Advanced Corporate Finance

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Advanced Corporate Finance - Quiz


Questions and Answers
  • 1. 

    Which of the following statements is false?

    • A.

      Fundamentally, interest rates are determined by the Federal Reserve.

    • B.

      The interest rates that are quoted by banks and other financial institutions are nominal interest rates.

    • C.

      The Federal Reserve determines very short-term interest rates through its influence on the federal funds rate.

    • D.

      The interest rates that banks offer on investment or charge on loans depends on the horizon of the investment or loan.

    Correct Answer
    A. Fundamentally, interest rates are determined by the Federal Reserve.
    Explanation
    The statement "Fundamentally, interest rates are determined by the Federal Reserve" is false. While the Federal Reserve does have influence over interest rates, it does not directly determine them. Interest rates are influenced by various factors such as supply and demand for credit, inflation, economic conditions, and market forces. The Federal Reserve can influence interest rates through its monetary policy decisions, such as adjusting the federal funds rate, but it does not have complete control over determining interest rates.

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  • 2. 

    Which of the following statements is false?

    • A.

      The relationship between the investment term and the interest rate is called the term structure of the interest rate.

    • B.

      Real interest rates indicate the rate at which your money will grow if invested for a certain period.

    • C.

      The yiesd curve is a potential leading indicator of future economic grow.

    • D.

      The shape of the yield curve will be strongly influenced by interest rate expectations.

    Correct Answer
    B. Real interest rates indicate the rate at which your money will grow if invested for a certain period.
    Explanation
    The correct answer is "Real interest rates indicate the rate at which your money will grow if invested for a certain period." This statement is false because real interest rates do not indicate the rate at which your money will grow if invested. Real interest rates are adjusted for inflation and represent the purchasing power of your money. They do not directly indicate the growth rate of your investment.

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  • 3. 

    Which of the following statements is false?

    • A.

      As firms mature, their earnings exeed their investment needs they begin to pay dividends.

    • B.

      Total return = earnings * by the divident payout rate.

    • C.

      Cutting the firm`s dividend to increase investment will raise the stock price if, and only if, the new investment have a positive NPV.

    • D.

      We cannot use the constant dividend growth model to value the stock of a firm with rapid or changing growth.

    Correct Answer
    B. Total return = earnings * by the divident payout rate.
    Explanation
    The statement "Total return = earnings * by the dividend payout rate" is false because total return is calculated by adding the dividend yield and the capital appreciation of a stock, not by multiplying earnings by the dividend payout rate.

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  • 4. 

    The date on which the board authorizes the dividend is the:

    • A.

      Declaration date.

    • B.

      Distribution date.

    • C.

      Record date.

    • D.

      Ex-dividend date.

    Correct Answer
    A. Declaration date.
    Explanation
    The declaration date refers to the date on which the board of directors officially approves and announces the dividend payment to the shareholders. It is the first step in the dividend distribution process and signifies the company's intention to distribute dividends. The distribution date is the actual date on which the dividend is paid to the shareholders. The record date is the cut-off date set by the company to determine which shareholders are eligible to receive the dividend. The ex-dividend date is the date on which the stock starts trading without the dividend, meaning that if an investor buys the stock on or after this date, they will not be entitled to the upcoming dividend payment.

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  • 5. 

    The firm will pay the divident to all shareholders who are registered owners on a specific dare, set by the board, called the:

    • A.

      Record date.

    • B.

      Declaration date.

    • C.

      Distribution date.

    • D.

      Ex-dividend date.

    Correct Answer
    A. Record date.
    Explanation
    The correct answer is "Record date." The record date is the specific date set by the board of a firm on which shareholders must be registered owners in order to receive a dividend payment. This date is used to determine which shareholders are eligible to receive the dividend and ensures that only those who are registered as owners on or before the record date will receive the payment. The declaration date is the date on which the board announces the dividend, the distribution date is the date on which the dividend is actually paid out, and the ex-dividend date is the date on which a stock begins trading without the right to receive the upcoming dividend.

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  • 6. 

    Anyone who purchases the stock on or after the______ date will not receive the devidend.

    • A.

      Distribution.

    • B.

      Ex-dividend.

    • C.

      Record.

    • D.

      Declaration.

    Correct Answer
    B. Ex-dividend.
    Explanation
    The correct answer is "Ex-dividend." The term "ex-dividend" refers to the date on or after which a stock buyer will not receive the upcoming dividend payment. This means that if someone purchases the stock on or after the ex-dividend date, they will not be entitled to receive the dividend that is declared for that particular period.

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  • 7. 

    Which of the following statements is false?

    • A.

      Most companies that pay dividends pay them semiannually.

