Introduction to Corporate Finance Test Preparation
Course Introduction
Introduction to Corporate Finance provides students with a foundational understanding of the financial decisions facing modern corporations and the analytical tools used to make those decisions. The course covers key concepts such as time value of money, risk and return, valuation of stocks and bonds, capital budgeting, cost of capital, and the impact of financial markets on corporate behavior. Students will also explore how firms raise and allocate capital, manage financial resources, and create value for shareholders, with real-world examples and case studies providing practical insights into the discipline.
Recommended Textbook
Fundamentals of Corporate Finance 5th Canadian Edition by Richard A Brealey
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26 Chapters
3182 Verified Questions
3182 Flashcards
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Page 2
Chapter 1: Goals and Governance of the Firm
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Sample Questions
Q1) Unlimited liability is faced by the owners of:
A)Corporations.
B)Partnerships and corporations.
C)Sole proprietorships and partnerships.
D)All forms of business organization.
Answer: C
Q2) A corporation is characterized by:
A)A legal entity unto itself (may sue or be sued, engage in contracts, acquire property).
B)Non-profitable.
C)Sufficient funds to fulfill their needs.
D)Simplicity of decision making.
Answer: A
Q3) Ethical decision making by management has a payoff for shareholders in terms of:
A)Improved capital structure.
B)Enhanced reputation value.
C)Increased managerial benefits.
D)Higher dividend payments.
Answer: B
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3
Chapter 2: Financial Markets and Institutions
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Sample Questions
Q1) An IPO is not the only occasion on which newly issued stock is sold to the public.
A)True
B)False
Answer: True
Q2) What is meant by over-the-counter trading?
Answer: "Over-the-counter" refers to trading that does not take place on a centralized exchange such as the New York Stock Exchange.Trading of securities on NASDAQ is over-the-counter, because NASDAQ is a network of security dealers linked by computers.Although some corporate bonds are traded on the New York Stock Exchange, most corporate bonds are traded over-the-counter, as are all U.S.Treasury securities.Foreign exchange trading is also over-the-counter.
Q3) Liquidity is important to a mutual fund because:
A)A fund that is more liquid will attract more investors.
B)The fund's shareholders may want to redeem their shares at any time.
C)The fund's managers need liquidity to trade actively.
D)The fund needs to distribute payouts to its shareholders and managers periodically.
Answer: B
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Page 4
Chapter 3: Accounting and Finance
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Sample Questions
Q1) Accumulated Depreciation is used to reduce what type of account on the balance sheet?
A)Current Asset
B)Capital Assets or Fixed Assets
C)Liability
D)Owners Equity
Answer: B
Q2) CumChan Corporation had operating income (EBIT) of $2,500,000 in 2005, depreciation expenses of $500,000, and dividends paid of $400,000.What is CumChan's operating cash flow (EBITDA) for 2005?
A)$3,000,000
B)$6,000,000
C)300 percent
D)$3,300,000
Answer: A
Q3) The payment of interest expense is considered cash flow from financing on the statement of cash flows.
A)True
B)False Answer: False
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Chapter 4: Measuring Corporate Performance
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Sample Questions
Q1) The use of debt in the firm's capital structure will increase ROE if the firm:
A)Has more debt than equity
B)Pays less in taxes than in interest
C)Earns a higher return than the rate paid on debt
D)Has a times interest earned greater than 1.0
Q2) What effect on the growth rate of earnings can be accomplished by decreasing the dividend-payout ratio from 70% to 40% if the firm has an ROE of 20%?
A)The growth rate can increase from 6% to 10.5%.
B)The growth rate can increase from 6% to 12%.
C)The growth rate can increase from 8% to 14%.
D)The growth rate can increase from 11% to 14%. current growth rate in earnings = plowback ratio x ROE = .3 x .2 = 6%
Q3) If a firm's cash coverage ratio is greater than its times interest earned ratio, then:
A)The firm's assets are not fully depreciated
B)The firm has no lease obligations
C)The firm has very little long-term debt
D)The firm has a high degree of liquidity
Q4) What are some potential pitfalls of ratio analysis based on accounting data?
