Corporate Finance Exam Questions With
Verified Answers
Dividend Reinvestment Plans have the option of:
Automatically reinvesting some or all of their cash dividends in shares of stock.
A stock split is characterized by all of the following, except:
Paid in cash to outstanding shareholders.
Benson Company has 150,000 outstanding shares @ $20/share. The company has declared a two-for-
one stock split. How many shares will be outstanding and at what value after the split?
300,000 shares @ $10/share
Firms can repurchase shares in the following ways:
I) open market repurchase;
II) tender offer;
III) Dutch auction;
IV) direct negotiation with a major shareholder
I, II, III, and IV
Company X has 100 shares outstanding. It earns $1,000 per year and announces that it will use all
$1,000 to repurchase its shares in the open market instead of paying dividends. Calculate the number
of shares outstanding at the end of year 1, after the first share repurchase, if the required rate of
return is 10 percent.
90.91
If dividends are taxed more heavily than capital gains, then investors
should be willing to pay more for stocks with low dividend yields.
Which of the following lists events in chronological order from earliest to latest?
Declaration date, ex-dividend date, record date
Dividend policy may affect firm value because
I) there is an unsatisfied clientele that prefer dividends to capital gains;
II) there are sufficient loopholes in the tax system that wealthy shareholders can avoid taxes on
dividends;
III) well-managed companies prefer to signal their worth by paying high dividends
I and III only
Generally, investors interpret the announcement of an increase in dividends as
good news, and the stock price increases.
Which of the following are true?
I) Firms have long-run target dividend payout ratios.
II) Dividend changes follow shifts in long-term, sustainable earnings.
, III) Managers are reluctant to make dividend changes that might have to be reversed.
I, II, and III
Generally, investors view the announcement of an open-market repurchase program as
good news, and the stock price increases.
Consider the procedure whereby the firm states a series of prices at which it is prepared to
repurchase stock. Shareholders then submit offers indicating how many shares they wish to sell and
at which price. The firm then calculates the lowest price at which it is able to buy the desired number
of shares. This procedure is known as a(n)
Dutch auction.
The effect of financial leverage depends on the company's _____________.
Earnings before interest and taxes.
In the following example, the proposed debt issue would raise $4,000,000; the interest rate would be
10%. In addition, the EBIT would be $2,000,000. What would be the increase in the Return on Equity
(ROE) from to current to the proposed structure?
Current Proposed
Assets $ 10,000,000 $ 10,000,000
Debt $ 0 $ 4,000,000
Equity $ 10,000,000 $ 6,000,000
Debt-Equity Ratio 0 0.67
Share Price $ 25 $ 25
Shares Outstanding 400,000 240,000
Interest Rate N/A 10 %
6.67%
The equation for M & M Proposition I, without taxes, is best shown as:
VL = VU
Samuel Corp. provides the following information:
EBIT = $286.50
Tax (TC ) = 35%
Debt = $810
RU = 15%
What is the value of the firm?
$1,241.53
Samuel Corp. provides the following information:
EBIT = $386.50
Tax (TC ) = 35%
Debt = $810
RU = 15%
What is the value of Samuel's equity?
$864.83
Wealth and Health Company is financed entirely by common stock that is priced to offer a 15 percent
expected return. The common stock price is $40/share. The earnings per share (EPS) is expected to be
Verified Answers
Dividend Reinvestment Plans have the option of:
Automatically reinvesting some or all of their cash dividends in shares of stock.
A stock split is characterized by all of the following, except:
Paid in cash to outstanding shareholders.
Benson Company has 150,000 outstanding shares @ $20/share. The company has declared a two-for-
one stock split. How many shares will be outstanding and at what value after the split?
300,000 shares @ $10/share
Firms can repurchase shares in the following ways:
I) open market repurchase;
II) tender offer;
III) Dutch auction;
IV) direct negotiation with a major shareholder
I, II, III, and IV
Company X has 100 shares outstanding. It earns $1,000 per year and announces that it will use all
$1,000 to repurchase its shares in the open market instead of paying dividends. Calculate the number
of shares outstanding at the end of year 1, after the first share repurchase, if the required rate of
return is 10 percent.
90.91
If dividends are taxed more heavily than capital gains, then investors
should be willing to pay more for stocks with low dividend yields.
Which of the following lists events in chronological order from earliest to latest?
Declaration date, ex-dividend date, record date
Dividend policy may affect firm value because
I) there is an unsatisfied clientele that prefer dividends to capital gains;
II) there are sufficient loopholes in the tax system that wealthy shareholders can avoid taxes on
dividends;
III) well-managed companies prefer to signal their worth by paying high dividends
I and III only
Generally, investors interpret the announcement of an increase in dividends as
good news, and the stock price increases.
Which of the following are true?
I) Firms have long-run target dividend payout ratios.
II) Dividend changes follow shifts in long-term, sustainable earnings.
, III) Managers are reluctant to make dividend changes that might have to be reversed.
I, II, and III
Generally, investors view the announcement of an open-market repurchase program as
good news, and the stock price increases.
Consider the procedure whereby the firm states a series of prices at which it is prepared to
repurchase stock. Shareholders then submit offers indicating how many shares they wish to sell and
at which price. The firm then calculates the lowest price at which it is able to buy the desired number
of shares. This procedure is known as a(n)
Dutch auction.
The effect of financial leverage depends on the company's _____________.
Earnings before interest and taxes.
In the following example, the proposed debt issue would raise $4,000,000; the interest rate would be
10%. In addition, the EBIT would be $2,000,000. What would be the increase in the Return on Equity
(ROE) from to current to the proposed structure?
Current Proposed
Assets $ 10,000,000 $ 10,000,000
Debt $ 0 $ 4,000,000
Equity $ 10,000,000 $ 6,000,000
Debt-Equity Ratio 0 0.67
Share Price $ 25 $ 25
Shares Outstanding 400,000 240,000
Interest Rate N/A 10 %
6.67%
The equation for M & M Proposition I, without taxes, is best shown as:
VL = VU
Samuel Corp. provides the following information:
EBIT = $286.50
Tax (TC ) = 35%
Debt = $810
RU = 15%
What is the value of the firm?
$1,241.53
Samuel Corp. provides the following information:
EBIT = $386.50
Tax (TC ) = 35%
Debt = $810
RU = 15%
What is the value of Samuel's equity?
$864.83
Wealth and Health Company is financed entirely by common stock that is priced to offer a 15 percent
expected return. The common stock price is $40/share. The earnings per share (EPS) is expected to be
