5.

Corporate Finance
Q-1. A portfolio manager who tracks the industry weights of a benchmark index, but within
each industry selects stocks with favorable ESG factors, is said to be engaging in:
A. active ownership.
B. thematic investing.
C. best-in-class investing.

Q-2. Which of the following statements about non-market factors in corporate governance
is most accurate?
A. Stakeholders can spread information quickly and shape public opinion.
B. A civil law system offers better protection of shareholder interests than does a common law
system.
C. Vendors providing corporate governance services have limited influence on corporate
governance practices.

Q-3. When two mutually exclusive projects with conventional cash flows are being ranked,
the net present value (NPV) and internal rate of return (IRR) decision rules are most
likely to conflict when the:
A. projects’ investments are of different scale.
B. projects have multiple IRRs.
C. projects have similar timing of cash flows.

Q-4. A company has 100 million shares outstanding. The share price of a company’s stock is
£15 just prior to announcing a £100 million expansionary investment in a new plant,
and the company estimates that the present value of future after-tax cash flows will be
£150 million. Analysts, however, estimate that the new plant’s profitability will be
lower than the company’s expectations. The company’s stock price will most likely:
A. drop below £15 per share due to the cannibalization of revenue from the new plant.
B. increase by less than £0.50 per share.
C. increase by the new plant’s net present value per share.

Q-5. An analyst gathered the following information about a company that expects to fund
its capital budget without issuing any additional shares of common stock:
Source of Capital Capital Structure Proportion Marginal After-Tax Cost
Long-term debt 50% 6%
Preferred stock 10% 10%
Common equity 40% 15%

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此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
 IRR of Two Independent Projects
Warehouse project 8%
Equipment project 12%
If no significant size or timing differences exist among the project(s) and both projects have the
same risk as the company’s existing projects, which project(s) should be accepted?
A. The warehouse project only
B. The equipment project only
C. Both projects

Q-6. Business risk is best described as resulting from the combined effects of a firm's:
A. financial risk and sales risk.
B. sales risk and operating risk.
C. operating risk and financial risk.

Q-7. A consultant sees the following information about a publicly listed company:
The company has a 12-person board of directors.
The board is chaired by the chief executive officer (CEO) of the company.
All members of the audit committee are outside directors with relevant financial
and accounting experience.
Which of the following changes would provide the greatest improvement in the corporate
governance of this company?
A. The chairman of the board should be an independent director.
B. The company’s Vice President of Finance should be a member of the audit committee.
C. The board of directors should have an odd number of directors to preclude tied votes.

Q-8. When estimating the NPV for a project with a risk level higher than the company’s
average risk level, an analyst will most likely discount the project’s cash flows by a rate
that is:
A. determined by the firm’s target capital structure.
B. below the WACC.
C. above the WACC.

Q-9. A company’s asset beta is 1.2 based on a debt-to-equity ratio (D/E) of 50%. If the
company’s tax rate increases, the associated equity beta will most likely:
A. increase.
B. decrease.
C. remain unchanged.

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此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
Q-10. A company manages its treasury function to exactly maintain its minimum daily cash
balance requirement. The following events occurred for the company on the same day:
$ millions
Funds transfer to subsidiaries 200
Maturing investments 150
Issues a stock dividend 25
Debt repayments 100
Minimum daily cash balance 50
Which of the following best describes the activities required of the Treasurer’s office this day?
They would need to increase borrowing by:
A. $175 million.
B. $100 million.
C. $150 million.

Q-11. Which of the following statements is correct?

A. The appropriate tax rate to use in the adjustment of the before-tax cost of debt to
determine the after-tax cost of debt is the average tax rate because interest is deductible
against the company's entire taxable income.
B. For a given company, the after-tax cost of debt is generally less than both the cost of
preferred equity and the cost of common equity.
C. For a given company, the investment opportunity schedule is upward sloping because as a
company invests more in capital projects, the returns from investing increase.

Q-12. Which of the following statements is the most appropriate treatment of flotation costs
for capital budgeting purposes? Flotation costs should be:
A. expensed in the current period.
B. incorporated into the estimated cost of capital.
C. deducted as one of the project’s initial-period cash flows.

Q-13. Faye Harlan, CFA, is estimating the cost of common equity for Cyrene Corporation. She
prepares the following data for Cyrene:
Price per share = $50.
Expected dividend per share = $3.
Expected retention ratio = 30%.
Expected return on equity = 20%.
Beta = 0.89.
Yield to maturity on outstanding debt = 10%.
3-8
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
 The expected market rate of return is 12% and the risk-free rate is 3%.
Based on these data, Harlan determines that Cyrene's cost of common equity is 14%. Harlan
most likely arrived at this estimate by using the:
A. dividend discount model approach.
B. capital asset pricing model approach.
C. bond yield plus risk premium approach.

