CORPORATE FINANCE TRIAL QUESTIONS

1. Corporate taxes favour debt financing but personal taxes favour equity financing, in
effect personal taxes lesson the advantage of corporate debt. Briefly explain this
statement.
2. Differentiate between signalling theory and pecking order theory. Explain their
implications in project finance.
3. How does risk premium differ from market risk premium? Show how each of them can
be corrupted manually.
4. Orchestra Inc. stock currently sells for $20 a share. The stock just paid a dividend of
$1.00 a share. The dividend is expected to grow at a constant rate of 10%. What stock
price is expected 1 year from now?
5. Briefly explain preemptive rights and indicate how stockholders benefit from these
rights.
6. In computing the price of a bond under semi-annual compounding state three
modifications which are done to the original bond value formula.
7. Suppose a firm has a $1000 face value, maturity in three years with a 10 percent coupon
rate paid semi-annually, calculate the price of the bond assuming corporate debt yield
of 12%
8. Briefly distinguish between yield to maturity (YTM) and yield to call (YTC)
9. Briefly explain why the return on equity (ROE) increases when a firm becomes
leveraged?
10. i. What is agency problem? State three features that contribute to the existence of
agency problem.
ii. Explain why shareholders prefer debt financing to equity financing as an
attempt to reduce agency problem.
11. Why should investors view the issuance of stock as a negative signal when managers
want to raise finance for a project? Explain how investors can deal with this situation.

Explain the main difference between financial leverage and operating leverage. Which
categories of investors bear these risks?
 OBJECTIVES
1. The focal point of financial management in a firm is
A. The number and types of products or service produced by the firm
B. The minimization of the amount of taxes paid by the firm
C. The creation of value for shareholders
D. The dollar profits earned by the firm
2. A bank uses the policy of half yearly compounding for its term deposits. A customer
deposits $10,000 for 5 years. The bank has mentioned 9% compounding, calculate the
maturity amount
A. $15,387
B. $16,506
C. $15,530
D. $15,657
3. If a corporation goes bankrupt, who is/are first entitled to the a corporation’s assets?
A. President of corporation
B. Preferred stockholder
C. Loans from banks, bondholders and taxes from government
D. Common stockholders
4. What is the difference between current ratio and the quick ratio?
A. The current ratio includes inventories and the quick ratio does not
B. The current ratio does not include inventories and the quick ratio does
C. The current ratio includes physical capital and the quick ratio does not
D. The current ratio does not include physical capital and the quick ratio does.
5. Which of the following statements is not true with respect to the matching strategy?
A. All assets should be financed with permanent long term capital
B. Temporary current assets should be financed with temporary working capital.
C. Permanent current assets should be financed with permanent working capital.
D. Long term assets should be financed from long term capital.
6. Different stakeholders possess different powers and interests. How should stakeholders
with high interest and high power be treated?
A. Keep them informed about all major happenings
B. Devote negligible effort
C. Invest maximum effort
D. No extra effort needed
7. Risk as it relates to working capital means that there is jeopardy to the firm for not
maintaining sufficient current assets to……………..
A. Meets its cash obligation as they occur and take advantage of prompt payment
discounts.
B. Support the proper level of sales and fake prompt payment discounts
C. Maintain current and acid –test ratios at or above industry norms
D. Meet its cash obligations as they occur and support the proper level of sales

8. To a financial analysts; working capital means the same thing as

 A. Total assets
B. Fixed assets
C. Current assets
D. Current asset minus currents liability
9. The purchasing power of money depends upon the ………
A. Price level
B. Demand level
C. Supply level
D. Distribution level
10. According to marketability feature, bonds which are attached to stock warrants have
A. Decreased floatation
B. Increased floatation
C. Increased marketability
D. Decreased marketability

Use the extract below to answer questions 11 and 12

Your firm is considering building a new office complex. Your firm already owns land suitable
for the new complex. The current book value of the land is $100,000. However a commercial
real estate agent has informed you that an outside buyer is interested in purchasing this land
and would be willing to pay $650,000 for it. When calculating the net present value (NPV) of
your new office complex ignoring taxes,
11. The appropriate incremental cashflow for the use of this land is
A. $650,000
B. $550,000
C. $750.00
D. 100,000
12. What general deductions can be made from the following financial decision?
A. Market value of an asset is always greater than the book value
B. Opportunity cost of using an asset is equal to its market values
C. Book value of an asset is always discarded in making financial decisions.
D. The book value of an asset is greater than its market value
13. Which of the following costs would you consider when making capital budgeting
decisions?
A. Sunk cost
B. Opportunity cost
C. Interest expense
D. Fixed overhead cost
14. Which of the following formula would correctly calculate net working capital?
A. Cash + inventory + receivable + payables
B. Cash + inventory + receivables – payables
C. Cash + inventory – receivables + payables
D. Cash – inventory +receivables + payables
 15. Bond holder can make profit by returning bonds and exchanging with other securities
if market value with conversion value
A. Exceed non-convertible value
B. Exceed collateral value
C. Exceed mortgage value
D. Exceed market value of bond
16. Which of these activities does not exclusively come within the scope of corporate
financial decision making?
A. How much should be invested
B. How much is to be allocated to the marketing budget.
C. Which type of finance should be chosen
D. How much finance should raised
17. Asymmetric information occur because
A. One party to a financial transaction has more information than another
B. Stock market prices on the internet lag real time prices by up to fifteen minutes
C. Not all investors understand company accounts and balance sheets
D. Not all shareholders are able to attend company annual general meetings.
18. Which of the following is not a fundamental concept in corporate financial
management?
A. Net present value
B. The relationship between risk and return
C. The business cycle
D. Double – entry book keeping
19. Which of the following is a legitimate reason why firm value maximization is preferred
to profit maximization as the ideal goal for the firm?
A. Value takes account of both profit and cashflow
B. Value or discounted cashflow is less ambiguous than profit
C. Value taken account of depreciation
D. Profit is concerned with the longer term.
20. What does the general principal of disclosure and transparency mean?
A. The company is oblige to reveal all holding companies, strategic alliances and
joint ventures to the government
B. The company is obliged to reveal all investment plans to employees
C. The company is obliged to reveal all information in a timely manner which could
have a significant effect on shareholder welfare.
D. The company is obliged to lodge audited accounts with companies’ house.

