Corporate Finance Final Exam
Questions With Complete Solutions
/. Investors buy debt or equity of the Firm with cash:
Financing Decision - how should the firm raise the cash/capital to pay for the firm's
assets?
External finance involves selling a financial claim - why choose debt or equity?
Debt - a contractual claim entitles investor to receive fixed interest payments at
specified dates
Equity - a residual claim entitles ownership in firm
Who gets "paid" first?
Neither
Debt holders
Equity holders
Depends - Answer-✅Depends
/.Investment Decision - what real assets do we want to purchase with the cash?
Operating Decision - how should the firm use assets in each period?
What is the most important relationship between Investing and Operating decisions?
Cash Outflow vs. Cash Inflow
Capital Budgeting
No relationship
Both Firm Decisions - Answer-✅Capital Budgeting
/.4a) Firm reinvests cash in the Firm's Operations
4b) Firm pays out cash to investors
Payout Decision - how should the Firm divide up operating cash flows into cash
distributed to investors and cash reinvested in the firm's operations and assets
Is this a cash inflow or outflow?
Cash Outflow
Cash Inflow
Both
Depends - Answer-✅Depends
/.Firm Manager Objectives: What is the manager's primary objective?
,Maximize the enterprise value of the Firm
Avoid financial distress and bankruptcy
Maximize Profit
Maximize the equity value of the Firm - Answer-✅Maximize the equity value of the Firm
/.4a) Firm reinvests cash in the Firm's Operations
4b) Firm pays out cash to investors
Payout Decision - how should the Firm divide up operating cash flows into cash
distributed to investors and cash reinvested in the firm's operations and assets
Is this a cash inflow or outflow?
Cash Outflow
Cash Outflow or Neither
Cash Inflow
Both - Answer-✅Cash Outflow or Neither
/.What are the five key strategic financial decisions that a firm must make?
Financing, Investing, Operating, Payout, Liquidity
Financing, Capital Budgeting, Payout, Add Liquidity, Draw Down Liquidity
Financing, Investing, Capital Budgeting, Payout, Liquidity
Capital Structure, Investing, Operating, Payout, Liquidity - Answer-✅Financing,
Investing, Operating, Payout, Liquidity
/.Finance Interview Question: How does a $10mm increase in Depreciation flow through
the three financial statements?
Assume 30% tax rate
Net Income decreases by $10m, Cash Flow from Operations decreases by $10m, Cash
is down $10m, Retained Earnings down $10m
Net Income decreases by $3m, Cash Flow from Operations increases by $7m, Cash is
up $7m, Net PP&E down $10m, Retained Earnings down $3m
Net Income decreases by $7m, Cash Flow from Operations increases by $3m, Cash is
up $3m, Net PP&E down $10m, Retained Earnings down $7m
No answer text provided. - Answer-✅Net Income decreases by $7m, Cash Flow from
Operations increases by $3m, Cash is up $3m, Net PP&E down $10m, Retained
Earnings down $7m
/.Where is Cost of Goods Sold (COGS)?
,Selling and Marketing
Research and Development
Other Costs of Revenue
General and Administrative - Answer-✅Other Costs of Revenue
/.What is EBIT? How would it be calculated using this information?
Earnings Before Interest and Taxes = Operating Income
Earnings Before Interest and Taxes = Operating Income + Other, net
Earnings Before Income and Taxes = Operating Income + Other, net
Earnings Before Income and Taxes = Operating Income + Interest - Answer-✅Earnings
Before Interest and Taxes = Operating Income + Other, net
/.Where is Depreciation and Amortization?
Included in another income statement line item: Other Costs of Revenue
Included in another income statement line item: General and Administrative if company
headquarters
Intuit does not have D&A
Included in another income statement line item: Other Costs of Revenue if production
facilities; General and Administrative if company headquarters - Answer-✅Included in
another income statement line item: Other Costs of Revenue if production facilities;
General and Administrative if company headquarters
/.Is income tax expense/provision what the firm typically pays?