Q-14. Freytag Company currently has assets on its balance sheet that are financed with 60%
equity and 40% debt. The company can issue debt at the yield of 8% when the value of
the debt doesn’t exceed 1 million. If larger amounts of debt are issued by the company,
the yield of the debt will be 9%. Calculate the break points for the company.
A. 1 million.
B. 1.67 million.
C. 2.5 million.

Q-15. Which of the following is least likely classified as an opportunity cost?

A. The cash flows generated by an old machine that is to be replaced.
B. The cash savings related to adopting a new production process.
C. The market value of vacant land used for a distribution center.

Q-16. A company is most likely faced with a drag on liquidity if its:

A. weighted average collection period increases from 42 days to 46 days.
B. largest vendor changes its invoice terms from “3/10 net 30” to “3/10 net 60.”
C. inventory turnover was below the industry average last year and is above the industry
average this year

Q-17. If GF’s sales increase by 10%, GF’s EBIT increases by 15%. If GF’s EBIT increases by 10%,
GF’s EPS increases by 12%.GF’s degree of operating leverage (DOL) and degree of total
leverage (DTL) are closest to:
A. 1.2 DOL and 1.5 DTL.
B. 1.2 DOL and 2.7 DTL.
C. 1.5 DOL and 1.8 DTL.

Q-18. Which of the following statements about capital structure and leverage is most accurate?
A. Financial leverage is directly related to operating leverage.
B. Increasing the corporate tax rate will not affect capital structure decisions.
C. A firm with low operating leverage has a small proportion of its total costs in fixed costs.
4-8
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
 5. Corporate Finance
Q-1. Solution: C.
With a best-in-class investing strategy, a portfolio manager selects the stocks within each industry
or sector that have the most favorable ESG characteristics, without excluding any industries.
Active ownership refers to using share ownership as a way to promote ESG related goals, through
proxy voting and access to company management. Thematic investing strategies are based on a
single ESG factor.
Corporate finance,ESG Considerations for Investors

Q-2. Solution: A.
A is correct. Social media has become a powerful tool for stakeholders to instantly broadcast
information with little cost or effort and to compete with company management in influencing
public sentiment.
Corporate finance, Factors that Affect Stakeholder Relationships and Corporate Governance

Q-3. Solution: A.
A is correct. Conflict between the NPV and IRR decision rules can arise when evaluating mutually
exclusive projects with conventional cash flows because 1) the scale of investments may differ
and/or 2) the timing of the cash flows may differ.
B is incorrect because multiple IRR will not occur in the projects with conventional cash flows.
C is incorrect because with mutually exclusive projects, the timing of cash flows also affects the
investment ranking under the NPV and IRR rules, but should not be a problem if they are similar.
Corporate finance, Project Evaluation Methods and NPV profile

Q-4. Solution: B.
B is correct. The value of a company is the value of its existing investments plus the net present
values of all of its future investments. The NPV of this new plant is £150 million − £100 million =
£50 million. The price per share should increase by NPV per share or £50 million/100 million
shares = £0.50 per share. As the new plant’s profitability is less than expectations, the NPV per
share (and hence the increase in the stock price) should therefore be slightly below £0.50 per
share.
A is incorrect because it is only new plant’s profitability that is below the average not the overall.
The company value should not fall below £15 per share, all things being equal.
C is incorrect because see the above calculation.
Corporate finance, Project Evaluation Methods and NPV profile

Q-5. Solution: B.
B is correct. The company’s weighted average cost of capital (WACC) is calculated as WACC =
0.5(6%) + 0.1(10%) + 0.4(15%) = 10%. In this scenario, the company should accept projects that
have an internal rate of return greater than the cost of capital. The equipment project’s IRR
exceeds the WACC. The warehouse project does not.
C and A are incorrect because accept projects that have an internal rate of return greater than
5-8
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
the cost of capital. The equipment project’s IRR exceeds the WACC. The warehouse project does
not.
Corporate finance, Project Evaluation Methods and NPV profile
Corporate finance, WACC

Q-6. Solution: B.
Business risk is the combination of sales risk, which is the variability of a firm's sales, and
operating risk, which is the additional variability in operating earnings (EBIT) caused by fixed
operating costs.
Corporate finance, Leverage and Risk

