CONFIDENTIAL

Module 1: CORPORATE FINANCE

EXAM QUESTIONS

CONFIDENTIAL
(For submission to Finance Accreditation Agency (FAA) only)

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Section 1: Intro to Corporate Finance

Q1. Return of Stock is made up of two components:
A) Equity and debt
B) Dividends and capital gains
C) Capital gains and equity
D) Equity and dividends

Q2. Shareholders will accept a high risk investment strategy as long as the strategy:
A) Maximizes shareholder value
B) Results in dividend payments
C) Is good for the company in the long run
D) Is favored by the Board of Directors

Q3. A loan's interest rate is also known as:

A) The price of doing business
B) The balloon payment
C) The cost of borrowing
D) The revolver payment

Q4. Money used to maintain inventory is:

A) Production-oriented capital
B) Working capital
C) Operations-oriented capital
D) Financial capital

Q5. Money used to pay for tangible assets like real estate or machinery is:
A) Production-oriented capital
B) Working capital
C) Operations-oriented capital
D) Financial Capital

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Q6. Money used to pay dividends is:

A) Production-oriented capital
B) Working capital
C) Operations-oriented capital
D) Financial Capital

Q7. Money used to pay salaries is:

A) Production-oriented capital
B) Working capital
C) Operations-oriented capital
D) Financial Capital

Q8. Which of the following is NOT considered a long-term source of financing?

A) Cash retained from operations
B) Bonds and debentures
C) Leasing or sale-and-lease back
D) None of the above

Q9. Which of the following provides the most liquidity?

A) Production-oriented capital
B) Working capital
C) Commercial paper
D) Operational-oriented capital

Q10. The Efficient Market Hypothesis (EMH) states that:

A) It is impossible to beat the market average return over short periods of time
B) Most assets are fairly valued in an open market
C) Most stock pickers can beat the market average return over long periods of time
D) Market efficiency is contradicted by the free flow of information in the markets

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Section 2: Time Value of Money

Q1. Which of the following best expresses Present Value?
A) PV = CFt/(1 + i)t
B) PV = CFt/(1 - i)t
C) PV = CFt/(1 + i)t
D) PV = CFt/(1 - i)t

Q2. Let's say you want to receive an annuity of $200 a year for the next five years. How much
money do you need to invest now to give you $200 a year for five years, assuming an interest
rate of 10%?
A) $379.08
B) $600.00
C) $758.16
D) $800.00

Q3. Assume that you are expecting $1,000 seven years from now. The interest rate is 8%. What
is the PV of that future payment?
A) $1,000.00
B) $583.49
C) $560.00
D) $540.27

Q4. You have $50,329.53, and you want to have annuity payments of $10,000. At an interest
rate of 9%, how long will the annuity last?
A) 5 years
B) 7 years
C) 10 years
D) 12 years

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Q5. You want to take out a 20-year, $100,000 mortgage at an interest rate of 8%, to be paid in
equal annual installments. How much are your annual payments?
A) $3,395.07
B) $6,790.14
C) $10,185.22
D) $13,580.28

Q6. Your firm needs to make pension payments of $7,900 per year to a recently retired
employee for the next 10 years. There's $50,000 available in the budget to invest now. How
much interest does she need to earn?
A) 8.23%
B) 9.32%
C) 10.54%
D) 11.32%

Q7. If you invest $850 today at 3% annual interest, how much will it be worth in 4 years?
A) $956.68
B) $874.58
C) $874.25
D) $799.52

Q8. You're about to receive a $100 annuity for each of the next five years at an interest rate of
8%. If you invest that annuity each year, how much will it be worth at the end of the five years?
A) $493.33
B) $586.66
C) $663.99
D) $683.66

Q9. What is the yield to maturity of a zero coupon bond with a face value of $100,000,
maturing in 5 years, with a current price of $73,000?
A) 7.50%
B) 6.50%
C) 6.38%
D) 6.22%

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Q10. If you are trying to value a company that doesn’t pay dividends, the best way to do that is
to project the company’s earnings over the next several years and:
A) Take the future value of those earnings
B) Average them to estimate an implied dividend
C) Multiply each year’s earnings by 50% to estimate an implied dividend
D) Take the present value of those earnings

