Corporate Finance

Answer Key Quiz 1 (Section B)

1. Which of the following options best describes the ideal goal of a manager of a
corporation?
A. Maximise the sales
B. Maximise the shareholder value (measured as total market capitalisation)
C. Maximise the size of the company (measured as total assets)
D. Maximise the profit
E. Maximise the competitive position of the firm

2. In which of the following types of businesses, do the owners enjoy limited

liability?
A. Private Limited Company
B. Sole Proprietorship
C. Partnership
D. Public Limited Company

3. Which of the following is NOT an important topic being covered in your applied
corporate finance course?
A. Financing Decisions
B. Investment Decisions
C. Corporate Politics
D. Payout Policy

4. The term ‘limited liability’ implies which of the following:

A. In a company with limited liability, the management is limited as to the amount
of debt and other liabilities they can incur
B. In a company with limited liability, the management is limited as to the types of
debt and other liabilities they can incur
C. In a company with limited liability, the managers are protected against legal action
D. In a company with limited liability, the shareholders are legally responsible for the
debts of the company only to the extent of their investment
E. This is a trick question. The term should ideally be ‘Unlimited Liability Corporation’

5. Which of the following scenarios best illustrates an agency conflict within a corporation?
A. A manager decides to invest company funds in a high-risk project that could
significantly increase the company's value, despite knowing that this might
jeopardise job security for employees.
B. Shareholders vote to increase their dividends, even though it means reducing the
budget for research and development.
C. The CEO awards herself a large bonus despite the company’s profits declining,
which is not aligned with the interests of shareholders.
D. The board of directors hires a new CFO who prioritises long-term growth over
short-term profits, even though shareholders prefer immediate returns.
E. A banker decides not to lend money to a corporation
 Corporate Finance
Answer Key: Quiz 2 (Section B)

1. Consider an annuity and perpetuity with the same annual cash flow streams while
they last. If the same discount rate applies to both, which of the following statements is
true?
A. Present value of annuity = present value of perpetuity
B. Present value of annuity > present value of perpetuity
C. Present value of annuity < present value of perpetuity
D. Future value of annuity > future value of perpetuity
E. None of the above

2. If I deposit ₹100 in the bank today at an interest rate of 10% per annum
(compounded annually), what will it be worth in two years?
A. ₹121
B. ₹120
C. ₹220
D. ₹100

3. What is the value of a perpetuity which pays ₹100 annually with the first payment
starting in a year and an interest rate of 10%?
A. ₹110
B. ₹1000
C. ₹220
D. ₹100

4. Bank A is willing to give you a loan at 10% APR compounded annually and Bank
B is willing to give you a loan at 10% APR compounded monthly. Which is better for you?
A. Both are similar
B. Bank A
C. Bank B
D. You need to compare the EAR rates and they are not given

5. You are considering two bank fixed deposit schemes. Bank A is willing to give you
an interest rate of 10% EAR compounded annually and Bank B is willing to give you an
interest rate of 10% EAR compounded monthly on the money deposited. Which is better
for you?
A. Both are similar
B. Bank A
C. Bank B
D. You need to compare the EAR rates and they are not given
 Corporate Finance
Answer Key: Quiz 3 (Section B)

1. What is the relationship between bond prices and market interest rates?
A) Bond prices decrease when market interest rates decrease.
B) Bond prices and market interest rates move in the same direction.
C) Bond prices and market interest rates move in opposite directions.
D) Bond prices are not affected by market interest rates.
E) Bond prices increase when market interest rates increase.

2. If a bond is selling at a premium, what is true about its coupon rate and Yield to
Maturity (YTM)?
A) The coupon rate is higher than the YTM.
B) The coupon rate is lower than the YTM.
C) The coupon rate equals the YTM.
D) The coupon rate and YTM are unrelated.

