Corporate Finances
Corporate Finance Challenge
Put your knowledge of corporate finance to the test with this comprehensive quiz! Featuring 67 questions, it covers a broad spectrum of essential topics.
Test your understanding in areas such as:
- Investment Proposals
- Capital Structure
- Cash Flow Analysis
- Mergers and Acquisitions
Suppose that the market price of Company X is $45 per share and that of Company Y is $30. If X offers three-fourths a share of common stock for each share of Y, the ratio of exchange of market prices would be:
1. 0.667
2. 1.0
3. 1.125
1.5
The restructuring of a corporation should be undertaken if
1. The restructuring can prevent an unwanted takeover.
2. The restructuring is expected to create value for shareholders.
3. The restructuring is expected to increase the firm's revenue.
4. The interests of bondholders are not negatively affected.
The "information effect" refers to the notion that
1. A corporation's actions may convey information about its future prospects.
2. Management is reluctant to provide financial information that is not required by law.
3. Agents incur costs in trying to obtain information.
4. The financial manager should attempt to manage sensitive information about the firm.
In the long run, a successful acquisition is one that:
1. Enables the acquirer to make an all-equity purchase, thereby avoiding additional financial leverage.
2. Enables the acquirer to diversify its asset base.
3. Increases the market price of the acquirer's stock over what it would have been without the acquisition.
4. Increases financial leverage.
Bidding companies often pay too much for the acquired firm. The hubris hypothesis explains this by suggesting that the bidders
1. Have too little information to make an optimal decision.
2. Have big egos and this impedes rational decision-making.
3. Have difficulty in thinking strategically over the long-term.
4. Are overly influenced by the tax consequences of an acquisition.
A tender offer is
1. A goodwill gesture by a "white knight."
2. A would-be acquirer's friendly takeover attempt.
3. A would-be acquirer's offer to buy stock directly from shareholders.
The public sale of common stock in a subsidiary in which the parent usually retains majority control is called
1. A pure play.
2. A spin-off.
3. A partial sell-off.
4. An equity carve-out.
Retained earnings are
1. An indication of a company's liquidity.
2. The same as cash in the bank.
3. Not important when determining dividends.
4. The cumulative earnings of the company after dividends.
Which of the following is an argument for the relevance of dividends?
1. Informational content.
2. Reduction of uncertainty.
3. Some investors' preference for current income.
4. All of the above.
All of the following are true of stock splits EXCEPT:
1. Market price per share is reduced after the split.
2. The number of outstanding shares is increased.
3. Retained earnings are changed.
4. Proportional ownership is unchanged.
If Ian O'Connor Enterprises, Inc., repurchased 50 percent of its outstanding common stock from the open (secondary) market, the result would be
1. A decline in EPS.
2. An increase in cash.
3. A decrease in total assets.
4. An increase in the number of stockholders.
The dividend-payout ratio is equal to
1. The dividend yield plus the capital gains yield.
2. Dividends per share divided by earnings per share.
3. Dividends per share divided by par value per share.
4. Dividends per share divided by current price per share.
The term "capital structure" refers to:
1. long-term debt, preferred stock, and common stock equity.
2. Current assets and current liabilities.
3. Total assets minus liabilities.
4. Shareholders' equity.
The traditional approach towards the valuation of a company assumes:
1. That the overall capitalization rate holds constant with changes in financial leverage.
2. That there is an optimum capital structure.
3. That total risk is not altered by changes in the capital structure.
4. That markets are perfect.
According to the concept of financial signaling, management behavior results in new debt issues being regarded as " news" by investors.
1. good
2. bad
3. non-event
4. risk-neutral
The investment proposal with the greatest relative risk would have
1. The highest standard deviation of net present value.
2. The highest coefficient of variation of net present value.
3. The highest expected value of net present value.
4. The lowest opportunity loss likelihood.
Probability-tree analysis is best used when cash flows are expected to be
1. Independent over time.
2. risk-free.
3. Related to the cash flows in previous periods.
4. Known with certainty.
You are considering two mutually exclusive investment proposals, project A and project B. B's expected value of net present value is $1,000 less than that for A and A has less dispersion. On the basis of risk and return, you would say that
1. Project A dominates project B.
2. Project B dominates project A.
3. Project A is more risky and should offer greater expected value.
4. Each project is high on one variable, so the two are basically equal.
If two projects are completely independent (or unrelated), the measure of correlation between them is:
0
0.5
1
-1
Managerial options can be viewed as
1. Methods for reducing agency risk through the use of incentives.
2. Methods for reducing total firm risk through diversification.
3. Strategies for increasing management compensation.
4. Opportunities for altering management decisions in the future.
A managerial option, in effect,
1. Limits the flexibility of management's decision-making.
2. Limits the downside risk of an investment project.
3. Limits the profit potential of a proposed project.
4. Applies only to new projects.
When using a probability tree approach, we discount the various cash flows to their present value at
1. The firm's weighted-average cost of capital.
2. The project's required rate of return.
3. The risk-free rate.
4. The after-tax cost of the firm's long-term debt.
The presence of managerial, or real, options ______ the worth of an investment project.