A bond is represented by the following information

Use this information to answer questions 21 to 25.
$1000
(X)

5yrs 10%
(Y) (Z)
21. What does X, Y and Z represent?
X Y Z
A. Face Value coupon rate maturity
B. Coupon rate maturity par value
C. Par value maturity yield to maturity
D. Face value maturity coupon rate
22. What is the coupon payment of this bond?
A. $ 1200
B. $11200
C. $1020
D. $120
23. How much will the holder of this bond receive in the 3rd year?
A. $ 1200
B. $11200
C. $1020
D. $120
24. How much will the holder of the bond receive in the 5th year
A. $ 1200
B. $11200
C. $1020
D. $120
25. If the prevailing market interest rate is 12% then it can be concluded that the bond is
sold at
A. Premium
B. Par
C. Discount
D. Maximum
26. Businesses maintain cash balances in order to take advantage of unanticipated business
opportunities that may come along from time to time. This motive is
A. Precautionary
B. Transactionary
C. Speculative
D. Aggressive
27. In corporate financial management, there is a positive trade – off between risk and
A. Working capital
B. Total asset
C. Fixed asset
D. Return
28. The process of selling and buying of stocks and bonds is classified as
A. S-trade
B. B-trade
 C. E – trade
D. Stock trade

A project requires an initial outlay of $500,000 to achieve all its objectives. Shareholders
require a return of 12% on their investment. The cashflows from the project for the next five
(5) years are presented in the table below. Use it to answer the questions 29 to 35
Year Cash flows Discount value Present value
1 250,000 0.893 Q29
2 Q30 Q31 79700
3 Q32 0.712 85440
4 300,000 Q33 190800
5 320,000 0.567 Q34

29.
A. 225000
B. 223250
C. 703243
D. 191800
30.
A. 90,000
B. 100,000
C. 150,000
D. 350,000
31.
A. 0.743
B. 0.797
C. 0.713
D. 0.543
32.
A. 250,000
B. 300,000
C. 120,000
D. 343,000
33.
A. 0.543
B. 0.636
C. 0.793
D. 0.715
34.
A. 190813
B. 181577
C. 760767
D. 190800
35. What is the Net Present Value (NPV) of the project?
 A. 193,434
B. 760,767
C. 260,767
D. 243,184
36. If 18% is the interest rate of a monthly compounded security. Calculate the periodic
interest rate.
A. 18%
B. 21.6%
C. 1.5%
D. 30%

37. The minimum amount a bank keeps in a non-interest checking account equal to the
specific percentage of an amount borrowed is called
A. Minimum balance
B. Compensating balance
C. Cash balance
D. Bank overdraft
38. Which of the following illustrate the Altman’s Linear Discriminant model?
A. Z = 1.3X1 + 1.4 X2 + 3.3 X3 + 0.6X4 + 1.5X5
B. Z = 1. 2 X1 + 1.4 X2 + 3.3 X3 - 0.6X4 + 1.0X5
C. Z = 1. 2 X1 + 1.4 X2 - 3.3 X3 + 0.6X4 + 1.0X5
D. Z = 1. 2 X1 + 1.4 X2 + 3.3 X3 + 0.6X4 + 1.0X5
39. Based on your answer above compute the z-score if
X1 = 0.0714 X2 = 0.0314 X3=0.20 X4 = 2.67 X5 = 0.7143
A. 3.113
B. 3.106
C. 2.565
D. 2.535
40. If the above Z-score is for business XYZ in applying for a loan, which of the following
conclusion(s) can be drawn.
A. XYZ is not credit worthy
B. XYZ is credit worthy
C. XYZ has a high default risk
D. XYZ is in the grey zone.
41. An exchange rate which entails delivery of trade currency within two business days is
known as
A. Forward rate
B. Future rate
C. Spot rate
D. Bid rate
42. A type of financial security which has linked payoff to another issued security is
classified as
A. Linked security
B. Derivative security
C. Payable security
 D. Non-issuing security
43. Which of the following statements is /are true about euro clear
A. Responsible for stocks and bonds for customers
B. Deactivates the secondary market and activates the primary market
C. Provides useful information to all traders about outstanding uses for sale
D. Provides primary mentorship to tenant companies