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Page 6
Chapter 5: The Time Value of Money
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Sample Questions
Q1) With $1.5 million in an account expected to earn 8 percent annually over the retiree's 30 years of life expectancy, what annual annuity can be withdrawn, beginning today?
A)$112,150
B)$120,000
C)$123,371
D)$133,241 $1,500,000 = pmt
Q2) What will be the monthly payment on a home mortgage of $75,000 at 12 percent interest, to be amortized over 30 years?
A)$771.46
B)$775.90
C)$1,028.61
D)$1,034.53 75,000 = PMT
Q3) $50,000 is borrowed, to be repaid in three equal, annual payments with 10% interest.Approximately how much principal is amortized with the first payment?
A)$201.06
B)$500.00
C)$1,510.57
D)$2,010.57
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7
Chapter 6: Valuing Bonds
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Sample Questions
Q1) Which one of the following will not happen for an investor who owns a Canada bond during a period of inflation?
A)The coupon payment will increase in nominal terms
B)The maturity value will remain constant in nominal terms
C)The investor's capital gain will rise
D)The bond price will fall
Q2) Suppose the prevailing market rate is 8 percent.A bond with a coupon rate of 6 percent will be sold at:
A)A premium
B)A discount
C)Par
D)$1,000
Q3) Which of the following is likely to be correct for a CCC-rated bond, compared to a BBB-rated bond?
A)The CCC bond will sell for a higher price
B)The CCC bond will sell for a lower price
C)The CCC bond will offer a higher promised yield to maturity
D)The CCC bond will offer a lower promised yield to maturity.
Q4) Why should many investors be cautious when relying on yield to maturity?
Q5) Why do bonds exhibit interest rate risk?
Page 8
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Chapter 7: Valuing Stocks
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Sample Questions
Q1) If next year's dividend is forecast to be $5.00, the constant growth rate is 4 percent, and the discount rate is 16 percent, then the current stock price should be:
A)$31.25
B)$40.00
C)$41.67
D)$43.33 P<sub>o</sub> =
Q2) Which of the following is inconsistent with a firm that sells for very near book value?
A)Low current earning power
B)No intangible assets
C)High future earning power
D)Low, unstable dividend payment
Q3) In the calculation of rates of return on common stock, dividends are _______ and capital gains are ______.
A)Guaranteed; not guaranteed
B)Guaranteed; guaranteed
C)Not guaranteed; not guaranteed
D)Not guaranteed; guaranteed
Q4) How does competition among investors lead to efficient markets?
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9
Chapter 8: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) As the opportunity cost of capital increases, the net present value of a project increases.
A)True
B)False
Q2) What is the maximum that should be invested in a project at time zero if the inflows are estimated at $40,000 annually for three years, and the cost of capital is 9 percent?
A)$101,251.79
B)$109,200.00
C)$117,871.97
D)$130,800.00 0 = $40,000
Q3) A Project's payback period is the length of time necessary to generate an NPV of zero.
A)True B)False
Q4) The use of NPV as an investment criterion is said to be more reliable than using IRR.Discuss potential problems with the use of IRR, and how to reconcile the two methods' results.
Q5) Why doesn't the payback rule always make shareholders better off?
Q6) Discuss three reasons why a firm may want to impose soft capital rationing.
Page 10
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Chapter 9: Using Discounted Cash-Flow Analysis to Make Investment Decisions
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Sample Questions
Q1) How should the cash flows of a proposed new project be calculated?
Q2) A bank can purchase an ATM (automated teller machine) for $110,000 that has an estimated life of six years.Maintenance over that period will begin at $2,500 annually and increase at a 10 percent rate.If the ATM is purchased the bank will not be required to hire one additional (human) teller.Including fringe benefits, the teller costs $18,000 per year, and this amount is expected to increase 5 percent annually.If the bank's cost of capital is 10 percent, which alternative should be selected?