1. increases
2. decreases
3. Does not affect
4. Increase or decreases
According to the accounting profession, which of the following would be considered a cash-flow item from an "investing" activity?
1. Cash inflow from interest income.
2. Cash inflow from dividend income.
3. Cash outflow to acquire fixed assets.
4. All of the above.
According to the Financial Accounting Standards Board (FASB), which of the following is a cash flow from a "financing" activity?
1. Cash outflow to the government for taxes.
2. Cash outflow to shareholders as dividends.
3. Cash outflow to lenders as interest.
4. Cash outflow to purchase bonds issued by another company.
If the following are balance sheet changes: 1. $5,005 decrease in accounts receivable 2. $7,000 decrease in cash 3. $12,012 decrease in notes payable 4. $10,001 increase in accounts payable a "use" of funds would be the:
1. $7,000 decrease in cash.
2. $5,005 decrease in accounts receivable.
3. $10,001 increase in accounts payable.
4. $12,012 decrease in notes payable.
On an accounting statement of cash flows an "increase(decrease) in cash and cash equivalents" appears as
1. A cash flow from operating activities.
2. A cash flow from investing activities.
3. A cash flow from financing activities.
4. None of the above.
Uses of funds include a (an):
1. Decrease in cash.
2. Increase in any liability.
3. Increase in fixed assets.
4. Tax refund.
Which of the following would be included in a cash budget?
1. Depreciation charges.
2. dividends.
3. goodwill
4. Patent amortization.
An examination of the sources and uses of funds statement is part of:
1. A forecasting technique.
2. A funds flow analysis.
3. A ratio analysis.
4. Calculations for preparing the balance sheet.
Which of the following is NOT a cash outflow for the firm?
1. depreciation
2. dividends.
3. Interest payments.
4. taxes
Which of the following would be considered a use of funds?
1. A decrease in accounts receivable.
2. A decrease in cash.
3. An increase in account payable.
4. An increase in cash.
The cash flow statement in the United States is most likely to appear using
1. a "supplementary method."
2. a "direct method."
3. an "indirect method."
4. a "flow of funds method."
For a profitable firm, total sources of funds will always ______ total uses of funds.
1. Be equal to
2. Be greater than
3. Be less than
4. Have no consistent relationship to
A firm's inventory turnover (IT) is 5 times on a cost of goods sold (COGS) of $800,000. If the IT is improved to 8 times while the COGS remains the same, a substantial amount of funds is released from or additionally invested in inventory. In fact,
1. $160,000 is released.
2. $100,000 is additionally invested.
3. $60,000 is additionally invested.
4. $60,000 is released.
Ninety-percent of Vogel Bird Seed's total sales of $600,000 is on credit. If its year-end receivables turnover is 5, the average collection period (based on a 365-day year) and the year-end receivables are, respectively:
1. 365 days and $108,000.
2. 73 days and $120,000.
3. 73 days and $108,000.
4. 81 days and $108,000.
If EOQ = 360 units, order costs are $5 per order, and carrying costs are $.20 per unit, what is the usage in units?
1. 129,600 units
2. 2,592 units
3. 25,920 units
4. 18,720 units
Costs of not carrying enough inventory include:
1. Lost sales.
2. Customer disappointment.
3. Possible worker layoffs.
4. All of these.
Which of the following relationships hold true for safety stock?
1. The greater the risk of running out of stock, the smaller the safety of stock.
2. The larger the opportunity cost of the funds invested in inventory, the larger the safety stock.
3. The greater the uncertainty associated with forecasted demand, the smaller the safety stock.
4. The higher the profit margin per unit, the higher the safety stock necessary.
Increasing the credit period from 30 to 60 days, in response to a similar action taken by all of our competitors, would likely result in:
1. An increase in the average collection period.
2. A decrease in bad debt losses.
3. An increase in sales.
4. Higher profits.
The credit policy of Spurling Products is "1.5/10, net 35." At present 30% of the customers take the discount, 62% pay within the net period, and the rest pay within 45 days of invoice. What would receivables be if all customers took the cash discount?
1. Lower than the present level.
2. No change from the present level.
3. Higher than the present level.
4. Unable to determine without more information.
An increase in the firm's receivable turnover ratio means that:
1. It is collecting credit sales more quickly than before.
2. Cash sales have decreased.
3. It has initiated more liberal credit terms.
4. Inventories have increased.
Receiving a required inventory item at the exact time needed.
1. ABC
2. JIT
3. FOB
4. PERT
EOQ is the order quantity that over our planning horizon.
1. Minimizes total ordering costs
2. Minimizes total carrying costs
3. Minimizes total inventory costs
4. The required safety stock
A B2B exchange is a Internet marketplace that matches supply and demand by real-time auction bidding.
