Valuation and Financial Strategy Pre-Test
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Course Introduction
Valuation and Financial Strategy equips students with the analytical tools and frameworks necessary to assess the value of businesses and make informed financial decisions. The course explores fundamental valuation methodologies including discounted cash flow (DCF), market multiples, and asset-based approaches while examining their practical applications in mergers and acquisitions, investment analysis, and corporate finance. Emphasis is placed on integrating valuation with long-term strategic planning, considering risk, capital structure, and value creation in dynamic markets. Through case studies and hands-on exercises, students develop the skills to evaluate investment opportunities, formulate sound financial strategies, and align financial decision-making with overall business objectives.
Recommended Textbook
Corporate Finance Linking Theory to What Companies Do 3rd Edition by John Graham
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Page 2
Chapter 1: The Scope of Corporate Finance
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Sample Questions
Q1) Which agency oversees fair reporting of financial information to investors of publicly traded stocks?
A) SEC
B) IRS
C) NYSE
D) NASDAQ
Answer: A
Q2) An agent of a firm could be any of the following:
A) 100% owner of the firm
B) the IRS agent in charge of auditing the firm's tax return
C) an employee who does not own any proportion of the firm
D) a supplier of the firm
Answer: C
Q3) What is the term applied to a firm that offers shares to the general public for the first time?
A) Initial Public Offering
B) Initial Placed Offering
C) Investment Plan Offer
D) Investment of Public Offers
Answer: A
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Chapter 2: Financial Statement and Cash Flow Analysis
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Q1) A firm reports net income of $500,000 for 2011.The most recent balance sheet for the reports retained earnings of $2,000,000.The firm will pay out 25% of net income as dividends.What will the new balance be for retained earnings?
A) $1,875,000
B) $2,125,000
C) $2,375,000
D) $2,500,000
Answer: C
Q2) A company has sales of $1,250,000,cost of goods sold of $750,000,depreciation expenses of $250,000 and interest expenses of $55,000.If the company's tax rate is 34% and the income statement is complete,what is this firm's operating cash flow?
A) $183,700
B) $433,700
C) $165,000
D) $415,000
Answer: B
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Chapter 3: The Time Value of Money
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Q1) If you were to invest $120 for two years,while earning 8% SIMPLE interest,what is the TOTAL AMOUNT OF INTEREST that you will earn?
A) $139.97
B) $139.20
C) $19.20
D) $19.97
Answer: C
Q2) Roxy is buying a house and the mortgage terms are 30 years,monthly payments.If the interest rate is 7% (APR),the loan is $300,000 loan,what is the balance of the loan after the seventh payment?
A) $300,000
B) $298,248
C) $286,028
D) $275,568
Answer: B
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Chapter 4: Valuing Bonds
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Q1) Winburn Sports & Entertainment has an outstanding $1,000 par value bond with a 11% coupon that pays SEMIANNUALLY at the end of each period.The bond matures in nine years.Bonds of similar risk have a required return of 10%.What is the market value of the Winburn bond?
A) $1,035.54
B) $1,057.59
C) $1,058.45
D) $1,073.05
Q2) A bond currently trades at $975 on the secondary market.The bond has 10 years until maturity and pays an ANNUAL coupon at 9% of face value.The face value of the bond is $1,000.What is the coupon yield for this bond?
A) 8.86%
B) 9.00%
C) 9.23%
D) 9.40%
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Chapter 5: Valuing Stocks
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Q1) Zeta Corp has an ROE of 15%; has just paid a dividend of $1.55; a pays 110% of its earnings out in dividends,and the appropriate discount rate is 20%; what is the current stock price?
A) $ 8.80
B) $ 10.51
C) $ 8.00
D) $ 7.10
Q2) Bavarian Sausage's enterprise value is $75,000,000,the market value of its debt is $23,000,000 and the company does not have any preferred stock outstanding.If the company has 3,500,000 shares outstanding,what should be Bavarian Sausage's stock price?
A) $21.43
B) $14.86
C) $28.00
D) $6.57
Q3) The largest stock exchange in the world is
A) the London Stock Exchange.
B) the New York Stock Exchange.
C) the NASDAQ.
D) the Paris Bourse.
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Chapter 6: The Trade-Off Between Risk and Return
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Q1) The total return of an asset captures
A) income paid by an asset over time.
B) the capital gain or loss on the asset over time.