3. The market value of a bond was ₹1000 when it was issued and the interest rate
was 5%. The interest rate subsequently increases to 6%. What happens to the
market value of the bond?
A) Market value remains the same
B) Market value increases
C) Market value decreases
D) Depends on the coupons of the bond
E) Depends on the face value of the bond

4. What is the face value of a bond?

A) The amount the bondholder pays to purchase the bond.
B) The amount the bondholder will receive at maturity.
C) The interest rate paid by the bond.
D) The market value of the bond.
E) The amount paid to the bondholder immediately upon purchase of the bond.

5. Consider a 10-year bond issued by the GoI with a face value of ₹1000 and a
coupon rate of 10%. Assume that the bond follows the conventions normal to the
Indian Market. What will be the cash flows faced by the investor in the bond?
A) An outflow of market price at purchase, an inflow of ₹100 annually for 9 years and
₹1100 at the end of year 10
B) An inflow of market price at purchase, an outflow of ₹100 annually for 9 years and
₹1100 at the end of year 10
C) An outflow of market price at purchase, the inflow depends on the interest rate
every year
D) An inflow of market price at purchase, the outflow depends on the interest rate
every year
E) An outflow of market price at purchase, an inflow of ₹50 semi-annually for 9.5 years
and ₹1050 at the end of year 10
 Corporate Finance
Answer Key: Quiz 4 (Section B)

1. Alphabet Inc. is one of the leading AI companies in the world. It has never paid dividends
to its shareholders. It plans to keep reinvesting perpetually. It does not plan to ever issue
a dividend. Your financial analyst predicts that its price will increase to ₹40 one year down
the line. How much is Alphabet Inc’s share worth today?
A) You can use the Multiples Approach to value the share
B) You can use the Discounted Cash Flow Approach to value the share
C) You can use either the Discounted Cash Flow Approach or the Multiples
Approach to value the share
D) Alphabet Inc’s share is worthless
E) Will need to know the cost of equity of Alphabet to answer

2. Apple paid a dividend of USD 3 in the current year. It will pay dividends perpetually with a
growth rate of 5% annually. If the discount rate is 10%, how much is Apple’s share worth
today?
A) USD 60
B) USD 63
C) USD 57
D) USD 0.6
E) Need more information to answer

3. Absolute Computing (AC) is operating in the same industry as Infosys and TCS. A
consultant, tasked with valuing AC, figures out that the PE multiple for the industry is 15
(based on the latest financial and market data of Infosys and TCS). The latest Earnings
per Share of AC is ₹30 and next year's earnings are projected to be ₹36. How much is
AC’s share worth using a multiples approach?
A) ₹540
B) ₹495
C) ₹475
D) ₹450
E) ₹610

4. Which of the following statements is most accurate?

A) A stock price represents the sum of the present values of future earnings of the
firm.
B) A stock price represents the sum of the present values of future dividends of the
firm.
C) A stock price represents the capitalized value of the firm’s next year’s earnings.
D) A stock price represents the capitalized value of the firm’s next year’s dividends.
E) A stock price represents the sum of the present value of future sales.

5. Infosys Limited will pay a dividend per share of ₹2 in 2025, ₹3 in 2026, ₹5 in 2027 and ₹7
each year thereafter. How much should you pay for Infosys shares in 2024 if the discount
rate is 10%?
A) ₹51.40
B) ₹55.87
C) ₹60.65
D) ₹56.36
E) ₹57.67
 Corporate Finance
Answer Key: Quiz 5 (Section B)

1. Which of the following normally varies across the life of a bond?

A) Face Value and Coupons
B) Market Value and Yield
C) Market Value
D) Yield
E) Face Value

2. Infosys is considering a bond issue and has a credit rating of AAA. Three other
AAA-rated bonds, with similar maturities as Infosys is considering issuing, have an
average yield of 5% and a coupon rate of 4%. The Infosys bond yield should be
A) Around 5%
B) Around 4%
C) Between 4% and 5%
D) It will be determined by Infosys
E) It will be decided by SEBI

3. Continuing with the previous question, Infosys bond coupon rates should be
A) Around 5%
B) Around 4%
C) Between 4% and 5%
D) It will be determined by Infosys
E) It will be decided by SEBI

