Corporate Finance QUESTIONS PRACTICE EXAM | ACCURATE AND VERIFIED FOR GUARANTEED PASs, Exams of Finance

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Corporate Finance QUESTIONS PRACTICE

EXAM | ACCURATE AND VERIFIED FOR

GUARANTEED PASS | GUARANTEED PASS|

LATEST UPDATE|2024- 2025 WITH 200+

QUESTIONS

In order to test the efficient-market hypothesis in the semi-strong form, researchers have used (the): A. Estimation of the serial correlation (autocorrelation) for securities and markets B. Measurement of the performance of mutual fund managers over the years C. Measurement of how rapidly security prices adjust to different news items D. All of the above

• CORRECT ANS-C Analysis of past monthly movements in Wal-Mart's stock price has produced the following estimates: α = - 0.45% and β = 0. 5. If the market index subsequently rises by 5% one month and Wal-Mart's stock price rises by 3%, what is the abnormal change in Wal- Mart's stock price? A. - 0.95% B. +0.95% C. +0.05% D. None of the above
• CORRECT ANS-B

Analysis of past monthly movements in IBM's stock price produces the following estimates: α = 2. 5% and β = 1. 6. If the market index subsequently rises by 12% in one month and IBM's stock price increases by 20%, what is the abnormal change in IBM's stock price? A. +1.7% B. +8% C. - 1.7% D. None of the above

• CORRECT ANS-C If the abnormal return for a stock during the first week is +5% and during the second week is +3%, what is the abnormal return for the two-week period? A. 5% B. 3% C. 8.15% D. None of the above
• CORRECT ANS-C The "event study" methodology is used in the test of: A. weak form efficiency B. semi-strong form efficiency C. strong form efficiency D. none of the above

- CORRECT ANS-B

In order to test the strong form of market efficiency, researchers have: I) examined the recommendations of professional security analysts II) performance of mutual funds III) performance of pension funds A. I only B. I and II only C. I, II, and III only D. II and III only

• CORRECT ANS-C Which of the following observations would provide evidence against the strong form of efficient market theory? I) Mutual fund managers do not on average make superior returns II) In any year approximately 50% of all pension funds outperform the market III) Managers who trade in their own firm's stocks make superior returns A. I only B. II only C. III only D. I and II only
  • CORRECT ANS-C

A lawyer works for a firm that advises corporate firms planning to sue other corporations for antitrust damages. He finds that he can "beat the market" by short selling the stock of the firm that will be sued. This finding is in violation of the: A. Weak form market efficiency B. Semi-strong form market efficiency C. Strong form market efficiency D. None of the above

• CORRECT ANS-C Strong-form efficiency implies that mutual fund managers: A. Buy the index that maximizes diversification and minimizes cost of managing portfolios B. Actively seek under performing stocks and buy them C. Fund mangers can consistently earn superior returns year after year D. None of the above
  • CORRECT ANS-A The following are anomalies associated with market efficiency except: I) the small-firm effect II) the earnings announcement puzzle III) the new-issue puzzle IV) trading rules based on patterns A. I only B. I and II only

C. I, II, and III only D. IV only

• CORRECT ANS-D The various lessons of market efficiency are: I) Markets have no memory II) Trust market prices III) Read the entrails IV) There are no financial illusions V) The do-it yourself alternative VI) Seen one stock, seen them all A. I and II only B. I, II, III and IV only C. I, II, III, IV and V only D. I, II, III, IV, V and VI
• CORRECT ANS-D Studies on behavioral finance have been developed using: A. market evidence B. economic evidence C. psychological evidence D. none of the above
• CORRECT ANS-C

Investors are particularly averse to the possibility of even a very small loss and need a high return to compensate for it. Such a concept is related to what theory? A. Market efficiency theory B. Random walk theory C. Convergence trading D. Prospect theory

• CORRECT ANS-D Which theory offers an explanation for the crash of a stock market one day and its rebound the next? A. Market efficiency theory B. Random walk theory C. Convergence trading D. Prospect theory
• CORRECT ANS-B Firms can pay out cash to their shareholders in the following ways: I) Dividends II) Share repurchases III) Interest payments A. I only B. II only C. I and II only

D. III only

• CORRECT ANS-C Dividends are decided by: I) The managers of a firm II) The government III) The board of directors A. I only B. II only C. III only D. I and II only
  • CORRECT ANS-C Which of these dates occurs last in time (when arranged in the chronological order)? A. Payment date B. Ex-dividend date C. Record date D. Dividend declaration date - CORRECT ANS-A Which of the following lists events in the chronological order from earliest to latest? A. Record date, declaration date, ex-dividend date B. Declaration date, record date, ex-dividend date C. Declaration date, ex-dividend date, record date