Q3) If a project permits a reduction in the level of working capital, this reduction is assumed to increase cash flows.
A)True
B)False
Q4) Which of the following changes would be likely to increase the NPV of a project?
A)Increasing the firm's opportunity cost of capital
B)Permitting a net decrease in working capital
C)Spreading the total cash inflows over a longer interval
D)Increasing the project's estimated expenses
Q5) Sunk costs remain the same whether or not you accept the project.
A)True
B)False
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Chapter 10: Project Analysis
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Sample Questions
Q1) What is the break-even level of revenues for a firm with $6 million in sales, variable costs of $3.9 million, fixed costs of $1.2 million, and depreciation of $1 million?
A)$3,428,571
B)$6,100,000
C)$6,285,700
D)$6,557,377 Variable costs =
Q2) How are sensitivity, scenario, and break-even analysis used to see the effect of an error in forecasts on project profitability? Why is an overestimate of sales more serious for projects with high operating leverage?
Q3) Forecasting inconsistencies can be minimized by:
A)Allowing managers to establish their own forecasts
B)Establishing a standardized economic forecast to be used year in, year out
C)Generating current economic forecasts that are used throughout the firm
D)Extending the current forecast into the future
Q4) Discuss the basic difference between an accounting break-even point analysis and an NPV break-even analysis.Which would you consider more reliable? Which would you consider more common? Why?
Q5) Why is managerial flexibility important in capital budgeting?
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Chapter 11: Introduction to Risk, Return, and the Opportunity
Cost of Capital
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Sample Questions
Q1) A firm is said to be countercyclical if its returns:
A)Continue to decrease, year after year
B)Continue to increase, year after year
C)Are better when most firms do poorly
D)Are negative in real terms
Q2) The variance of an investment's returns is a measure of the:
A)Volatility of the rates of return
B)Probability of a negative return
C)Historic return over long periods
D)Average value of the investment
Q3) Which of the following companies might you expect to be exposed to less macro risk?
A)A large producer of flour
B)A regional airline
C)A major commercial bank
D)An electric utility
Q4) Justify the historic ranking of returns for the following three categories of investment, listed from highest to lowest return: Common stocks, long-term Treasury bonds, and Treasury bills.
Q5) Discuss the statement, "Only market risk matters to a diversified investor."
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Chapter 12: Risk, Return, and Capital Budgeting
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Sample Questions
Q1) As a project's Beta increases, the project's opportunity cost of capital increases.
A)True
B)False
Q2) A major benefit of investing in mutual funds is:
A)Reducing the Beta of the investment portfolio
B)Increasing the Beta of the investment portfolio
C)Low cost reduction of exposure to unique risks
D)The elimination of market risk
Q3) If the slope of the line measuring a stock's historic returns against the market's historic returns is positive, then the stock:
A)Has a Beta greater than 1.0
B)Has no unique risk
C)Has a positive Beta
D)Plots above the security market line
Q4) The cost of capital for a project depends on the risk of the company.
A)True
B)False
Q5) How can a manager calculate the opportunity cost of capital for a project?
Q6) How can you measure and interpret the market risk, or Beta, of a security?
Page 14
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Chapter 13: The Weighted-Average Cost of Capital and Company Valuation
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Sample Questions
Q1) The weighted-average cost of capital is the return the company needs to earn after tax in order to satisfy all its security holders.
A)True
B)False
Q2) What is a firm's weighted-average cost of capital if the stock has a beta of 1.45, Treasury bills yield 5%, and the market portfolio offers an expected return of 14%? In addition to equity, the firm finances 35% of its assets with debt that has a yield to maturity of 9%.The firm is in the 35% marginal tax bracket.
Q3) Which of the following should be expected to occur when a firm significantly increases its proportion of debt financing?
