Intermediate Corporate Finance Exam 1
UPDATED ACTUAL Exam Questions and
CORRECT Answers
A corporation currently has 1.5 million outstanding shares with a market value of $28 per share.
The corporation does not currently have any debt. It intends to borrow money at 8% in order to
buy back 20% of its outstanding shares at the current market price. Calculate the breakeven
EBIT for this new structure to make sense. - CORRECT ANSWER - $3,360,000
A corporation has 2,000,000 outstanding shares with a current market value of $57 each. It also
has $28,500,000 in debt, financed at 10%. What is the firm's D/E ratio? - CORRECT
ANSWER - 0.25
A corporation has 12,000,000 outstanding shares with a market value of $20 each. It also has
$360,000,000 in debt, financed at 10%. What is the firm's D/E ratio? - CORRECT
ANSWER - 1.5
Why might a firm consider using increasing its debt / leverage?
- The firm wishes to reduce its WACC.
- The firm believes it can increase earnings per share and dividends.
- The firm wants to take further advantage of the tax shelter of increasing debt and reducing
equity. - CORRECT ANSWER - All of these answers are reasons why a firm might
consider increasing its debt / leverage.
In a bankruptcy liquidation, which are paid last, if they even receive anything? - CORRECT
ANSWER - common stockholders
What encourages firms to seek the optimal financial structure which balances debt and equity
rather than endlessly increasing debt? - CORRECT ANSWER - increased probability of
financial distress
,In comparing firm commitment underwriting and best efforts underwriting, who bears the risk of
potentially unsold shares? - CORRECT ANSWER - The issuer bears the risk in best
efforts, whereas the underwriting syndicate bears the risk in firm commitment.
Suppose a firm wishes to sell 100,000 shares and uses a Dutch auction method to sell those
shares. The following bids are received:
$32 for 20,000 shares
$28 for 25,000 shares
$24 for 40,000 shares
$18 for 15,000 shares
$16 for 15,000 shares
$15 for 50,000 shares
$14 for 50,000 shares
What is the result? - CORRECT ANSWER - The firm sells 100,000 shares for $18 per
share.
A corporation currently has 2 million outstanding shares with a market value of $40 per share.
The corporation does not currently have any debt. It intends to borrow money at 10% interest in
order to buy back 40% of its outstanding shares at the current market price. Calculate the
breakeven EBIT for this new structure to make sense. - CORRECT ANSWER -
$8,000,000
A hypothetical corporation, Extended Powergrid, Inc., currently has 3,500,000 outstanding
shares of common stock. On November 30, it declared a 25 cent dividend with a date of record
of December 23, which happens to be a Friday. The stock is trading at $37.75 per share just
before the ex-divided date. The firm has a net income of $35 million for the year, and it paid 25
cent dividends per share each quarter. What is the ex-dividend date? - CORRECT
ANSWER - Thursday, December 22
A hypothetical corporation, Extended Powergrid, Inc., currently has 3,500,000 outstanding
shares of common stock. On November 30, it declared a 25 cent dividend with a date of record
of December 23, which happens to be a Friday. The stock is trading at $37.75 per share just
, before the ex-divided date. The firm has a net income of $35 million for the year, and it paid 25
cent dividends per share each quarter. What do we expect the share price to be, approximately, on
the ex-dividend date assuming no other factors impacting stock price? - CORRECT
ANSWER - $37.50
A hypothetical corporation, Extended Powergrid, Inc., currently has 3,500,000 outstanding
shares of common stock. On November 30, it declared a 25 cent dividend with a date of record
of December 23, which happens to be a Friday. The stock is trading at $37.75 per share just
before the ex-divided date. The firm has a net income of $35 million for the year, and it paid 25
cent dividends per share each quarter. What is the firm's dividend payout ratio? - CORRECT
ANSWER - 10%
A hypothetical corporation, Extended Powergrid, Inc., currently has 3,500,000 outstanding
shares of common stock. On November 30, it declared a 25 cent dividend with a date of record
of December 23, which happens to be a Friday. The stock is trading at $37.75 per share just
before the ex-divided date. The firm has a net income of $35 million for the year, and it paid 25
cent dividends per share each quarter. Using the expected stock price on the ex-dividend date,
what is the firm's price-to-earnings ratio? - CORRECT ANSWER - 3.75
A hypothetical corporation, Extended Powergrid, Inc., currently has 3,500,000 outstanding
shares of common stock. On November 30, it declared a 25 cent dividend with a date of record
of December 23, which happens to be a Friday. The stock is trading at $37.75 per share just
before the ex-divided date. The firm has a net income of $35 million for the year, and it paid 25
cent dividends per share each quarter. What is the firm's retention ratio? - CORRECT
ANSWER - 90%
A hypothetical corporation, Cascade Strategic & Innovative Solutions, has decided to raise
capital through a rights offering. The company has 2,000,000 outstanding shares of stock with a
market value of $55 per share. Cascade would like to raise an additional $15,000,000 in capital
through a rights offering. The company will set the subscription price at $25 per new share. How
many new shares will need to be issued? - CORRECT ANSWER - 600,000 new shares
A hypothetical corporation, Cascade Strategic & Innovative Solutions, has decided to raise
capital through a rights offering. The company has 2,000,000 outstanding shares of stock with a
market value of $55 per share. Cascade would like to raise an additional $15,000,000 in capital
through a rights offering. The company will set the subscription price at $25 per new share. What
would we expect the new share price to be after all rights have been exercised, considering no
UPDATED ACTUAL Exam Questions and
CORRECT Answers
A corporation currently has 1.5 million outstanding shares with a market value of $28 per share.