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Section 3: Time Value Applications

Q1. Solve for i in the following equation:
PV = $400An,i + FV/(1 + i)N
Where:
• An,i is the annuity factor for a three-year period ($1 annuity at interest rate i)
• $9,167 price is the present value of the promised $400 three-year annuity (which is
multiplied by An,i)
• The lump sum is $10,000
A) 9.09%
B) 8.03%
C) 7.30%
D) 7.18%

Q2. PV = $50 An,i + FV/(1 + i)N is also known as a:

A) Binomial equation
B) Trinomial equation
C) Quadnomial equation
D) Polynomial equation

Q3. Suppose you're offered a $900, 20-year bond with a face value of $1,000, an 8% coupon,
and semi-annual interest payments. What's the yield?
A) 9.09%
B) 9.33%
C) 9.99%
D) 10.90%

Q4. Book value is the historical cost of assets as recorded in the balance sheet _________.
A) Adjusted for changes in market value
B) Plus accumulated depreciation
C) Less accumulated depreciation
D) Adjusted for expected salvage value

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Q5. The three factors involved in calculating the present value of a stock are:
A) Cash flow, time, and interest
B) Cash flow, interest, and growth rate of cash flow
C) Dividend rate, growth rate, and maturity
D) Book rate, liquidation value, and future earnings

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Section 4: Capital Budgeting

Q 1. Who is most affected by capital rationing constraints?
A. Firms with credibility problems
B. Smaller firms, which pay higher flotation costs than large firms
C. Companies that primarily depend on equity financing for projects (rather than debt
financing).
D. All of the above

Q 2. Profitability Index (PI) =

A. Net Present Value/The initial investment
B. The initial investment/Net Present Value
C. Assets/The initial investment
D. Net Present Value/Assets

Q 3. Assuming a cost of capital of 10% and a choice between Machine A with a useful life of 5
years and Machine B with a useful life of 4 years:
NPVA = -$16mm + $4.5mmA5,10%
NPVB = -8mm + $2.84mmA4.10%
Which machine should be purchased?
A. Machine A
B. Machine B
C. Neither machine since both have negative NPVs
D. Not enough information given to make decision

Q 4. The lower the WACC, the _____.

A. Higher that value of the firm
B. Lower the cost of debt
C. Lower the cost of equity
D. Lower the value of the firm

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Q5. WACC =
A. L(R) (1 - T) - (1 - L)Re
B. L(R) (1+ T) + (1 - L)Re
C. L(R) (1 - T) - (1 + L)Re
D. L(R) (1 - T) + (1 - L)Re

Q6. In the following equation:

WACC = L(R) (1 - T) + (1 - L)Re
The first instance of R refers to:
A. The corporate tax rate
B. The percentage of equity financing used by the firm
C. The yield of the firm's debt outstanding
D. The yield of the firm's equity

Q7. In the following equation:

WACC = L(R) (1 - T) + (1 - L)Re
The (1 - L) refers to:
A. The corporate tax rate
B. The percentage of equity financing used by the firm
C. The yield of the firm's debt outstanding
D. The yield of the firm's equity

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Section 5: Factors Affecting Financial Decisions

Q1. The optimal financing decision is the one that ________ the WACC.
A) Minimizes
B) Maximizes

Q2. Which of the following would NOT influence financing decisions?

A) Signaling
B) Asset base
C) Taxes
D) Coupon rate

Q3. Which of the following would not be influenced by debt/equity mix?

A) Call features
B) Conflict of interest
C) Restrictive covenants
D) Debt maturity

Q4. A firm's financing decision doesn't affect the total cash flow available to stockholders and
bondholders. Nobel Prize-winning economists Modigliani and Miller first discovered this
irrelevance proposition in which year?
A) 1948
B) 1958
C) 1968
D) 1978

Q5. Assuming no corporate taxes and no risk of default, as leverage increases:

A) WACC decreases
B) WACC increases
C) WACC resists change
D) Cost of equity decreases

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Q6. Having many tangible assets would lead one to consider _________ debt.
A) Less
B) More
C) No change

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Tel: +1 347 842 2501 © New York Institute of Finance, Inc. All rights reserved.
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