D. None of the above - CORRECT ANS-C On January 2, Michigan Mining declared a $25-per-share quarterly dividend payable on March 9th to stockholders of record on February 9. What is the latest date by which you could purchase the stock and still get the recently declared dividend? A. February 5 B. February 6 C. February 7 D. February 8 - CORRECT ANS-B Which of the following dividends is never in the form of cash? I) Regular dividend II) Special dividend III) Stock dividend IV) Liquidating dividend A. I only B. II only C. III only D. I, II, and IV only - CORRECT ANS-C The following statements are true of dividend reinvestment plans (DRIPs): I) offered by the companies to their shareholders II) generally, new shares are issued at a discount

III) the dividends are taxable as ordinary income A. I only B. I and II only C. I, II and III D. III only - CORRECT ANS-C Firms can repurchase shares in the following ways: I) Open market repurchase II) Through a tender offer III) Through a Dutch auction process IV) Through direct negotiation with a major shareholder A. I only B. II only C. III only D. I, II, III, and IV - CORRECT ANS-D Dutch auction process is the same as: A. discriminatory price auction B. uniform price auction C. English auction D. none of the above - CORRECT ANS-B The par value of the outstanding shares is defined as:

A. Retained earnings B. Legal capital C. Book value of equity D. None of the above - CORRECT ANS-B The procedure where the firm states a series of prices at which it is prepared to repurchase stock. Shareholders submit offers indicting how many shares they wish to sell at each price. The firm then calculates the lowest price at which it is able to buy the desired number of shares. This procedure is known as: A. Open market transaction B. Dutch auction C. Green mail D. None of the above - CORRECT ANS-C The most important difference between stock repurchases and cash dividends is that they: I) Benefit different groups II) Have different effects on corporate cash flow III) May have different tax consequences A. I only B. II only C. III only D. I, II, and III - CORRECT ANS-B Greenmail refers to the practice of a company purchasing its stock, usually at a high price,

from: A. Small shareholders who are happy with performance of the firm B. A hostile shareholder who threatens to take over the firm C. Large shareholders who are happy with performance of the firm D. None of the above - CORRECT ANS-B Which of the following is not true? A. Firms have long-run target dividend payout ratios B. Dividend changes follows shifts in long-term, sustainable earnings C. Managers are reluctant to make dividend changes that might have to be reversed D. All of the above - CORRECT ANS-D Generally, firms resort to repurchase of stock because: I) Firms have accumulated large amount of excess cash II) Firms want to change their capital structure III) Firms want to substitute it for regular dividends A. I only B. II only C. I and II only D. III only - CORRECT ANS-C Generally, firms resort to repurchase of stock during:

I) boom times at an increasing rate as firms accumulate excess cash II) recession at an increasing rate because of the low stock price III) boom as well as recession at a steady rate A. I only B. II only C. III only D. II and III only - CORRECT ANS-A According to financial executives' views about dividend policy, the following statement is the most frequently cited one: I) we try to avoid reducing the dividend II) we try to maintain a smooth dividend stream III) we look at the current dividend level IV) we are reluctant to make a change that may have to be reversed A. I only B. II only C. III only D. IV only - CORRECT ANS-A Generally, investors interpret the announcement of an increase in dividends as: A. bad news and the stock price drops B. good news and the stock price increases C. a non-event and does not affect the stock price

D. very bad news and the stock price plunges - CORRECT ANS-B Generally, investors interpret the announcement of a decrease in dividends as: A. bad news and the stock price drops B. good news and the stock price increases C. a non-event and does not affect the stock prices D. very good news and the stock price jumps up - CORRECT ANS-A Generally, investors view the announcement of open-market repurchase of stocks as: A. bad news and the stock price drops B. good news and the stock price increases C. a non-event and does not affect the stock prices D. very good news and the stock price jumps up - CORRECT ANS-B One key assumption of the Miller and Modigliani (MM) dividend irrelevance argument is that: A. Future stock prices are certain B. There are no capital gains taxes C. All investments are risk-free D. New shares are sold at a fair price - CORRECT ANS-D The indifference proposition regarding dividend policy: A. Assumes that tax rates increase at the same rate as inflation