A)The required return on debt will decrease
B)The required return on equity will decrease
C)The company cost of capital will increase
D)The company cost of capital will remain unchanged
Q4) To the company, the cost of interest payments on bonds (issued debt) is reduced by the amount of tax savings.
A)True
B)False
Page 15
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Chapter 14: Introduction to Corporate Financing and Governance
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Sample Questions
Q1) Which of the following statements is correct concerning stock dividends?
A)Common stock dividends cannot be paid if preferred stock dividends are in arrears
B)Preferred stock dividends cannot be paid if common stock dividends are in arrears
C)Neither common nor preferred dividends can be paid if accrued interest is in arrears
D)No stock dividends can be paid if the firm has no cash
Q2) Show the capital accounts at the end of the first year of operation for a firm that, at the beginning of the year, issued 50,000 shares of $1.50 par value common stock for $15 per share, repurchased 5,000 shares during the year at $20 per share, and paid out 40 % of earnings as dividends with a 50 cent per share dividend.
Q3) ABC Corporation has fallen upon hard times and dividends on their non-cumulative, preferred stock have not been paid for three years.Which of the following is true?
A)Common shareholders must now receive three years' worth of dividends
B)Preferred shareholders must now receive three years' worth of dividends
C)The corporation must fold if preferred shareholders are not paid
D)Common shareholders have not received dividends for three years
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Page 16
Chapter 15: Venture Capital, Ipos, and Seasoned Offerings
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Sample Questions
Q1) The most likely reason that underpricing of new issues occurs more frequently than overpricing is the:
A)Underwriters' desire to reduce the risk of a firm commitment
B)Demand for a new issue is typically too high
C)Underwriters earn low rates of return
D)Issuing firms demand that equity be underpriced
Q2) When underwriters are unsure of the demand for a new offering, they:
A)Reduce their spread
B)Undertake the issue on a firm commitment basis
C)Undertake the issue on a best efforts basis
D)Provide shelf registration for the issue
Q3) Prospective investors are advised of a stock's potential risks by the:
A)underwriter
B)Underpricing laws
C)Prospectus
D)Initial public offering
Q4) What are the net proceeds, gross proceeds and underwriter's spread? How does each affect the funds received by a public firm when debt or equity securities are issued?
Q5) What is the expected stock price after the rights are issued?
Page 17
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Chapter 16: Debt Policy
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Sample
Questions
Q1) What is the change in value for a firm with $1 million in equity, $1 million in permanent debt at a 10% interest rate, and a 35% tax rate if MM I is modified to recognize corporate taxes?
A)Value increases by $35,000
B)Value increases by $100,000
C)Value increases by $350,000
D)Value increases by $700,000 PV of interest tax shield = T<sub>c</sub> x D = )35 x $1,000,000 = $350,000
Value of levered firm = value of all-equity financed + present value of tax shield
Q2) According to MM, an increase in expected earnings per share can leave the share price unchanged if the:
A)Firm's operating risk decreases
B)Number of shares is decreased
C)Required return on equity increases
D)Firm has no financial leverage
Q3) A firm's capital structure refers to the maturity of debt it employs.
Q4) What is the goal of the capital structure decision? What is the financial manager trying to do?
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Chapter 17: Payout Policy
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Sample Questions
Q1) Which of the following statements is not true of a financial lease?
A)It can be cancelled after the equipment is no longer needed
B)It is a source of financing
C)It is binding obligation for the lessee
D)It lessee has the asset for most of its economic life
Q2) A sale and leaseback arrangement transfers ownership from a user to a lessor who then leases the asset back to the former owner.
A)True
B)False
Q3) Generally, equivalent annual cost analyses show that the longer you need an asset, the more likely it is that it is cheaper to buy rather than lease an asset.
A)True
B)False
Q4) Which rate should you use to discount the leasing cash flows in an NPV analysis?
