Introduction to Corporate Finance
Mock Exam
Course Introduction
Introduction to Corporate Finance provides an overview of the fundamental principles and concepts in financial management within corporations. The course covers key topics such as financial statement analysis, time value of money, risk and return, valuation of stocks and bonds, capital budgeting, and cost of capital. Students will learn how managers make investment and financing decisions aimed at maximizing shareholder value, understand the trade-offs involved, and gain practical skills in analyzing and interpreting financial information. The course lays the groundwork for advanced study in finance and prepares students for careers in corporate finance, banking, consulting, and related fields.
Recommended Textbook
Corporate Finance A Focused Approach 5th Edition by Michael C. Ehrhardt
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1391 Verified Questions
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Page 2
Chapter 1: An overview of financial management and the financial environment
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Sample Questions
Q1) With which of the following statements would most people in business agree?
A) The short-run profits of a corporation will almost always increase if the firm takes actions the government has determined are in the nation's best interests.
B) Government agencies and firms almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees.
C) Although people's moral characters are probably developed before they get into a business school, it is still useful for business schools to cover ethics, including giving students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation.
D) Developing a formal set of rules defining ethical and unethical behavior is not useful for a large corporation.Such rules generally can't be applied in many specific instances, so it is better to deal with ethical issues on a case-by-case basis.
E) Because of the courage it takes to blow the whistle, "whistle blowers" are generally promoted more rapidly than other employees.
Answer: C
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3
Chapter 2: Financial statements, cash flow, and taxes
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Sample Questions
Q1) Which of the following would be most likely to occur in the year after Congress, in an effort to increase tax revenue, passed legislation that forced companies to depreciate equipment over longer lives? Assume that sales, other operating costs, and tax rates are not affected, and assume that the same depreciation method is used for tax and stockholder reporting purposes.
A) Companies' reported net incomes would decline.
B) Companies' net operating profits after taxes (NOPAT)would decline.
C) Companies' physical stocks of fixed assets would increase.
D) Companies' net cash flows would increase.
E) Companies' cash positions would decline.
Answer: E
Q2) Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the values at which these assets are carried on the books.
A)True
B)False
Answer: True
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Chapter 3: Analysis of financial statements
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Sample Questions
Q1) Ziebart Corp.'s EBITDA last year was $390, 000 ( = EBIT + depreciation + amortization), its interest charges were $9, 500, it had to repay $26, 000 of long-term debt, and it had to make a payment of $17, 400 under a long-term lease.The firm had no amortization charges.What was the EBITDA coverage ratio?
A) 7.32
B) 7.70
C) 8.09
D) 8.49
E) 8.92
Answer: B
Q2) Since the ROA measures the firm's effective utilization of assets (without considering how these assets are financed), two firms with the same EBIT must have the same ROA. A)True
B)False
Answer: False
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Chapter 4: Time value of money
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Sample Questions
Q1) You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would lower the calculated value of the investment?
A) The discount rate decreases.
B) The cash flows are in the form of a deferred annuity, and they total to $100, 000.You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20, 000 rather than for $10, 000.
C) The discount rate increases.
D) The riskiness of the investment's cash flows decreases.
E) The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.
Q2) If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by multiplying the periodic rate by the number of periods per year. A)True B)False
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Chapter 5: Bonds, bond valuation, and interest rates
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Sample Questions
Q1) Under normal conditions, which of the following would be most likely to increase the coupon rate required to enable a bond to be issued at par?
A) Adding a call provision.
B) The rating agencies change the bond's rating from Baa to Aaa.
C) Making the bond a first mortgage bond rather than a debenture.
D) Adding a sinking fund.
E) Adding additional restrictive covenants that limit management's actions.
Q2) Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%.Each bond has face value of $1, 000 and makes semiannual interest payments.If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?