    • B.

      From an accounting perspective, dividends generally reduce the firm`s current (or accumulated) retained earnings.

    • C.

      The way a firm chooses between paying dividends and retaining earnings is referred to as its payout policy.

    • D.

      Occasionally, a firm may pay a one-time, special dividend that is usually much large than a regular dividend.

    Correct Answer
    A. Most companies that pay dividends pay them semiannually.
    Explanation
    Most companies that pay dividends do not pay them semiannually.

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  • 8. 

    A firm can repurchase shares through a(n)______ in which it offers to buy shares at a prespecified price during a short time period, generally within 20 days.

    • A.

      Tender offer.

    • B.

      Open market share repurchases.

    • C.

      Target repurchase.

    • D.

      Dutch auction share repurchase.

    Correct Answer
    A. Tender offer.
    Explanation
    A firm can repurchase shares through a tender offer, which is a process in which the firm offers to buy shares at a pre-specified price within a short time period, typically within 20 days. During a tender offer, shareholders have the option to sell their shares back to the firm at the offered price. This method allows the firm to control the repurchase process and set the price at which they are willing to buy the shares.

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  • 9. 

    One of methods to repurchase shares is the__________, in which the firm lists different prices at which it is prepared to buy shares, and shareholders in turn indicate how many shares they are willing to sell at each price.

    • A.

      Dutch auction share repurchase.

    • B.

      Tender offer.

    • C.

      Targeted repurchase.

    • D.

      Open market share repurchases.

    Correct Answer
    A. Dutch auction share repurchase.
    Explanation
    The correct answer is Dutch auction share repurchase. In a Dutch auction share repurchase, the firm lists different prices at which it is prepared to buy shares, and shareholders in turn indicate how many shares they are willing to sell at each price. This method allows the firm to determine the lowest price at which it can repurchase the desired number of shares, ensuring a fair and efficient process for both the firm and the shareholders.

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  • 10. 

    A(n)_________is the most common way that firms repurchase shares.

    • A.

      Target repurchase

    • B.

      Dutch auction share repurchse.

    • C.

      Tender offer.

    • D.

      Open market share repurchases.

    Correct Answer
    D. Open market share repurchases.
    Explanation
    Open market share repurchases refer to the practice of a firm buying back its own shares from the open market. This is the most common method used by firms to repurchase shares. In this method, the firm buys shares directly from existing shareholders through stock exchanges. It allows the firm to have more control over the timing and quantity of shares repurchased, and it also provides liquidity to shareholders who wish to sell their shares. This method is often preferred due to its flexibility and the ability to make purchases at market prices.

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  • 11. 

    Which of the following statements is false?

    • A.

      Equity holders expect to receive dividends and the firm is legally obligated to pay them.

    • B.

      A firm that fails to make the required interest or principal payment on the debt is in default.

    • C.

      In the extreme case, the debt holders take legal ownership of firm`s assets through a process called bankruptcy.

    • D.

      After a firm defaults, debt holders are given certain rights to the assets of the firm.

    Correct Answer
    A. Equity holders expect to receive dividends and the firm is legally obligated to pay them.
    Explanation
    Equity holders do not have a legal obligation to receive dividends from the firm. Dividends are typically discretionary payments made by the firm to its equity holders, depending on the profitability and financial position of the company. While equity holders may have an expectation or desire to receive dividends, there is no legal obligation for the firm to pay them.

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  • 12. 

    Which of the following statements is false?

    • A.

      An important consequence of leverage is the risk of bankruptcy.

    • B.

      Whether default occurs depends on the cash flow, not on the relative value of the firm`s assets and liabilities.

    • C.

      Economic distress is a significant decline in the value of a firm`s assets, whether or not it experiences financial distress due to leverage.

    • D.

      Modigliani and Miller`s results continue to hold in a perfect market even when debt is risky and the firm may default.

    Correct Answer
    B. Whether default occurs depends on the cash flow, not on the relative value of the firm`s assets and liabilities.
    Explanation
    The statement "Whether default occurs depends on the cash flow, not on the relative value of the firm's assets and liabilities" is false. In reality, default occurs when the value of a firm's liabilities exceeds the value of its assets, regardless of its cash flow. This is because the relative value of assets and liabilities determines the firm's ability to meet its financial obligations.

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  • 13. 

    Which of the following statements regarding perpetuities is false?

    • A.

      To find the value of a perpetuity one cash flow at a time would take forever.

    • B.

      A perpetuity is a stream of equal cash flows that occur at regular intervals and last forever.

    • C.

      PV of a perpetuity = r/C

    • D.

      One example of a perpetuity is the British goverment bond called a consol.

