Corporate finance

Question 1

Which of the following is a disadvantage of incorporating a business
a. Access to financial markets
b. Limited liability
c. Becoming a permanent legal entity
d. Profits taxed at the corporate level and the shareholder level

Answer 1

d. Profits taxed at the corporate level and the shareholder leve

Question 2

A company can pay for its expansion in all the following ways except:
a. by using the cashflow generated from selling obsolete equipment.
b. by doing an Initial Public Offering.
c. by buying bonds in the secondary market.
d. by plowing back (reinvesting) part of its profits.

Answer 2

c. by buying bonds in the secondary market.

Question 3

Which one of the following expense categories is subtracted from total revenues to help arrive at a firm’s EBIT?
a. Dividends
b. Depreciation expense
c. Interest expense
d. Tax expense

Answer 3

b. Depreciation expense

Question 4

4 An asset’s liquidity measures:
a. its potential for generating a profit.
b. the cash requirements.
c. how easy it can be converted into cash.
d. the proportion of debt financing.

Answer 4

c. how easy it can be converted into cash

Question 5

7 The semi-strong form of the efficient market hypothesis states that:
a. The efficient market hypothesis is only half true.
b. professional investors make superior profits but amateurs don’t.
c. Stock prices follow a random walk.
d. prices reflect all publicly available information, but not non-public information.

Answer 5

d. prices reflect all publicly available information, but not non-public information.

Question 6

A project’s opportunity cost of capital is:
a. The return earned by investing in the project
b. The return that investors can expect to earn by investing in the financial markets, in securities of similar risk
c. The average return on all the company’s projects
d. lower than the project’s IRR

Answer 6

b. The return that investors can expect to earn by investing in the financial markets, in securities of similar risk

Question 7

9 Which one of these represents a cash outflow for a project
a A sunk cost
b An increase in accounts receivable
c Interest payments
d Depreciation of equipment

Answer 7

b An increase in accounts receivable

Question 8

10 Which statement isleastaccurate?
a. Incremental cashflows that are not directly due to the project (costs incurred at other divisions, or lower sales of other company products), are often overlooked but should be taken into account.
b. project proposers may exaggerate the profitability of a project in order to gain acceptance
c. A project with more flexibility (to in- or de-crease production for example) has a higher value for the company
d. Project proposers tend to make too conservative forecasts.

Answer 8

d. Project proposers tend to make too conservative forecasts.

Question 9

11 The actual real rate of return on an investment will be positive as long as the:
a. nominal return is positive
b. inflation rate is positive
c. nominal return exceeds the inflation rate
d. inflation rate exceeds the real return.

Answer 9

c. nominal return exceeds the inflation rate

Question 10

12 The expected return on a security includes a reward for:
a. market risk and specific risk
b. specific (=idiosyncratic, diversifiable) risk only
c. diversification and portfolio risk
d. time value of money and undiversifiable market risk

Answer 10

d. time value of money and undiversifiable market risk

Question 11

With respect to corporate bonds, when the interest rate increases, typically
a the coupon rates on existing bonds also increases.
b the coupon rate on existing bonds remains unchanged.
c bond prices also increase.
d bond prices remain constant.

Answer 11

b the coupon rate on existing bonds remains unchanged.

Question 12

15 Who bears the bulk of the cost of underpricing an IPO?
a. The underwriters
b. The investors who purchase IPO shares at the offerprice.
c. Investors who buy shares in the open market after the IPO.
d. The pre-IPO shareholders

Answer 12

d. The pre-IPO shareholders

Question 13

16 The present value of the costs of financial distress increases as the debt ratio increases because the:
a. Expected return on assets increases
b. Present value of the interest tax shield increases
c. Agency costs of free cashflows increases
d. Probability of default increases

Answer 13

d. Probability of default increases

Question 14

17 Companies can pay out cash to their shareholders by
a. only by paying dividends
b. either by paying dividends or paying off their debt
c. either by paying dividends or by buying back shares
d. either by paying dividends or by plowing back earnings

Answer 14

c. either by paying dividends or by buying back shares