Mgmt 517 Corporate Finance Exam I Spring 2005-2006

Note: This is a sample test, just to give you a taste of the exam. It does not cover the topics fully and is not comprehensive.

FINA_MGMT 517 CORPORATE FINANCE EXAM I SAMPLE

Student Name & Number: ______

This is a scrambled test in which there are multiple choice questions, brief essay questions, one problem. Questions are grouped in line with the topics we have covered in class. Each multiple choice question and each brief essay question is 3 points each (25 questions x 3.5 pts.= 88 pts.). The last question is 12 points worth. Please answer all questions in the space provided. The duration of the test is 90 minutes. There is a brief bonus essay question at the end of the test which is 5 points worth. Good Luck!!

1. / The financial goal of a corporation is to:
A. / Minimize stockholder wealth
B. / Maximize profit
C. / Maximize value of the corporation to the stockholders
D. / Decrease job security
2. / The idea of “maximizing shareholder value” is widely accepted in:
(I) U.S.A.; (II) U.K; (III) Germany; (IV) France; (V) Japan
A. / I only
B. / I and II only
C. / III, IV and V only
D. / I,II, III, IV and V
3. / The following are some of the actions shareholders can take if the corporation is not performing well:
A. / Replace the board of directors in an election.
B. / Force the board of directors to change the management team.
C. / Sell their shares of stock in the corporation.
D. / Any of the above
4. / Briefly explain some of the institutional arrangements that ensure that managers work toward increasing the value of a firm.
5. / Corporations, potentially, have infinite life because:
A. / it is a legal entity
B. / of separation of ownership and management
C. / limited liability
D. / none of the above
6. / A firm's investment decision is also called the:
A. / Financing decision
B. / Liquidity decision
C. / Capital budgeting decision
D. / None of the above
7. / The treasurer usually oversees the following functions of a corporation except:
(I) Preparation of financial statements; (II) Investor relationships; (III) Cash management
(IV) raising new capital
A. / I only
B. / I and II only
C. / II, III and IV only
D. / III only
8. / Conflicts of interest between shareholders and managers of a firm result in:
A. / Principal-agent problem
B. / Increased agency costs
C. / Both A and B
D. / managers owning the firm
9. / In the principal-agent framework:
A. / Shareholders are the principals
B. / Managers are the principals
C. / Shareholders are the agents
D. / Managers are the agents
E. / A and D
10. / Agency costs are incurred by a corporation because:
A. / managers may not attempt to maximize the value of the firm to shareholders
B. / shareholders incur monitoring cost
C. / separation of ownership and management
D. / all of the above

Problem (12 points)

Mr. Cyrus Clops, the president of Giant Enterprises, has to make a choice between two possible investments:

Cash Flows ($ Thousands)
Project / C0 / C1 / C2 / IRR (%)
A / -400 / +250 / +300 / 23
B / -200 / +140 / +179 / 36

The opportunity cost of capital is 9 %. Mr. Clops is tempted to take B, which has a higher IRR.

(a)  Explain to Mr. Clops why this is not the correct procedure.

(b)  Show him how to adapt the IRR rule to choose the best project.

(c)  Show him that this project also has the higher NPV.

11. / Generally, managers of corporations prefer internally generated cash to finance their capital expenditures because:
(I) They can avoid the discipline of the financial markets
(II) The costs of issuing new securities are high
(III) The announcement of new equity issue is usually bad news for investors
A. / I only
B. / II only
C. / II and III only
D. / I,II, and III
12. / If you own 1,000 shares of stock and you can cast 5,000 votes for a particular director, then the stock features:
A. / Cumulative voting
B. / Straight voting
C. / Majority voting
D. / None of the above
13. / Minority shareholders can also be represented on the board of directors under:
A. / Majority voting
B. / Cumulative voting
C. / Straight voting
D. / None of the above
14. / The following are characteristics of preferred stock except:
(I) pays fixed dividends
(II) has cumulative feature
(III) has voting rights
A. / I only
B. / I and II only
C. / III only
D. / II only
15. / Indicate important sources of finance available to corporations and why do corporations heavily rely on internal funds?
16. / Wealthy individuals who provide equity investment for new firms are called:
(I) White knights
(II) Red herrings
(III) Angel investors
A. / I only
B. / I and II only
C. / III only
D. / II only
17. / Generally initial public offerings (IPOs) are:
A. / Overpriced
B. / Correctly priced
C. / Under priced
18. / Generally, underwriters provide the following services to the issuing firm:
(I) Provide advice
(II) Buy new issue
(III) Reselling the issue to the public
A. / I only
B. / I and II only
C. / I, II, and III
19. / The possibility that the winner (highest bidder) in an auction process may have bid a price that is very high (far above the value) is called:
A. / Winner’s curse
B. / Double auction
C. / Best efforts
D. / None of the above
20. / A security issue sold directly to the public is called:
A. / A rights offer
B. / A general cash offer
C. / A private placement
D. / An uniform-price auction
21. / The following are advantages of shelf registration except:
A. / Securities can be issued in dribs and drabs without incurring excessive transaction costs
B. / Securities can be issued in short notice
C. / Security issues can be timed to take advantage of market conditions
D. / All of the above are advantages
22. / A new public equity issue from a company with equity previously outstanding is called:
A. / An initial public offering (IPO)
B. / American depositing receipts (ADRs)
C. / A seasoned equity offering (SEO)
D. / A private placement
23. / Generally, which of the following issues have the lowest total direct costs of issuing as a percentage of gross proceeds?
A. / Initial public offerings (IPOs)
B. / Seasoned equity offerings (SEOs)
C. / Convertible bonds
D. / Straight bonds
24. / Generally, there is a drop in the price of equity subsequent to the announcement of a new issue. This is attributed to:
A. / An increase in the supply of shares
B. / Information effect
C. / Both a and b
D. / None of the above
25. / Image Corporation has #1,000,000 shares outstanding. It wishes to issue 250,000 new shares using rights issue. If the current stock price is $50 and the subscription price is $45/share, calculate the value of a right?
A. / $0.25/right
B. / $5.00/right
C. / $2.50/right
D. / $1.00/right

11.The equity accounts of Bio-Tech Company is as follows:
Suppose the firm sells 2,000,000 new (additional) shares at a price of $20 per share. What is the new value of Common Shares account?
A.12,000,000
B.10,000,000
C.2,000,000
D.None of the above

12.Bio-Tech Company has had a very successful year and earnings are $21million. The company has 12 million shares outstanding and will pay a dividend of $1.00/share. The old value of retained earnings account is 125 million. What is the retained earnings for the year and the new value of retained earnings account?
A.$21 million & $146 million
B.$9 million& $134 million
C.$12 million & $137 million
D.None of the above13.The equity accounts of Bio-Tech Company is as follows:
Suppose that the firm sells 2,000,000 new shares at a price of $20/share. What is the new value of the additional paid-in-capital account?
A.$144,000,000
B.$40,000,000
C.$88,000,000
D.$70,000,000

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