    Correct Answer
    C. PV of a perpetuity = r/C
    Explanation
    The given statement that "PV of a perpetuity = r/C" is false. The correct formula to calculate the present value of a perpetuity is PV = C/r, where PV represents the present value, C represents the cash flow, and r represents the discount rate.

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  • 14. 

    Which of the following statements is regarding annuities is false?

    • A.
    • B.

      The difference between an annuity and perpetuity is that a perpetuity ends after some fixed number of payments.

    • C.

      An annuity is a stream of N equal cash flows paid at regular intervals.

    • D.

      Most car loans, mortgages, and some bonds are annuities.

    Correct Answer
    B. The difference between an annuity and perpetuity is that a perpetuity ends after some fixed number of payments.
    Explanation
    The given statement is false because the difference between an annuity and a perpetuity is that a perpetuity has no fixed end date and continues indefinitely, while an annuity has a fixed number of payments.

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  • 15. 

    Which of the followig statements is false?

    • A.

      The interest rates that banks offer on investments or charge on loans depends on the horizon of the investment or loan.

    • B.

      The Federal Reserve determines very short-term interest rates through its influence on the federal funds rate.

    • C.

      Fundamentally, interest rates are determined by the Federal Reserve.

    Correct Answer
    C. Fundamentally, interest rates are determined by the Federal Reserve.
    Explanation
    The given answer is false because interest rates are not fundamentally determined by the Federal Reserve. While the Federal Reserve does play a role in influencing short-term interest rates through its control over the federal funds rate, interest rates are also influenced by various other factors such as market conditions, inflation, supply and demand for credit, and the overall health of the economy. Therefore, it is incorrect to say that interest rates are fundamentally determined solely by the Federal Reserve.

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  • 16. 

    Which of the following statements is false?

    • A.

      The relationship between the investment term and the interest rate is called the term structure of interest rates.

    • B.

      Real interest rates indicate the rate at which your money will grow if invested for a certain period.

    • C.

      The yield curve is a potential leading indicator of future economic grow.

    Correct Answer
    B. Real interest rates indicate the rate at which your money will grow if invested for a certain period.
    Explanation
    Real interest rates do not indicate the rate at which your money will grow if invested for a certain period. Real interest rates adjust for inflation and reflect the purchasing power of the money invested. The growth of money invested for a certain period is determined by the nominal interest rate, which does not take inflation into account.

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  • 17. 

    P/E ratio?

    • A.

      P/E ratio = Share Price/EPS

    • B.

      P/E ratio = Profit/Number of Shares Outstanding

    Correct Answer
    A. P/E ratio = Share Price/EPS
    Explanation
    The P/E ratio, or price-to-earnings ratio, is a financial metric used to assess the valuation of a company's stock. It is calculated by dividing the share price by the earnings per share (EPS). This ratio provides insight into how much investors are willing to pay for each dollar of earnings generated by the company. A higher P/E ratio suggests that investors have higher expectations for future earnings growth, while a lower ratio may indicate undervaluation or lower growth prospects. Therefore, the correct answer is that the P/E ratio is calculated by dividing the share price by the EPS.

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  • 18. 

    Share Price ?

    • A.

      Equty = Share Price * Shares Outstanding

    • B.

      SP = Equty / Shares Outstanding

    Correct Answer
    B. SP = Equty / Shares Outstanding
    Explanation
    The given equation SP = Equity / Shares Outstanding represents the calculation of the share price. The share price is determined by dividing the equity (the total value of a company's assets minus its liabilities) by the number of shares outstanding (the total number of shares that have been issued by the company and are held by investors). This equation allows investors to calculate the price they are willing to pay for a share of the company's stock based on its equity and the number of shares available in the market.

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  • 19. 

    A voluntary reorganization of debts whereby a firm`s debt obligations are still expected to be paid in full but at a later than originally scheduled date, is called?

    • A.

      A composition.

    • B.

      An extention.

    • C.

      Creditor control

    • D.

      None of the above

    Correct Answer
    B. An extention.
    Explanation
    A voluntary reorganization of debts whereby a firm's debt obligations are still expected to be paid in full but at a later than originally scheduled date is called an extension. This means that the firm is seeking to delay the payment of its debts while still intending to fulfill its obligations in the future. This allows the firm to manage its cash flow and financial obligations more effectively. A composition refers to an agreement between a debtor and creditors to settle debts for less than the full amount owed, while creditor control suggests that the creditors have taken control of the firm's operations to manage its debts.

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Quiz Review Timeline +

Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

  • Current Version
  • Apr 11, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Apr 26, 2012
    Quiz Created by
    Kir08
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