Midterm Corporate Finance Past Paper 2022-11 PDF

1. What is a benefit corporation? A. a type of organization that places social and/or environmental values on equal footing with profits. B. a type of organization that only aims at making profits C. a non-governmental organization (NGO) D. a non-profit organization E. None of these answers An...

1. What is a benefit corporation? A. a type of organization that places social and/or environmental values on equal footing with profits. B. a type of organization that only aims at making profits C. a non-governmental organization (NGO) D. a non-profit organization E. None of these answers Answer A 2. Which of the following statements is correct? A. A capital budget lists the expected revenues and expenses of the next years. B. Operating cash flow = operating income × (1 - Tax rate) + depreciation and amortization + change in net working capital. C. When sales of a new product displace sales of an existing product, the situation is often referred to as merchandising. D. Non-operating expenses are part of the core business activity of the firm. E. None of these answers Answer: B 3. The purpose of a corporation is to A. Maximize value for its shareholders and nothing else. B. Generate profit and also take into consideration social and environmental issues. C. Maximize its revenues D. Maximize value for all its stakeholders E. None of these answers The correct answer is A 4. Which of the following statements is false? A. The IRR investment rule will identify the correct decision in many, but not all, situations. B. By setting the NPV equal to zero and solving for r, we find the IRR. C. If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate. D. The IRR and the NPV investment rules always identify the same investment decision. E. None of these answers The correct answer is D 5. The present value of €100 expected 3 years from today at a discount rate of 11 percent is closest to A. €111.25. B. €73.12. C. €100.00. D. €89.43. E. None of these answers B 6. If the present value of €1250 expected one year from today is €1150, the one-year discount rate is closest to A. 6.5 percent B. 8.7 percent C. 12 percent D. 17.3 percent E. None of these answers B 7. An initial investment of €5000 is expected to produce an end-of-year cash flow of €5200. The NPV of the project at a discount rate of 8 percent is closest to A. €200 B. - €5,200 C. - €185.19 D. €43.52 E. None of these answers C 8. At an interest rate of 5 percent, which of the following sequences of cash flows should you prefer? ,Year 1, Year 2, Year 3 option A: 600, 600, 800 option B: 200, 600, 1200 option C: 800, 600, 600 option D: Any of the above as all add up to €2,000 A. Option A B. Option B C. Option C D. Option D E. None of these answers C 9. What is the present value of €15000 per year in perpetuity at an annual interest rate of 4 percent? Assume the perpetuity starts in one year. A. €200,000 B. €100,000 C. €375,000 D. €655,000 E. None of these answers C 10. Mr Dupont has just bought a house partly financed with a €650000 mortgage loan at an interest rate of 8 percent per year. The loan will be reimbursed with 15 equal annual payments. The amount of each payment is closest to A. €43,333 B. €52,000 C. €75,939 D. €92,544 E. None of these answers C. 11. Cash flow estimates of an investment project called 'Abbey Road' are C0 = -1250; C1 = +535; C2 = +570; and C3 = +625. The internal rate of return for 'Abbey Road' is closest to: A. 17.67 percent B. 8.98 percent C. 25.15 percent D. 12.53 percent E. None of these answers A 12. Wind Power Corp. plans to invest into a new plant. This will require an initial investment of €5.6 million and will generate €2.7 million (after-tax) cash flows for three years. Assuming that the cost of capital is 10 percent, the net present value is closest to A. €987,675 B. €1,114,500 C. €8,100,000 D. €2,498,516 E. None of these answers B 13. Marshall's & Co. purchased a corner lot in Eglon City five years ago at a cost of €2.2 million. The lot was recently appraised at €2.5 million. At the time of the purchase, the company spent €150000 to grade the lot and another €50000 to build a small building on the lot. The company now wants to build a new retail store on the site. The building cost is estimated at €1.9 million. If the company decides not to go ahead with this project, it will resell the lot. What amount should be used as the initial cash flow for this project? A. €2,200,000 B. €2,500,000 C. €1,900,000 D. €4,400,000 E. None of these answers D. 14. Windmill Inc. has generated sales of €150000 and net income of €7500. It has recorded depreciation of €17500. The net working capital has increased by €8500. The firm has no interest expense. Give the operating cash flow that is free to be returned to investors (we assume that the NWC is part of the operating flows). A. €41,000 B. €68,500 C. €35,000 D. €16,500 E. None of these answers D 15. Shareholder activism is A. good for the society at large B. bad for the society at large C. about including social and/or environmental issues among the firm's objectives D. about maximizing value for its shareholders E. None of these answers (we cannot say, it depends on the situation) E 16. The Ramones ltd is expanding its product offerings to reach a wider range of customers. The expansion project includes increasing the floor inventory by €1 million and increasing its debt to suppliers by 15% of that amount. The company will also spend €150000 for a building contractor to expand the size of the showroom. This will add an additional €30000 of annual depreciation. The company will be offering credit to its customers and expect to generate and additional €200000 in sales. Its trade receivables represent 10% of the sales. If any, give the amount of net working capital to be included in the initial cash flow of this project. A. 870,000 B. €200,000 C. €1,800,000 D. €1,620,000 E. None of these answers A 17. For project A in year 2, inventories decrease by €20000 and accounts payable increase by €10000. Accounts receivable remain the same. Calculate the increase or decrease in net working capital for year 2. A. Decreases by €10,000 B. Increases by €10,000 C. Decreases by €30,000 D. Increases by €30,000 E. None of these answers C 18. So far in finance, the mainstream view is that the purpose of corporations is to A. Maximize societal welfare B. Maximize shareholders' wealth C. Maximize the well-being of its employees D. Maximize the protection of the environment E. None of these answers B 19. Which of the following balance sheet equations is correct? A. Assets + Liabilities = Shareholders' Equity B. Assets = Liabilities + Shareholders' Equity C. Assets + Current Liabilities = Long Term Liabilities + Shareholders' Equity D. Current Assets + Current Liabilities = Long Term Liabilities + Shareholders' Equity E. None of these answers B 20. You would like to have enough money saved to receive €40000 per year in perpetuity after retirement. How much would you need to have saved in your retirement fund to achieve this goal? (Assume that the perpetuity payments start one year from the date of your retirement. The annual interest rate is 8 percent.) A. €500,000 B. €2,000,000 C. €400,000 D. €750,000 E. None of these answers A