4. HDFC Bank and Axis Bank are operating in the same industry. HDFC gives a dividend of
₹40/share and Axis gives a dividend of ₹30/share. According to this information, which of
the following is true?
A) HDFC Bank should have a higher share price
B) Axis Bank should have a higher share price
C) HDFC Bank has a higher payout ratio
D) Axis Bank has a higher payout ratio
E) None of the above options are necessarily true

5. HDFC Bank has a payout ratio of 40% and a return on equity of 20%. If these numbers
are likely to remain steady perpetually, what is the expected growth rate of HDFC
dividends?
A) 800 Basis points
B) 1200 Basis points
C) 8 Basis points
D) 12 Basis points
E) Not enough information to say
 Corporate Finance
Answer Key: Quiz 6 (Section B)

1. You are considering investing in two projects – Project A, which has an NPV of ₹800 and
Project B which has an NPV of ₹600. The initial investment required for both projects is
₹750. The first project is riskier than the second project. Capital is not a constraint. What
do you do?
A) Invest in Project A; Don’t invest in Project B
B) Don’t invest in Project B; Investment in Project A will depend on its riskiness
C) Don’t invest in either
D) Invest in both projects
E) Check the IRRs before answering

2. If in the previous question (question 1), both the projects have a dependency (both
require the same asset which can be used only in one project), and therefore only one
project can be undertaken. What would you decide?
A) Accept Project A, reject Project B
B) Accept Project B, reject Project A
C) Need more information before making a decision
D) Reject both projects

3. Project A has an IRR of 14% and Project B has an IRR of 18%. The hurdle rate required
for investing in the project is 16%. If you go by the decision rule for IRR, you should
A) Accept Project A, reject Project B
B) Reject both projects
C) Accept both projects
D) Make the NPV calculations before making a decision
E) Accept Project B, reject Project A

4. Project A has an IRR of 20% and Project B has an IRR of 18%. The hurdle rate required
for investing in the project is 16%. If you go by the decision rule for IRR, you should
A) Accept Project A, reject Project B
B) Reject both projects
C) Accept both projects
D) Make the NPV calculations before making a decision
E) Accept Project B, reject Project A

5. If in the previous question (question 4), both the projects have a dependency (both
require the same asset which can be used only in one project), and therefore only one
project can be undertaken. What would you decide?
A) Accept Project A, reject Project B
B) Accept Project B, reject Project A
C) Need more information before making a decision
D) Reject both projects
 Applied Corporate Finance Quiz 7
5*1 marks
5 minutes
Questions

1. Which of the following is true about Design Your Own Doll

A. It is a competitor to New Heritage dolls which allows customers to design their own dolls
B. Design your own doll is a promotional event conducted by the company
C. It is a proposed project in which customers can customise and purchase their own dolls
D. It is an existing division of the company which the company is considering shutting down
E. It is a competitor that the company is considering purchasing

2. Which of the following is true about Match My Doll Clothing?

A. It is an existing division of the company which the company is considering expanding
B. It is a competitor to New Heritage dolls which designs dolls based on the customers
favourite clothes
C. It is a promotional event conducted by the company
D. It is a competitor that the company is considering purchasing
E. It is an existing division of the company which the company is considering shutting down

3. In what context is the Barbie dolls mentioned in the case?

A. It is one of the bestselling models for the New Heritage doll company
B. It is one of the brands that is sold by the New Heritage doll company
C. One of the challenges faced by the New Heritage doll company is that their Barbie dolls
are not selling as much as earlier
D. As an exceptional case of lasting franchise value created among a branded line of dolls
E. Barbie dolls is not mentioned in the case at all

4. Which of the following is best describes Dr. Beckwith’s aim in starting the New Heritage doll
company as mentioned in the case?
A. Exploit the low levels of competition in the doll’s segment which is also expected to grow
at a quick pace
B. Start a company which sells lower priced branded dolls in contrast to the mostly
unbranded other offerings
C. Produce dolls with unique storylines and wholesome themes which help develop
imagination and fosters a positive self image
D. Produce dolls with a real life simulating material that was produced by her research and
patented by the New Heritage doll company
E. Produce dolls that incorporate modern technologies such as music, light, sound, robotics
and AI for high-tech dolls

