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Corporate Finance 30 Multiple Choice Questions
1. Which one of the following is the financial statement that summarizes a firm’s revenue
and expenses over a period of time?
A. statement of cash flows
B. tax reconciliation statement
C. income statement
D. balance sheet
E. market value report
2. Kelly’s Corner Bakery purchased a lot in Oil City six years ago at a cost of $278,000.
Today, that lot has a market value of $264,000. At the time of the purchase, the company
spent $6,000 to level the lot and another $8,000 to install storm drains. The company
now wants to build a new facility on that site. The building cost is estimated at $1.03
million. What amount should be used as the initial cash flow for this project?
A. -$1,294,000
B. -$1,308,000
C. -$1,045,000
D. -$1,322,000
E. -$1,308,000
3. The condition stating that the interest rate differential between 2 countries is equal to the
percentage difference between the forward exchange rate and the spot exchange rate is
called:
A. the international Fisher effect
B. uncovered interest rate parity
C. purchasing power parity
D. unbiased forward rates condition
E. interest rate parity
4. Precise Machinery is analyzing a proposed project. The company expects to sell 2,100
units, give or take 5 percent. The expected variable cost per unit is $260 and the
expected fixed costs are $589,000. Cost estimates are considered accurate within a plus
or minus 4 percent range. The depreciation expense is $129,000. The sales price is
estimated at $750 per unit, give or take 2 percent. The tax rate is 35 percent. The
company is conducting a sensitivity analysis on the sales price using a sales price
estimate of $755. What is the operating cash flow based on this analysis?
A. $368,015
B. $293,089
C. $86,675
D. $354,874
E. $337,975
5. The Dry Dock is considering a project with an initial cost of $118,400. The project’s
cash inflows for years 1 through 3 are $37,200, $54,600, and $46,900, respectively.
What is the IRR of this project?
A. 7.48 percent
B. 8.04 percent
C. 8.22 percent
D. 8.56 percent
E. 8.42 percent
6. The common stock of Dayton Repair sells for $43,19 a share. The stock is expected to
pay $2.28 per share next year when the annual dividend is distributed. The firm has
established a pattern of increasing its dividends by 2.15 percent annually and expects to
continue doing so. What is the market return of return on this stock?
A. 7.67 percent
B. 7.59 percent
C. 7.43 percent
D. 7.28 percent
E. 7.14 percent
7. Three Corners Markets paid an annual dividend of $1.37 a share last month. Today, the
company announced that future dividends will be increasing by 2,8 percent annually. If
you require a return of 11.6 percent, how much are you willing to purchase one share of
this stock today?
A. $17.68
B. $16.00
C. $15.57
D. $16.67
E. $18.23
8. Phillips Equipment has 75,000 bonds outstanding that are selling at par. Bonds with
similar characteristics are yielding 7.5 percent. The company also has 750,000 shares of
6 percent preferred stock and 2.5 million shares of common stock outstanding. The
preferred stock sells for $64 a share. The common stock has a beta of 1.21 and sells for
$44 a share. The U. S. Treasury bill is yielding 2.3 percent and the return on the market
is 11.2 percent. The corporate tax rate is 34 percent. What is the firm’s weighted
average cost of capital?
A.
B.
C.
D.
E.
11.56 percent
9.69 percent
11.30 percent
11.18 percent
10.64 percent
9. Fresno Salads has current sales of $6,000 and a profit margin of 6.5 percent. The firm
estimates that sales will increase by 4 percent next year and that all costs will vary in
direct relationship to sales. What is the pro forma net income?
A. $303.33
B. $438.70
C. $405.60
D. $441.10
E. $327.18
10. Which one of these actions will increase the operating cycle? Assume all else held
constant.
A. decreasing the receivables turnover rate
B. decreasing the average inventory level
C. increasing the payables period
D. increasing the inventory turnover rate
E. decreasing the payables period
11. Which one of the following is a source of cash?
A. acquisition of debt
B. granting credit to a customer
C. repurchase of common stock
D. purchase of inventory
E. payment to a supplier
12. You are comparing two investment options that each pay 6 percent interest, compounded
annually. Both options will provide you with $12,000 of income. Option A pays $2,000
the first year followed by two annual payments of $5,000 each. Option B pays three
annual payments of $4,000 each. Which one of the following statements is correct given
these two investment options? Assume a positive discount rate.
A. Option B is a perpetuity
B. Both options are of equal value since they both provide $12,000 of income
C. Option A has the higher future value at the end of year three
D. Option B has a higher present value at time zero
E. Option A is an annuity
13. You are doing some comparison shopping. Five stores offer the product you want at
basically the same price but with differing credit terms. Which one of these terms is bestsuited to you if you plan to forgo the discount?
A. 1/10, net 45
B. 2/5, net 20
C. 1/5, net 15
D. 2/5, net 30
E. 2/10, net 30
14. The plowback ratio is:
A. The percentage of net income available to the firm to fund future growth.
B. The change in retained earnings divided by the dividends paid.
C. Equal to net income divided by the change in total equity
D. The dollar increase in net income divided by the dollar increase in sales
E. Equal to one minus the retention ratio
15. Al invested $7,200 in an account that pays 4 percent simple interest. How much money
will he have at the end of 5 years?
A. $8,056
B. $8,640
C. $8,678
D. $8,299
E. $8,710
…
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