A) $891.00
B) $913.27
C) $936.10
D) $959.51
E) $983.49
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Chapter 6: Risk and return
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Sample Questions
Q1) Stock A has an expected return of 12%, a beta of 1.2, and a standard deviation of 20%.Stock B also has a beta of 1.2, but its expected return is 10% and its standard deviation is 15%.Portfolio AB has $300, 000 invested in Stock A and $100, 000 invested in Stock B.The correlation between the two stocks' returns is zero (that is, rA, B = 0).Which of the following statements is CORRECT?
A) The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is overvalued.
B) The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is undervalued.
C) Portfolio AB's expected return is 11.0%.
D) Portfolio AB's beta is less than 1.2.
E) Portfolio AB's standard deviation is 17.5%.
Q2) A stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio.
A)True
B)False
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Chapter 7: Valuation of stocks and corporations
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Sample Questions
Q1) Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return.Which of the following statements is CORRECT?
A) If one stock has a higher dividend yield, it must also have a lower dividend growth rate.
B) If one stock has a higher dividend yield, it must also have a higher dividend growth rate.
C) The two stocks must have the same dividend growth rate.
D) The two stocks must have the same dividend yield.
E) The two stocks must have the same dividend per share.
Q2) If a firm's expected growth rate increased then its required rate of return would A) decrease.
B) fluctuate less than before.
C) fluctuate more than before.
D) possibly increase, possibly decrease, or possibly remain constant.
E) increase.
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9
Chapter 8: Financial options and applications in corporate finance
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Sample Questions
Q1) Suppose you believe that Basso Inc.'s stock price is going to increase from its current level of $22.50 sometime during the next 5 months.For $3.10 you can buy a 5-month call option giving you the right to buy 1 share at a price of $25 per share.If you buy this option for $3.10 and Basso's stock price actually rises to $45, what would your pre-tax net profit be?
A) -$3.10
B) $16.90
C) $17.75
D) $22.50
E) $25.60
Q2) The current price of a stock is $50, the annual risk-free rate is 6%, and a 1-year call option with a strike price of $55 sells for $7.20.What is the value of a put option, assuming the same strike price and expiration date as for the call option?
A) $7.33
B) $7.71
C) $8.12
D) $8.55
E) $9.00
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Chapter 9: The cost of capital
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Sample Questions
Q1) The cost of debt is equal to one minus the marginal tax rate multiplied by the average coupon rate on all outstanding debt.
A)True
B)False
Q2) For capital budgeting and cost of capital purposes, the firm should assume that each dollar of capital is obtained in accordance with its target capital structure, which for many firms means partly as debt, partly as preferred stock, and partly common equity.
A)True
B)False
Q3) The text identifies three methods for estimating the cost of common stock from reinvested earnings (not newly issued stock): the CAPM method, the DCF method, and the bond-yield-plus-risk-premium method.However, only the CAPM method always provides an accurate and reliable estimate.
A)True
B)False
Q4) "Capital" is sometimes defined as funds supplied to a firm by investors.
A)True
B)False
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Chapter 10: The basics of capital budgeting: evaluating cash flows
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Sample Questions
Q1) The NPV and IRR methods, when used to evaluate two independent and equally risky projects, will lead to different accept/reject decisions and thus capital budgets if the projects' IRRs are greater than their cost of capital.
A)True
B)False
Q2) The phenomenon called "multiple internal rates of return" arises when two or more mutually exclusive projects that have different lives are compared to one another.
A)True
B)False
Q3) Other things held constant, an increase in the cost of capital will result in a decrease in a project's IRR.
A)True
B)False
Q4) The regular payback method is deficient in that it does not take account of cash flows beyond the payback period.The discounted payback method corrects this fault.
A)True
B)False
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Chapter 11: Cash flow estimation and risk analysis
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Sample Questions
Q1) If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land.
A)True
B)False
Q2) Accelerated depreciation has an advantage for profitable firms in that it moves some cash flows forward, thus increasing their present value.On the other hand, using accelerated depreciation generally lowers the reported current year's profits because of the higher depreciation expenses.However, the reported profits problem can be solved by using different depreciation methods for tax and stockholder reporting purposes.
A)True
B)False
Q3) The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return.
A)True
B)False
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Chapter 12: Corporate valuation and financial planning
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Sample Questions
Q1) The fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.