C) the book value of the asset over time.
D) a and b are both correct.
Q2) You purchased a 10-year,6% coupon bond (the bond makes semi-annual payments)last year based upon a discount rate of 6%.One year later the discount rate has fallen to 5.5%.What is your total return on the bond?
A) 6.000%
B) 3.512%
C) 9.512%
D) none of the above
Q3) A bond was purchased last year for $900.The bond pays a 10% annual coupon and has a face value of $1,000.Today,the bond has a coupon yield of 8%.What is the total return for this bond over the last year?
A) 8%
B) 10%
C) 39%
D) 50%
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Page 8
Chapter 7: Risk, return, and the Capital Asset Pricing Model
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Sample Questions
Q1) Given Exhibit 7-5,what is the weight of Security 1?
A) 42.9%
B) 33.3%
C) 23.8%
D) Cannot be determined with the data given
Q2) Suppose that over the last 30 years,company ABC has averaged a return of 10%.Over the same period,the Treasury bond rate has averaged 3%.The current estimate of the Treasury bond rate is 5%.Using the historical approach,what is the estimate of ABC's expected return.
A) 13.0%
B) 12.5%
C) 12.0%
D) 11.0%
Q3) Suppose David can borrow and lend at the risk-free rate of 5%.Which of the following three risky portfolios should he hold in combination with a position in the risk-free asset?
A) portfolio with a standard deviation of 16% and an expected return of 12%
B) portfolio with a standard deviation of 20% and an expected return of 16%
C) portfolio with a standard deviation of 30% and an expected return of 20%
D) he should be indifferent in holding any of the three portfolios
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Page 9
Chapter 8: Capital Budgeting Process and Decision Criteria
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Sample Questions
Q1) Refer to Exhibit 8-1.If a firm uses discounted payback with a 15% discount rate and a 3-year cutoff period,what's the discount payback period of the project? Should the firm accept the project?
A) 3.3 years; reject
B) 3.6 years; reject
C) 3.6 years; accept
D) 2.7 years; accept
Q2) As the discount rate increases,the IRR of a project:
A) increases.
B) decreases.
C) is unaffected.
D) cannot be determined with out knowing the discount rate.
Q3) A project may have multiple IRRs when
A) the project generates an alternating series of net cash inflows and outflows
B) the project generates an immediate cash inflow followed by cash outflow
C) the project has a negative NPV
D) the project is of considerably large scale
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Chapter 9: Cash Flow and Capital Budgeting
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Sample Questions
Q1) You are considering buying carpet for your university; Grade A carpet costs $25.25 a square yard and lasts 5 years and Grade B costs $18.25 a square yard and lasts 3 years; Grade C costs $12.10 a yard and lasts 2 years; which carpet should be chosen if the discount rate is 5%? Assume that due to a large endowment given by the state's"carpet king" the university is committed to continued carpet use.What is the EAC of Grade B carpet?
A) $ (4.44)
B) $ (4.36)
C) $ (4.22)
D) none of the above
Q2) Refer to FAR Corporation.What is the operating cash flow for year 3?
A) $55,470
B) $60,000
C) $48,798
D) $37,686
Q3) Refer to DSSS Corporation.What is the depreciation expense in year 1?
A) $44,996
B) $10,004
C) $60,008
D) $19,994
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Chapter 10: Risk and Capital Budgeting
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Sample Questions
Q1) What is Bavarian Brewhouse's cost of preferred stock?
A) 8.00%
B) 15.5%
C) 10.7%
D) 12.6%
Q2) What is Bavarian Sausage's breakeven point in the most likely scenario?
A) 572
B) 1,125
C) 5,000
D) 2,526
Q3) Which statement is FALSE regarding WACC and its components?
A) The cost of debt is usually less than the cost of equity.
B) The WACC should be used as the discount rate for all projects that the firm considers.
C) For an all-equity firm, the cost of equity equals the WACC.
D) The WACC may increase if the firm seeks external financing for a project.
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Chapter 11: Raising Long-Term Financing
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Q1) One characteristic of share privatizations is
A) that they are generally much larger than the IPOs of their private-sector counterparts. B) that they are generally much smaller than the IPOs of their private-sector counterparts.
C) that the decision to privatize is made solely on economic grounds.
D) none of the above.
