair market value for that bond.
A)True
B)False
Q3) The real rate of interest is composed of a risk-free rate of interest plus a premium that reflects the riskiness of the security.
A)True
B)False
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Chapter 6: Bonds Debt-Characteristics and Valuation
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Q1) Cold Boxes Ltd.has 100 bonds outstanding (maturity value = $1,000).The required rate of return on these bonds is currently 10 percent,and interest is paid semiannually.The bonds mature in 5 years,and their current market value is $768 per bond.What is the annual coupon interest rate?
A) 8%
B) 6%
C) 4%
D) 2%
E) 0%
Q2) Which of the following statements is false?
A) Any bond sold outside the country of the borrower is called an international bond. B) Foreign bonds and Eurobonds are two important types of international bonds.
C) Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold.
D) The term Eurobond specifically applies to any foreign bonds denominated in U.S. currency.
E) None of the above.
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Chapter 7: Stocks Equity-Characteristics and Valuation
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Q1) NYC Company has decided to make a major investment.The investment will require a substantial early cash outflow,and inflows will be relatively late.As a result,it is expected that the impact on the firm's earnings for the first 2 years will cause a negative growth of 5 percent annually.Further,it is anticipated that the firm will then experience 2 years of zero growth,after which it will begin a positive annual sustainable growth of 6 percent.If the firm's required return is 10 percent and its last dividend,D0,was $2 per share,what should be the current price per share?
A) $32.66
B) $47.83
C) $53.64
D) $38.47
E) $42.49
Q2) The book value per share is computed by taking the sum of common stock,additional paid in capital,and retained earnings and dividing the number by the number of shares outstanding.
A)True
B)False
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Chapter 8: Risk and Rates of Return
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Q1) If we develop a weighted average of the possible return outcomes,multiplying each outcome or "state" by its respective probability of occurrence for a particular stock,we can construct a payoff matrix of expected returns.
A)True
B)False
Q2) Other things held constant,(1)if the expected inflation rate decreases,and (2)investors become more risk averse,the Security Market Line would shift
A) Down and have steeper slope.
B) Up and have less steep slope.
C) Up and keep same slope.
D) Down and keep same slope.
E) Down and have less steep slope.
Q3) While the portfolio return is a weighted average of realized security returns,portfolio risk is not necessarily a weighted average of the standard deviations of the securities in the portfolio.It is this aspect of portfolios that allows investors to combine stocks and actually reduce the riskiness of a portfolio.
A)True
B)False
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Chapter 9: Capital Budgeting Techniques
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Q1) An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay premiums of $100 per year at the end of each year of the 20 years.Find the internal rate of return to the nearest whole percentage point.
A) 9%
B) 7%
C) 5%
D) 3%
E) 11%
Q2) Los Angeles Lumber Company (LALC)is considering a project with a cost of $1,000 at t = 0 and inflows of $300 at the end of Years 1-5.LALC's cost of capital is 10 percent.What is the project's modified IRR (MIRR)?
A) 10.0%
B) 12.9%
C) 15.2%
D) 18.3%
E) 20.7%
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Chapter 10: Project Cash Flows and Risk
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Q1) Inflation does not need to be built into expected cash flows; the discount rate used in net present value calculations captures the effect of inflation.If you were to include expected inflation into cash flows,all net present value calculations would be incorrect.
A)True
B)False
Q2) A sunk is a cash outlay that has already been incurred and that cannot be recovered regardless of whether the project is accepted or rejected.These sunk costs are extremely important in capital budgeting decisions.
A)True
B)False
Q3) The change in net working capital associated with a capital project may actually result in a decrease in the firm's current funding requirement,which frees up cash flows for investment.
A)True
B)False
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Chapter 11: The Cost of Capital
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Q1) Refer to J.Ross and Sons Inc.What is the firm's cost of retained earnings?
A) 10.0%
B) 12.5%
C) 15.5%
D) 16.5%
E) 18.0%
Q2) Which of the following statements is correct?
A) Beta measures market risk, but if a firm's stockholders are not well diversified, beta may not accurately measure the firm's total risk.
B) If the calculated beta underestimates the firm's true investment risk, then the CAPM method will overestimate r<sub>s</sub>.
C) The discounted cash flow method of estimating the cost of equity can't be used unless the growth component, g, is constant during the analysis period.
D) An advantage shared by both the DCF and CAPM methods of estimating the cost of equity capital, is that they yield precise estimates and require little or no judgment.
E) None of the above is a correct statement.
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Chapter 12: Capital Structure
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Q1) The announcement of a stock offering by a mature firm that seems to have financing alternatives is taken as a signal that the firm's prospects are very good. A)True B)False
Q2) If a given change in EBIT results in a larger relative change in EPS then we can definitely say that the firm has
A) a degree of operating leverage greater than one.