A)True
B)False
Q2) As a firm's sales grow, its current assets also tend to increase.For instance, as sales increase, the firm's inventories generally increase, and purchases of inventories result in more accounts payable.Thus, spontaneous liabilities that reduce AFN arise from transactions brought on by sales increases.
A)True
B)False
Q3) If a firm's capital intensity ratio (A?*/S?)decreases as sales increase, use of the AFN formula is likely to understate the amount of additional funds required, other things held constant.
A)True
B)False
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14
Chapter 13: Agency conflicts and corporate governance
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Sample Questions
Q1) Which of the following is NOT normally regarded as being a barrier to hostile takeovers?
A) Targeted share repurchases.
B) Shareholder rights provisions.
C) Restricted voting rights.
D) Poison pills.
E) Abnormally high executive compensation.
Q2) Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
A) To enable the firm to borrow at a below-market interest rate.
B) To make it easier to grant stock options to employees.
C) To help prevent a hostile takeover.
D) To help retain valued employees.
E) To increase worker productivity.
Q3) ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent hostile takeovers.
A)True
B)False
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15
Chapter 14: Distributions to shareholders: dividends and repurchases
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Sample Questions
Q1) Which of the following statements is correct?
A) One nice feature of dividend reinvestment plans (DRIPs)is that they reduce the taxes investors would have to pay if they received cash dividends.
B) Empirical research indicates that, in general, companies send a negative signal to the marketplace when they announce an increase in the dividend, and as a result share prices fall when dividend increases are announced.The reason is that investors interpret the increase as a signal that the firm has relatively few good investment opportunities.
C) If a company wants to raise new equity capital rather steadily over time, a new stock dividend reinvestment plan would make sense.However, if the firm does not want or need new equity, then an open market purchase dividend reinvestment plan would probably make more sense.
D) Dividend reinvestment plans have not caught on in most industries, and today about 99% of all companies with DRIPs are utilities.
E) Under the tax laws as they existed in 2008, a dollar received for repurchased stock must be taxed at the same rate as a dollar received as dividends.
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Page 16
Chapter 15: Capital structure decisions
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Sample Questions
Q1) The firm's target capital structure should be consistent with which of the following statements?
A) Minimize the cost of debt (rd).
B) Obtain the highest possible bond rating.
C) Minimize the cost of equity (rs).
D) Minimize the weighted average cost of capital (WACC).
E) Maximize the earnings per share (EPS).
Q2) It is possible that two firms could have identical financial and operating leverage, yet have different degrees of risk as measured by the variability of EPS.
A)True
B)False
Q3) Based on the information below for Benson Corporation, what is the optimal capital structure?
A) Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90.
B) Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20.
C) Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40.
D) Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00.
E) Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50.
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Chapter 16: Supply chains and working capital management
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Sample Questions
Q1) Which of the following actions would be likely to shorten the cash conversion cycle?
A) Change the credit terms offered to customers from 3/10 net 30 to 1/10 net 50.
B) Begin to take discounts on inventory purchases; we buy on terms of 2/10 net 30.
C) Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days.
D) Change the credit terms offered to customers from 2/10 net 30 to 1/10 net 60.
E) Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days.
Q2) If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.
A)True
B)False
Q3) Net working capital is defined as current assets divided by current liabilities.
A)True
B)False
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Page 18
Chapter 17: Multinational financial management
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Q1) If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market, then the forward currency is said to be selling at a discount to the spot rate.
A)True
B)False
Q2) Suppose a foreign investor who holds tax-exempt Eurobonds paying 9% is considering investing in an equivalent-risk domestic bond in a country with a 28% withholding tax on interest paid to foreigners.If 9% after-tax is the investor's required return, what before-tax rate would the domestic bond need to pay to provide the required after-tax return?
A) 9.00%
B) 10.20%
C) 11.28%
D) 12.50%
E) 13.57%
Q3) The interest rate paid on Eurodollar deposits depends on the particular bank's lending rate and on rates available on U.S.money market instruments.
A)True
B)False
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Page 19