Corporate Finance Fundamentals practice questions

Question 1

What is an advantage of a corporate form of business?

Accepted Answer

Ease of transferring ownership

Answer

Ease of formation

Answer

No double taxation of income

Answer

Less expensive to operate

Question 2

A financial analyst is entrusted with analyzing the values of a company's debt and equity to determine the financial leverage. Which financial statement should the analyst focus on?

Accepted Answer

Balance sheet

Answer

Income statement

Answer

Cash flow statement

Answer

Statement of retained earnings

Question 3

The following information is obtained from a company's financial statements: sales, $10,000,000; total assets, $5,000,000; net income, $4,000,000; total equity, $4,000,000; market price per share, $20.00; total outstanding shares, 1,000,000. What is the company's price-sales ratio?

Accepted Answer

2.0

Answer

0.4

Answer

0.5

Answer

5.0

Question 4

A financial analyst is analyzing an electronic company's previous year's and current year's balance sheet. Which change in the company's balance sheet will they consider as a net use of cash?

Accepted Answer

Its mortgage balance decreased from the previous year to the current year.

Answer

Its accounts receivable decreased from the previous year to the current year.

Answer

Its additional paid-in capital increased from the previous year to the current year.

Answer

Its outstanding bond increased from the previous year to the current year.

Question 5

A company's balance sheet shows cash of $100,000, fixed assets of $150,000, accounts payable of $50,000, a mortgage of $80,000, and equity of $120,000. What is the fixed asset percentage shown in the company's common-size balance sheet?

Accepted Answer

60%

Answer

150%

Answer

30%

Answer

125%

Question 6

Which ratio will a financial analyst use to examine a company's ability to pay its bills over a short-term period?

Accepted Answer

Quick ratio

Answer

Total debt ratio

Answer

Debt-equity ratio

Answer

Price-earnings ratio

Question 7

A company's income statement shows EBIT of $100,000 and depreciation and amortization expenses of $150,000. The company's balance sheet shows liabilities of $300,000 and cash of $50,000. What is its enterprise value-EBITDA multiple if the market value of equity is $750,000?

Accepted Answer

4.0

Answer

4.4

Answer

2.8

Answer

10.0

Question 8

An automobile company's cost of goods sold and inventory for the current year are $24,000 and $8,000, respectively. The company's days' sales in inventory is 120 days. What should the company do to reduce days' sales in inventory to 100 days next year? Assume there are 360 days in a year.

Accepted Answer

Reduce inventory to $6,667.

Answer

Reduce cost of goods sold to $21,333.

Answer

Increase cost of goods sold to $25,000.

Answer

Increase inventory to $10,000.

Question 9

A company has net income of $25,000, 1,000 shares outstanding, and a price per share of $100. What does the price-earnings ratio indicate?

Accepted Answer

The shares sell for 4 times earnings.

Answer

Earnings per share is 2 times relative to its growth rate.

Answer

The shares sell for 8 times the company's sales value.

Answer

The market value of a share is 3 times its earnings.

Question 10

A three-year project has projected cash flows of $100,000, $200,000, and $500,000, with an initial investment of $500,000. What is its payback period?

Accepted Answer

2.4 years

Answer

2 years

Answer

3 years

Answer

2.2 years

Corporate Finance Fundamentals practice questions

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Corporate Finance Fundamentals practice questions

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