Advanced Corporate Finance Exam Questions with Verified Answers Latest Update 2024 (Already
Passed)
Historically merger activity increases which which mArket condition? - Answers High stock market prices
Firm A is planning to acquire Firm B. If firm A prefers to make a cash offer for the merger, it indicates
that - Answers Firm A's managers are optimistic about the post merger value of A
The market for corporate control includes - Answers Mergers, spin-offs and divestitures, leveraged
buyouts (LBOs) and privatisation
If an acquisition is completed using a cash payment, then the acquisition is - Answers Taxable
Suppose that the market price of company A is $50 per share and that of company B is $20 per share. If
A offers half a share of common stock for each share of B, what is the percentage increase in wealth of
B's shareholders? (Assume that the offer has no effect o The value of A's shares) - Answers +25%
The merger between Facebook and WhatsApp universal is an example of a - Answers Horizontal merger
The "Bootstrap Game" may mislead investors regarding the prospects for a merged firm. How are
investors potentially mislead - Answers The firm acquires a target with low D/E ratio, which generates
short-term earnings per share growth without any true economic advantage
Many mergers that appear to make economic sense fail because managers cannot handle the complex
task of integrating two firms with different - Answers Production processes accounting methods and
corporate cultures
What is not a sensible motive for mergers - Answers Diversification
Firm A has a value of $100 million and Firm B have a value of $70 million. Merging the two would enable
cost savings with a present value of $20million. Firm A purchases Firm B for $75 million what is the gain
from the merger. - Answers $20 million
The merger of two similar pharmaceutical firms is an example of a - Answers Horizontal merger
An analyst predicts that at the 95% confidence level a bank could lose 7% of its assets value. Given
assets of $30 million, what is the value at risk? - Answers $2.1 million
The Z-score model was developed by Altman using - Answers Multiple discrimination analyses
Floating rate bonds have adjustable coupons to protect investors against changes in interest rates. The
rates paid may be limited by - Answers Both a floor rate that sets the minimum and a cap rate that sets
the maximum
Which of the following rated bonds has the most risk?
,Aaa
Aa
Baa
Ba - Answers Ba
Which of the following rated bonds has the least risk ?
AAA
AA
A
BBB - Answers AAA
Generally you can insure corporate bonds through a(n) - Answers Credit default swap
Suppose that a bond with one year maturity a coupon rate of 5%, and face value of $1000 sells for
$881.94. Calculate the promised yield on the bonds. - Answers 19.06%
A corporate bond matures in one year. The bond promises a $50 coupon and a principal payment of
$1000 at maturity. If the bi d has a 15% probability of default and payment under default is $400.
Calculate the expected payment from the bind - Answers $952.50
A corporate bind matures in one year. The bond promises a coupons of $50 and principal of $1000 at
maturity. If the bond has a 10% probability of default and payment under default is $400. Calculate the
expected payment for the bond. - Answers $985
Which of the following are examples of real options? - Answers The options to expand if an investment
project succeeds, the option to wait (and learn) before investing, the option to shrink or abandon a
project, and the option to vary the mix of output or the firms production methods
The discounted cash flow (DCF) approach should be - Answers Augmented by added analysis if a
decision has significant imbedded options
Practical challenges in Applying real options analysis - Answers Real options can be complex, the real
options problems may not be well structured and competition may reduce or change the value of real
options
Contrast the difference between the NPV of an investment and the value of the option to invest in it -
Answers The value of the option to invest increases with interest rates while the NPV decrease and the
value of the option to invest decreases with an increase in short term cash flows while NPV increases
What might lead a financial manager to decide to expedite a positive net present value investment
project? - Answers Investment required for the project is expected to increase in the near future
, If projects have implied options then - Answers The shorter the forecasted life of the project, the less
valuable the option is
The opportunity to defer investing to a later date may have value because - Answers Market conditions
may change and increase the NPV of the project
A project is worth $15 million Today without an abandonment option. SuPpose the value of the project
is either $20 million one year for today (if product demand is high) or $10 million (if product demand is
low). It is possible to sell off the project for $13 million if product demand is low. Calculate the value of
the abandonment option if discount rate of 5% per year. - Answers $1.2 million
The APV method should be used - Answers When the project level of debt is known over the life of the
project
The MFC CORPORATION needs to raise $200million for its mega project. The NPV of the project using all
equity financing is $40 million . If the cost of raising funds for the project is $20 million, what is the APV
of the project ? - Answers $20 million
Flotation costs are incorporated j to the APV framework by - Answers Subtracting them from the all
equity value of the project
The opportunity cost of capital, used to calculate the base-case for adjusted present value analyses can
be thought of as - Answers The WACC of an all equity financed version of the firm
Which of the following is an important assumption required if using the WACC formula? - Answers
Companies rebalance the capital structure to mountain a constant debt ratio
Lowering the debt-equity ratio of the firm can change the firm's - Answers Financial leverage, cost of
equity, cost of debt and effective tax rate
Given are the following data for outsourcing company PV (of FCCs for years 1-3) = $35 million PV
(horizon value) =$65 million. Suppose that the market value of the debt =$30 million. Calculate total
market value of equity of the firm. - Answers $70 million
Give are the following data for year 1; profits after taxes = $20 million, depreciation =$6 million
, Interest expense =$4 million, Investment I. Fixed assets = $12 million, Investment in working capital
=$4 million. The corporate tax rate is 25%. Calculate the free cash flow(FCF) for 1 year - Answers $13
million
When one uses the after tax weighted average cost of capital (WACC) to value a levered firm, the
interest tax shield is - Answers Automatically considered because the after-tax cost of debt is included
within the WACC formula
Given are the following data for Golf Corporation Market price/share $12; book value/ share $10;
price/bond $800; face value/bond $1000; number of bonds outstanding $1 million. Calculate the