5. What is the discount rate used by the New Heritage doll company for its projects
A. 8.4%
B. It uses different rates depending on the perceived risk of the project
C. 12%
D. 4.6%
E. 3%
 Corporate Finance Quiz 8 (Section B)
5*1 marks
5 minutes

Instructions
1. Each question is worth 1 point.
2. In case of questions with multiple seemingly correct answers, select the answer that appears
most true.
3. The Quiz will be closed book
Questions

1. Which of the following is a measure of systematic risk faced by a stock?

A. Volatility of the stock returns
B. Standard Deviation of stock returns
C. Beta of the stock
D. Standard Deviation of stock returns minus standard deviation of the market
E. Standard Deviation of the market

2. The theoretical lower bound of beta (The lowest value it can take is)
A. -Infinity
B. 0
C. -1
D. 1
E. -3

3. The beta of the market portfolio will be

A. Infinite
B. 3
C. Higher than that of individual stocks
D. 1
E. None of the above

4. If for every 1% return in the market portfolio (returns), the stock of an average returns 1.5%, the
Beta of the stock is
A. Greater than 0
B. 1.5
C. Positive
D. Negative
E. 1

5. Sigma (Standard Deviation of stock returns) of a stock is a measure of

A. Systematic risk of the stock
B. Systematic risk of the market
C. Total risk of the stock
D. Unsystematic risk of the stock
E. Unsystematic risk of the market
 Applied Corporate Finance Quiz 9 – Version 2 5*1 marks
Instructions 5 minutes
1. Each question is worth 1 point.
2. In case of questions with multiple seemingly correct answers, select the answer that appears
most true.
3. The Quiz will be closed book

1. The Beta of a stock A is 1 and for Stock B is 2. The returns of the stocks are 12% and 20%
respectively. Which of the following is necessarily true about its systematic risk
A. Systematic Risk of both stocks are the same
B. Systematic Risk of Stock A>Systematic Risk of Stock B
C. Systematic Risk of Stock A<Systematic Risk of Stock B
D. Systematic Risk of stock A is more than the unsystematic risk of stock A
E. None of the above

2. In the above question, what can we can about the unsystematic risks of stocks A and B?
A. Unsystematic Risk of both stocks are the same
B. Unsystematic Risk of Stock A>Unsystematic Risk of Stock B
C. Unsystematic Risk of Stock A<Unsystematic Risk of Stock B
D. Unsystematic Risk of stock A is more than the systematic risk of stock A
E. None of the above

3. In the above question (Q1), what can we can about the total risks of stocks A and B?
A. Total Risk of both stocks are the same
B. Total Risk of Stock A>Total Risk of Stock B
C. Total Risk of Stock A<Total Risk of Stock B
D. Unsystematic Risk of stock A is more than the Total risk of stock A
E. None of the above

4. If you create a portfolio of stocks A and B (such that weights of both stocks are non-negative), what
is the range of returns the portfolio can produce
A. 12%-20%
B. Greater than 20%
C. Lesser than 12%
D. 0 - Infinity
E. -Infinity to Infinity

