Corporate Finance

Practice Questions for Mid-Semester Exam

Question 1: For a project with conventional cash flows, if Present Value Index is
greater than 1, then the:
A: IRR is equal to the firms cost of capital
B: IRR is equal to the firms required rate of return
C: NPV is greater than zero
D: Accounting rate of return exceeds the IRR
E: NPV is negative
Question 2: A invests in a property that pays him 14% annually. If A invests $325,
calculate A's simple interest component at the end of 24 months?
A: $119
B: $109
C: $91
D: $90
E: $93
Question 3: All other things being equal, the lower the coupon rate:
A: the longer the time to maturity
B: the higher the price
C: the lower the price
D: the greater the interest rate risk
E: none of the above
Question 4: Calculate the NPV if the outflow is $50 000 and the inflows are:
Year 1 $10 000
Year 2 $20 000
Year 3 $50 000
Year 4 -$5 000
The appropriate discount rate is 18%.
A: $961
B: $691
C: $1 961
D: $1 691
E: $1 196
Question 5: The current value of future cash flows discounted at the discount rate is:
A: future value
B: future value interest factor
C: present value interest factor
D: compounding value
E: present value
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Question 6: There is an inverse relationship between interest rates and:

A: coupon
B: bond prices
C: term to maturity
D: face value
E: both A and D
Question 7: An increase in an asset account:
A: is a source of cash
B: is a use of cash
C: does not affect cash
D: is an increase in the liability account
E: none of the above
Question 8: Assume that a project generates cash flows of $2 000 in years 1 and 2,
$4 000 in the next two years, and $5 000 in the last year. The initial investment is
$10 000. The discount rate is 10%. What is the NPV?
A: $12 313
B: $10 000
C: $ 2 313
D: $ 2 133
E: $22 313
Question 9: You are interested in buying a property that will cost you $10 million. You
have $2.3 million. If you earn interest at the rate of 5% per year, how long will you
have to wait before you buy this property?
A: 30.21 years
B: 30.10 years
C: 30.12 years
D: 30.00 years
E: 29.12 years
Question 10: The primary goal of financial management is to:
A: maximise current sales
B: maximise the value of shares
C: minimise costs
D: avoid bankruptcy
E: all of the above

Question 11: A Limited has just paid a dividend of $0.30 per share. The dividend
grows at a steady rate of 8% per year. Based on this information what will be the
dividend in five years?
A: $0.144
B: $0.141
C: $0.444
D: $0.441
E: $0.044

Question 12: The next dividend for A Limited will be $0.40 per share. Investors
require a 16% return on companies such as A Limited. As dividend increases by 6%
every year. Based on the dividend growth model what is the value of A Limiteds
shares today?
A: $2.50
B: $0.40
C: $5.05
D: $4.00
E: cannot be calculated
Question 13: The discount rate that makes the NPV of an investment zero is known as
the:
A: discounted rate of return
B: average rate of return
C: required rate of return
D: internal rate of return
E: target rate of return

Question 14: The difference between a firms current assets and current liabilities is
called:
A: accounting profits
B: excess profits
C: net working capital
D: both A and C
E: all of the above

Question 15: A Limited has just issued a bond with a $100 face value and a coupon
rate of 8%. If the bond has a life of 20 years, pays annual coupons and the YTM is
7.5%, what will the bond sell for?
A: $102
B: $105.10
C: $108.70
D: $116.20
E: $101.50
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Question 16: Price/earnings ratio is defined as:

A: price per share/book value per share
B: price per share/market value per share
C: price per share/earnings per share
D: earnings per share/price per share
E: price per share/market value per share
Question 17: You are interested in buying a property that will cost you $10 million.
You have $2.3 million. If you earn interest at the rate of 16% per year, how long will
you have to wait before you buy this property?
A: 12 years
B: 11 years
C: 10 years
D: 8.96 years
E: 9.10 years
Question 18: A conventional cash flow is a cash flow where the first cash flow:
A: is positive and all other cash flows are negative
B: is negative and all other cash flows are also negative
C: is negative and all other cash flows are positive
D: is positive and all other cash flows are also positive
E: there is no such thing as a conventional cash flow

Question 19: A Limited has just issued a bond with a $100 face value and a coupon
rate of 8%. If the bond has a life of 20 years, pays annual coupons and the YTM is
7.5% what is the present value of the bonds face value?
A: $100
B: $105.09
C: $80.05
D: $25.34
E: $23.54

Question 20: Total return has two components: one of them is the dividend yield and
the other is:
A: required return
B: current price
C: capital gains yield
D: cash dividend rate
E: future dividend

Question 21: The present value index is defined as:

A: initial outlay/net cash flows
B: value of net cash flows/initial outlay
C: present value of net cash flows/initial outlay
D: present value of cash flows/initial outlay
E: none of the above
Question 22: You are considering a one-year investment. If you invest $1250 you will
get back $1350. What rate is this investment paying?
A: 7.5%
B: 6.5%
C: 8.5%
D: 8.0%
E: 9.0%
Question 23: Alternative investment projects are known as:
A: independent projects
B: mutually exclusive projects
C: positively correlated projects
D: negatively correlated projects
E: higher opportunity cost project
Question 24: A bank is offering 12% compounded quarterly. If you put $100 in an
account, how much will you have at the end of one year?
A: $115.12
B: $112.15
C: $112.50
D: $112.55
E: $126.68
Question 25: The ----------- method ignores the time value of money and cash flows
beyond a specified point in time, and is largely useful only in evaluating short-term
projects.
A: NPV
B: IRR
C: ARR
D: pay back
E: present value index
Question 26: Return on assets is defined as:
A: net profit/total current assets
B: net profit/total non-current assets
C: net profit/total assets
D: net profit/total equity
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E: none of the above

Question 27: Calculate the NPV if the outflow is $100 000 and the inflows are $40
000 for the next three years. Assuming the appropriate discount rate to be 15%, what
is the NPV?
A: -$8 671
B: -$4 032
C: $8 064
D: $9 075
E: $15 000
Question 28: Your grandmother placed $10,000 in a fund for you so that you can
withdraw $25,000 in 10 years. What is the rate of return?
A: 6.9%
B: 9.6%
C: 9.5%
D: 8.9%
E: 9.4%
Question 29: Which of the following cannot be calculated?
A: the present value of a perpetuity
B: the interest rate on a perpetuity given the present value and payment amount
C: the present value of an annuity due
D: the future value of an annuity due
E: the future value of a perpetuity

Question 30: The possibility of conflict between shareholders and management of the
firm is called:
A: corporate breakdown
B: an agency problem
C: management breakdown
D: legal liability
E: financial distress
Question 31: Interest earned on only the original principal amount invested is:
A: present value interest
B: simple interest
C: time value of money
D: beginning interest
E: none of the above

Question 32: Assume that A contributes $2000 every year into a retirement account
paying 8%. If A retires in 30 years, how much will he have?
A: $212,576
B: $262,576
C: $226,576
D: $262,567
E: $226,567
Question 33: A Limited currently pays a cash dividend of $0.50 per share. You believe
that the dividend will be increased by 4% each year indefinitely. How big will the
dividend be in eight years?
A: $0.86
B: $0.66
C: $0.65
D: $0.68
E: not enough information available
Question 34: Suppose you need $400 to buy textbooks next year. You can earn 7% on
your money. How much do you have to invest today?
A: $337.85
B: $367.83
C: $337.83
D: $373.83
E: cannot be calculated

Question 35: Profit is often expressed on a per share basis and called:
A: price to earnings ratio
B: earnings per share
C: retained earnings per share
D: none of the above
E: dividends per share

Question 36: Peggy Grey's Cookies has net income of $360. The firm pays out 40
percent of the net income to its shareholders as dividends. During the year, the
company raised $80 worth of new equity. What is the cash flow to stockholders?
A: $64
B: $136
C: $144
D: $224
E: $296

Question 37: Bill Bailey and Sons pays no dividend at the present time. The company
plans to start paying an annual dividend in the amount of $.30 a share for two years
commencing two years from today. After that time, the company plans on paying a
constant $1 a share dividend indefinitely. How much are you willing to pay to buy a
share of this stock if your required return is 14 percent?
A: $4.82
B: $5.25
C: $5.39
D: $5.46
E: $5.58

Question 38: Tool Makers, Inc. uses tool and die machines to produce equipment for
other firms. The initial cost of one customized tool and die machine is $850,000. This
machine costs $10,000 a year to operate. Each machine has a life of 3 years before it
is replaced. What is the equivalent annual cost of this machine if the required return is
9 percent? (Round your answer to whole dollars)
A: $325,794
B: $340,002
C: $345,797
D: $347,648
E: $351,619
Question 39: Jupiter Explorers has $6,400 in sales. The profit margin is 4 percent.
There are 6,400 shares of stock outstanding. The market price per share is $1.20.
What is the price-earnings ratio?
A: 13
B: 14
C: 21
D: 30
E: 48
Question 40: Patti's has net income of $1,800, a price-earnings ratio of 12, and
earnings per share of $1.20. How many shares of stock are outstanding?
A: $1,200
B: $1,400
C: $1,500
D: $1,600
E: $1,800

Key:
1. C
2. C
3. D
4. B
5. E
6. B
7. B
8. C
9. C
10. B
11. D
12. D
13. D
14. C
15. B
16. C
17. C
18. C
19. E
20. C
21. D
22. D
23. B
24. D
25. D
26. C
27. A
28. B
29. E
30. B
31. B
32. E
33. D
34. D
35. B
36. A
37. B
38. C
39. D
40. C