Q2) Roxy International needs $200 Million in new equity capital; currently shares are trading at $50 per share.Morgan Steely (the investment banker)requires a 6% spread of the offer price which will be $45 per share and is fully subsribed at that price.The fixes costs (legal,accounting,etc.)are estimated at $750,000.What is the net price per share the firm will receive?
A) $47.00
B) $42.00
C) $45.00
D) $42.30
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Chapter 12: Capital Structure
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Q1) Louis Corporation finances its operations with $80 million in stock and $30 million in bonds.If the firm issues $20 million in additional bonds and uses the proceeds to retire $20 million worth of equity.What will be the firm's new debt to equity ratio? (Assume zero taxes and perfect capital markets)
A) 0.75
B) 0.60
C) 0.63
D) 0.83
Q2) Nuclear Widgets has a current cost of levered equity equal to 13%.Its return on assets is 12% and its cost of debt is 8%.Nuclear Widgets has borrowed a total of $5,000,000.What is the current value of Nuclear Widgets' equity? Ignore the effect of taxes.
A) $1,250,000
B) $20,000,000
C) the problem yields a negative number which means the problem is not realistic
D) not enough information is given
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14
Chapter 13: Long-Term Debt and Leasing
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Q1) If a bond has a sinking fund provision then the actual maturity of the bond will probably be
A) greater than the stated maturity on the bond.
B) exactly equal to the state maturity on the bond.
C) less than the stated maturity on the bond.
D) none of the above.
Q2) A bond where the investor is granted the right to receive payment in shares of underlying stock rather than in cash is called a
A) junk bond
B) zero-coupon bond
C) convertible bond
D) bearer bond
Q3) Bavarian Brew has also the option to purchase the machine.If the present value of the cash flows associated with the purchase is $78,000,what is the net present value of the lease option? Assume that the company's cost of debt is 7%.
A) $8,870
B) -$8,870
C) $7,950
D) -$7,950
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Page 15
Chapter 14: Payout Policy
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Q1) The required rate of return on Extruded's shares is 13%.What is the share price today based on the Gordon growth model?
A) $16.00
B) $23.44
C) $24.63
D) $25.88
Q2) The situation where a company replaces a certain number of shares with just one share is called a
A) stock dividend
B) stock split
C) reverse stock split
D) stock repurchase
Q3) A company's stock currently trades at $15 per share.The company is going to undertake a 3-2 stock split.What should be the stock price after the stock split took place?
A) $10
B) $15
C) $22.50
D) $25
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Page 16
Chapter 15: Financial Planning
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Sample Questions
Q1) Consider the cash receipts projections of Roxy Inc.that is developing a cash budget for October ,November and December; sales in August and September were $600,000 and $500,000 respectively.The forecast sales are $400,000,$300,000 and $200,000 for October,November and December respectively.20 % of sales are cash sales and 80% are credit sales; collects about 70% of each month's sales in the next month but waiting until the following month for the remaining 10% of sales.Bad debts are negligible.The Firm is expectsing cash dividend of $10,000 in December from a subsidiary.What are the total cash receipts in October? (In thousands)
A) $330
B) $490
C) $255
D) $ 60
Q2) Which of the following is a source of discretionary or external financing?
A) a new debt issue
B) accounts payable
C) a new equity issue
D) both a and c
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Chapter 16: Cash Conversion, inventory, and Receivables Management
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Q1) Firms that tend to do extensive credit checks on clients before offering credit are more likely to be
A) firms with low variable costs.
B) firms with high variable costs.
C) firms with high fixed costs.
D) none of the above.
Q2) What is the process through which a customer's payment is posted to its account and the outstanding invoices are cleared as paid?
A) payment pattern monitoring
B) aging of accounts receivable
C) cash application
D) just-in-time system
E) none of the above
Q3) What is Smart Product's economic order quantity (EOQ)for this input?
A) 2236 units
B) 707 units
C) 822 units
D) 1581 units
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Chapter 17: Cash, payables, and Liquidity Management
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Q1) What is the minimum transfer amount for which the transfer would be beneficial for Bavarian Sausage?
A) $55,800
B) $27,900
C) $13,850
D) $41,950
Q2) What would be the benefit of a lock-box system that reduced mail float by 1.5 days,eliminated processing float,and reduced clearing float by 1 day,if Coyote Valley Products faces a 9% opportunity cost of funds?