B. Assumes that investors are indifferent about the timing of dividend payments C. States that investors are indifferent between stock dividends and cash dividends D. States that investors are indifferent between stock repurchase and cash dividends - CORRECT ANS-B One key assumption of the Miller and Modigliani (MM) dividend irrelevance is that: A. Future stock prices are certain B. There are no capital gains taxes C. Capital markets are efficient D. All investments are risk-free - CORRECT ANS-C The dividend-irrelevance proposition of Miller and Modigliani depends on the following relationship between investment policy and dividend policy. A. The level of investment does not influence or matter to the dividend decision B. Once the dividend policy is set the investment decision can be made as desired C. The investment policy is set before the dividend decision and not changed by dividend policy D. None of the above - CORRECT ANS-C One possible reason that shareholders often insist on higher dividends is: A. They agree with Miller and Modigliani B. Tax consideration C. The stock market is efficient D. They do not trust managers to spend retained earnings wisely - CORRECT ANS-D

The rightist position is that the market will reward firms that: A. Have high dividend yield. B. Have low dividend yield. C. Are well managed, regardless of dividend yield. D. None of the above. - CORRECT ANS-A According to behavioral finance investors prefer dividends because: A. investors prefer the discipline that comes from spending only the dividends B. of the tax consideration C. stock market is efficient D. all of the above - CORRECT ANS-A If investors do not like dividends because of the additional taxes that they have to pay, how would you expect stock prices to behave on the ex-dividend date? A. Fall by more than the amount of the dividend B. Fall exactly by the amount of the dividend C. Fall by less than the amount of the dividend D. Cannot be predicted - CORRECT ANS-C If both dividends and capital gains are taxed at the same ordinary income tax rate, the effect of tax is different because: A. Capital gains are actually taxed, while dividends are taxed on paper only B. Dividends are taxed when distributed while capital gains are deferred until the stock is sold

C. Both dividends and capital gains are taxed every year D. Both A and C - CORRECT ANS-B If dividends are taxed more heavily than capital gains, the investors: A. Should be willing to pay more for stocks with low dividend yields B. Should be willing to pay more for high dividend yields C. Should be willing to pay the same for stocks regardless of the dividend yields D. Cannot be predicted as stock prices fluctuate randomly - CORRECT ANS-A If investors have a marginal tax rate of 20% and a firm has announced a dividend of $5; A. The price of stock should decrease by $4 on the ex-dividend date B. The price of the stock should decrease by $5 on the ex-dividend date C. The price of the stock should increase by $5 on the ex-dividend date D. The price of the stock should increase by $4 on the ex-dividend date - CORRECT ANS-A Which of the following investors have the strongest tax reason to prefer dividends over capital gains? A. Pension funds B. Financial institutions C. Individuals D. Corporations - CORRECT ANS- According to middle-of-the-roaders, a firm's value is not affected by its dividend policy because:

A. of the clientele effect B. of the tax loopholes available to wealthy stockholders C. well-managed companies prefer to signal their worth by paying high dividends D. All of the above - CORRECT ANS-D firm in Australia earns a pretax profit of $A10 per share. It pays a corporate tax of $3 per share (30% tax rate) in taxes. The firm pays the remaining $A7 in dividends to a shareholder in 30% tax bracket. What is the amount of tax paid by the shareholder under the imputation tax system? A. $A2. B. Zero C. $A3. D. None of the above - CORRECT ANS-B A firm in Australia earns a pretax profit of $A10 per share. It pays a corporate tax of $3 per share (30% tax rate) in taxes. The firm pays the remaining $A7 in dividends to a shareholder in 30% tax bracket. What is the amount of tax paid by the shareholder under the imputation tax system? A. $A2. B. Zero C. $A3. D. None of the above - CORRECT ANS-A What would best explain the reluctance of General Motors to eliminate its dividend in 2008, only a few months before its financial collapse and eventual government takeover?

A. Clientele effect B. Leftist theory C. Rightest theory D. Signaling hypothesis - CORRECT ANS-A What dividend policy is probably the best from a financial standpoint, but not likely to be accepted by the market place or investors? A. High dividend B. Low dividend C. Residual dividend D. Signaling dividend - CORRECT ANS-C When a firm has no debt, then such a firm is known as: I) an unlevered firm II) a levered firm III) an all-equity firm A. I only B. II only C. III only D. I and III only - CORRECT ANS-D Capital structure of the firm can be defined as: I) the firm's debt-equity ratio

II) the firm's mix of different securities used to finance assets III) the market imperfection that the firm's manager can exploit A. I only B. II only C. III only D. I, II, and III - CORRECT ANS-B If a firm is financed with both debt and equity, the firm's equity is known as: A. unlevered equity B. levered equity C. preferred equity D. none of the above - CORRECT ANS-B Under what conditions would a policy of maximizing the value of the firm not the same as a policy of maximizing shareholders' wealth? A. If the issue of debt increases the probability of bankruptcy B. If the firm issues debt for the first time C. If the beta of equity is positive D. If an issue of debt affects the market value of existing debt - CORRECT ANS-D A policy of maximizing the value of the firm is the same as a policy of maximizing the shareholders' wealth rests on two important assumptions. They are: I) the firm can ignore dividend policy II) the debt equity ratio of the firm does not change

