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FIN 370 – Corporate Finance | A+ Graded Exam Questions,
Solutions, Study Guide, and Complete Preparation Material
for 2025/2026 Exams
Below is the common equity section (in millions) of Fethe Industries' last two year-
end balance sheets:
2015 2014
Common stock $2,000 $1,000
Retained earnings 2,000 2,340
Total common equity $4,000 $3,340
The company has never paid a dividend to its common stockholders. Which of the
following statements is CORRECT?
a. The company's net income in 2014 was higher than in 2015.
b. The company issued common stock in 2015.
c. The market price of the company's stock doubled in 2015.
d. The company had positive net income in both 2014 and 2015, but the company's
net income in 2014 was lower than it was in 2015.
e. The company has more equity than debt on its balance sheet.
B
Rao Corporation has the following balance sheet. How much net operating
working capital does the firm have?
Cash $ 10 Accounts payable $ 20
Short-term investments 30 Accruals 20
Accounts receivable 50 Notes payable 50
Inventory 40 Current liabilities $ 90
Current assets $130 Long-term debt 60
Net fixed assets 100 Common equity 30
Retained earnings 50
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Total assets $230 Total liab. & equity $230
a. $54.00
b. $60.00
c. $66.00
d. $72.60
e. $79.86
ANSWER: b
RATIONALE: Net operating working capital = Operating current assets −
Operating current liabilities NOWC = $100.00 − $40.00 NOWC = $60.00
A firm wants to strengthen its financial position. Which of the following actions
would increase its quick ratio?
a. Issue new common stock and use the proceeds to acquire additional fixed assets.
b. Offer price reductions along with generous credit terms that would (1) enable the
firm to sell some of its excess inventory and (2) lead to an increase in accounts
receivable.
c. Issue new common stock and use the proceeds to increase inventories.
d. Speed up the collection of receivables and use the cash generated to increase
inventories.
e. Use some of its cash to purchase additional inventories.
B.
Inventory is less Liquid asset. Quick ratio measures the $ amount of liquid assets
available for each $ amount of current Liabilities.
If a bank loan officer were considering a company's request for a loan, which of the
following statements would you consider to be CORRECT?
a. Other things held constant, the lower the current ratio, the lower the interest rate
the bank would charge the firm.
b. The lower the company's EBITDA coverage ratio, other things held constant, the
lower the interest rate the bank would charge the firm.
c. Other things held constant, the higher the debt ratio, the lower the interest rate
the bank would charge the firm.
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d. Other things held constant, the lower the debt ratio, the lower the interest rate
the bank would charge the firm.
e. The lower the company's TIE ratio, other things held constant, the lower the
interest rate the bank would charge the firm.
D.
HW 6 Answer
Which of the following would indicate an improvement in a company's financial
position, holding other things constant?
a. The current and quick ratios both increase.
b. The inventory and total assets turnover ratios both decline.
c. The debt ratio increases.
d. The profit margin declines.
e. The EBITDA coverage ratio declines.
A.
. Companies Heidee and Leaudy have the same tax rate, sales, total assets, and
basic earning power. Both companies have positive net incomes. Company Heidee
has a higher debt ratio and, therefore, a higher interest expense. Which of the
following statements is CORRECT?
a. Company Heidee has a lower times interest earned (TIE) ratio.
b. Company Heidee has a lower equity multiplier.
c. Company Heidee has more net income.
d. Company Heidee pays more in taxes.
e. Company Heidee has a lower ROE.
ANSWER: a
RATIONALE: Heidee has higher interest charges. Basic earning power equals
EBIT/Assets, and since assets are equal, EBIT must also be equal. TIE =
EBIT/Interest. Therefore, Heidee higher interest charges means that its TIE must
be lower. Thus, a is correct. All of the other statements are incorrect.