1. buyer-to-business
2. business-to-business
3. business-to-buyer
4. buyer-to-buyer
In finance, "working capital" means the same thing as
1. Total assets.
2. Fixed assets.
3. Current assets.
4. Current assets minus current liabilities.
Which of the following would be consistent with a more aggressive approach to financing working capital?
1. Financing short-term needs with short-term funds.
2. Financing permanent inventory buildup with long-term debt.
3. Financing seasonal needs with short-term funds.
4. Financing some long-term needs with short-term funds.
Which asset-liability combination would most likely result in the firm's having the greatest risk of technical insolvency?
1. Increasing current assets while lowering current liabilities.
2. Increasing current assets while incurring more current liabilities.
3. Reducing current assets, increasing current liabilities, and reducing long-term debt.
4. Replacing short-term debt with equity.
Which of the following illustrates the use of a hedging (or matching) approach to financing?
1. Short-term assets financed with long-term liabilities.
2. Permanent working capital financed with long-term liabilities.
3. Short-term assets financed with equity.
4. All assets financed with a 50 percent equity, 50 percent long-term debt mixture.
In deciding the appropriate level of current assets for the firm, management is confronted with
1. A trade-off between profitability and risk.
2. A trade-off between liquidity and marketability.
3. A trade-off between equity and debt.
4. A trade-off between short-term versus long-term borrowing.
Varies inversely with profitability.
1. Liquidity.
2. Risk
Spontaneous financing includes
1. Accounts receivable.
2. Accounts payable.
3. short-term loans.
4. A line of credit.
Permanent working capital
1. Varies with seasonal needs.
2. Includes fixed assets.
3. Is the amount of current assets required to meet a firm's long-term minimum needs.
4. Includes accounts payable.
Financing a long-lived asset with short-term financing would be
1. An example of "moderate risk -- moderate (potential) profitability" asset financing.
2. An example of "low risk -- low (potential) profitability" asset financing.
3. An example of "high risk -- high (potential) profitability" asset financing.
4. An example of the "hedging approach" to financing.
Net working capital refers to
1. Total assets minus fixed assets.
2. Current assets minus current liabilities.
3. Current assets minus inventories.
4. Current assets.
This type of risk is avoidable through proper diversification.
1. Portfolio risk
2. Systematic risk
3. Unsystematic risk
4. Total risk
A statistical measure of the degree to which two variables (e.g., securities' returns) move together.
1. Coefficient of variation
2. variance
3. covariance
4. Certainty equivalent
An "aggressive" common stock would have a "beta"
1. Equal to zero.
2. Greater than one.
3. Equal to one.
4. Less than one.
A line that describes the relationship between an individual security's returns and returns on the market portfolio.
1. Characteristic line
2. Security market line
3. Capital market line
4. beta
According to the capital-asset pricing model (CAPM), a security's expected (required) return is equal to the risk-free rate plus a premium
1. Equal to the security's beta.
2. Based on the unsystematic risk of the security.
3. Based on the total risk of the security.
4. Based on the systematic risk of the security.
The risk-free security has a beta equal to , while the market portfolio's beta is equal to one; more than one.
1. one; less than one.
2. zero; one.
3. Less than zero; more than zero.
Carrie has a "certainty equivalent" to a risky gamble's expected value that is less than the gamble's expected value. Carrie shows
1. Risk aversion.
2. Risk preference.
3. Risk indifference.
Beta is the slope of
1. The security market line.
2. The capital market line.
3. A characteristic line.
4. the CAPM.
A measure of "risk per unit of expected return."
1. Standard deviation
2. Coefficient of variation
3. Correlation coefficient
4. beta
The greater the beta, the of the security involved.
1. Greater the unavoidable risk
2. Greater the avoidable risk
3. Less the unavoidable risk
4. Less the avoidable risk
Plaid Pants, Inc. Common stock has a beta of 0.90, while Acme Dynamite Company common stock has a beta of 1.80. The expected return on the market is 10 percent, and the risk-free rate is 6 percent. According to the capital-asset pricing model (CAPM) and making use of the information above, the required return on Plaid Pants' common stock should be , and the required return on Acme's common stock should be .
1. 3.6 percent; 7.2 percent
2. 9.6 percent; 13.2 percent
3. 9.0 percent; 18.0 percent
4. 14.0 percent; 23.0 percent
Espinosa Coffee & Trading, Inc.'s common stock measured beta is calculated to be 0.75. The market beta is, of course, 1.00 and the beta of the industry of which the company is a part is 1.10. If Merrill Lych were to calculate an "adjusted beta" for Espinosa's common stock, that adjusted beta would most likely be .
1. Less than 0.75
2. More than 0.75, but less than 1.10
3. Equal to 1.10
4. Equal to 0.95 {i.e., (1/3) x (0.75 + 1.00 + 1.10)}
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