Valuation and Financial Strategy Exam Bank
Course Introduction
This course explores the principles and practices of valuing businesses, securities, and investment projects, with an emphasis on their application to financial decision-making and strategic planning. Students will learn various valuation techniques, including discounted cash flow (DCF), comparable company analysis, and precedent transactions, as well as the critical role valuation plays in merger and acquisition decisions, capital budgeting, and corporate restructuring. The course also examines how financial strategy is formulated to enhance firm value, manage risk, and align with long-term organizational objectives, integrating real-world case studies and financial modeling exercises.
Recommended Textbook
Corporate Finance A Focused Approach 5th Edition by Michael C. Ehrhardt
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Chapter 1: An overview of financial management and the financial environment
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than partners.
B) There is no good reason to expect a firm's bondholders and stockholders to react differently to the types of new asset investments a firm makes.
C) Bondholders are generally more willing than stockholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns.
D) Stockholders are generally more willing than bondholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns.
E) Relative to sole proprietorships, corporations generally face fewer regulations, which makes raising capital easier for corporations.
Answer: D
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3
Chapter 2: Financial statements, cash flow, and taxes
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Sample Questions
Q1) Last year Tiemann Technologies reported $10, 500 of sales, $6, 250 of operating costs other than depreciation, and $1, 300 of depreciation.The company had no amortization charges, it had $5, 000 of bonds that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%.This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $750.By how much will net after-tax income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes.
A) -463.13
B) -487.50
C) -511.88
D) -537.47
E) -564.34
Answer: B
Q2) The interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability.
A)True
B)False
Answer: False
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Chapter 3: Analysis of financial statements
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) An increase in a firm's debt ratio, with no changes in its sales or operating costs, could be expected to lower the profit margin.
B) The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio.
C) If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE.
D) An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio.
E) An increase in the DSO, other things held constant, could be expected to increase the ROE.
Answer: A
Q2) A decline in a firm's inventory turnover ratio suggests that it is managing its inventory more efficiently and also that its liquidity position is improving, i.e., it is becoming more liquid.
A)True
B)False
Answer: False
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Chapter 4: Time value of money
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Sample Questions
Q1) You are considering investing in a European bank account that pays a nominal annual rate of 18%, compounded monthly.If you invest $5, 000 at the beginning of each month, how many months would it take for your account to grow to $250, 000? Round fractional months up.
A) 23
B) 27
C) 32
D) 38
E) 44
Q2) American Express and other credit card issuers must by law print the Annual Percentage Rate (APR)on their monthly statements.If the APR is stated to be 18.00%, with interest paid monthly, what is the card's EFF%?
A) 18.58%
B) 19.56%
C) 20.54%
D) 21.57%
E) 22.65%
Q3) A time line is not meaningful unless all cash flows occur annually.
A)True
B)False
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Chapter 5: Bonds, bond valuation, and interest rates
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.
B) If interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond.
C) If a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a premium.
D) If a coupon bond is selling at a premium, its current yield equals its yield to maturity.
E) If a coupon bond is selling at par, its current yield equals its yield to maturity.
Q2) You have funds that you want to invest in bonds, and you just noticed in the financial pages of the local newspaper that you can buy a $1, 000 par value bond for $800.The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1, 000 par value.You should buy the bond if your required return on bonds with this risk is 12%.
A)True
B)False
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Chapter 6: Risk and return
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Q1) Suppose that Federal Reserve actions have caused an increase in the risk-free rate, rRF.Meanwhile, investors are afraid of a recession, so the market risk premium, (rM - rRF), has increased.Under these conditions, with other things held constant, which of the following statements is most correct?
A) The required return on all stocks would increase, but the increase would be greatest for stocks with betas of less than 1.0.
B) Stocks' required returns would change, but so would expected returns, and the result would be no change in stocks' prices.
C) The prices of all stocks would decline, but the decline would be greatest for high-beta stocks.
D) The prices of all stocks would increase, but the increase would be greatest for high-beta stocks.
