Questions and Answers of Principles Corporate Finance

In what ways has the finance industry been on the cutting edge of technology in the past?
What is blockchain technology, and how might it be useful in finance?
The following quote on Tesla stock appeared on June 29, 2022, on Barchart.com:If you wanted to buy Tesla, what price would you pay? How much would you receive if you wanted to sell Tesla? Tesla Inc
Why has finance historically been an early adopter of new technology?
Choose 3 of the following companies and describe how they are utilizing new technology in the provision of financial services.a. Wealthfrontb. LendingTreec. Metromiled. Acornse. Robinhoodf. Stripe g.
Identify a new fintech startup and describe its business model. What new services or features does it provide to its customers? How does it earn its revenue? How does it differ from traditional
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
Using the dividend discount model, what is the cost of equity capital for Zeller Mining if the company will pay a dividend of C$2.30 next year, has a payout ratio of 30%, a return on equity (ROE) of
The cost of debt can be determined using the yield-to-maturity and the bond rating approaches. If the bond rating approach is used, the:A. coupon is the yield.B. yield is based on the interest
A financial analyst at Buckco Ltd. wants to compute the company’s weighted average cost of capital (WACC) using the dividend discount model. The analyst has gathered the following data:Buckco’s
Fran McClure of Alba Advisers is estimating the cost of capital of Frontier Corporation as part of her valuation analysis of Frontier.McClure will be using this estimate, along with projected cash
Wang Securities had a long-term stable debt-to-equity ratio of 0.65. Recent bank borrowing for expansion into South America raised the ratio to 0.75. The increased leverage has what effect on the
Brandon Wiene is a financial analyst covering the beverage industry. He is evaluating the impact of DEF Beverage’s new product line of flavored waters. DEF currently has a debt-to-equity ratio of
Trumpit Resorts Company currently has 1.2 million common shares of stock outstanding and the stock has a beta of 2.2. It also has $$10$ million face value of bonds that have five years remaining to
Using the capital asset pricing model, Kruspa’s cost of equity capital for its typical project is closest to:A. 7.62%.B. 10.52%.C. 12.40%.Jurgen Knudsen has been hired to provide industry expertise
Sandell is interested in the weighted average cost of capital of Kruspa AB prior to its investing in the China project. This weighted average cost of capital (WACC) is closest to:A. 7.65%.B. 9.23%.C.
In his estimation of the project’s cost of capital, Sandell would like to use the asset beta of Kruspa as a base in his calculations. The estimated asset beta of Kruspa prior to the China project
Sandell is performing a sensitivity analysis of the effect of the new project on the company’s cost of capital. If the China project has the same asset risk as Kruspa, the estimated project beta
As part of the sensitivity analysis of the effect of the new project on the company’s cost of capital, Sandell is estimating the cost of equity of the China project considering that the China
In his report, Sandell would like to discuss the sensitivity of the project’s net present value to the estimation of the cost of equity. The China project’s net present value calculated using the
The asset betas for Relevant, ABJ, and Opus, respectively, are:A. 1.70, 2.52, and 2.73.B. 1.70, 2.79, and 3.37.C. 1.70, 2.81, and 3.44.Boris Duarte, CFA, covers initial public offerings for Zellweger
The average asset beta for the pure players in this industry, Relevant, ABJ, and Opus, weighted by market value of equity is closest to:A. 1.67.B. 1.97.C. 2.27.Boris Duarte, CFA, covers initial
Using the capital asset pricing model, the cost of equity capital for a company in this industry with a debt-to-equity ratio of 0.01, asset beta of 2.27, and a marginal tax rate of 23% is closest
The marginal cost of capital for TagOn, based on an average asset beta of 2.27 for the industry and assuming that new stock can be issued at $$8$ per share, is closest to:A. 20.5%.B. 21.0%.C.
Two years ago, a company issued $$20$ million in long-term bonds at par value with a coupon rate of 9%. The company has decided to issue an additional $$20$ million in bonds and expects the new
An analyst gathered the following information about a company and the market:Using the discounted cash flow (DCF) approach, the cost of retained earnings for the company is closest to:A. 15.7%.B.
