Corporate Financial Management – BEC22306
QUESTIONS AND ANSWERS
In this summary you can find: multiple choice questions, fill in the blank and true/false
questions about the book: Corporate Finance: European 3 rd edition, from David Hillier. The
answers are shown in italics immediately under the question itself. The following chapters
are covered: 1, 4, 5, 6, 7, 8, 10, 12, 15, 16, 18, 19, 20, 22, 24, 25 and 26.
Content
Chapter 1: Introducton....................................................................................................................................................... 2
Chapter 4: Discounted Cash Flow Valuaton....................................................................................................................... 10
Chapter 5: Bond, Equity and Firm Valuaton...................................................................................................................... 17
Chapter 6: Net Present Value and Other Investment Rules................................................................................................26
Chapter 7: Making Capital Investment Decisions............................................................................................................... 34
Chapter 8: Risk Analysis, Real Optons and Capital Budgetng............................................................................................42
Chapter 10: Risk and Return: The capital Asset Pricing Model............................................................................................ 48
Chapter 12: Risk, Cost of Capital and Capital Budgetng..................................................................................................... 56
Chapter 15: Capital Structure: Basic Concepts.................................................................................................................... 64
Chapter 16: Capital Structure: Limits to the Use of Debt.................................................................................................... 70
Chapter 18: Dividends and Other Payouts......................................................................................................................... 81
Chapter 19: Equity Financing............................................................................................................................................. 90
Chapter 20: Debt Financing............................................................................................................................................... 98
Chapter 22: Optons and Corporate Finance..................................................................................................................... 105
Chapter 24: Warrants and Convertbles........................................................................................................................... 113
Chapter 25: Financial Risk Management with Derivatves................................................................................................ 119
Chapter 26: Short-term Finance and Planning.................................................................................................................. 124
,Chapter 1: Introduction
1. Which one of the following is the essence of the secondary markets?
a. One company going public
b. One company selling to another
c. One owner selling to another
d. One company to liquidate its assets
Answer = C, one owner selling to another
2. Which of the following have to be considered by international finance nowadays? Check all apply.
a. Global geopolitical risk(s)
b. Accounting treatments
c. The dynamics of currency movements
d. The need for increased salaries
Answer = A ,B and C
3. An increase in the firm’s equity will result in a(n) ……… in the firms value.
Answer = increase
4. For a business to be truly successful, it has to understand the fundamental basis of good business
and ……… finance.
Answer = corporate
5. Where does cash flow risk usually arise from? Check all that apply.
a. Its predictable
b. Its known variance
c. Its unknown timing
d. Its unknown level
Answer = C and D, its unknown timing and unknown level
6. Non-current assets are those assets that last for a(n). Choose the answer you think is right.
a. Infinite period of time
b. Long period of time
c. Short period of time
d. Medium period of time
Answer = B, long period of time
7. Which of the following is part of the dealers’ responsibilities? Check all that apply.
a. They are the principal in most transactions
b. They buy instruments for their own inventory
c. They do not have to take much risk
d. They sometimes make quotations
Answer = A and B
8. Recent research shows that having several options on where to trade a firm’s shares does ………
harm the value, and it can increase the ……… of the share pricing.
Answer = not, efficiency
9. Financial risk ……… has recently become an essential area as a result of the latest developments
in finance.
, Answer = management
10. Which of the following are types of primary market sales corporations engage in? Check all apply.
a. Share buybacks
b. Share splits
c. Private placements
d. Public offerings
Answer = C and D, private placements and public offerings
11. According to one important principle in finance individuals prefer to receive cash flow sooner rather
than ………
Answer = later
12. What are assets with a short life called?
a. Long-term assets
b. Current assets
c. Non-current assets
d. Fixed assets
Answer = B, current assets
13. Which two financial papers would have to be created and used in order to attract the initial
financing? Check all that apply.
a. Business plan
b. Statement of financial position
c. Profit and loss account
d. Cash flow forecasting
e. Balance sheet
Answer = A and D
14. What is the assumption classic corporate finance based on? Choose the one you think is right.
a. Rational investors make rational decision
b. Rational decisions are made by irrational investors
Answer = A
15. What should the corporate executive be able to do? Check the answer you think is right.
a. Understand risk and minimize it
b. Understand risk an ignore it
c. Understand risk and use it to their advantage
d. Understand risk but avoid it as much as they can
Answer = C, understand risk and use it to their advantage
16. The brokers will ……… own the share they are trying to sell
Answer = not
17. A firm can raise ……… through borrowing money or issuing shares through the debt markets.
a. Cash
b. Profit
c. Capital
d. Equity
Answer = C, captial
, 18. Which of the following could be considered goals of the financial management team? Check all apply
a. Beat the competition
b. To maintain market share
c. Maximize profits
d. To minimize cost
e. To maintain unstable earnings growth
Answer = A, C and D
19. Corporate finance could be defined as the study of the ……… between business decisions and the
value of the shares.
Answer = relationship
20. Financial managers try to create value through buying assets that generate ……… cash than/as
they cost.
Answer = more
21. Auction markets ……… have a physical location.
Answer = do
22. Which one of the following could represent the first stage of setting up a business?
a. Deciding the financing mix
b. Coming up with the idea
c. Approaching potential partners
d. Finding the initial funding
Answer = B, coming up with the idea
23. Which of the following are considered by people when defining corporate finance?
a. Valuation
b. Employee satisfaction
c. Capital structure
d. Risk decrease
e. Risk management
Answer = A, C and E.
24. The assets that last for a long period of time are called
a. Long-term assets
b. Fixed assets
c. Non-current assets
d. Current assets
Answer = C, non-current assets
25. The market used by corporations when they initially sell securities is the ……… market.
Answer = primary
26. Liquidity is important because of which one of the following reasons?
a. Firms cannot raise funds as quickly
b. Shareholders have to forego some ownership benefits
c. Liquidity enables firms to pay down debt
d. There is more demand for highly liquid shares
