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Exam Paper for Corporate Finance in BBA (With Answers)
PAPER # 1
**Course: BBA in Corporate Finance**
**Duration: 2 hours**

**Instructions:**
1
...

2
...

3
...


**Section A: Multiple Choice Questions (10 marks)**

Choose the best answer for each question
...
Which of the following represents the primary goal of financial management for a
corporation?
a
...
Minimizing expenses
c
...
Maximizing employee satisfaction

**Answer: c**

2
...
Weighted Average Cost of Capital (WACC)
b
...
Internal Rate of Return (IRR)
d
...
If a company's current ratio is 2
...
The company is highly liquid
...
The company may face liquidity issues
...
The company is not profitable
...
The company has a low debt-to-equity ratio
...
Define the term "Capital Budgeting" and explain its importance in corporate finance
...

It involves assessing the feasibility and profitability of potential investments to determine
which projects to undertake
...


5
...
Provide an example of
each
...
Equity investors become
shareholders and have ownership rights, but the company doesn't have a legal
obligation to repay the capital
...


Debt financing, on the other hand, involves raising capital by borrowing money
through loans, bonds, or other debt instruments
...
An example of debt financing is a company
taking out a bank loan to expand its operations
...
Calculate the Net Present Value (NPV) of an investment that requires an initial outlay
of $50,000 and is expected to generate cash flows of $20,000, $30,000, and $40,000
over the next three years
...


**Answer:**
NPV = (CF₁ / (1 + r)¹) + (CF₂ / (1 + r)²) + (CF₃ / (1 + r)³) - Initial Outlay
NPV = ($20,000 / (1 + 0
...
10)²) + ($40,000 / (1 + 0
...
82 + $24,793
...
62 - $50,000
NPV = $23,115
...
Calculate the Weighted Average Cost of Capital (WACC) for a company with a cost
of equity of 12%, a cost of debt of 6%, and a tax rate of 30%
...


**Answer:**
WACC = (E/V * Re) + (D/V * Rd * (1 - Tax Rate))
WACC = (0
...
12) + (0
...
06 * (1 - 0
...
072 + (0
...
06 * 0
...
072 + 0
...
0888 or 8
...
What is the primary goal of corporate finance?
o

A
...
To minimize risk

o

C
...
To reduce costs

2
...
Purchase of raw materials

o

B
...
Purchase of a new machine

o

D
...
Which of the following is a source of long-term financing?
o

A
...
Accounts payable

o

C
...
Trade credit

4
...
Dividends

o

B
...
Flotation costs

o

D
...
What is the weighted average cost of capital (WACC)?
o

5

A
...
The cost of equity

o

C
...
All of the above

Part B: Short Answer (5 marks each)
6
...

7
...
What are the two main types of equity?
9
...
Explain how a company can use financial leverage to increase its return on
equity
...
Discuss the different types of capital budgeting techniques and explain which one
you think is the most effective
...
Explain the different types of corporate risk and how companies can manage
them
...
A
2
...
C
4
...
D
Part B
6
...


6

Operating expenses are expenses that are incurred on a day-to-day basis in
order to keep a business running
...
The three main sources of financing for a business are debt, equity, and retained
earnings
...
The two main types of equity are common stock and preferred stock
...
The formula for calculating the WACC is:
WACC = (Cost of equity * Weight of equity) + (Cost of debt * Weight of debt)
10
...
Debt has a lower cost than equity, so using debt
to finance investments can increase the company's overall return on equity
...

Part C
11
...
NPV takes into account the time
value of money and calculates the net present value of all future cash flows from the
investment
...
Payback period and
discounted payback period are simpler capital budgeting techniques, but they do not
take into account the time value of money
...
The different types of corporate risk are:

7



Business risk



Financial risk

Business risk is the risk that the company will not be able to generate enough profit to
cover its costs
...