5. If you create a portfolio of stocks A and B (such that weights of both stocks are non-negative), what
is the range of betas that the portfolio can produce
A. 0-2
B. Greater than 2
C. 1-2
D. 0 to Infinity
E. -Infinity to Infinity
 Applied Corporate Finance Quiz 11 – Version 2 5*1 marks
Instructions 5 minutes
1. Each question is worth 1 point.
2. In case of questions with multiple seemingly correct answers, select the answer that appears
most true.
3. The Quiz will be closed book
The return on NIFTY50 (the large cap index) has been 15% over the past 5 years, the return on the
NIFTY SMALL CAP 100 (small cap index) has been 18%, NIFTY500 (a well-diversified Index) has
been 20% and the NIFTY IT (software index) has been 16%. The 10 year Government bond trading
has a coupon rate of 10% and a yield of 8%.
1. Infosys, a large cap software company has a Beta equity of 1.5. Calculate the expected cost of equity
for Infosys shares
A. 23.0%
B. 18.5%
C. 20.0%
D. 25.0%
E. 26.0%
2. Infosys has a Beta equity of 1.5, Debt and Equity of 200 and 100 Cr respectively on its balance
sheet. Infosys shares are trading at 50 Rs/share and there are 5Cr shares outstanding. What is the
Beta asset of Infosys?
A. 0.67
B. 0.50
C. 0.83
D. 1.00
E. 2.70
3. Backbench, a small cap software company has a Beta asset of 1. Its latest balance sheet shows 100
Cr of Debt and 250 Cr of equity. Backbench has a market cap of 300 Cr as on today. What is a good
estimate of its Beta asset?
A. 1.33
B. 1.40
C. 3.00
D. 2.50
E. 1.45
4. Backbench, a small cap software company has a Beta equity of 1.8. Calculate the expected cost of
equity for Backbench shares
A. 20.6%
B. 26.0%
C. 22.4%
D. 28.0%
E. 29.6%
5. You are trying to value an unlisted company NoList Inc in the software industry and have identified
Backbench and Infosys as competitors. Which of the following is a reasonable assumption to make
for calculating cost of capital of NoList?
A. Use average WACC of Backbench and Infosys as an estimate of NoList WACC
B. Use average Beta Equity of Backbench and Infosys as an estimate of NoList Beta Equity
C. Use weighted average WACC of Backbench and Infosys as an estimate of NoList WACC
D. Use average Beta Asset of Backbench and Infosys as an estimate of NoList Beta Asset
E. Use weighted average Beta Equity of Backbench and Infosys as an estimate of NoList Beta
Equity
 Applied Corporate Finance Quiz 10 – Version 2 5*1 marks
Apollo and Bridgestone are both tyre manufacturers and are direct competitors. Apollo has debt of Rs.
500 Cr on its latest balance sheet while Bridgestone has Rs. 100 Cr. The equity value of the balance
sheets of both companies are Rs. 100 Cr and Rs. 180 Cr respectively. The risk free rate is 5%, the risk
premium is 13%, Bridgestone has a market cap of Rs. 200 Cr with its share price trading at Rs.
20/share. The corporate tax rate is 30%.
1. If Bridgestone’s asset beta is 1.2, estimate its Equity Beta assuming that its debt beta is 0.1
A. 1.75
B. 1.8
C. 3.6
D. 3.4
E. 1.2

2. What is the Cost of equity for Bridgestone’s stocks assuming an Equity Beta of 1.8?
A. 37.4%
B. 33.1%
C. 28.4%
D. 20.6%
E. 26.8%

3. What is Bridgestone’s Weighted Average Cost of Capital assuming tax free world, Cost of debt is
5% and Cost of equity is 26.8%?
A. 19.53%
B. 12.27%
C. 19.01%
D. 12.79%
E. 15.87%

4. What is Bridgestone’s After Tax Weighted Average Cost of Capital assuming a tax rate of 30% and
same assumptions as question 3?
A. 18.48%
B. 11.27%
C. 9.93%
D. 19.03%
E. 11.82%

5. What is your best estimate of Apollo’s Weighted Average Cost of Capital assuming a tax free world
given the assumptions in questions 3 and 4?
A. 12.27%
B. 19.53%
C. 8.63%
D. Same as answer in question 3 above
E. Same as answer in question 4 above
 Applied Corporate Finance Quiz 12 – Version 2 5*1 marks

Instructions 5 Marks
1. Each question is worth 1 point.
2. In case of questions with multiple seemingly correct answers, select the answer that appears most true.
3. The Quiz will be closed book

1. Company A and B are operating in the same industry and vary only wrt their capital structure.
Company A has 80% debt/value whereas company B is fully funded by equity. Which of the
following is true about their equity betas?
A. Their equity betas are likely to be similar
B. Company Bs equity betas are likely to be higher than that of A
C. Company As equity betas are likely to be higher than that of B
D. Company As equity betas will be higher than company B in good scenario and vice versa in
bad
E. Company As equity betas will be higher than company B in bad scenario and vice versa in
good