Yes
No - Answer-✅No
Correct. Income Tax Expense is NOT what the firm typically pays. Actual payments -
$355m (2019), $245m (2018), $430m (2017).
/.Retained Earnings (RE): changes every year, what is the formula?
RE (next year) = RE (current year) + Net Income (current year)
RE (next year) = RE (current year)
, RE (next year) = RE (current year) + Net Income (current year) - Dividend (current year)
- Answer-✅RE (next year) = RE (current year) + Net Income (current year) - Dividend
(current year)
/.How would you classify the financial strength of Intuit?
Strong
Weak
Average - Answer-✅Strong
/.Is income tax expense/provision what the firm typically pays?
No, firm pays more
Yes
No, firm could pay more or less
No, firm pays less - Answer-✅No, firm could pay more or less
/.Based on current year information, what is the formula for next year's Retained
Earnings (RE)?
RE (next year) = RE (current year) + Net Income (current year)
RE (next year) = RE (current year) + Net Income (current year) - Dividend (current year)
RE (next year) = RE (current year) + Net Income (current year) + Dividend (current
year)
RE (next year) = RE (current year) - Answer-✅RE (next year) = RE (current year) + Net
Income (current year) - Dividend (current year)
/.Why do you add back Depreciation and Amortization? Where do you find this number?
Non-cash expense. Cash Flow Statement.
Non-cash expense. Income Statement.
Cash Flow. Cash Flow Statement.
Cash Flow. Income Statement. - Answer-✅Non-cash expense. Cash Flow Statement.
/.Is Cash Taxes Paid the same as Income Tax Provision? Where does the taxes paid
number come from?
Yes. Income Statement.
No. Cash Taxes Paid = Income Tax Provision + Change in Deferred Tax Liabilities
No. Cash Taxes Paid = Income Tax Provision - Change in Deferred Tax Liabilities
Questions With Complete Solutions
/. Investors buy debt or equity of the Firm with cash:
Financing Decision - how should the firm raise the cash/capital to pay for the firm's
assets?
External finance involves selling a financial claim - why choose debt or equity?
Debt - a contractual claim entitles investor to receive fixed interest payments at
specified dates
Equity - a residual claim entitles ownership in firm
Who gets "paid" first?
Neither
Debt holders
Equity holders
Depends - Answer-✅Depends
/.Investment Decision - what real assets do we want to purchase with the cash?
Operating Decision - how should the firm use assets in each period?
What is the most important relationship between Investing and Operating decisions?
Cash Outflow vs. Cash Inflow
Capital Budgeting
No relationship
Both Firm Decisions - Answer-✅Capital Budgeting
/.4a) Firm reinvests cash in the Firm's Operations
4b) Firm pays out cash to investors
Payout Decision - how should the Firm divide up operating cash flows into cash
distributed to investors and cash reinvested in the firm's operations and assets
Is this a cash inflow or outflow?
Cash Outflow
Cash Inflow
Both
Depends - Answer-✅Depends
/.Firm Manager Objectives: What is the manager's primary objective?
,Maximize the enterprise value of the Firm
Avoid financial distress and bankruptcy
Maximize Profit
Maximize the equity value of the Firm - Answer-✅Maximize the equity value of the Firm
/.4a) Firm reinvests cash in the Firm's Operations
4b) Firm pays out cash to investors
Payout Decision - how should the Firm divide up operating cash flows into cash
distributed to investors and cash reinvested in the firm's operations and assets
Is this a cash inflow or outflow?
Cash Outflow
Cash Outflow or Neither
Cash Inflow
Both - Answer-✅Cash Outflow or Neither
/.What are the five key strategic financial decisions that a firm must make?