E) The required return on all stocks would increase by the same amount.
Q2) In portfolio analysis, we often use ex post (historical)returns and standard deviations, despite the fact that we are really interested in ex ante (future)data.
A)True B)False
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Chapter 7: Valuation of stocks and corporations
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Sample Questions
Q1) When a new issue of stock is brought to market, it is the marginal investor who determines the price at which the stock will trade.
A)True
B)False
Q2) If D? = $1.25, g (which is constant)= 4.7%, and P? = $26.00, what is the stock's expected dividend yield for the coming year?
A) 4.12%
B) 4.34%
C) 4.57%
D) 4.81%
E) 5.05%
Q3) The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.
A)True
B)False
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Chapter 8: Financial options and applications in corporate finance
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Q1) Which of the following statements is most correct, holding other things constant, for XYZ Corporation's traded call options?
A) The higher the strike price on XYZ's options, the higher the option's price will be.
B) Assuming the same strike price, an XYZ call option that expires in one month will sell at a higher price than one that expires in three months.
C) If XYZ's stock price stabilizes (becomes less volatile), then the price of its options will increase.
D) If XYZ pays a dividend, then its option holders will not receive a cash payment, but the strike price of the option will be reduced by the amount of the dividend.
E) The price of these call options is likely to rise if XYZ's stock price rises.
Q2) Because of the time value of money, the longer before an option expires, the less valuable the option will be, other things held constant.
A)True
B)False
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Chapter 9: The cost of capital
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Sample Questions
Q1) The cost of equity raised by retaining earnings can be less than, equal to, or greater than the cost of external equity raised by selling new issues of common stock, depending on tax rates, flotation costs, the attitude of investors, and other factors.
A)True
B)False
Q2) As the winner of a contest, you are now CFO for the day for Maguire Inc.and your day's job involves raising capital for expansion.Maguire's common stock currently sells for $45.00 per share, the company expects to earn $2.75 per share during the current year, its expected payout ratio is 70%, and its expected constant growth rate is 6.00%.New stock can be sold to the public at the current price, but a flotation cost of 8% would be incurred.By how much would the cost of new stock exceed the cost of common from reinvested earnings?
A) 0.09%
B) 0.19%
C) 0.37%
D) 0.56%
E) 0.84%
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Page 11
Chapter 10: The basics of capital budgeting: evaluating cash flows
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) One drawback of the regular payback is that this method does not take account of cash flows beyond the payback period.
B) If a project's payback is positive, then the project should be accepted because it must have a positive NPV.
C) The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.
D) One drawback of the discounted payback is that this method does not consider the time value of money, while the regular payback overcomes this drawback.
E) The shorter a project's payback period, the less desirable the project is normally considered to be by this criterion.
Q2) A firm should never accept a project if its acceptance would lead to an increase in the firm's cost of capital (its WACC).
A)True B)False
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Chapter 11: Cash flow estimation and risk analysis
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Q1) In cash flow estimation, the existence of externalities should be taken into account if those externalities have any effects on the firm's long-run cash flows.
A)True
B)False
Q2) Opportunity costs include those cash inflows that could be generated from assets the firm already owns if those assets are not used for the project being evaluated.
A)True
B)False
Q3) 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
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Chapter 12: Corporate valuation and financial planning
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Sample Questions
Q1) The minimum growth rate that a firm can achieve with no access to external capital is called the firm's sustainable growth rate.It can be calculated by using the AFN equation with AFN equal to zero and solving for g.
A)True
B)False
Q2) Marston, Inc.has developed a forecasting model to estimate its AFN for the upcoming year.All else being equal, which of the following factors is most likely to lead to an increase of the additional funds needed (AFN)?
A) A switch to a just-in-time inventory system and outsourcing production.
B) The company reduces its dividend payout ratio.
C) The company switches its materials purchases to a supplier that sells on terms of 1/5, net 90, from a supplier whose terms are 3/15, net 35.
