Solution Manual for Principles of
Corporate Finance
1. What is the primary goal of a corporation according to corporate finance
principles?
a) Maximizing revenue
b) Minimizing costs
c) Maximizing shareholder value
d) Achieving corporate social responsibility
Answer: c) Maximizing shareholder value
,2. Which of the following is a key assumption in the Modigliani-Miller (M&M)
theorem without taxes?
a) Firms pay corporate taxes on profits
b) Capital structure is irrelevant
c) Equity is more expensive than debt
d) Dividends increase firm value
Answer: b) Capital structure is irrelevant
3. Which of the following best defines the term “agency problem”?
a) The conflict between shareholders and the government
b) The conflict of interest between the firm’s owners and its managers
c) The misalignment between corporate and environmental goals
d) The difficulty in financing new projects
Answer: b) The conflict of interest between the firm’s owners and its managers
4. Which of the following techniques is commonly used to value a bond?
a) Discounting the bond’s coupon payments and face value
b) Estimating the future stock prices
c) Calculating the firm’s free cash flows
d) Performing a market analysis on dividend payouts
Answer: a) Discounting the bond’s coupon payments and face value
5. Which method is used to evaluate a project’s profitability by considering the time
value of money?
a) Payback period
b) Net present value (NPV)
c) Accounting rate of return
d) Profitability index
,Answer: b) Net present value (NPV)
6. Which of the following factors is irrelevant in determining a firm’s weighted
average cost of capital (WACC)?
a) The firm’s tax rate
b) The cost of debt
c) The firm’s current liabilities
d) The cost of equity
Answer: c) The firm’s current liabilities
7. What does the capital asset pricing model (CAPM) primarily help determine?
a) The appropriate discount rate for risky projects
b) The fair value of a stock dividend
c) The impact of debt on corporate value
d) The relationship between risk and inflation
Answer: a) The appropriate discount rate for risky projects
8. Which of the following is a characteristic of preferred stock?
a) Voting rights similar to common stock
b) Fixed dividends, typically paid before common stock dividends
c) Dividends that fluctuate with company profits
d) Limited liability for preferred stockholders
Answer: b) Fixed dividends, typically paid before common stock dividends
9. In the context of corporate finance, “leverage” refers to:
a) The use of short-term financing
b) The use of debt in the firm’s capital structure
c) Issuing new equity shares
d) The profit margin of the firm
, Answer: b) The use of debt in the firm’s capital structure11. What is the internal rate
of return (IRR) for a project?
The discount rate that makes the project's net present value (NPV) zero
The rate of return required by shareholders
The average rate of return on a company’s investments
The company’s weighted average cost of capital (WACC)
Answer: The discount rate that makes the project's net present value (NPV) zero
12. Which of the following would increase a firm's cash flows?
A decrease in accounts payable
An increase in inventory
A reduction in taxes paid
A decrease in the number of shares outstanding
Answer: A reduction in taxes paid
13. Which of the following is the best definition of “capital structure”?
The mix of a firm’s long-term debt and equity financing
The allocation of capital expenditures
The division of assets among shareholders
The process of issuing new shares
Answer: The mix of a firm’s long-term debt and equity financing
14. In dividend discount models, the price of a stock is primarily based on:
Future dividends discounted at the cost of equity
Historical dividend payments
The growth rate of dividends
The amount of retained earnings
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