An analyst gathered the following information about a company and the market:Using the capital asset pricing model (CAPM) approach, the cost of retained earnings for the company is closest to:A.
An analyst gathered the following information about a private company and its publicly traded competitor:Using the pure-play method, the estimated equity beta for the private company is closest to:A.
An analyst gathered the following information about the capital markets in the United States and in Paragon, a developing country.Based on the analyst’s data, the estimated country equity premium
If two companies have identical unit sales volume and operating risk, they are most likely to also have identical:A. sales risk.B. business risk.C. sensitivity of operating earnings to changes in the
The Fulcrum Company produces decorative swivel platforms for home televisions. If Fulcrum produces 40 million units, it estimates that it can sell them for $$100$ each.Variable production costs are
The business risk of a particular company is most accurately measured by the company’s:A. debt-to-equity ratio.B. efficiency in using assets to generate sales.C. operating leverage and level of
Consider two companies that operate in the same line of business and have the same degree of operating leverage: the Basic Company and the Grundlegend Company. The Basic Company and the Grundlegend
Myundia Motors now sells 1 million units at $$3$,529 per unit. Fixed operating costs are $$1$,290 million and variable operating costs are $$1$,500 per unit. If the company pays $$410$
Juan Alavanca is evaluating the risk of two companies in the machinery industry: The Gearing Company and Hebelkraft, Inc. Alavanca used the latest fiscal year’s financial statements and interviews
Based on Benn’s analysis, 4G’s sales risk relative to Qphone’s is most likely to be:A. lower.B. equal.C. higher.Mary Benn, CFA, is a financial analyst for Twin Fields Investments, located in
What is the most appropriate response to Cho’s question regarding the components of business risk?A. Sales risk and financial risk.B. Operating risk and sales risk.C. Financial risk and operating
The most appropriate response to Cho’s question regarding the classification of risk arising from the mixture of variable and fixed costs is:A. sales risk.B. financial risk.C. operating risk.Mary
Based on the information in Exhibit B, the degree of operating leverage (DOL) of 4G, Inc., at unit sales of 1,000,000, is closest to:A. 1.60.B. 2.67.C. 3.20.Mary Benn, CFA, is a financial analyst for
Based on the information in Exhibit B, 4G, Inc.’s degree of financial leverage (DFL), at unit sales of 1,000,000, is closest to:A. 1.33.B. 2.67.C. 3.00.Mary Benn, CFA, is a financial analyst for
Based on the information in Exhibit A and Exhibit C, Qphone’s expected percentage change in operating income for 2010 is closest to:A. 17.25%.B. 21.00%.C. 24.30%.Mary Benn, CFA, is a financial
4G’s breakeven quantity of unit sales is closest to:A. 437,500 units.B. 625,000 units.C. 875,000 units.Mary Benn, CFA, is a financial analyst for Twin Fields Investments, located in Storrs,
In response to Cho’s question regarding an increase in unit sales above 2009 unit sales levels, it is most likely that 4G’s net income will increase at:A. a slower rate than Qphone’s.B. the
The most appropriate response to Cho’s question regarding a description of the degree of total leverage is that degree of total leverage is:A. the percentage change in net income divided by the
Which of the following best defines the concept of corporate governance?A. A system for monitoring managers’ activities, rewarding performance, and disciplining misbehavior.B. Corporate values and
Which of the following is an example of a conflict of interest that an effective corporate governance system would mitigate or eliminate?A. A majority of the board is independent of management.B.