Passed)
Historically merger activity increases which which mArket condition? - Answers High stock market prices
Firm A is planning to acquire Firm B. If firm A prefers to make a cash offer for the merger, it indicates
that - Answers Firm A's managers are optimistic about the post merger value of A
The market for corporate control includes - Answers Mergers, spin-offs and divestitures, leveraged
buyouts (LBOs) and privatisation
If an acquisition is completed using a cash payment, then the acquisition is - Answers Taxable
Suppose that the market price of company A is $50 per share and that of company B is $20 per share. If
A offers half a share of common stock for each share of B, what is the percentage increase in wealth of
B's shareholders? (Assume that the offer has no effect o The value of A's shares) - Answers +25%
The merger between Facebook and WhatsApp universal is an example of a - Answers Horizontal merger
The "Bootstrap Game" may mislead investors regarding the prospects for a merged firm. How are
investors potentially mislead - Answers The firm acquires a target with low D/E ratio, which generates
short-term earnings per share growth without any true economic advantage
Many mergers that appear to make economic sense fail because managers cannot handle the complex
task of integrating two firms with different - Answers Production processes accounting methods and
corporate cultures
What is not a sensible motive for mergers - Answers Diversification
Firm A has a value of $100 million and Firm B have a value of $70 million. Merging the two would enable
cost savings with a present value of $20million. Firm A purchases Firm B for $75 million what is the gain
from the merger. - Answers $20 million
The merger of two similar pharmaceutical firms is an example of a - Answers Horizontal merger
An analyst predicts that at the 95% confidence level a bank could lose 7% of its assets value. Given
assets of $30 million, what is the value at risk? - Answers $2.1 million
The Z-score model was developed by Altman using - Answers Multiple discrimination analyses
Floating rate bonds have adjustable coupons to protect investors against changes in interest rates. The
rates paid may be limited by - Answers Both a floor rate that sets the minimum and a cap rate that sets
the maximum
Which of the following rated bonds has the most risk?
,Aaa
Aa
Baa
Ba - Answers Ba
Which of the following rated bonds has the least risk ?
AAA
AA
A
BBB - Answers AAA
Generally you can insure corporate bonds through a(n) - Answers Credit default swap
Suppose that a bond with one year maturity a coupon rate of 5%, and face value of $1000 sells for
$881.94. Calculate the promised yield on the bonds. - Answers 19.06%
A corporate bond matures in one year. The bond promises a $50 coupon and a principal payment of
$1000 at maturity. If the bi d has a 15% probability of default and payment under default is $400.
Calculate the expected payment from the bind - Answers $952.50
A corporate bind matures in one year. The bond promises a coupons of $50 and principal of $1000 at
maturity. If the bond has a 10% probability of default and payment under default is $400. Calculate the
expected payment for the bond. - Answers $985
Which of the following are examples of real options? - Answers The options to expand if an investment
project succeeds, the option to wait (and learn) before investing, the option to shrink or abandon a
project, and the option to vary the mix of output or the firms production methods
The discounted cash flow (DCF) approach should be - Answers Augmented by added analysis if a
decision has significant imbedded options
Practical challenges in Applying real options analysis - Answers Real options can be complex, the real
options problems may not be well structured and competition may reduce or change the value of real
options
Contrast the difference between the NPV of an investment and the value of the option to invest in it -
Answers The value of the option to invest increases with interest rates while the NPV decrease and the
value of the option to invest decreases with an increase in short term cash flows while NPV increases
What might lead a financial manager to decide to expedite a positive net present value investment
project? - Answers Investment required for the project is expected to increase in the near future
, If projects have implied options then - Answers The shorter the forecasted life of the project, the less
valuable the option is
The opportunity to defer investing to a later date may have value because - Answers Market conditions
may change and increase the NPV of the project
A project is worth $15 million Today without an abandonment option. SuPpose the value of the project
is either $20 million one year for today (if product demand is high) or $10 million (if product demand is
low). It is possible to sell off the project for $13 million if product demand is low. Calculate the value of
the abandonment option if discount rate of 5% per year. - Answers $1.2 million
The APV method should be used - Answers When the project level of debt is known over the life of the
project
The MFC CORPORATION needs to raise $200million for its mega project. The NPV of the project using all
equity financing is $40 million . If the cost of raising funds for the project is $20 million, what is the APV
of the project ? - Answers $20 million
Flotation costs are incorporated j to the APV framework by - Answers Subtracting them from the all
equity value of the project
The opportunity cost of capital, used to calculate the base-case for adjusted present value analyses can
be thought of as - Answers The WACC of an all equity financed version of the firm
Which of the following is an important assumption required if using the WACC formula? - Answers
Companies rebalance the capital structure to mountain a constant debt ratio
Lowering the debt-equity ratio of the firm can change the firm's - Answers Financial leverage, cost of
equity, cost of debt and effective tax rate
Given are the following data for outsourcing company PV (of FCCs for years 1-3) = $35 million PV
(horizon value) =$65 million. Suppose that the market value of the debt =$30 million. Calculate total
market value of equity of the firm. - Answers $70 million
Give are the following data for year 1; profits after taxes = $20 million, depreciation =$6 million
, Interest expense =$4 million, Investment I. Fixed assets = $12 million, Investment in working capital
=$4 million. The corporate tax rate is 25%. Calculate the free cash flow(FCF) for 1 year - Answers $13
million
When one uses the after tax weighted average cost of capital (WACC) to value a levered firm, the
interest tax shield is - Answers Automatically considered because the after-tax cost of debt is included
within the WACC formula
Given are the following data for Golf Corporation Market price/share $12; book value/ share $10;
price/bond $800; face value/bond $1000; number of bonds outstanding $1 million. Calculate the