A)WACC
B)Market interest rate
C)Cost of debt
D)Internal rate of return
Q5) Provide a critique of two weak or dubious reasons for leasing.
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Chapter 18: Long-Term Financial Planning
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Sample Questions
Q1) How much should an investor pay now for a stock expected to sell for $30 one year from now if: the stock offers a $2 dividend, dividends are taxed at 40%, capital gains are taxed at 20%, and a 15% after-tax return is expected on the investment?
A)$25.04
B)$26.53
C)$27.09
D)$27.50 .15 =
Q2) A firm's dividend policy involves a trade-off between:
A)Growth versus no growth in investment
B)High share price versus low share price
C)Internal versus external financing of investment
D)A large asset base and a small asset base
Q3) Xian Inc.has 7,000,000 shares outstanding.If the company declares a 3 for 2 reverse stock split, determine the number of shares outstanding afterwards.
A)10,050,000
B)10,080,000
C)10,200,000
D)10,220,000
Q4) Discuss the concept of dividend "smoothing."
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Chapter 19: Short-Term Financial Planning
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Sample Questions
Q1) A potential downfall of using dividends as the plug item is that:
A)It may give shareholders mixed signals
B)Dividends are constant within a planning horizon
C)The firm may have to borrow cash to pay dividends
D)Shareholders may receive an excessive return
Q2) When a firm is said to have no spare capacity, it:
A)Has no need for new employees
B)Currently has no inventory available for sale
C)Must issue new equity to grow
D)Must increase fixed assets to increase sales
Q3) Which of the following is not typically included among the three major requirements for effective planning?
A)Financing the plan
B)Selecting the best plan
C)Observing the plan unfold
D)Forecasting
Q4) Financial planning models routinely adjust for present value and risk.
A)True
B)False
Q5) Why do current or fixed assets often not vary proportionately with sales?
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Chapter 20: Working Capital Management
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Sample Questions
Q1) A reduction in inventory levels from year-end to year-end would be considered a source of cash.
A)True
B)False
Q2) Which of the following would not be included among the costs of carrying inventory?
A)Obsolescence
B)Opportunity cost of capital
C)Raw material cost
D)Risk of pilferage
Q3) An increase in short-term interest rates will increase the carrying costs of the firm.
A)True
B)False
Q4) Company that pays $5,000 previously owed to one of its suppliers will see a $5,000 decrease in cash.
A)True
B)False
Q5) How does long-term financing policy affect short-term financing requirements?
Q6) Discuss the usefulness of the concept of "maturities matching" in finance.
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Chapter 21: Mergers, Acquisitions, and Corporate Control
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Q1) How much time must be saved to justify a lock-box system that processes 350 cheques per day at an average amount of $400 per cheque if the system will cost $20,000 annually and interest rates average 8 percent?
A)0.56 days
B)1.79 days
C)2.14 days
D)7.00 days break-even point for system = $20,000/.08 = $250,000 Thus, the system must reduce collection float by $250,000. 300 cheques x $400 per cheque x days saved = $250,000
Q2) A firm's safety stock represents the:
A)Inventory having passed quality-control inspection
B)Largest order size that retains minimum order costs
C)Inventory of most frequently ordered items
D)Reorder point that considers lags and uncertainties
Q3) Which of the following is true regarding the cash management model in Figure 20.5?
A)The return point is in the middle of the spread
B)The model minimizes the number of transactions
C)The model assumes cash flows to be predictable
D)The return point minimizes the sum of interest costs and transaction costs
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Page 23
Chapter 22: International Financial Management
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Sample Questions
Q1) Which of the following credit agreements provides the maximum protection to the seller?
A)Banker's acceptance
B)Conditional sale
C)Open account
D)Commercial draft
Q2) A retailer buys Christmas merchandize from the manufacturer on Sep.1.The manufacturer postdates the invoice to Dec.31, and the credit terms of the sale are 2/10, net 30.When is the payment due?