Which of the following best describes the corporate governance responsibilities of members of the board of directors?A. Establish long-term strategic objectives for the company.B. Ensure that at
Which of the following is least likely to be useful in evaluating a company’s corporate governance system for investment analysis purposes?A. Assess issues related to the board, managers, and
The objectives of an effective system of corporate governance include all of the following except:A. ensure that the assets of the company are used efficiently and productively.B. eliminate or
All of the following are core attributes of an effective corporate governance system except:A. fairness and accuracy in identifying inherent conflicts of interest.B. clearly defined governance
All of the following are examples of conflicts of interest that an effective corporate governance system should address except relationships between:A. managers and shareholders.B. managers and
All of the following are true of an effective system of corporate governance except:A. the system must be continually monitored especially with changes in management and the board.B. a single system
All of the following indicate Zero’s board’s lack of independence except:A. personal relationships.B. service of the outside counsel as a board member.C. lack of interlocking directorships.Jane
Which of the following is the most effective action for the board to take to address their oversight responsibilities concerning the hedge fund’s proxy voting?A. Establish corporate values and
Which of the following omissions best describes a corporate governance shortcoming of Zero’s board of directors? The board’s failure to:A. address the potential conflicts of interest between
Given that Zero’s directors all previously worked at the company, which of the following would you recommend for a more effective system of corporate governance?A. Ensure that assets are used
Which of the following best describes the objectives of Zero’s board that the consultant has not yet reviewed? The board should ensure:A. that the assets of the company are used efficiently and
Which of the following is the most critical activity that an analyst can engage in to assess the quality of the corporate governance system at Zero, among those that the consultant did not review?A.
Which of the following would best complete the objectives of corporate governance for the CEO?A. Ensure that assets of the company are used efficiently and productively and in the best interests of
On the basis of the Wall Street analyst comments about AMC’s corporate governance system, which of the following would be most effective for AMC to attract investors’interest?A. Implement a
Which of the following is a core attribute that the Wall Street analyst left out of his analysis of AMC?A. Corporate governance systems rely on checks and balances among managers, directors, and
Based on the information provided in the case, which of the following corporate disclosures could investment professionals use to evaluate the quality of the corporate governance system at AMC?A.
Which of the following is an example of a corporate governance responsibility that AMC’s board of directors has failed to meet?A. Ensure that the board adequately monitors and oversees the
Kim Corporation is considering an investment of 750 million won with expected aftertax cash inflows of 175 million won per year for seven years. The required rate of return is 10%. What is the
Kim Corporation is considering an investment of 750 million won with expected aftertax cash inflows of 175 million won per year for seven years. The required rate of return is 10%. Expressed in
Hermann Corporation is considering an investment of €375 million with expected after-tax cash inflows of €115 million per year for seven years and an additional after-tax salvage value of h50
Erin Chou is reviewing a profitable investment project that has a conventional cash flow pattern. If the cash flows for the project, initial outlay, and future after-tax cash flows all double, Chou
Shirley Shea has evaluated an investment proposal and found that its payback period is one year, it has a negative NPV, and it has a positive IRR. Is this combination of results possible?A. Yes.B.
An investment has an outlay of 100 and after-tax cash flows of 40 annually for four years. A project enhancement increases the outlay by 15 and the annual after-tax cash flows by 5. As a result, the
Projects 1 and 2 have similar outlays, although the patterns of future cash flows are different. The cash flows as well as the NPV and IRR for the two projects are shown below. For both projects, the
Consider the two projects below. The cash flows as well as the NPV and IRR for the two projects are given. For both projects, the required rate of return is 10%.What discount rate would result in the
Wilson Flannery is concerned that this project has multiple IRRs.How many discount rates produce a zero NPV for this project?A. One, a discount rate of 0%.B. Two, discount rates of 0% and 32%.C. Two,
With regard to the net present value (NPV) profiles of two projects, the crossover rate is best described as the discount rate at which:A. two projects have the same NPV.B. two projects have the same
With regard to net present value (NPV) profiles, the point at which a profile crosses the vertical axis is best described as:A. the point at which two projects have the same NPV.B. the sum of the
With regard to net present value (NPV) profiles, the point at which a profile crosses the horizontal axis is best described as:A. the point at which two projects have the same NPV.B. the sum of the
With regard to capital budgeting, an appropriate estimate of the incremental cash flows from a project is least likely to include:A. externalities.B. interest costs.C. opportunity costs.