2. Continuing with question 1, if you want to obtain the expected returns of company A by investing in
company B, what should be your strategy
A. Take four times your capital as debt and invest in B
B. Take 80% debt on your capital and invest in B
C. There is no free lunch in finance. If you invest in B you get returns of A
D. You invest 80% of your capital in B and 20% in debt
E. You invest 80% of your capital in debt and 20% in B

3. Continuing with question 1, how would you expect the market Return on Capital Employed (RoCE)
of A and B to behave? Good scenario may be interpreted as having ROA>Cost of debt
A. Company As RoCEs are likely to be higher than that of B
B. Both A and B will have similar RoCEs
C. Company Bs RoCE are likely to be higher than that of A
D. Company As RoCE will be higher than company B in good scenario and vice versa in bad
E. Company As RoCE will be higher than company B in bad scenario and vice versa in good

4. Which of the following is true as per the trade-off theory of capital structure?
A. Trade Off theory says that with higher debt you face higher bankruptcy costs so prefer debt
over equity
B. Trade Off theory says debt is exposed to higher asymmetric information than equity. Hence
prefer debt over equity
C. Trade Off theory says that with higher debt you get higher interest tax benefits
D. Trade Off theory suggests that equity issues should be the last resort in raising new capital
E. Trade Off theory suggests that you should use a diversified mix of all instruments to get
maximum diversification benefits

5. Which of the following is a NOT a common advantage of debt financing over equity financing?
A. Debt financing sends a better signal to the market than equity financing as the latter may imply
that the company is overvalued
B. Debt does not reduce a company’s credit rating whereas equity does
C. Interest payments on debt are tax-deductible
D. Debt reduces risks of bankruptcy as banks are uncomfortable with incurring bankruptcy costs
E. Cost of debt is cheaper than cost of equity. Hence, debt financing reduces the overall WACC of
the company even in the absence of taxes
 Applied Corporate Finance Quiz 13 – Version 2 5*1 marks

Instructions 5 Marks
1. Each question is worth 1 point.
2. In case of questions with multiple seemingly correct answers, select the answer that appears most true.
3. The Quiz will be closed book

1. Which of the following is true about dividends?

A. If a company pays a dividend, the inherent value of the company rises by the same amount
B. Companies do not like to reduce their dividend payments
C. Companies try to pay the maximum dividend they can because it sends a good signal
D. Companies do not like to smooth dividends
E. Companies should pay dividend whenever they have sufficient cash

2. According to Modigliani and Miller’s Proposition I or Capital structure irrelevance theorem (without
taxes), in a perfect market, the value of a leveraged firm is:
A. More than the value of the unlevered firm
B. Dependent on whether tax benefit or bankruptcy costs are higher
C. Lower than the value of the assets because taking debt is a negative signal to the market
D. Equal to the value of the unlevered firm
E. Less than the value of the unlevered firm

3. Which of the following is typically not a good reason to use repurchases over dividends?
A. To signal confidence in the firm’s future
B. To avoid taxes associated with dividends
C. To increase the number of shares outstanding
D. To increase the firm's debt-to-equity ratio
E. To distribute surplus capital after positive NPV projects are exhausted

4. Which of the following is true about dividends?

A. An increase in dividends has a smaller smock market reaction than a proportionate decrease
B. Increase in dividends is always seen as bad news by shareholders
C. Increase in dividends is always seen as good news by shareholders
D. A pensioner typically prefers a non-dividend stock over a dividend paying one
E. Dividends are typically taxed at a lower rate than repurchases

5. If your companies’ profits increases, as the manager, you should

A. Always increases dividend by as much if not more than the increase in profit
B. Only increase dividends if you are sure that the increased dividends can be paid in the future
periods as well
C. Keep the extra money for additional investments.
D. Repay all the debt. Only then should you think about increasing dividends
E. Only increase dividends for your long term shareholders