CORPORATE FINANCE : EXAMS FROM 2010 TO 2012

PART I

IN RED : THE ANSWERS WERE IN THE PDFs

IN GREEN : THE ANSWERS WERE VERIFIED

Exam Finance (Special) MiM 20th of December 2012

1. When a company becomes listed in the stock market it is securitizing:

a) Its long-term debt and its equity;

b) The previous hypothesis plus its short-term debt

c) Its assets

d) All previous answers

2. The concept of duration is important in corporate finance for:

a) To control the general exposure of the company to interest rate risk

b) The immunize the company against interest rate risk

c) To eliminate interest rate risk associated with the firms debt

d) The concept of duration is not useful at company level

3. The DuPont analysis (analysis of ROE) is particularly useful for:

a) Explaining company performance in terms of return to shareholders

b) Calculating the effective rate of return of the company

c) Identifying the value drivers of the company

d) Analyzing the economic performance of the company

4. In order to improve its liquidity a company must:

a) Increase working capital

b) Reduce working capital

c) Prevent working capital from becoming negative

d) None of the previous answers

5. A company faces interest rate risk:

a) Always

b) When its debt is fixed rate

c) When its debt is floating rate

d) When it underwrites interest rate swap contracts

6. To value a company, a cost of capital must be adopted corresponding to:

a) The capital market line model

b) The security market line model

c) Both a) and b)

d) An average of a) and b)

7. The identification of the optimal capital structure is an approach proposed by:

a) The theory of pecking order

b) The trade-off theory

c) The theory of stakeholders

d) The theory of the windows of opportunity

8. The major risks of non-distribution of dividends are:

a) The reinvestment risk

b) The agency risks

c) The capital market risks

d) All previous answers

9. In the analysis of investment projects, the reinvestment risk:

a) Is present always

b) Is present only in the analysis of mutually exclusive projects, for the projects of
shorter economic life