Standard Corporation is investing $$400$,000 of fixed capital in a project that will be depreciated straight-line to zero over its 10-year life. Annual sales are expected to be $$240$,000, and
Five years ago, Frater Zahn’s Company invested ₤38 million—₤30 million in fixed capital and another d8 million in working capital—in a bakery. Today, Frater Zahn’s is selling the fixed
What is the McConachie net investment outlay?A. $$400$,000.B. $$420$,000.C. $$460$,000.McConachie Company is considering the purchase of a new 400-ton stamping press. The press costs
McConachie’s incremental annual after-tax operating cash flow is closest to:A. $$116$,000.B. $$124$,000.C. $$140$,000.McConachie Company is considering the purchase of a new 400-ton stamping
What is the terminal year after-tax nonoperating cash flow at the end of year five?A. $$108$,000.B. $$132$,000.C. $$180$,000.McConachie Company is considering the purchase of a new 400-ton
For Concept 1, the statement is correct regarding the effects on:A. the real tax savings from depreciation, but incorrect regarding the real after-tax interest expense.B. both the real tax savings
For Concept 2, the statement is correct regarding:A. sensitivity analysis, but not correct regarding scenario analysis.B. scenario analysis, but not correct regarding sensitivity analysis.C. both
Are the statements identified as Concept 3 and Concept 4 correct?A. No for Concepts 3 and 4.B. No for Concept 3, but yes for Concept 4.C. Yes for Concept 3, but no for Concept 4.Linda Pyle is head of
The after-tax operating cash flows in euros for the Fontenot Company are:A. 50 in both years.B. 70 in both years.C. 85 in both years.Linda Pyle is head of analyst recruiting for PPA Securities. She
Should the capital budgeting committee accept the internal auditor’s third and fourth suggestions, respectively?A. No for Suggestions 3 and 4.B. Yes for Suggestions 3 and 4.C. No for Suggestion 3
Should the capital budgeting committee accept the internal auditor’s first and second suggestions, respectively?A. No for Suggestions 1 and 2.B. No for Suggestion 1 and Yes for Suggestion 2.C. Yes
What is the NPV (C$ millions) of the optimal set of investment decisions for Society Services including the expansion option?A. 6.34.B. 12.68.C. 31.03.The capital budgeting committee for Laroche
What is the NPV (C$ millions) of the original project for Society Services without considering the expansion option?A. –6.11.B. –5.66.C. 2.33.The capital budgeting committee for Laroche
The optimal subset of the six projects that Schoeman is considering consists of Projects:A. 1 and 5.B. 2, 3, and 4.C. 2, 4, 5, and 6.The capital budgeting committee for Laroche Industries is meeting.
What is the optimal service life for Laroche Livery’s fleet of vans?A. Two years.B. Three years.C. Four years.The capital budgeting committee for Laroche Industries is meeting. Laroche is a North
The market value added (MVA) in euros for the Fontenot Company is closest to:A. 38.87.B. 39.92.C. 43.65.Linda Pyle is head of analyst recruiting for PPA Securities. She has been very frustrated by
The economic income in euros for the Fontenot Company is:A. 17.24 in year one and 9.11 in year two.B. 17.76 in year one and 24.89 in year two.C. 24.89 in year one and 17.76 in year two.Linda Pyle is
What terminal selling price is required for a 15% internal rate of return on the Richie project?A. $$588$,028.B. $$593$,771.C. $$625$,839.Maximilian Bo¨hm is reviewing several capital
Of the two grinders that the Dominion Company is evaluating, Bo¨hm should recommend the:A. Bolten grinder because its NPV is higher than the Pinto grinder NPV.B. Bolten grinder because its EAA is
The NPV and IRR, respectively, of the Gasup Company investment are closest to:A. $$509$,600 and 21.4%.B. $$509$,600 and 31.3%.C. $$946$,700 and 31.3%.Maximilian Bo¨hm is reviewing several
What is the value of equity at time zero?A. 44,055.B. 77,973.C. 122,027.Mun Hoe Yip is valuing Pure Corporation. Pure is a simple corporation that is going out of business in five years, distributing
What is EP during Year 1?A. –12,101.B. –6,000.C. 6,000.Mun Hoe Yip is valuing Pure Corporation. Pure is a simple corporation that is going out of business in five years, distributing its income
What is residual income during Year 1?A. –2,916.B. 2,542.C. 8,653.Mun Hoe Yip is valuing Pure Corporation. Pure is a simple corporation that is going out of business in five years, distributing its
Economic income during Year 1 is closest to:A. 23,186.B. 29,287.C. 46,101.Mun Hoe Yip is valuing Pure Corporation. Pure is a simple corporation that is going out of business in five years,

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