CORPORATE FINANCE STUDY MATERIAL.
QUESTIONS AND ANSWERS 2024 UPDATE
1. Which of the following portfolios have the least risk?
A) Treasury Bill
B) Portfolio of long-term US Government Bonds
C) Portfolio of US common stocks
D) Portfolio of AAA-rated corporate bonds: A) - Portfolio of
Treasury Bills
2. Generally, IPOs are: Underpriced
3. Which of the following statements best describes shelf
regulation? Registration of the sale of securities in the primary
market
4. A new public entity issue from a company with public equity
previously outstanding is called: Seasoned Equity Offering
(SEO)
5. When a company sells an entire issue of securities to a small
group of institutional investors like life insurance companies,
pension funds, etc., it is called: Private Placement
6. Which of the following is NOT a sensible reason for a firm to
rely on internal funds:
A) Equity issues are generally expensive
B) A new bond issue may drive the firm's debt ratio too high
C) Financial markets interpret the issuance of equity unfavorably
7. If a bond is junior or subordinated, it: Must give preference to senior
creditors in the event of default
8. An investor can create the effect of leverage on his/her
account by: 1)
Buying equity of an unlevered firm
, CORPORATE FINANCE STUDY MATERIAL.
QUESTIONS AND ANSWERS 2024 UPDATE
2) Borrowing on his/her account 9. If an investor buys a portion
(X) of the equity of a levered firm, then his/her payoff is: (X) *
(profits-interest)
10. Capital structure is irrelevant if: 1) Capital markets are
efficient
2) Each investor can borrow/lend on the same terms as
the firm 3) There are no tax benefits to debt
1 1. MM Proposition Il (assuming no bankruptcy) states: 1) The expected
return on equity is positively related to leverage
2) The required return on equity is a linear function of the firm's debt to
equity ratio 3) The risk to equity increases with leverage
12. Generally, which is the following is true? (Beta): bD<bA<bE
13. Minimizing the weighted average cost of capital (WACC) is the
same as maximizing: Market value of the firm
14. The main advantage of debt financing for a firm is: Interest
expenses are tax deductible
15. In order to find the present value of the tax, shields provided
by debt, the discount rate used is the: Cost of Debt
16. MM Proposition I with corporate taxes states: A) Capital structure
can affect firm value by an amount that is equal to the present value
of the interest tax shield B) By raising the debt-to-equity ratio, the
firm can lower its taxes and thereby increase its total value
17. Assuming that bonds are sold at a fair price, the benefits from
the interest tax shield go to the: Stockholders of the firm
18. Although the use of debt provides tax benefits to the firm,
debt also puts pressure on the firm to: Meet interest and
principal payments, which if not met can put the company
into financial distress
QUESTIONS AND ANSWERS 2024 UPDATE
1. Which of the following portfolios have the least risk?
A) Treasury Bill
B) Portfolio of long-term US Government Bonds
C) Portfolio of US common stocks
D) Portfolio of AAA-rated corporate bonds: A) - Portfolio of
Treasury Bills
2. Generally, IPOs are: Underpriced
3. Which of the following statements best describes shelf
regulation? Registration of the sale of securities in the primary
market
4. A new public entity issue from a company with public equity
previously outstanding is called: Seasoned Equity Offering
(SEO)
5. When a company sells an entire issue of securities to a small
group of institutional investors like life insurance companies,
pension funds, etc., it is called: Private Placement
6. Which of the following is NOT a sensible reason for a firm to
rely on internal funds:
A) Equity issues are generally expensive
B) A new bond issue may drive the firm's debt ratio too high
C) Financial markets interpret the issuance of equity unfavorably
7. If a bond is junior or subordinated, it: Must give preference to senior
creditors in the event of default
8. An investor can create the effect of leverage on his/her
account by: 1)
Buying equity of an unlevered firm
, CORPORATE FINANCE STUDY MATERIAL.
QUESTIONS AND ANSWERS 2024 UPDATE
2) Borrowing on his/her account 9. If an investor buys a portion
(X) of the equity of a levered firm, then his/her payoff is: (X) *
(profits-interest)
10. Capital structure is irrelevant if: 1) Capital markets are
efficient
2) Each investor can borrow/lend on the same terms as
the firm 3) There are no tax benefits to debt
1 1. MM Proposition Il (assuming no bankruptcy) states: 1) The expected
return on equity is positively related to leverage
2) The required return on equity is a linear function of the firm's debt to
equity ratio 3) The risk to equity increases with leverage
12. Generally, which is the following is true? (Beta): bD<bA<bE
13. Minimizing the weighted average cost of capital (WACC) is the
same as maximizing: Market value of the firm
14. The main advantage of debt financing for a firm is: Interest
expenses are tax deductible
15. In order to find the present value of the tax, shields provided
by debt, the discount rate used is the: Cost of Debt
16. MM Proposition I with corporate taxes states: A) Capital structure
can affect firm value by an amount that is equal to the present value
of the interest tax shield B) By raising the debt-to-equity ratio, the
firm can lower its taxes and thereby increase its total value
17. Assuming that bonds are sold at a fair price, the benefits from
the interest tax shield go to the: Stockholders of the firm
18. Although the use of debt provides tax benefits to the firm,
debt also puts pressure on the firm to: Meet interest and
principal payments, which if not met can put the company
into financial distress