c) Is present but is correctly treated by the established methods of analysis

d) Is not relevant

10. Real options represent:

a) A new method of investment project analysis

b) A new definition of investment projects, integrating their strategic and

flexibility elements

c) Call option or put option contracts of real assets

d) Call option or put option contracts of tangible assets

11. The value drivers of real options and of projects of investment in real assets:

a) Are identical

b) Are identical in given circumstances

c) Are distinct

d) Are identical when the projects have embedded options

12. Financing contracts are more complete when they:

a) Specify all contractually relevant situations

b) Include guarantees

c) Include covenants

d) Have embedded options

13. The highest cost of equity financing is associated with the following instruments:

a) Ordinary stocks

b) Non-voting preferred stocks

c) Retained earnings

d) All the previous represent an equivalent cost of capital

14. In a long-term fixed rate financing contract, interest rate risk may be reduced through:

a) Covenants

b) Options

c) Interest rate swaps

d) There is no interest rate risk in a fixed rate financing contract

15. The contracts of operational leasing and of financial leasing differ with respect to:

a) The allocation of maintenance costs

b) The margin (spread) added to interest rate

c) The periodicity of rents

d) All previous answers

16. Conversion options and warrants associated with bonds differ with respect to:

a) The degree of their respective autonomy

b) The nature of the exercise price

c) The possibility of being traded in secondary markets

d) All previous answers

17. Income bonds are similar to convertible bonds and to warrant bonds because:

a) They represent equity risk taking

b) They possess embedded options

c) They have an identical impact on capital structure

d) They represent a similar interest rate risk

18. Short-term financial management covers:

a) Optimizing working capital

b) Re-dimensioning of current assets

c) Analyzing short-term investment projects

d) Choosing the size of cash reserves

19. The major element of short-term financing is:

a) The variety of banks to deal with

b) The flexibility of financing contracts

c) The matching of the amount of funding with the size of working capital

d) The possibility of its successive renovation

20. A major instrument of liquidity management is:

a) The maturity mismatch table

b) The CF budget

c) The set of financing options offered to the company

d) All previous answers

 Exam Finance 13th of June 2012

1. A company can be valuated based on the following models:

a) The discounted CFs applied to the fixed assets

b) The CF model applied to debt and the Black-Scholes model applied to equity

c) The Gordon Shapiro model

d) All the previous

2. To preserve its liquidity, a company must:

a) Increase its working capital

b) Decrease its working capital

c) Avoid its working capital being negative

d) None of the previous

3. A company faces interest rate risk:

a) Always

b) When its debt has a fixed rate

c) When its debt has a floating rate

d) When it underwrites interest rate swap contracts

4. Financial distress risk is detected when:

a) The liquidity situation of a company is negative

b) The current revenues dont cover the current expenses

c) The book value of the company is higher that its financial one

d) The working capital of the company is negative

5. To valuate a company, a cost of capital must be adopted corresponding:

a) To the capital market line model

b) The security market line model

c) To the average of the rates indicates by a) and b) hypothesis

d) To the a) and b) hypothesis

6. An optimal capital structure is identified when:

a) The marginal taxes savings equals the marginal costs of debt

b) The financial value of equity is maximum

c) The bankruptcy costs are minimum

d) The debt value equals the equity value

7. The main risks of not offering dividends are:

a) Reinvestment risks

b) Agency risks

c) Capital market risks

d) All the previous

8. In the analysis of investment projects, the reinvestment risk:

e) Is present always

f) Is only present, in the analysis of mutually exclusive projects, for the projects of
shorter economic life

g) Is present but is properly treated by the established methods of analysis

h) Is not relevant
9. The value drivers of real options and of projects of investment in real assets:

e) Are identical

f) Are identical in given circumstances

g) Are distinct

h) Are identical when the projects have embedded options

10. Financing contracts are more complete when they:

e) Specify all contractually relevant situations

f) Include guarantees

g) Include covenants

h) Have embedded options options

11. A capital increase operation reserved to shareholders configures:

a) A distribution of the companys reserves

b) An issuing of options to buy shares

c) A dividend payment in shares

d) All the previous

12. The operational leasing and financial leasing contracts differentiate themselves:

a) By the allocation of the maintenance costs

b) By the spread applied on the interest rate

c) By the periodicity of rents

d) All the previous

13. Convertible bonds and warrant bonds issuing are similar:

a) By their immediate impact in the capital structure

b) By the implicit rate of cost of capital

c) By the characteristics of the respective implicit options

d) By their future potential impact in the capital structure

14. Participating bonds are similar with convertible bonds and warrant bonds because:

a) They represent the assumption of equity risk

b) They have implicit options

c) They have a similar impact in the capital structure

d) They present the same interest rate risk

15. The basic idea in the sizing of the current assets is:

a) The equilibrium between maintenance costs and assets rupture costs

b) The minimization of the working capital

c) The adequacy of the financing means

d) The maximization of the return on assets

16. There is something in common between the treasury management and stocks
management:

a) The general frame of the decision making process

b) The notion of a stock that minimizes the total costs that is associated with it

c) The relation of both with the business cycle

d) The insertion of both in the concept of working capital necessities

 Exam Finance 4th of July 2012 (Recurso)

1. When a company becomes listed in the stock market, it is securitizing:

a) Its long-term debt and its equity;

b) The previous hypothesis plus its short-term debt

c) Its assets

d) All previous answers

2. The concept of duration is important in corporate finance for:

e) To control the general exposure of the company to interest rate risk

f) The immunize the company against interest rate risk

g) To eliminate interest rate risk associated with the firms debt

h) The concept of duration is not useful at company level

3. The working capital necessities of a firm depend on:

a) Business cycle

b) CFs cycle

c) Business volume

d) B) and c)

4. Fixing the debt ratio of a company must pay attention to:

a) Effect on the companys value

b) Working capital necessities

c) Financial distress risk

d) Debt capacity of the firm

5. A companys capacity to produce CFs depends on:

a) Its liquidity management

b) Its business volume

c) Its working capital necessities

d) Its investments

6. Managing the liquidity risk of a firm is done by:

a) Maximizing its general liquidity ratio

b) Maintaining adequate fund reserves

c) Synchronizing maturity terms of assets and liabilities

d) All the previous

7. In a world were the M&M assumptions are true, except the absence of taxes, the optimal
capital structure corresponds to:

a) Maximum debt

b) Minimum debt

c) A level of debt depending on the mix of taxes rates

d) The capital structure is irrelevant

8. According to empirical observations, the dominant dividend policy translates into the
stabilization of:

a) Divided pay-out

b) Dividend yield

c) Dividend per share

d) Return rates
9. The best method of risk treatment in the analysis of investment projects consists of:

a) Adding a risk premium to the discount rate

b) Convert future CFs in certainty equivalents

c) Conducting a sensitivity analysis or a simulation

d) Defining the project as a real option

10. In the analysis of real options, the binomial model and the Black-Scholes one:

a) Are absolutely distinct and lead to divergent results

b) Concord in determined circumstances

c) Apply each to different nature projects

d) Apply each to different duration projects

11. Real options:

a) Are inherent in any investment project

b) Are inherent in some investment projects

c) Are independent of the project they refer to

d) Implied options and independent options can coexist in the same project

12. An initial public offering (IPO) is:

a) A financing operation

b) A capital dispersion operation

c) A) and b)