III) an issue of new debt does not affect the market value of existing debt A. I only B. II only C. III only D. I and III only - CORRECT ANS-D Modigliani and Miller's Proposition I states that: A. The market value of any firm is independent of its capital structure B. The market value of a firm's debt is independent of its capital structure C. The market value of a firm's common stock is independent of its capital structure D. None of the above - CORRECT ANS-A An investor can create the effect of leverage on his/her account by: I) buying equity of an unlevered firm II) by investing in risk-free debt like T-bills III) by borrowing on his/her own account A. I only B. II only C. III only D. I and III only - CORRECT ANS-D If firm U is unlevered and firm L is levered, then which of the following is true:

I) VU = EU

II) VL = EL + DL

III) VL = EU + DL

A. I only B. I and II only C. I, II, and III D. III only - CORRECT ANS-B If an investor buys "a" proportion of an unlevered firm's (firm U) equity then his/her payoff is: A. (a) * (profits) B. (a) * (interest) C. (a) * (profits - interest) D. none of the above - CORRECT ANS-A If an investor buys "a" proportion of an both debt and equity of a levered firm (firm L) then his/her payoff is: A. (a) * (profits) B. (a) * (interest) C. (a) * (profits - interest) D. none of the above - CORRECT ANS-A If an investor buys "a" proportion of the equity of a levered firm (firm L) then his/her payoff is: A. (a) * (profits)

B. (a) * (interest) C. (a) * (profits - interest) D. none of the above - CORRECT ANS-C The law of conservation of value implies that: A. The value of a firm's common stock is unchanged when debt is added to its capital structure B. The value of any asset is preserved regardless of the nature of the claims against it C. The value of a firm's debt is unchanged when common stock is added to its capital structure D. None of the above - CORRECT ANS-B An investor can undo the effect of leverage on his/her own account by: I) investing in the equity of a levered firm II) by borrowing on his/her own account III) by investing in risk-free debt like T-bills A. I only B. II only C. III only D. I and III above - CORRECT ANS-D If an individual wanted to borrow with limited liability he/she should: A. Invest in the equity of an unlevered firm

B. Borrow on his/her own account C. Invest in the equity of a levered firm D. Invest in a risk-free asset like T-bills - CORRECT ANS-C "Value additivity" works for: I) combining assets II) splitting up of assets III) mix of debt securities issued by the firm A. I only B. II only C. I and II only D. I, II, and III - CORRECT ANS-D The law of conservation of value implies that: I) the mix of senior and subordinated debt does not affect the value of the firm II) the mix of convertible and non-convertible debt does not affect the value of the firm III) the mix of common stock and preferred stock does not affect the value of the firm A. I only B. II only C. III only D. I, II, and III - CORRECT ANS-D The law of conservation of value implies that:

I) the mix of common stock and preferred stock does not affect the value of the firm II) the mix of long-term and short-term debt does not affect the value of the firm III) the mix of secured and unsecured debt does not affect the value of the firm A. I only B. II only C. III only D. I, II, and III - CORRECT ANS-D Capital structure is irrelevant if: A. the capital markets are perfect B. each investor holds a fully diversified portfolio C. each investor holds the same proportion of debt and equity of the firm D. all of the above - CORRECT ANS-D For a levered firm, A. As earnings before interest and taxes (EBIT) increases, the earnings per share (EPS) increases by the same percent B. As EBIT increases, the EPS increases by a larger percent C. As EBIT increases, the EPS decreases D. None of the above - CORRECT ANS-B For an all equity firm,

A. As earnings before interest and taxes (EBIT) increases, the earnings per share (EPS) increases by the same percent B. As EBIT increases, the EPS increases by a larger percent C. As EBIT increases, the EPS decreases D. None of the above - CORRECT ANS-A An EPS-Operating Income graph shows the trade-off between financing plans and: I) Greater risk associated with debt financing, which is evidenced by the greater slope II) Their break-even point III) The minimum earnings needed to pay the debt financing for a given level of debt A. I only B. II only C. III only D. I, II, and III only - CORRECT ANS-D According to EPS-operating income graph, debt financing is preferred if the expected operating income is: A. less than the break-even income B. greater then the break-even income C. equal to the break-even income - CORRECT ANS-B When comparing levered vs. unlevered capital structures, leverage works to increase EPS for high levels of operating income because: A. Interest payments on the debt vary with EBIT levels