FIN 306 - CORPORATE FINANCE EXAM QUESTIONS WITH CORRECT SOLUTIONS LATEST UPDATE 2026

FIN 306 - CORPORATE FINANCE EXAM QUESTIONS WITH CORRECT SOLUTIONS LATEST UPDATE 2026 XYZ Corp had their quarterly dividend meeting on April 9. The directors declared a $0.50 per share cash dividend for the holder's of record on Monday, May 1. XYZ's stock will sell "ex-dividend" on - Answers April 27 The day before XYZ's stock went "ex-dividend" it was selling for $25 per share. If the quarterly cash dividend was $0.50,all other things being equal, the day after it went "ex-dividend" it should sell for: - Answers $24.50 A well known mid-Atlantic company was running into trouble with the New York Stock Exchange (NYSE). It's stock price had fallen below $1.00 per share and a requirement to be listed on the NYSE is that a company's stock must sell at $1.00 or higher, otherwise the stork can be "de-listed" (This is a true story, by the way). One way the company could get back into the good graces of the NYSE would be to : - Answers Perform a 1 for 2 reverse stock split Myron Gordon's "bird-in-the-hand" argument suggests that - Answers Stockholders are generally risk adverse and attach less risk to current dividends The residual theory of dividends suggests that dividends are _______ to the value of the firm. - Answers idk i got this wrong, its NOT residual tho A break point occurs when - Answers a company hits their "budget constraint" _____ is the process of evaluating and selecting long-term investments consistent with the firm's goal of wealth maximization - Answers capital budgeting Consider the following cash flow pattern. In year zero: capital expense = $100,000; year 1 cash inflow =$25,000; year 2 cash inflow = $10,000; year 3 cash inflow= $50,000; year 4 cash inflow = $60,000. This cash flow pattern is best described as a(n) - Answers mixed stream and a conventional cash flow _____ projects do not compete with each other, the acceptance of one _____ the others from consideration. - Answers Independent; does not eliminate A firm with limited dollars available for capital expenditures is subject to - Answers capital rationing The _____ is the exact amount of time it takes the firm to recover its initial investment - Answers payback All of the following are weaknesses of the payback method except - Answers it is easy to calculate A firm is evaluating a proposal which has an initial investment of $35,000 and has cash inflows of $10,000 in year one; $20,000 in year two; and $10,000 in year 3. The payback period of the project is - Answers between 2 & 3 years A firm is evaluating an investment proposal which has an initial investment of $5,000 and cash inflows presently valued at $4,000. The NPV of the investment is - Answers -$1,000 The _____ is the discount rate that equates the present value of the cash inflows with the initial investment. - Answers IRR A firm with a cost of capital of 12.5% is evaluating 3 capital projects. The IRRs are as follows: Project 1 = 12% Project 2 = 15% Project 3 = 13.5% The firm should: - Answers accept 2 & 3; reject 1 When the NPV is negative, the IRR is _____ the cost of capital - Answers less than In comparing NPV to IRR: - Answers NPV is theoretically superior, but financial managers prefer IRR In the context of capital budgeting, risk refers to: - Answers the degree of variability of the cash inflows In capital budgeting, a break point affects the: - Answers MCC schedule The four basic sources of long-term funds for a business are: - Answers long-term debt, common stock, preferred stock, and retained earnings The higher the risk of a project, the higher its RADR and thus the lower the NPV for a given stream of inflows - Answers True The firm's optimal mix of debt and equity is called its: - Answers target capital structure The _____ is the weighted average cost of funds which relates the interrelationship of financial decisions - Answers cost of capital A tax adjustment must be made in determining the cost of _____ - Answers long-term debt The before tax cost of debt for a firm which has a marginal tax rate of 40% is 12%. Therefore the interest rate that should be included in the cost of capital is - Answers 7.2% Debt is generally the least expensive source of capital. This is primarily due to - Answers the tax deductibility of interest payments The cost of common equity may be estimated using the - Answers Gordon model; r = D/P + g The investment opportunity schedule (IOS) combined with the WACC indicates - Answers which projects are acceptable As the cumulative amount of money invested in capital projects increases, its return on the project increases - Answers False P-1) What is the payback for a project that has anticipated cash inflows of $10,000 for 5 years and a cost of $22,000 - Answers The payback would be between 2 & 3 years (2.2 to be exact). Year 1 = $10,000 Year 2 = $10,000 + $10,000 = $20,000 Year 3 = $10,000 + $10,000 + $10,000 = $30,000 P-2) Good old XYZ Corp is considering two mutually exclusive projects, A & B, in order to expand their product line. After letting the cost accountants out of their cages, it was determined that Project A's initial investment must be $42,400, while Project B will cost $60,000. Project A has projected cash inflows of $25,000 per year for three years. Project B's inflows are more variable: $10,000 in year 1; $30,000 in year 2; and $40,000 in its final year. You have determined the following: the Prime is 7%, LIBOR is 6%, the firms cost of capital is 12%. Using NPV analysis, if the NPV for project B = +$1,320, which project do you prefer? - Answers Based on NPV, I would prefer project A since their NPV is much higher than Project B's. Project A NPV: NPV = CF(PVIFA r,t) - CFo NPV = 25,000(PVIFA 12%, 13yr) - $42,400 [look at table in back of book] NPV = 25,000(2.4018) - 42,400 NPV = $17,645 P-3)