d) Depends on the object of the offer

13. Convertible bonds and warrant bonds differentiate themselves by:

a) The nature of the implicit option

b) The different attribution of implicit options to the issuing entity and to investor

c) The nature of the exercise price

d) The valuation model applicable to them

14. Short term financial management covers:

a) The establishment of the working capital dimension

b) Sizing the current assets

c) The short term investment projects analysis

d) The choice of the dimension of cash reserves

15. A major instrument of liquidity management is:

e) The maturity mismatch table

f) The CF budget

g) The set of financing options offered to the company

h) All previous answers

16. Stocks management is:

a) An economical problem

b) A working capital management problem

c) A) and b)

d) A financing problem
 Exam Finance 15th of June 2011

1. In financial terms, the objective function of the company consists in:

a) Reaching the best equilibrium for the interests of its stockholders

b) Maximize the results of the company

c) Maximize the total value of the company

d) Maximize the value of the company for its shareholders

2. The value of the company is determined based on:

a) The rate of return required by its shareholders

b) The yield to maturity of its bonds

c) The rate of return required by its (permanent) capital

d) The expected rate of return of its (permanent) capital

3. When the market price of a company is equal to its assets value

a) The market is efficient

b) The valuation model is adjusted to the reality of the company

c) The a) and b) hypothesis

d) The goodwill of the company is 0

4. The value of a company can be calculated based on

a) The discounted CF model

b) The capital assets pricing model (CAPM)

c) A) and B) hypothesis

d) The Black-Scholes model

5. The reinvestment risk influences the effects of

a) The companys dividend policy

b) The investment decisions

c) A) and B)

d) None of the previous

6. On the valuation of a company, the discount rate of the CFs depends on

a) The optimal capital structure

b) Its expected rate of return

c) The risk aversion of its shareholders

d) The dividend yield and the interest yield rates insured by the company

7. The idea of an optimal capital structure in the company is based on

a) A trade off between different categories of frictions in capital markets;

b) The choice of a capital structure according to the pecking order perspective

c) The equilibrium between the rights of different stakeholders of the company

d) taking advantage of the windows of opportunity in financing the company

8. The optimal capital structure allows reaching

a) the maximum value of the company

b) the maximum value of the companys shares

c) the minimum cost of capital of the company

d) all the previous ones

9. A dividend stabilization policy must stabilize:

a) the effective rate of return of the company

b) the dividend yield offered by the company

c) the dividend per share

d) the dividend cannot be stable because it depends on the investments of the company

10. the basis of the the analysis of the investment projects consists of:

a) assess their investment recovery period

b) determining the internal rate of profitability / internal rate of return

c) comparing the value with its costs

d) evaluate the real options that are implicit

11. Given the following data:

W d,0 ; W s,0 : capital structure of the company as it is
W d,* ; W s,* : present optimal capital structure
W d,1 ; W s,1 : capital structure applied to finance new projects of the company
The evaluation of the new investment projects of the company must be done based on
the following discount rate:

a) ra = ws,0 . rs + wd,0 . rd (1 T);

b) ra = ws,* . rs + wd,* . rd (1 T);

c) ra = ws,1 . rs + wd,1 . rd (1 T);

d) none of the previous

12. A loan at a variable rate of return represents for the issuing company:

a) A CF risk of the interest rate

b) A value risk of the interest rate

c) A) and B)

d) A variable rate loan has no interest rate risk

13. Convertible Bonds are different from the warranty bonds by the following:

a) The nature of the implicit option

b) The strike price

c) The effect on the bond value

d) The effect on the yield to maturity of the bond

14. Real options are:

a) Options associated with the continuous management of the investment projects

b) Implicit options in financing contracts

c) Buying or selling commodities options

d) B) and C)

