Corporate Finance Quiz

The primary goal of financial management in a corporation is to:

• Maximize the company's annual profit.

• Maximize the company's market share.

• Maximize the current value per share of the existing stock.

• Minimize the company's total liabilities.

The agency problem in corporate finance refers to:

• The conflict of interest between a company's management and its stockholders.

• The difficulty in hiring a qualified CEO.

• The legal obligation of a firm to act as an agent for its customers.

• The conflict between a company and its bondholders.

Which of the following is a measure of a company's short-term liquidity?

• Debt-to-Equity Ratio

• Return on Equity (ROE)

• Current Ratio

• Price-to-Earnings (P/E) Ratio

The concept of the time value of money states that:

• A dollar today is worth less than a dollar in the future.

• A dollar today is worth the same as a dollar in the future.

• A dollar today is worth more than a dollar in the future.

• The value of money is constant over time.

In capital budgeting, the Net Present Value (NPV) of a project is the:

• Sum of all the project's expected future cash flows.

• Present value of the project's future cash flows minus the initial investment.

• Project's expected profit divided by the initial investment.

• The interest rate that makes the project's NPV equal to zero.

The Internal Rate of Return (IRR) is the discount rate at which:

• The project's NPV is maximized.

• The project's NPV is equal to the initial investment.

• The project's NPV is equal to zero.

• The project's payback period is minimized.

According to the Modigliani-Miller (M&M) Proposition I in a world with no taxes:

• The value of a firm increases with the use of debt.

• The value of a firm decreases with the use of debt.

• The value of a firm is independent of its capital structure.

• The optimal capital structure is 100% equity.

The cost of debt is typically lower than the cost of equity because:

• Interest payments on debt are tax-deductible.

• Debt holders have a lower priority claim on the firm's assets in case of bankruptcy.

• Equity is a less risky investment than debt.

• Dividends are legally required to be paid.

A company announces a stock repurchase program. According to signaling theory, this is often interpreted by the market as a:

• Negative signal, suggesting the company is in financial trouble.

• Positive signal, suggesting management believes the stock is undervalued.

• Neutral signal with no new information.

• Signal that the company plans to issue new debt soon.

A vertical merger is a merger between two companies that:

• Are in the same industry and are direct competitors.

• Are in completely unrelated industries.

• Are in the same industry but at different stages of the production/supply chain.

• Involve one company going private through a leveraged buyout.