44. An increase in a firm’s financial leverage will

A. Increase the variability in earnings per share
B. Reduce the operating risk of the firm
C. Increase the value of the firm in a non-MM world
D. Increase the Weighted Average Cost of Capital (WACC)
45. Financial risk refers to the
A. Risk of owning equity securities
B. Risk faced by equity holders when debt is used
C. General business risk of the firm
D. Possibly that interest rates will increase
46. Annuity is defined as
A. Equal cashflows at equal intervals of time at a specific period
B. Equal cashflows at equal intervals of time forever
C. Unequal cashflows at equal intervals of time at a specific period
D. Unequal cashflows at equal intervals of time forever
47. An investor will receive $5,000 and $10,000 after one and two years from today
respectively. If the interest rate during this period is 10% then what is the present value
of this cashflow
A. $12,000
B. $12,450
C. $12,810
D. $13,705
48. Orchestra Inc. is considering an investment that will cost $80,000 and has a useful life
of 4years. During the first 2years, the net-increments after-tax cashflows are $25,000
per year and for the last two years they are $20,000 per year. What is the payback period
for this investment?
A. 3.2years
B. 3.5years
C. 4years
D. 6years
49. Which of the following statements is incorrect regarding a normal project?
A. If the NPV of a project is greater than 0, then its PI will exceed 1
B. If the IRR of a project is 8% its NPV using a discount rate K, greater than 8%
will be less than 0
C. If the PI of a project equals 1, then the projects initial cash out flow equals the
PV of its cashflows
D. If the IRR of a project is greater than the discount rate K, then its PI will be
greater than 1
 50. A business raises a share capital of $50,000 and a bank loan of $20,000. If stockholders
require 11.5% on the investment and the bank charges 8.45% on the loan. Calculate the
WACC of the business if the tax rate is 17.5%
A. 10%
B. 10.21%
C. 10.8%
D. 10.6%

51. Explain Cost of Capital

52. Explain how risk influences how a firm chooses finance

53. Intuitively explain the rationale behind the acceptance of a project with NPV of zero (
54. consider a project with the following Cashflows

Year Cashflow
0 -10,000
1 4000
2 4000
3 4000
4 4000

If the appropriate discount rate for this project is 15% compute the Net Present Value of the project
and intuitively explain the answer.

55.
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
Project C/F C/F C/F C/F C/F C/F C/F C/F C/F
Alpha -79 20 25 30 35 40 N/A N/A 15%
Beta -80 25 25 25 25 25 25 25 16%

Assume that projects Alpha and Beta are mutually exclusive which one would you choose and
why?
 56. A company has total assets valued at $70,000. It has current liabilities total of $28,000
and long term liabilities of $32,000. Its fixed assets are valued at $42,500 and the
company currently has stock worth $15,000. Its gross profit is recorded as 27% which
indicates an increase compared to the previous year. Using this information, calculate
i. The current ratio
ii. The quick ratio
iii. What do the figures obtained in I and II tell about the company

57. Cashflow projects A – I with their NPVs

Project Investment NPV

A 135,000 6,000
B 200,000 30,000
C 125,000 20,000
D 150,000 2,000
E 175,000 10,000
F 75,000 10,000
G 80,000 9,000
H 200,000 20,000
I 50,000 4,000

Assuming that your capital is constrained so that you only have $600.000 available to invest in
projects above, which project (s) should you invest in and in what order? Use profitability

index in for your ranking PI =

58. a. Explain the term financial planning

b. Briefly discuss the importance of effective financial planning in an organization

c. Discuss the steps involved in the financial planning process.

59. It costs Okukuseku Company £20 in labor, £10 in electricity and £15 is printing
materials to produce a text book which sells for £90 each. Straight line depreciation is
used to apportion the cost of the fixed tangible asset over its 5 year useful economic
life. The original cost of the asset £20,000 and has a scrap value of £5000. Other fixed
costs that go into producing a text book amount to £1500. The total revenue for the
accounting period is £13,400. Calculate
 i. The total fixed cost for the account period
ii. The product breakeven level
iii. Break even sales level
iv. The margin of safety as a percentage of sale
v. If the selling price is decreased by 15% calculate the new product breakdown level

60. If a firm needs $100 million to finance it new project and the floatation cost is expected
to be 5.5%
i. How much should the firm raise by selling price securities?
ii. How much is the flotation costs?

C.An investor invests $100 and receives the following returns from the portfolio
Year Returns (%)
1 3
2 5
3 8
4 -1

5 10

i. Calculate the arithmetic and geometric mean return of the portfolio

ii. Which of these two average methods is better in estimating average return of
investment? Why?

iii. Differentiate between equity participation and matching fund