15. There is a financial distress in a company when:

a) The liquidity situation is negative

b) The CFs of the firm are not enough to pay its obligations

c) The financial value of the firm is lower than its asset value

d) The CF of the firm is negative

16. The takeover risk of a company is more accentuated when:

a) The firm has significant unexplored assets

b) The company adopts a residual dividend policy

c) The company does not present significant agency risks

d) All of the above

 Exam Finance 16th of June 2010

1. The explanatory variable of a company's value with an established investment program

is:

a) The free cash flow

b) The operating cash flow

c) Its dividends

d) Its net income

2. In the financial management of an industrial company, the concept of duration:

a) It's not applicable

b) Allows you to alleviate the value risk of the company's interest rate

c) Allows you to manage the value risk of the debt's interest rate

d) Allows you to manage the cash flow risk of the debt's interest rate

3. When evaluating a company, the Gordon model:

a) Is a direct application of the discounted CF model

b) Is an alternative company valuation model

c) Is an alternative equity valuation model

d) Doesnt apply

4. The goodwill of a company is:

a) an additional quota to the book value to form the financial value

b) the discounted value of the over-normal results of the company

c) the difference between the market capitalization and book value

d) the difference between the financial value and book value

5. DuPont analysis consists of:

a) The analysis of the return rate of the company

b) In the analysis of the profitability of the company

c) An explanation of the determinant factors of return on equity

d) An analysis of the return-risk of the company

6. The financial risks analysis can be made based on:

a) Maturities mismatch maps

b) The value at risk concept

c) The Cfs maps analysis

d) The systematic risk coefficient (beta)

7. The capital structure of a company:

a) Is irrelevant

b) Is a corporate finance instrument

c) Is a financing combination that affect the value of the firm

d) Is an agency risk factor

8. The stabilization theory and the residual theory of dividends:

a) Are 2 alternative explanations for the dividend policy practice in firms

b) Are compatible

c) Are antagonistic

d) Dont explain dividend policies

9. Given the following data:
W d,0 ; W s,0 : capital structure of the company as it is
W d,* ; W s,* : present optimal capital structure
W d,1 ; W s,1 : capital structure applied to finance new projects of the company
The evaluation of the new investment projects of the company must be done based on
the following discount rate:

a) ra = ws,0 . rs + wd,0 . rd (1 T);

b) ra = ws,* . rs + wd,* . rd (1 T);

c) ra = ws,1 . rs + wd,1 . rd (1 T);

d) none of the previous

10. Convertible bonds and warrant bonds differentiate themselves by:

a) The presence or absence of an implicit option

b) The degree of autonomy of the implicit option

c) The nature of the implicit option

d) They dont differentiate themselves

11. The covenant, when present in a debt contract, represent:

a) A guarantee

b) A collateral

c) A debt credit risk hedge

d) An enabling clause of the adjustment of the spread to the interest coupon

12. Structured financing is:

a) A way of financing supported by a complex contract

b) A debt issuing in the international market

c) A combination of debt and equity

d) An operation of arbitrage of the cost of capital and other financing costs

13. The conceptual basis for managing current investments is:

a) The discounted liquid value

b) A real option

c) The equilibrium between maintenance costs and rupture costs

d) The level of necessities of the working capital

14. A commercial paper program is:

a) An issuing of commercial paper with implicit options

b) A sum of options of issuing commercial paper

c) A structured loan

d) A structured issuing of commercial paper

15. Managing financial risks of a company requires:

a) To determinate the degree of uncertainty and exposure of the company

b) To determinate the probability of bankruptcy

c) To determine the value at risk

d) None of the previous

CORPORATE FINANCE : EXAMS FROM 2010 TO 2012

PART II
 Exam Finance (Special) MiM 20th of December 2012

1. Explain the concept of financial architecture of the company.

2. Describe the process of analysis and resolution of the risk of financial distress in a
company.

3. Explain the most critical phases of an initial public offer.

4. Explain the financial policy instruments a company may use to improve flexibility in its
financing.

5. Describe and explain the major elements of a company's credit policy.

Exam Finance 13th of June 2012

Annexes (?) 1 to 4 provide some actual historical data concerning the company JP S
Couto, S.A. Consider Annex 1 and answer:

1. How do you analyze the evolution of Return on Equity (ROE)?

2. What is your opinion about the relationship between working capital and working capital
needs?

3. How would you rate the evolution of the company's business risk?

Consider Annex 2 and that the company's debt in the medium and long term amounted,
in 2009, 825 M, for an equity of 17 355 M and answer:

4. How would you classify the capital structure reflected in those numbers?

5. What specific measures would recommend to implement a more appropriate capital

structure?

6. Roughly, what potential value creation would be associated with such measures for the
different stakeholders of the company?