Companies can manage risk by diversifying their operations, hedging their positions,
and purchasing insurance
...
What is the primary goal of corporate finance?
o

A
...
To minimize risk

o

C
...
To reduce costs

2
...
Purchase of raw materials

o

B
...
Purchase of a new machine

o

D
...
Which of the following is a source of long-term financing?
o

A
...
Accounts payable

o

C
...
Trade credit

4
...
Dividends

o

B
...
Flotation costs

o

D
...
What is the weighted average cost of capital (WACC)?
o

9

A
...
The cost of equity

o

C
...
All of the above

Part B: Short Answer (5 marks each)
6
...

7
...
What are the two main types of equity?
9
...
Explain how a company can use financial leverage to increase its return on
equity
...
Discuss the different types of capital budgeting techniques and explain which one
you think is the most effective
...
Explain the different types of corporate risk and how companies can manage
them
...
A
2
...
C
4
...
D
Part B
6
...


10

Operating expenses are expenses that are incurred on a day-to-day basis in
order to keep a business running
...
The three main sources of financing for a business are debt, equity, and retained
earnings
...
The two main types of equity are common stock and preferred stock
...
The formula for calculating the WACC is:
WACC = (Cost of equity * Weight of equity) + (Cost of debt * Weight of debt)
10
...
Debt has a lower cost than equity, so using debt
to finance investments can increase the company's overall return on equity
...

Part C
11
...
NPV takes into account the time
value of money and calculates the net present value of all future cash flows from the
investment
...
Payback period and
discounted payback period are simpler capital budgeting techniques, but they do not
take into account the time value of money
...
The different types of corporate risk are:

11



Business risk



Financial risk

Business risk is the risk that the company will not be able to generate enough profit to
cover its costs
...

Companies can manage risk by diversifying their operations, hedging their positions,
and purchasing insurance
...
Which of the following is NOT a primary goal of corporate finance?
o

A
...
Minimize risk

o

C
...
Ensure the long-term viability of the firm

Answer: C
2
...
Purchase of inventory

o

B
...
Salaries and wages

o

D
...
Which of the following is NOT a type of financial statement?
o

A
...
Income statement

o

C
...
Statement of retained earnings

Answer: D
4
...
(Cost of equity * Equity ratio) + (Cost of debt * Debt ratio)

o

B
...
(Cost of equity * Debt ratio) + (Cost of debt * Equity ratio)

o

D
...
Which of the following is a type of risk that is specific to a particular firm or
industry?
o

A
...
Unsystematic risk

o

C
...
None of the above

Answer: B
Part B: Short Answer Questions (30 points)
1
...
Secondary markets are where existing securities are traded between
investors
...
What are the three main financial statements?
o

The three main financial statements are the balance sheet, income
statement, and statement of cash flows
...
What is the difference between debt and equity?
o

Debt is a type of financing that requires the borrower to repay the principal
and interest at a predetermined time
...


4
...


5
...
Systematic risk is risk that cannot be diversified away,
such as market risk and interest rate risk
...


14

Part C: Essay Question (50 points)
Discuss the different factors that a company should consider when making a capital
investment decision
...

The cost of capital: The company should also estimate the cost of capital for the
investment
...

The risk of the investment: The company should also assess the risk of the
investment
...

The strategic fit of the investment: The company should also consider how the
investment fits into its overall strategy
...


In addition to these factors, the company may also want to consider other factors such
as the impact of the investment on its employees, customers, and suppliers
...

The expected return on the investment is the estimated cash flows from the investment
divided by the initial investment cost
...
The cash flows should be discounted to present
value using

15

PAPER # 5

**Instructions:**
1
...

2
...

3
...

4
...

5
...
No reference materials are allowed
...
Use additional sheets if necessary, and clearly label them with the question number
...
Which of the following represents a primary goal of financial management in a
corporation?
a) Maximizing shareholder wealth
b) Maximizing employee satisfaction
c) Minimizing taxes
d) Maximizing social responsibility

**Answer: a) Maximizing shareholder wealth**

2
...
What is the formula for calculating the Net Present Value (NPV) of a project?
a) NPV = Initial Investment / Cash Flows
b) NPV = Cash Flows / Initial Investment

16

c) NPV = ∑(Cash Flows / (1 + r)^t)
d) NPV = Initial Investment * Discount Rate

**Answer: c) NPV = ∑(Cash Flows / (1 + r)^t)**

**Section B: Short Answer Questions (5 marks each)**

4
...
" Why is it important for a business?