A) $112,500
B) $157,500
C) $180,000
D) $67,500
Q3) Refer to Dilly Deli.Which of the following is true?
A) The wire transfer dominates both the DTC and the EDT.
B) The wire transfer dominates the EDT but not the DTC.
C) The DTC dominates both the EDT and the wire transfer.
D) The EDT dominates the DTC and the wire transfer.
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Chapter 18: International Financial Management
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Q1) Which type of institution is in a unique position to bear exchange rate risk by creating a natural hedge?
A) National banks
B) Multinational corporations
C) Large corporations
D) International banks
Q2) The annualized rate of interest on a three-month government bond in Japan is 8% and the rate on a similar instrument in the United States is 6%.The current spot rate is $0.0079/¥.Calculate the 3-month forward needed for interest rate parity to hold.
A) $0.00821/¥
B) $0.00786/¥
C) $0.00794/¥
D) $0.00805/¥
Q3) This risk that exchange rate movements will adversely impact reported financial results on a firm's financial statements
A) Transactions exposure
B) Translation exposure
C) Economic exposure
D) Political Risk
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Page 20
Chapter 19: Options
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Q1) Stanley Saeli is an investor who is bullish on LSL Corporation.Currently,LSL Corp.is trading at $51.To profit from his position,Saeli decides to sell put options on LSL Corp.that have a strike price of $45 and 1 year until expiration.The premium that he would receive on the option is $2.50.What is the most that Saeli can expect to gain per put option?
A) $6
B) $45
C) $2.50
D) $42.50
Q2) You have written a call option on 1 share of A stock that is currently worth $30.You expect the price of the stock to either move to $40 or $20 over the next year.If the one-year risk-free interest rate is 5% and the strike price on the option is $25,what should have been the proceeds of the option?
A) $15.72
B) $8.22
C) $.72
D) $0
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21
Chapter 20: Entrepreneurial Finance and Venture Capital
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Q1) Modern venture capital is defined as
A) a professionally managed pool of money raised for the sole purpose of making actively managed direct equity investments in rapidly growing private companies.
B) a professionally managed pool of money raised for the purpose of making equity investments in slowly growing private companies.
C) a professionally managed pool of money raised for the sole purpose of making actively managed direct equity investments charitable ventures.
D) none of the above.
Q2) Which of the following had a significant impact on the change that the venture capital industry went through in the early 1970's?
A) the lowered top personal tax rate on capital gains from 35% to 28%
B) the adoption of the "Prudent Man Rule"in 1979
C) the restructuring of the economy in 1975
D) a and b
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Chapter 21: Mergers, acquisitions, and Corporate Control
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Q1) A target integration in which the acquirer can absorb the target's resources directly with no remaining trace of the target as a separate entity.
A) subsidiary merger
B) statutory merger
C) Subsidiary merger
D) reverse triangle merger
E) consolidation
Q2) In the periods 2000-2010 the abnormal returns for the bidding firm was
A) -8.23%
B) -1.65%
C) 21.92%
D) 2.68%
Q3) Refer to Bavarian Merger.If you owned 250 shares of Bavarian Sausage what would be the control premium?
A) 55.6%
B) 35.7%
C) 62.5%
D) 41.9%
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23
Chapter 22: Bankruptcy and Financial Distress
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Q1) A creditor that has a specific asset pledged as collateral are called
A) secured creditors
B) unsecured creditors
C) general creditors
D) shareholders
Q2) Within Altman's Z score model of predicting bankruptcy,the total value of the assets are included in the model.If the total value of the assets decreases what effect does that have on the probability of the firm being in bankruptcy?
A) increases
B) remains the same
C) decreases
D) it is impossible to determine since the value of the assets is only used as a parameter in the model
Q3) If an auto maker were to fail in an economic downturn then it would fail due to A) economic activity.
B) corporate maturity.
C) an overly conservative capital structure.
D) none of the above.
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Chapter 23: Risk Management
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Q1) A call option on interest rates is called an
A) interest rate collar
B) interest rate floor
C) interest rate cap
D) interest rate swap
Q2) What is MakeStuff's after-tax earnings if it can lock in the moderate price level for sure?
A) $50,000
B) $42,500
C) $80,000
D) $40,333
Q3) Refer to Exhibit 23-1.How many June contracts were outstanding at the end of the trading day?
A) 3,338
B) 8,621
C) 183,158
D) 125,845
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