Financing, Investing, Operating, Payout, Liquidity
Financing, Capital Budgeting, Payout, Add Liquidity, Draw Down Liquidity
Financing, Investing, Capital Budgeting, Payout, Liquidity
Capital Structure, Investing, Operating, Payout, Liquidity - Answer-✅Financing,
Investing, Operating, Payout, Liquidity
/.Finance Interview Question: How does a $10mm increase in Depreciation flow through
the three financial statements?
Assume 30% tax rate
Net Income decreases by $10m, Cash Flow from Operations decreases by $10m, Cash
is down $10m, Retained Earnings down $10m
Net Income decreases by $3m, Cash Flow from Operations increases by $7m, Cash is
up $7m, Net PP&E down $10m, Retained Earnings down $3m
Net Income decreases by $7m, Cash Flow from Operations increases by $3m, Cash is
up $3m, Net PP&E down $10m, Retained Earnings down $7m
No answer text provided. - Answer-✅Net Income decreases by $7m, Cash Flow from
Operations increases by $3m, Cash is up $3m, Net PP&E down $10m, Retained
Earnings down $7m
/.Where is Cost of Goods Sold (COGS)?
,Selling and Marketing
Research and Development
Other Costs of Revenue
General and Administrative - Answer-✅Other Costs of Revenue
/.What is EBIT? How would it be calculated using this information?
Earnings Before Interest and Taxes = Operating Income
Earnings Before Interest and Taxes = Operating Income + Other, net
Earnings Before Income and Taxes = Operating Income + Other, net
Earnings Before Income and Taxes = Operating Income + Interest - Answer-✅Earnings
Before Interest and Taxes = Operating Income + Other, net
/.Where is Depreciation and Amortization?
Included in another income statement line item: Other Costs of Revenue
Included in another income statement line item: General and Administrative if company
headquarters
Intuit does not have D&A
Included in another income statement line item: Other Costs of Revenue if production
facilities; General and Administrative if company headquarters - Answer-✅Included in
another income statement line item: Other Costs of Revenue if production facilities;
General and Administrative if company headquarters
/.Is income tax expense/provision what the firm typically pays?
Yes
No - Answer-✅No
Correct. Income Tax Expense is NOT what the firm typically pays. Actual payments -
$355m (2019), $245m (2018), $430m (2017).
/.Retained Earnings (RE): changes every year, what is the formula?
RE (next year) = RE (current year) + Net Income (current year)
RE (next year) = RE (current year)
, RE (next year) = RE (current year) + Net Income (current year) - Dividend (current year)
- Answer-✅RE (next year) = RE (current year) + Net Income (current year) - Dividend
(current year)
/.How would you classify the financial strength of Intuit?
Strong
Weak
Average - Answer-✅Strong
/.Is income tax expense/provision what the firm typically pays?
No, firm pays more
Yes
No, firm could pay more or less
No, firm pays less - Answer-✅No, firm could pay more or less
/.Based on current year information, what is the formula for next year's Retained
Earnings (RE)?
RE (next year) = RE (current year) + Net Income (current year)
RE (next year) = RE (current year) + Net Income (current year) - Dividend (current year)
RE (next year) = RE (current year) + Net Income (current year) + Dividend (current
year)
RE (next year) = RE (current year) - Answer-✅RE (next year) = RE (current year) + Net
Income (current year) - Dividend (current year)
/.Why do you add back Depreciation and Amortization? Where do you find this number?
Non-cash expense. Cash Flow Statement.
Non-cash expense. Income Statement.
Cash Flow. Cash Flow Statement.
Cash Flow. Income Statement. - Answer-✅Non-cash expense. Cash Flow Statement.
/.Is Cash Taxes Paid the same as Income Tax Provision? Where does the taxes paid
number come from?
Yes. Income Statement.
No. Cash Taxes Paid = Income Tax Provision + Change in Deferred Tax Liabilities
No. Cash Taxes Paid = Income Tax Provision - Change in Deferred Tax Liabilities