16. The Jameson Company just paid a dividend of $0.75 per share, and that
dividend is expected to grow at a constant rate of 5.50% per year in the future. The
FIN 370 – Corporate Finance | A+ Graded Exam Questions,
Solutions, Study Guide, and Complete Preparation Material
for 2025/2026 Exams
Below is the common equity section (in millions) of Fethe Industries' last two year-
end balance sheets:
2015 2014
Common stock $2,000 $1,000
Retained earnings 2,000 2,340
Total common equity $4,000 $3,340
The company has never paid a dividend to its common stockholders. Which of the
following statements is CORRECT?
a. The company's net income in 2014 was higher than in 2015.
b. The company issued common stock in 2015.
c. The market price of the company's stock doubled in 2015.
d. The company had positive net income in both 2014 and 2015, but the company's
net income in 2014 was lower than it was in 2015.
e. The company has more equity than debt on its balance sheet.
B
Rao Corporation has the following balance sheet. How much net operating
working capital does the firm have?
Cash $ 10 Accounts payable $ 20
Short-term investments 30 Accruals 20
Accounts receivable 50 Notes payable 50
Inventory 40 Current liabilities $ 90
Current assets $130 Long-term debt 60
Net fixed assets 100 Common equity 30
Retained earnings 50
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Total assets $230 Total liab. & equity $230
a. $54.00
b. $60.00
c. $66.00
d. $72.60
e. $79.86
ANSWER: b
RATIONALE: Net operating working capital = Operating current assets −
Operating current liabilities NOWC = $100.00 − $40.00 NOWC = $60.00
A firm wants to strengthen its financial position. Which of the following actions
would increase its quick ratio?
a. Issue new common stock and use the proceeds to acquire additional fixed assets.
b. Offer price reductions along with generous credit terms that would (1) enable the
firm to sell some of its excess inventory and (2) lead to an increase in accounts
receivable.
c. Issue new common stock and use the proceeds to increase inventories.
d. Speed up the collection of receivables and use the cash generated to increase
inventories.
e. Use some of its cash to purchase additional inventories.
B.
Inventory is less Liquid asset. Quick ratio measures the $ amount of liquid assets
available for each $ amount of current Liabilities.
If a bank loan officer were considering a company's request for a loan, which of the
following statements would you consider to be CORRECT?
a. Other things held constant, the lower the current ratio, the lower the interest rate
the bank would charge the firm.
b. The lower the company's EBITDA coverage ratio, other things held constant, the
lower the interest rate the bank would charge the firm.
c. Other things held constant, the higher the debt ratio, the lower the interest rate
the bank would charge the firm.
, 3|Page
d. Other things held constant, the lower the debt ratio, the lower the interest rate
the bank would charge the firm.
e. The lower the company's TIE ratio, other things held constant, the lower the
interest rate the bank would charge the firm.
D.
HW 6 Answer
Which of the following would indicate an improvement in a company's financial
position, holding other things constant?
a. The current and quick ratios both increase.
b. The inventory and total assets turnover ratios both decline.
c. The debt ratio increases.
d. The profit margin declines.
e. The EBITDA coverage ratio declines.
A.
. Companies Heidee and Leaudy have the same tax rate, sales, total assets, and
basic earning power. Both companies have positive net incomes. Company Heidee
has a higher debt ratio and, therefore, a higher interest expense. Which of the
following statements is CORRECT?
a. Company Heidee has a lower times interest earned (TIE) ratio.
b. Company Heidee has a lower equity multiplier.
c. Company Heidee has more net income.
d. Company Heidee pays more in taxes.
e. Company Heidee has a lower ROE.
ANSWER: a
RATIONALE: Heidee has higher interest charges. Basic earning power equals
EBIT/Assets, and since assets are equal, EBIT must also be equal. TIE =
EBIT/Interest. Therefore, Heidee higher interest charges means that its TIE must
be lower. Thus, a is correct. All of the other statements are incorrect.
16. The Jameson Company just paid a dividend of $0.75 per share, and that
dividend is expected to grow at a constant rate of 5.50% per year in the future. The