7. Review the result of the company valuation obtained by applying the Black-Sholes
model that is summed up in Annex 4.

Additionally, answer to the following questions:

8. Explain the relevance of the break-even analysis in the current Portuguese business
environment.

9. Describe the process of analyzing and resolving the financial distress risk of a company.

10. Explain the main elements in a company's credit policy.

 Exam Finance 4th of July 2012 (Recurso)

Annexes 1 to 5 show some actual historical data related with Efacec, SA. Consider
Annex 1 and answer:

1. What is the optimal capital structure of the company and which was the criterion used to
determine it?

2. Assuming that Efacec's debt, at the date of the analysis, was 35 M, what operations
should be made to implement that optimal capital structure?

3. How was established the relationship between debt level and cost of debt?

Consider annexes 2 and 5 and answer:

4. What are the main value drivers of Efacec?

5. How would you characterize the relation between the company's revenue and its break-
even point?

6. What is the situation of the company regarding its working capital and what measures
can be used to improve it?

Additionally, answer to the following questions:

7. If the company decides to return to the capital market through an IPO, which would you
recommend to be the offer price? Justify.

8. The company had, in late 2010, a general liquidity ratio of 1.07. What significance can
you give to it?

9. All funding of the company is represented by bank loans. Comment.

10. What are the main instruments to manage the liquidity of a company?
Exam Finance 15th of June 2011

Consider the following case and answer to the questions.

A company with a capital of 50 M, represented by 50 M ordinary shares (at 31

December 2010) presented the following assets, in accounting terms (amounts in
thousands of , the deadlines for both assets and liabilities are the contract terms):

Assets Equity
Fixed Assets Social Capital 25 000
Allocated 180 000 Legal Reserve 5 000
Non Allocated 5 000 Reserves 20 000

Current Assets Liabilities

Stocks (120 days) 30 000 Bank Loan (5 years, euribor 150 000
Credits (90 days) 20 000 180 + 350 pb, call 11-08-31)
Commercial Paper 25 000
Accruals and Deferrals 5 000 Program (euribor 90 + 275 pb)
15 000
Suppliers (90 days)

240 000 240 000

The company ended the year of 2010 with a sales volume of 80M, a net profit of 4M
and generated cash flow of 1,5M. In April 2011, a dividend of 0,08 per share was
distributed, regarding the results reported in 2010. The dividend was in line with the
growth of 5% of the dividends paid in each year, coinciding with the growth of the cash
flow of the company.

Similar companies, publicly listed, have a beta coefficient of 1,2. The average capital
market is 7,5%.

The company prepares to promote its admission to Alternext market. To this end, various
economical and financial analysis were conducted, including the valuation of its assets,
with a total result of 275 000 M.

The coupon rate of the bank loan, contracted on August 31, 2010, includes a spread of
350 pb, greater than the coupon rate of the commercial paper, which is 275 bp. The loan
agreement provides a call option, with exercise on August 31, 2011 without penalty.

The commercial paper program has a ceiling of 75 M, usable in quarterly withdrawals

of 25 M, coinciding with the end of each calendar quarter, with a underwriting fee of
0,25%, charged by the bank leader of the program.

Use in your answers, the market interest rates as needed. Consider a volatility of 10% of
the market interest rate. Assume that the company supports an income tax rate of 20%.
1. Since the company is facing the possibility to access the Alternext market, at which price
do you suggest the initial public offer (IPO) should be made?

2. Refer, briefly, the goals and difficulties of an IPO.

3. Facing the prospect of close and continuous rising of the interest rates, what solution
would you propose to cover the consequent risk that the company will be exposed to?

4. What is the goodwill of the company and how do you interpret it?

5. Which is the company's cash cycle and how do you justify that the cash flow generated
in 2010 has been lower than the net income of the same year?

6. Quantify the working capital needs of the company. Do you consider that the financial
sources established are appropriate?

7. Explain the financial-contract format of the commercial paper program as adopted by the
company.

8. Without performing calculations, explain how can the the bank loan revealed in the
company's liabilities be evaluated.

9. Determine and explain the ROE of the company, based on the DuPont analysis.

10. Identify and explain the explicit and implicit options present in this balance sheet.
 Exam Finance 16th of June 2010

Consider the case of Revigrs company and answer the following questions:

1. Compare the two methods used in the valuation of Revigrs the discounted cash flows
and the Black-Scholes model both in its theoretical foundations and in their results.

2. Characterize the working capital situation.

3. Characterize the risk of the company's business.

4. If the company conduct an initial public offering (IPO), to be quoted in the capital market,
which would you suggest to be the offer price? Explain, citing the main problems of the
operation.

5. With which measures would you implement the optimal capital structure determined for
Revigrs?

6. Set up a loan agreement of a company, with a capital of 10 M$, within five years, in
which the risks of liquidity, interest rate and exchange rate are properly treated.