B) a degree of operating leverage less than one.
C) a degree of financial leverage greater than one.
D) a degree of financial leverage less than one.
E) a degree of total leverage less than one.
Q3) As long as a firm is near its target capital structure it will not have to concern itself with financial flexibility. A)True B)False
Q4) The management of a firm can control the degree of total leverage to some extent. A)True B)False
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Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
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Q1) According to your text,the ex-dividend date associated with a stock is two days before the
A) declaration date.
B) holder-of-record date.
C) payment date.
D) firm pays interest on its debt every year.
E) None of the above answers is correct.
Q2) Which of the following statement completions is correct? If investors prefer dividends to capital gains,then
A) The equilibrium return, r<sub>s</sub>, will not be affected by a change in dividend policy because tax effects will offset these preferences.
B) r<sub>s</sub> will decrease as dividends are reduced.
C) r<sub>s</sub> will increase as dividends are reduced.
D) r<sub>s</sub> will decrease as the retention rate increases.
E) Dividend policy as determined by the residual dividend model is the only dividend policy which will maximize the price per share of common stock.
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Chapter 14: Working Capital Policy
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Q1) Jordan Air Inc.has average inventory of $1,000,000.Its estimated annual sales are 15 million and the firm estimates its receivables collection period to be twice as long as its inventory conversion period.The firm pays its trade credit on time; its terms are net 30.The firm wants to decrease its cash conversion cycle by 10 days.It believes that it can reduce its average inventory to $900,000.Assume a 360-day year and that sales will not change.Cost of goods sold equal 80 percent of sales.By how much must the firm also reduce its accounts receivable to meet its goal of a 10-day reduction?
A) $101,900
B) $1,000,000
C) $291,667
D) $333,520
E) $0
Q2) The cash conversion cycle is the sum of the inventory conversion period,the receivables collection period,and the payables deferral period.
A)True
B)False
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Chapter 15: Managing Short-Term Assets
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Q1) The four major elements in a firm's credit policy are (1)credit standards,(2)credit terms,(3)monitoring function,and (4)collection policy.
A)True
B)False
Q2) Which of the following is (are)typically part of the cash budget?
A) Payment lag.
B) Payment for plant construction.
C) Cumulative cash.
D) All of the above.
E) Only answers a and c above.
Q3) Synchronization of cash flows is an important cash management technique and effective synchronization can actually increase a firm's profitability.
A)True
B)False
Q4) All else equal,firms that hold greater amounts of short-term assets are considered more risky than firms that hold grater amounts of long-term securities.
A)True
B)False
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Chapter 16: Managing Short-Term Liabilities Financing
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Q1) "Stretching" accounts payable is a widely accepted and costless financing technique.
A)True
B)False
Q2) Small,undercapitalized firms
A) Are generally users of net trade credit.
B) Are major users of banker's acceptances.
C) Generally do not issue commercial paper.
D) Typically have a high cost of debt capital.
E) Are described by all of the above statements.
Q3) The prime rate charged by big money center banks can vary greatly (for example,as much as 2 to 4 percentage points)across banks due to banks' ability to differentiate themselves and because particular banks develop particular clienteles,such as mainly making loans to small firms.
A)True
B)False
Q4) Trade credit is an inexpensive source of short-term financing if no discounts are offered.
A)True
B)False
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Chapter 17: Financial Planning and Control
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Q1) Refer to Crum Company.Crum expects sales to grow by 50% in 2010,and operating costs should increase at the same rate.Fixed assets were being operated at 40% of capacity in 2009,but all other assets were used to full capacity.Underutilized fixed assets cannot be sold.Current assets and spontaneous liabilities should increase at the same rate as sales during 2010.The company plans to finance any external funds needed as 35% notes payable and 65% common stock.After taking financing feedbacks into account,and after the second pass,what is Crum's projected ROE using the projected balance sheet method?
A) 16.98%
B) 23.73%
C) 25.68%
D) 19.61%
E) 23.24%
Q2) Refer to Trident Food Corporation.What is the degree of operating leverage for Trident Foods?
A) 2.78
B) 10.71
C) 3.86
D) 3.00
E) 4.00
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Chapter 18: project Cash Flows and Risk
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Q1) The use of accelerated versus straight-line depreciation causes net income reported to stockholders to be lower,and cash flows higher,for the duration of a project's life,other things held constant.
A)True
B)False
Q2) A firm that bases its capital budgeting decisions on either NPV or IRR will be more likely to accept a given project if it uses MACRS accelerated depreciation than if it uses the optional straight-line alternative,other things being equal.
A)True
B)False
Q3) The primary advantage of accelerated depreciation over straight line depreciation is that the total,undiscounted,depreciation tax savings over the life of the project are greater when an accelerated depreciation method is used.
A)True
B)False
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