Corporate Finance Exam Help
Q1. Averaging the deviations from the mean for a portfolio of securities will:
- compute the standard deviation.
- compute the variance.
- equal zero.
- equal the number of securities in the portfolio.
Q2. Every additional stock added to a portfolio reduces the portfolio’s level of risk by an equal amount.
Q3. The market risk premium is the difference between the return on common stocks and the risk-free interest rate.
Q4. Treasury bonds have provided a higher historical return than Treasury bills, which can be attributed to their:
- greater default risk.
- higher level of specific risk.
- greater exposure to interest rate risk.
Q5. The CAPM is a theory of the relationship between risk and return that states that the expected risk premium on any security equals its beta times the market return.
Q6. In practice, the market portfolio is often represented by:
- a portfolio of U.S. Treasury securities.
- a diversified stock market index.
- an investor’s mutual fund portfolio.
- the historic record of stock market returns.
Q7. The slope of the security market line equals:
- the market risk premium.
- the expected return on the market portfolio.
Q8. Beta measures a stock’s sensitivity to market risks.
Q9. To a company, the cost of interest payments on its bonds is reduced by the amount of tax savings generated by that interest.
Q10. A firm’s WACC:
- is the proper discount rate for every project the firm undertakes.
- is used to value all of the firm’s existing projects.
- is a benchmark discount rate that may be adjusted for the riskiness of each project.
- is for informational value only and should never be used as a discount rate.
Q11. Dividends represent an important component of a firm’s net book value.
Q12. Assume a corporation has cumulative voting and there are two directors up for election. What is the maximum number of votes a shareholder who owns 100 shares can cast for Candidate Jones if there are a total of 5 candidates?
Q13. Different classes of stock often have different voting rights.
Q14. Bonds that have been sold only to a limited number of institutional investors are considered:
- secured bonds.
- convertible bonds.
- private placements.
- indexed bonds.
Q15. Assume a corporation has cumulative voting and there are two directors up for election. What is the minimum number of votes a shareholder who owns 100 shares can cast for Candidate Jones if there are a total of 5 candidates?
Q16. If an underwriter charges the public $40 per share for a new issue after having promised the issuer $38 per share, the spread per share is:
Q17. In many countries it is common even for large businesses to remain privately owned.
Q18. The SEC reviews the registration statement and determines whether or not an investment in the firm is advisable.
Q19. When underwriters offer a firm commitment on a stock issue, they:
- employ their best efforts in selling the stock.
- guarantee the net proceeds to the issuing firm.
- agree to purchase the venture capitalists’ shares.
- assure purchasers that the stock will appreciate.
Q20. The advantage of the bookbuilding method is that it allows underwriters to give preference to those investors whose bids are most helpful in setting the issue price and to offer them a reward in the shape of underpricing.
Q21. Which ranking of financing from most preferred to least preferred is predicted by the pecking-order theory?
- Debt issue, stock issue, internally generated funds
- Internally generated funds, debt issue, stock issue
- Stock issue, internally generated funds, debt issue
- Internally generated funds, stock issue, debt issue
Q22. Financial risk is the risk to shareholders that results from debt financing.
Q23. A firm increases its debt ratio from 50% to 60%. In the absence of taxes, an investor can offset the change in capital structure by:
- selling part of her holding and buying debt.
- borrowing money and investing it in the firm’s equity.
- holding a diversified portfolio.
- switching her investment to convertible bonds.
Q24. Those who benefit from the interest tax shield are:
- debt holders.
- equity holders.
- both debt holders and equity holders.
- only the firm’s customers.
Q25. A firm’s capital structure is represented by its mix of:
- liabilities and equity.
- assets and liabilities.
- assets, liabilities, and equity.
Q26. Which one of the following firms is likely to exhibit the least macro risk exposure?
- Construction company
- Airline company
- Gold mining company
- Auto manufacturer
Q27. The primary difference between U.S. Treasury bills and U.S. Treasury bonds is that the bills:
- do not have default risk.
- have more price volatility.
- have a shorter maturity at time of issue.
- offer a higher return.
Q28. Which one of the following would you expect to represent the broadest-based index of U.S. stocks?
- Wilshire 5000
- Dow Jones Industrial Average
- Standard and Poor’s Composite
- Financial Times Index
Q29. A market index is used to measure performance of a broad-based portfolio of stocks.
Q30. The required risk premium for any given investment is defined by the security market line.
Q31. The basic tenet of the CAPM is that a stock’s expected risk premium should be:
- greater than the expected market return.
- proportionate to the market return.
- proportionate to the stock’s beta.
- greater than the risk-free rate of return.
Q32. Why should stock market investors ignore specific risks when calculating required rates of return?
- There is no method for quantifying specific risks.
- Specific can be diversified away.
- Specific risks are compensated by the risk-free rate.
- Beta includes a component to compensate for specific risk.
Q33. The capital asset pricing model (CAPM) assumes that the stock market is dominated by well-diversified investors who are concerned only with market risk.
Q34. Capital structure refers to a firm’s mix of long-term debt and equity financing.
Q35. Capital structure decisions refer to the:
- dividend yield of the firm’s stock.
- blend of equity and debt used by the firm.
- capital gains available on the firm’s stock.
- maturity date for the firm’s securities.
Q36. Which one of these accounts represents internal funding?
- Retained earnings
- Common stock
- Bonds payable
- Preferred stock
Q37. The system of electing a board of directors where each director is voted on separately is known as:
- majority voting.
- super majority voting.
- cumulative voting.
- proxy voting.
Q38. A eurobond is defined as any bond that is denominated in euros.
Q39. A stock’s par value is the:
- maturity value of the stock.
- price at which each share is recorded.
- price at which an investor could sell the stock.
- price received by the firm when the stock was issued.
Q40. Equity capital in young businesses is known as venture capital and it is provided by venture capital firms, wealthy individuals, and investment institutions such as pension funds.
Q41. A major purpose of the prospectus is to:
- inform investors of the security’s rate of return.
- advise investors of the security’s potential risks.
- distribute stock warrants to prospective investors.
- list the security’s dividend payment dates.
Q42. Those subject to the winner’s curse are:
- uninformed investors.
- firms issuing IPOs.
- venture capitalists.
Q43. The advantage of the bookbuilding method is that it allows underwriters to give preference to those investors whose bids are most helpful in setting the issue price and to offer them a reward in the shape of underpricing.
Q44. According to the trade-off theory, if the PV of the tax shield generated by debt is equal to the PV of the financial distress costs, then the:
- tax shield has been calculated incorrectly.
- firm is too heavily levered.
- firm has reached its optimal debt level.
- firm appears to have a low risk of financial distress.
Q45. According to MM’s proposition II the expected return on equity is equal to the expected return on assets for a levered firm.
Q46. The present value of a perpetual tax shield increases as the firm’s tax rate _____ and as the amount of the debt_____.
- increases; increases
- increases; decreases
- decreases; decreases
- decreases; increases
Q47. Financial slack:
- is associated with high leverage
- allows firms to take advantage of good investment opportunities
- solves any agency costs when managers want to empire-build
- is a term that describes a lazy CFO
Q48. Costs of financial distress are greater when a firm increases its:
- intangible assets as a percentage of total assets.
- tangible assets as a percentage of total assets.
- net working capital.
- retained earnings.
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