Note: This is a sample test, just to give you a taste of the exam.

It does not cover the topics fully

and is not comprehensive.
FINA_MGMT 517 CORPORATE FINANCE EXAM I SAMPLE
Student Name & Number: _________________________________________________________
This is a scrambled test in which there are multiple choice questions, brief essay questions, one problem. Questions are grouped in
line with the topics we have covered in class. Each multiple choice question and each brief essay question is 3 points each (25
questions x 3.5 pts.= 88 pts.). The last question is 12 points worth. Please answer all questions in the space provided. The duration
of the test is 90 minutes. There is a brief bonus essay question at the end of the test which is 5 points worth. Good Luck!!
1. The financial goal of a corporation is to:
A.
Minimize stockholder wealth
B.
Maximize profit
C.
Maximize value of the corporation to the stockholders
D.
Decrease job
security
2. The idea of maximizing shareholder value is widely accepted in:
(I) U.S.A.; (II) U.K; (III) Germany; (IV) France; (V) Japan
A.
I only
B.
I and II only
C.
III, IV and V only
D.
I,II, III, IV and V
3. The following are some of the actions shareholders can take if the corporation is not performing well:
A.
Replace the board of directors in an election.
B.
Force the board of directors to change the management team.
C.
Sell their shares of stock in the
corporation.
D.
Any of the
above
4. Briefly explain some of the institutional arrangements that ensure that managers work toward increasing the value of a firm.

5.

6.

7.

8.

Corporations, potentially, have infinite life because:

A.
it is a legal entity
B.
of separation of ownership and
management
C.
limited liability
D.
none of the above
A firm's investment decision is also called the:
A.
Financing decision
B.
Liquidity decision
C.
Capital budgeting decision
D.
None of the above
The treasurer usually oversees the following functions of a corporation except:
(I) Preparation of financial statements; (II) Investor relationships; (III) Cash management
(IV) raising new capital
A.
I only
B.
I and II only
C.
II, III and IV only
D.
III only
Conflicts of interest between shareholders and managers of a firm result in:
A.
Principal-agent problem
B.
Increased agency
costs
C.
Both A and B
D.
managers owning the
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firm
In the principal-agent framework:
A.
Shareholders are the principals
B.
Managers are the
principals
C.
Shareholders are the agents
D.
Managers are the
agents
E.
A and D
10. Agency costs are incurred by a corporation because:
A.
managers may not attempt to maximize the value of the firm to shareholders
B.
shareholders incur monitoring cost
C.
separation of ownership and management
D.
all of the above
Problem (12 points)
9.

Mr. Cyrus Clops, the president of Giant Enterprises, has to make a choice between two possible investments:
Project
A
B

C0
-400
-200

Cash Flows ($ Thousands)

C1
+250
+140

C2
+300
+179

IRR (%)
23
36

The opportunity cost of capital is 9 %. Mr. Clops is tempted to take B, which has a higher IRR.
(a) Explain to Mr. Clops why this is not the correct procedure.

(b) Show him how to adapt the IRR rule to choose the best project.

(c) Show him that this project also has the higher NPV.

11. Generally, managers of corporations prefer internally generated cash to finance their capital expenditures because:
(I) They can avoid the discipline of the financial markets
(II) The costs of issuing new securities are high
(III) The announcement of new equity issue is usually bad news for investors
A.
I only
B.
II
only
C.
II and III only
D.
I,II, and III
12.
If you own 1,000 shares of stock and you can cast 5,000 votes for a particular director, then the stock features:
A.
Cumulative voting
B.
Straight voting
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C.
D.
13.
A.
B.
C.
D.
14.

A.
B.
C.
D.
15.

Majority voting
None of the above
Minority shareholders can also be represented on the board of directors
under:
Majority voting
Cumulative voting
Straight voting
None of the above
The following are characteristics of preferred stock
except:
(I) pays fixed dividends
(II) has cumulative feature
(III) has voting rights
I only
I and II only
III only
II only
Indicate important sources of finance available to corporations and why do corporations heavily rely on internal
funds?

16. Wealthy individuals who provide equity investment for new firms are called:
(I) White knights
(II) Red herrings
(III) Angel investors
A.
I only
B.
I and II only
C.
III only
D.
II only
17.
Generally initial public offerings (IPOs) are:
A.
Overpriced
B.
Correctly
priced
C.
Under priced
18.
Generally, underwriters provide the following services to the issuing firm:

A.
B.
C.
19.
A.
B.
C.
D.
20.
A.
B.
C.
D.
21.
A.

(I) Provide advice

(II) Buy new issue
(III) Reselling the issue to the public
I only
I and II only
I, II, and III
The possibility that the winner (highest bidder) in an auction process may have bid a price that is very high (far above the
value) is called:
Winners curse
Double auction
Best efforts
None of the above
A security issue sold directly to the public is called:
A rights offer
A general cash offer
A private placement
An uniform-price auction
The following are advantages of shelf registration
except:
Securities can be issued in dribs and drabs without incurring excessive transaction costs
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B.
C.
D.
22.
A.
B.
C.
D.
23.
A.
B.
C.
D.
24.
A.
B.
C.
D.
25.
A.
B.
C.
D.

Securities can be issued in short notice

Security issues can be timed to take advantage of market
conditions
All of the above are advantages
A new public equity issue from a company with equity previously outstanding is called:
An initial public offering (IPO)
American depositing receipts
(ADRs)
A seasoned equity offering (SEO)
A private placement
Generally, which of the following issues have the lowest total direct costs of issuing as a percentage of gross proceeds?
Initial public offerings (IPOs)
Seasoned equity offerings (SEOs)
Convertible bonds
Straight bonds
Generally, there is a drop in the price of equity subsequent to the announcement of a new issue. This is attributed to:
An increase in the supply of shares
Information effect
Both a and b
None of the above
Image Corporation has #1,000,000 shares outstanding. It wishes to issue 250,000 new shares using rights issue. If the
current stock price is $50 and the subscription price is $45/share, calculate the value of a right?
$0.25/right
$5.00/right
$2.50/right
$1.00/right

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11. The equity accounts of Bio-Tech Company is as follows:

Suppose the firm sells 2,000,000 new (additional) shares at a price of $20 per share. What is the new value
of Common Shares account?
A. 12,000,000
B. 10,000,000
C. 2,000,000
D. None of the above
12. Bio-Tech Company has had a very successful year and earnings are $21million. The company has 12
million shares outstanding and will pay a dividend of $1.00/share. The old value of retained earnings
account is 125 million. What is the retained earnings for the year and the new value of retained earnings
account?
A. $21 million & $146 million
B. $9 million& $134 million
C. $12 million & $137 million
D. None of the above13. The equity accounts of Bio-Tech Company is as follows:

Suppose that the firm sells 2,000,000 new shares at a price of $20/share. What is the new value of the
additional paid-in-capital account?
A. $144,000,000
B. $40,000,000
C. $88,000,000
D. $70,000,000

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