D) The company discovers that it has excess capacity in its fixed assets.
E) A sharp increase in its forecasted sales.
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Chapter 13: Agency conflicts and corporate governance
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Q1) A poison pill is also known as a corporate restructuring.
A)True
B)False
Q2) The CEO of D'Amico Motors has been granted some stock options that have provisions similar to most other executive stock options.If D'Amico's stock underperforms the market, these options will necessarily be worthless.
A)True
B)False
Q3) 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.
Q4) 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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Chapter 14: Distributions to shareholders: dividends and repurchases
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Sample Questions
Q1) Last week, Weschler Paint Corp.completed a 3-for-1 stock split.Immediately prior to the split, its stock sold for $150 per share.The firm's total market value was unchanged by the split.Other things held constant, what is the best estimate of the stock's post-split price?
A) $50.00
B) $52.50
C) $55.13
D) $57.88
E) $60.78
Q2) Which of the following should not influence a firm's dividend policy decision?
A) A strong preference by most shareholders for current cash income versus capital gains.
B) Constraints imposed by the firm's bond indenture.
C) The fact that much of the firm's equipment has been leased rather than bought and owned.
D) The fact that Congress is considering changes in the tax law regarding the taxation of dividends versus capital gains.
E) The firm's ability to accelerate or delay investment projects.
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Chapter 15: Capital structure decisions
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Sample Questions
Q1) Two operationally similar companies, HD and LD, have identical amounts of assets, operating income (EBIT), tax rates, and business risk.Company HD, however, has a much higher debt ratio than LD.Company HD's basic earning power ratio (BEP)exceeds its cost of debt (rd).Which of the following statements is CORRECT?
A) Company HD has a higher times interest earned (TIE)ratio than Company LD.
B) Company HD has a higher return on equity (ROE)than Company LD, and its risk, as measured by the standard deviation of ROE, is also higher than LD's.
C) The two companies have the same ROE.
D) Company HD's ROE would be higher if it had no debt.
E) Company HD has a higher return on assets (ROA)than Company LD.
Q2) Firm A has a higher degree of business risk than Firm B.Firm A can offset this by using less financial leverage.Therefore, the variability of both firms' expected EBITs could actually be identical.
A)True
B)False
Q3) Whenever a firm borrows money, it is using financial leverage.
A)True
B)False
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Chapter 16: Supply chains and working capital management
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Sample Questions
Q1) Pascarella Inc.is revising its payables policy.It has annual sales of $50, 735, 000, an average inventory level of $15, 012, 000, and average accounts receivable of $10, 008, 000.The firm's cost of goods sold is 85% of sales.The company makes all purchases on credit and has always paid on the 30th day.However, it now plans to take full advantage of trade credit and to pay its suppliers on the 40th day.The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1, 946, 000 and accounts receivable by $1, 946, 000.What will be the net change in the cash conversion cycle, assuming a 365-day year?
A) -26.6 days
B) -29.5 days
C) -32.8 days
D) -36.4 days
E) -40.5 days
Q2) Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive current operating asset financing strategy because of the inherent risks of using short-term financing.
A)True
B)False
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Chapter 17: Multinational financial management
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Q1) A foreign currency will, on average, depreciate against the U.S.dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.
A)True
B)False
Q2) S.-based company, Stewart, Inc., arranged a 2-year, $1, 000, 000 loan to fund a project in Mexico.The loan is denominated in Mexican pesos, carries a 10.0% nominal rate, and requires equal semiannual payments.The exchange rate at the time of the loan was 5.75 pesos per dollar, but it dropped to 5.10 pesos per dollar before the first payment came due.The loan was not hedged in the foreign exchange market.Thus, Stewart must convert U.S.funds to Mexican pesos to make its payments.If the exchange rate remains at 5.10 pesos per dollar through the end of the loan period, what effective interest rate will Stewart end up paying on the loan?
A) 10.36%
B) 11.50%
C) 17.44%
D) 20.00%
E) 21.79%
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