Q-7. Solution: A.
A is correct. In good corporate governance practices the chair of the board and CEO roles are
independent. If the chair of the board is a chief executive of the company, it may hamper efforts
to undo the mistakes made by him or her as chief executive. There is a general trend in
governance toward reduced influence for executive directors, as exemplified by the decreasing
incidence of CEO duality.
B is incorrect because all members of the audit committee should be independent members of
the board.
C is incorrect because there is no single optimal number of directors, either odd or even.
Corporate finance, ESG Considerations for Investors
Corporate finance, Functions and Responsibilities of Board of Directors and Committees

Q-8. Solution: C.
C is correct. If the systematic risk of the project is above average relative to the company’s
current portfolio of projects, an upward adjustment is made to the company’s MCC or WACC.
A is incorrect because the firm’s target capital structure is used to determine WACC, but in this
case we need more adjustment in the company’s WACC.
B is incorrect because if the systematic risk of the project is above average relative to the
company’s current portfolio of projects, an upward adjustment is made to the company’s MCC or
WACC.
Corporate finance,WACC

Q-9. Solution: B.
B is correct.
βequity = β asset × [1+(1−tax rate)×D/E]
If the tax rate increases, then the bracketed term (1 − tax rate) decreases, making the equity beta
6-8
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
decrease because the asset beta is unchanged.
A is incorrect because the equity beta decreases.
C is incorrect because the equity beta decreases.
Corporate finance, Pure-play Method & Country Risk Premium
Q-10. Solution: C.
C is correct. The change in the net daily cash position (in millions) is calculated as shown below
and would require additional borrowing of $150 million:
Opening cash balance $50
Funds transfer to subsidiaries (200)
Maturing investments 150
Debt repayments (100)
Change is cash for the day (150)
Borrowing required 150
Closing cash balance $50
Stock dividend is not included as it is a non-cash item.
Corporate finance, Liquidity Measures and Management

Q-11. Solution: B.
Debt is generally less costly than preferred or common stock. The cost of debt is further reduced

if interest expense is tax deductible.

Corporate finance, Optimal Capital Budget, Marginal Cost of Capital & Flotation Costs

Corporate finance,Cost of the Debt & Preferred Stock

Corporate finance,WACC

Q-12. Solution: C.
Flotation costs are an additional cost of the project and should be incorporated as an adjustment
to the initial-period cash flows in the valuation computation.
Corporate finance, Optimal Capital Budget, Marginal Cost of Capital & Flotation Costs

Q-13. Solution: C.
Using the CAPM approach, the estimated cost of common equity = 3% + 0.89(12% − 3%) = 11%.
Using the dividend discount model approach, the growth rate = (0.3)(0.2) = 6% and the estimated
cost of common equity = $3 / $50 + 6% = 12%. To get a cost of common equity of 14%, Harlan
most likely added a risk premium to Cyrene's bond yield.
Corporate finance, Cost of common equity

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内部使用资料，严禁传播，否则追究法律责任
Q-14. Solution: C.
When the value of the debt exceeds 1 million, the yield of the bonds issued changed. So the
break point for the company occurs when 40% of the whole capital exceeds 1 million. Break point
= 1 million/40% = 2.5 million.
Corporate finance, Optimal Capital Budget, Marginal Cost of Capital & Flotation Costs

Q-15. Solution: B.
The cash savings related to adopting a new production process is an incremental cash flow, not
an opportunity cost.
Corporate finance, The Basic of Capital Budgeting

Q-16. Solution: A.
An increase in the weighted average collection period indicates that customers are taking longer
to pay their outstanding accounts. This represents a drag on the company's liquidity. A vendor
that changes its payment terms from "net 30" to "net 60" is allowing the company 60 days to pay
instead of 30. This extension of trade credit is a source of liquidity for the company. An inventory
turnover ratio that is increasing relative to the industry average is a sign of good inventory
management, which can also be a source of liquidity for a company.
Corporate finance, Liquidity Measures and Management

Q-17. Solution: C.
DOL =15%/10% = 1.5
DOL = 12%/10%= 1.2
DTL = DOL × DFL = 1.5 × 1.2 = 1.8
Corporate finance, Leverage and Risk

Q-18. Solution: C.
If fixed costs are a small percentage of total costs, operating leverage is low.
Operating leverage is separate from financial leverage, which depends on the amount of debt in
the capital structure. Increasing the tax rate would make the after-tax cost of debt cheaper.
Corporate finance, Leverage and Risk

8-8
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任