A)Jan.10
B)Jan.30
C)Feb.10
D)Sep.30
Q3) Which of the following would not be a customary source of credit information on customers?
A)Dun & Bradstreet
B)Canada Customs and Revenue Agency
C)Credit Bureau
D)Customer's bank
Q4) When does it make sense to ask customers for formal IOUs?
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Chapter 23: Options
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Q1) Who is typically the primary beneficiary(ies) in a merger?
Q2) Which of the following is least likely to provide a motivation for vertical integration?
A)A continuous source of raw materials
B)A desire to spread fixed costs across more output
C)Access to an efficient distribution channel
D)Acquisition of an established customer base
Q3) Firms A and B are each worth $50 million, but generate a $20 million gain when merged.If the cost of the merger was $5 million, how much did Firm A pay for Firm B?
A)$50 million
B)$55 million
C)$60 million
D)$65 million cost = cash - PV<sub>B</sub><sub>
</sub>$5 million = cash - $50 million
Q4) One of the reasons why proxy fights are rarely successful is that:
A)Management is always viewed as performing their jobs well
B)Management can use corporate resources to defend against the fight
C)Mergers are a cheaper form of changing management
D)Shareholders are unconcerned with corporate management
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Page 25
Chapter 24: Risk Management
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Q1) One of the drawbacks of using forward contracts to hedge foreign-exchange risk is that the:
A)Transaction costs in the forward market are high
B)Forward rates are always lower than spot rates
C)Hedged currency could appreciate during the period
D)Hedged currency could depreciate during the period
Q2) You have decided to hedge your exchange-rate risk in your U.S.-based firm by contracting forward to buy 500,000 Swiss Francs for delivery in one year.The current exchange rate is Sf1.6/$.The forward rate is Sf1.7/$(U.S.).How much better (worse) off are you if you don't buy the forward contract and instead pay the spot rate in one year if it turns out to be Sf1.65/$?
A)($14,245)
B)($8,912)
C)$8,912
D)$27,472 current Dollar commitment =
Q3) Indirect quotes describe units of domestic currency bought by a unit of foreign unit.
A)True
B)False
Q4) Explain the international Fisher Effect.
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Chapter 25: Conclusion
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Q1) The conversion ratio for a convertible bond equals the:
A)Ratio of bond value to stock price at conversion
B)Number of bonds necessary to convert into one share of stock
C)Number of shares of stock that can be exchanged for one bond
D)Floor value beneath which the bond price cannot fall
Q2) You can make a deposit with a bank that does not pay interest if the market index rises but which makes an increasingly large payment as the market index falls.How should the bank protect itself against the risk of offering this deposit?
Q3) The floor of a convertible bond will be the value of the underlying bond.
A)True
B)False
Q4) What is a callable bond and how is its value determined?
Q5) A homeowner can refinance the mortgage loan on the house at a lower rate when the interest rates go down.The right to refinance at a lower rate is a(n):
A)Put option
B)Call option
C)Option to expand
D)It is not an option
Q6) Which graph represents a selling a call option?
Page 27
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Chapter 26: What We Do and Do Not Know About Finance
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122 Verified Questions
122 Flashcards
Source URL: https://quizplus.com/quiz/49980
Sample Questions
Q1) The effect of marking a futures contract to market is similar to:
A)Requiring daily payments from the contract buyer
B)Requiring daily payments from the contract seller
C)Closing the current position and opening a new position daily
D)Imposing a daily fee on both buyers and sellers
Q2) List the advantages and disadvantages of holding futures rather than the underlying commodity.
Q3) Unlike options, a futures contract binds the buyer to buy the commodity at a fixed price.
A)True
B)False
Q4) An oil producer would sell, rather than buy, crude oil futures for protection from falling prices.
A)True
B)False
Q5) Speculators are a necessary component of well-functioning futures markets.
A)True
B)False
Q6) What is the basic difference between hedgers and speculators?
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Q7) How can companies use swaps to change the risk of securities they have issued?