# Corporate Finance Multiple Choice Questions

1. The concept of compound interest refers to:

A) earning interest on the original investment.

B) payment of interest on previously earned interest.

C) investing for a multi-year period of time.

D) determining the APR of the investment.

2. When an investment pays only simple interest, this means:

A) the interest rate is lower than on comparable investments.

B) the future value of the investment will be low.

C) the earned interest is non taxable to the investor.

D) interest is earned only on the original investment.

3. Assume the total expense for your current year in college equals $20,000. Approximately how much would your parents have needed to invest 21 years ago in an account paying 8% compounded annually to cover this amount?

A) $ 952

B) $1,600

C) $1,728

D) $3,973

4. How much will accumulate in an account with an initial deposit of $100, and which earns 10% interest compounded quarterly for three years?

A) $107.69

B) $133.10

C) $134.49

D) $313.84

5. How much must be invested today in order to generate a five-year annuity of $1,000 per year, with the first payment one year from today, at an interest rate of 12%?

A) $3,604,78

B) $3,746.25

C) $4,037.35

D) $4,604.78

6. A stock's par value is represented by:

A) the maturity value of the stock.

B) the price at which each share is recorded.

C) the price at which an investor could sell the stock.

D) the price received by the firm when the stock was issued.

7. Additional paid-in capital refers to:

A) a firm's retained earnings.

B) a firm's treasury stock.

C) the difference between the issue price and the par value.

D) funds borrowed from a bank or bondholders.

8. Which of the following equity concepts would you expect to be least important to a financial analyst?

A) Par value per share

C) Retained earnings

D) Net common equity

9. An increase in a firm's financial leverage will:

A) increase the variability in earnings per share.

B) reduce the operating risk of the firm.

C) increase the value of the firm in a non-MM world.

D) increase the WACC.

10. Financial risk refers to the:

A) risk of owning equity securities.

B) risk faced by equityholders when debt is used.

C) general business risk of the firm.

D) possibility that interest rates will increase.

11. Ignoring taxes, a firm's weighted-average cost of capital is equal to:

A) its expected return on assets.

B) its expected return on equity.

C) the sum of expected return on equity and expected return on debt.

D) its expected return on assets times the debt-equity ratio.

12. What is the proportion of debt financing for a firm that expects a 24% return on equity, a 16% return on assets, and a 12% return on debt? Ignore taxes.

A) 54.0%

B) 60.0%

C) 66.7%

D) 75.0%

13. A firm has an expected return on equity of 16% and an after-tax cost of debt of 8%. What debt-equity ratio should be used in order to keep the WACC at 12%?

A) .50

B) .75

C) 1.00

D) 1.50

14. Which of the following is not found in John Lintner's "stylized facts" of corporate dividend policies?

A) Firms have long-run target dividend payout ratios.

B) Managers focus more on dividend absolute levels than on its changes.

C) Dividend changes follow shifts in long-run, sustainable levels of earnings rather than short-run changes in earnings.

D) Managers are reluctant to make dividend changes that might have to be reversed.

15. An increase in dividends might not increase price and may actually decrease stock price if:

A) the dividend increase cannot be sustained.

B) the firm does not maintain an exact dividend payout ratio.

C) the firm has too much retained earnings.

D) markets are weak-form efficient.

16. A policy of dividend "smoothing" refers to:

A) maintaining a constant dividend payout ratio.

B) keeping the regular dividend at the same level indefinitely.

C) maintaining a steady progression of dividend increases over time.

D) alternating cash dividends with stock dividends.

17. What is the most likely prediction after a firm reduces its regular dividend payment?

A) Earnings are expected to decline.

B) Investment is expected to increase.

C) Retained earnings are expected to decrease.

D) Share price is expected to increase.

18. What is the cash conversion cycle for a firm with a receivables period of 40 days, a payables period of 30 days, and an inventory period of 60 days?

A) 10 days

B) 50 days

C) 70 days

D) 130 days

19. Which of the following would not be included among the costs of carrying inventory?

A) Obsolescence

B) Opportunity cost of capital

C) Raw material cost

D) Risk of pilferage

20. When financial managers take action to minimize the carrying costs of current assets, they:

A) are likely to maximize profits.

B) also consider spoilage costs.

C) may increase costs due to shortages.

D) engage in the matching of maturities.

21. Which of the following would act to reduce the carrying costs of inventory?

A) The inventory is capable of spoiling.

B) The inventory will rapidly go out of style.

C) General interest rates decrease in the economy.

D) General interest rates increase in the economy.

22. Which of the following statements about total capital requirement is least likely to be correct for a profitable firm?

A) Requirements remain constant over time.

B) Seasonal variations are often experienced.

C) The trend is often upward-sloping.

D) A portion of working capital is permanent.

23. Which of the following would not be included as a source of short-term financing?

A) Line of credit

B) Increase in the minimum operating cash balance

C) Sale of marketable securities

D) Stretching accounts payable

24. Bank lines of credit must be judiciously requested because the lines often:

A) accrue interest regardless of whether funds are borrowed.

B) require payment of a commitment fee to establish.

C) appear as a liability on the firm's balance sheet.

D) have a negative impact on the firm's credit history.

25. Although commercial paper is unsecured, the companies that issue this short-term security are:

A) typically known to repay all defaults.

B) large firms of top credit quality.

C) small firms of top credit quality.

D) firms that have government-sponsored guarantees for the debt.

#### Solution Preview

1. The concept of compound interest refers to:

A) earning interest on the original investment.

B) payment of interest on previously earned interest.

C) investing for a multi-year period of time.

D) determining the APR of the investment.

Answer: B

2. When an investment pays only simple interest, this means:

A) the interest rate is lower than on comparable investments.

B) the future value of the investment will be low.

C) the earned interest is non taxable to the investor.

D) interest is earned only on the original investment.

Answer: D

3. Assume the total expense for your current year in college equals $20,000. Approximately how much would your parents have needed to invest 21 years ago in an account paying 8% compounded annually to cover this amount?

A) $ 952

B) $1,600

C) $1,728

D) $3,973

PV = FV where PV is the present value

(1 + i)n FV is the future amount

i is the interest rate

n is the period

PV = 20,000

(1 + 0.08)21

PV = 3,973

Answer: D

4. How much will accumulate in an account with an initial deposit of $100, and which earns 10% interest compounded quarterly for three years?

A) $107.69

B) $133.10

C) $134.49

D) $313.84

100 = FV

(1 + 0.025)12

FV = 134.49

Answer: C

5. How much must be invested today in order to generate a five-year annuity of $1,000 per year, with the first payment one year from today, at an interest rate of 12%?

A) $3,604,78

B) $3,746.25

C) $4,037.35

D) $4,604.78

PVA = W x 1 - 1 where PVA is the present value

(1 + i)n W is the annuity amount

i i is the interest rate

n is the period

PVA = 1,000 x 1 - 1

(1 + 0.12)5

0.12

PVA = 3,604.78

Answer: A

6. A stock's par value is represented ...

#### Solution Summary

The correct answer is identified for each question in this problem set. Calculations for PV (present value) in question 3, FV (future value) in question 4, PVA (present value of an annuity) in question 5, ROA (return on assets) and the cash conversion cycle in question 18 are included.