The corporation does not currently have any debt. It intends to borrow money at 8% in order to
buy back 20% of its outstanding shares at the current market price. Calculate the breakeven
EBIT for this new structure to make sense. - CORRECT ANSWER - $3,360,000
A corporation has 2,000,000 outstanding shares with a current market value of $57 each. It also
has $28,500,000 in debt, financed at 10%. What is the firm's D/E ratio? - CORRECT
ANSWER - 0.25
A corporation has 12,000,000 outstanding shares with a market value of $20 each. It also has
$360,000,000 in debt, financed at 10%. What is the firm's D/E ratio? - CORRECT
ANSWER - 1.5
Why might a firm consider using increasing its debt / leverage?
- The firm wishes to reduce its WACC.
- The firm believes it can increase earnings per share and dividends.
- The firm wants to take further advantage of the tax shelter of increasing debt and reducing
equity. - CORRECT ANSWER - All of these answers are reasons why a firm might
consider increasing its debt / leverage.
In a bankruptcy liquidation, which are paid last, if they even receive anything? - CORRECT
ANSWER - common stockholders
What encourages firms to seek the optimal financial structure which balances debt and equity
rather than endlessly increasing debt? - CORRECT ANSWER - increased probability of
financial distress
,In comparing firm commitment underwriting and best efforts underwriting, who bears the risk of
potentially unsold shares? - CORRECT ANSWER - The issuer bears the risk in best
efforts, whereas the underwriting syndicate bears the risk in firm commitment.
Suppose a firm wishes to sell 100,000 shares and uses a Dutch auction method to sell those
shares. The following bids are received:
$32 for 20,000 shares
$28 for 25,000 shares
$24 for 40,000 shares
$18 for 15,000 shares
$16 for 15,000 shares
$15 for 50,000 shares
$14 for 50,000 shares
What is the result? - CORRECT ANSWER - The firm sells 100,000 shares for $18 per
share.
A corporation currently has 2 million outstanding shares with a market value of $40 per share.
The corporation does not currently have any debt. It intends to borrow money at 10% interest in
order to buy back 40% of its outstanding shares at the current market price. Calculate the
breakeven EBIT for this new structure to make sense. - CORRECT ANSWER -
$8,000,000
A hypothetical corporation, Extended Powergrid, Inc., currently has 3,500,000 outstanding
shares of common stock. On November 30, it declared a 25 cent dividend with a date of record
of December 23, which happens to be a Friday. The stock is trading at $37.75 per share just
before the ex-divided date. The firm has a net income of $35 million for the year, and it paid 25
cent dividends per share each quarter. What is the ex-dividend date? - CORRECT
ANSWER - Thursday, December 22
A hypothetical corporation, Extended Powergrid, Inc., currently has 3,500,000 outstanding
shares of common stock. On November 30, it declared a 25 cent dividend with a date of record
of December 23, which happens to be a Friday. The stock is trading at $37.75 per share just
, before the ex-divided date. The firm has a net income of $35 million for the year, and it paid 25
cent dividends per share each quarter. What do we expect the share price to be, approximately, on
the ex-dividend date assuming no other factors impacting stock price? - CORRECT
ANSWER - $37.50
A hypothetical corporation, Extended Powergrid, Inc., currently has 3,500,000 outstanding
shares of common stock. On November 30, it declared a 25 cent dividend with a date of record
of December 23, which happens to be a Friday. The stock is trading at $37.75 per share just
before the ex-divided date. The firm has a net income of $35 million for the year, and it paid 25
cent dividends per share each quarter. What is the firm's dividend payout ratio? - CORRECT
ANSWER - 10%
A hypothetical corporation, Extended Powergrid, Inc., currently has 3,500,000 outstanding
shares of common stock. On November 30, it declared a 25 cent dividend with a date of record
of December 23, which happens to be a Friday. The stock is trading at $37.75 per share just
before the ex-divided date. The firm has a net income of $35 million for the year, and it paid 25
cent dividends per share each quarter. Using the expected stock price on the ex-dividend date,
what is the firm's price-to-earnings ratio? - CORRECT ANSWER - 3.75
A hypothetical corporation, Extended Powergrid, Inc., currently has 3,500,000 outstanding
shares of common stock. On November 30, it declared a 25 cent dividend with a date of record
of December 23, which happens to be a Friday. The stock is trading at $37.75 per share just
before the ex-divided date. The firm has a net income of $35 million for the year, and it paid 25
cent dividends per share each quarter. What is the firm's retention ratio? - CORRECT
ANSWER - 90%
A hypothetical corporation, Cascade Strategic & Innovative Solutions, has decided to raise
capital through a rights offering. The company has 2,000,000 outstanding shares of stock with a
market value of $55 per share. Cascade would like to raise an additional $15,000,000 in capital
through a rights offering. The company will set the subscription price at $25 per new share. How
many new shares will need to be issued? - CORRECT ANSWER - 600,000 new shares
A hypothetical corporation, Cascade Strategic & Innovative Solutions, has decided to raise
capital through a rights offering. The company has 2,000,000 outstanding shares of stock with a
market value of $55 per share. Cascade would like to raise an additional $15,000,000 in capital
through a rights offering. The company will set the subscription price at $25 per new share. What
would we expect the new share price to be after all rights have been exercised, considering no