**Answer:**
Working capital is the difference between a company's current assets (such as cash,
accounts receivable, and inventory) and its current liabilities (such as accounts payable
and short-term debt)
...
Working capital is important for a business because it
ensures that the company can meet its short-term obligations, maintain smooth
operations, and take advantage of opportunities
...


5
...
How does it impact a
company's risk and return?

**Answer:**
Leverage in financial management refers to the use of debt or borrowed funds to
finance a company's operations or investments
...
Operating leverage relates to the use of fixed
costs in a company's cost structure, while financial leverage involves the use of debt to
fund the company's activities
...

However, it also increases the financial risk because the company must make interest
payments regardless of its performance
...
This increases the operational risk
...

Companies must carefully manage their leverage to strike the right balance between
risk and return
...
XYZ Corporation is evaluating two mutually exclusive projects, A and B
...
Project B has an initial investment of $60,000 and is expected to
generate cash flows of $18,000 per year for five years
...


**Answer:**
NPV of Project A:
NPV(A) = ∑(Cash Flows / (1 + r)^t) = (-$50,000) + ($20,000 / (1 + 0
...
10)^2) + ($20,000 / (1 + 0
...
10)^4) + ($20,000 / (1 +
0
...
82 + $16,528
...
30 + $13,659
...
88
NPV(A) = $25,811
...
10)^1) + ($18,000 /
(1 + 0
...
10)^3) + ($18,000 / (1 + 0
...
10)^5)

NPV(B) = -$60,000 + $16,363
...
04 + $13,523
...
24 +
$11,175
...
26

Therefore, the NPV of Project A is $25,811
...
26
...
Discuss the concept of "Capital Structure" in corporate finance
...
It represents the way a
company balances its long-term financing sources
...
Here's a discussion of the concept and the factors involved:

**Definition of Capital Structure:**
Capital structure includes two main components: debt and equity
...
The proportion of debt to equity in a company's capital
structure is a crucial aspect
...
The optimal capital
structure is the one that minimizes the company's weighted average cost of capital
(WACC) while still meeting financial obligations and risk tolerance
...
**Business Risk**: Highly leveraged

(debt-heavy) companies face higher bankruptcy risk and interest expenses
...


19

2
...
This may influence the use of debt
...
**Cost of Debt and Equity**: The cost of debt (interest rate) and the cost of equity
(required return to shareholders) impact the WACC
...


4
...
This factor encourages companies to use some level of debt in their
capital structure
...
**Market Conditions**: The availability of debt and equity financing in the capital
markets, as well as prevailing interest rates, can influence the decision
...
**Investor Expectations**: Shareholder preferences for dividends versus capital gains
can affect the choice of capital structure
...
**Regulatory and Legal Constraints**: Companies must comply with legal and
regulatory requirements related to debt and equity issuance
...
It's a dynamic decision that may change over time as
market conditions, business circumstances, and the company's financial performance
evolve
...


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KEYWORDS

1
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BBA Program
3
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Financial Management
5
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BBA Corporate Finance
7
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Study Materials
9
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Investment Decisions
11
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Risk Management
13
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Valuation Techniques
15
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Financial Ratios
17
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Corporate Finance Practice Test
19
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BBA Exam Preparation
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BBA
Corporate Finance
Exam Paper
Answers
Financial Management
Capital Budgeting
Cost of Capital
Dividend Policy
Working Capital Management
Mergers and Acquisitions
Risk Management

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International Finance
Financial Markets
Financial Institutions
Net present value (NPV)
Internal rate of return (IRR)
Weighted average cost of capital (WACC)
Capital asset pricing model (CAPM)
Arbitrage pricing theory (APT)
Dividend discount model (DDM)
Free cash flow (FCF)
Economic value added (EVA)
Beta
Credit rating
Exchange rate
Interest rate
Volatility



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