Free CISI Corporate Finance Technical Foundations Practice Questions

Sample Practice Questions

Try these 10 sample questions from the CISI Corporate Finance Technical Foundations practice bank. Each includes the answer and explanation. Continue with the interactive practice above to review the full question set.

1. 1Why does applying common accounting standards help an analyst compare two otherwise similar companies?

   1. A.It makes their reported profits independent of estimates.
   2. B.It gives their financial statements a consistent basis.Correct answer: B
   3. C.It makes their accounting values equal to market values.
   4. D.It gives their investors identical information needs.

   Explanation: The workbook explains that standards help ensure accounts "can be compared on a like-for-like basis with other similar companies." Consistent preparation supports comparison; it does not eliminate estimates, equate book and market values, or make every user’s needs identical.

   Reference: CISI Corporate Finance Technical Foundations learning workbook — PDF page 10, Accounting Standards

2. 2What distinguishes debt capital from ordinary equity capital?

   1. A.Debt gives ownership rights; equity requires fixed principal repayment.
   2. B.Debt requires contractual repayment; equity represents ownership.Correct answer: B
   3. C.Debt is retained profit; equity is borrowed from external lenders.
   4. D.Debt has no funding cost; equity pays a contractual rate of interest.

   Explanation: The workbook states: "While equity represents ownership in a company, typically obtained by selling shares to investors, debt involves borrowing funds from lenders with a promise to repay the principal amount along with interest within a set timeframe." Debt is borrowing with contractual repayment obligations; ordinary equity is ownership. The other answers reverse those roles, confuse internal reserves with debt, or treat discretionary equity returns as contractual interest.

   Reference: CISI Corporate Finance Technical Foundations learning workbook — Chapter 2, §2 Debt Capital

3. 3Which statement correctly distinguishes equity value from enterprise value in a corporate valuation?

   1. A.Equity value is the residual attributable to ordinary shareholders after prior claims.Correct answer: A
   2. B.Equity value includes lenders’ claims while enterprise value excludes those claims.
   3. C.Enterprise value represents only the nominal value of outstanding ordinary shares.
   4. D.Enterprise value is the company’s annual profit before interest and taxation.

   Explanation: The workbook states: "The equity value of the business is the residual of the enterprise value after the deduction of these prior claims." Equity value is the amount attributable to ordinary shareholders after relevant prior financing claims. It is not a value including lenders’ claims; enterprise value is neither nominal share capital nor one year’s profit.

   Reference: CISI Corporate Finance Technical Foundations learning workbook — Chapter 3, §2 Enterprise Value and Equity Value

4. 4A public-company bidder proceeds with an offer that the target board refuses to recommend to shareholders. How is the bid described?

   1. A.Hostile.Correct answer: A
   2. B.Recommended.
   3. C.A management buyout.
   4. D.A private placing.

   Explanation: The workbook states: "The takeovers which attract the most commentary are those where the target directors are not prepared to recommend the offer. These are referred to as hostile or unsolicited bids." The target board’s opposition makes it a hostile bid. A recommended bid has board support; a management buyout describes the acquiring management team; a private placing is a capital-raising method.

   Reference: CISI Corporate Finance Technical Foundations learning workbook — Chapter 4, §1.4 Public M&A

5. 5A potential buyer receives confidential transaction information under an NDA. What use of that information does the standard purpose restriction described in the workbook allow?

   1. A.Using it to compete with the seller’s unrelated operating businesses.
   2. B.Passing it to any third party willing to make a competing bid.
   3. C.Using it to evaluate the potential investment covered by the NDA.Correct answer: C
   4. D.Publishing it after signing, because confidentiality no longer applies.

   Explanation: The workbook states: "will use it only for the purposes of evaluating a potential investment" The restriction permits evaluation of the proposed investment. Competitive exploitation, unrestricted onward circulation and publication are inconsistent with that restricted purpose and the confidentiality obligation.

   Reference: CISI Corporate Finance Technical Foundations learning workbook — Chapter 5, §2.1 Non-Disclosure Agreements (NDAs)

6. 6What does an external financial-statement audit principally add to the reliability of company information?

   1. A.A forecast of the return shareholders will receive.
   2. B.A replacement for the directors’ accounting policies.
   3. C.A confirmation that every asset can be sold at book value.
   4. D.An examination of accuracy and compliance with applicable rules.Correct answer: D

   Explanation: The workbook states: "Auditing involves the accounts being tested for accuracy and compliance, with the applicable rules". The audit examines financial reporting; it neither forecasts investment returns nor replaces management’s policies or guarantees asset realisation values.

   Reference: CISI Corporate Finance Technical Foundations learning workbook — Chapter 1, §1.1 Financial Statements

7. 7Among ordinary shares, preference shares and debt claims, which broad liquidation ranking applies to shareholders?

   1. A.Ordinary shares rank before debt and preference shares.
   2. B.Preference shares rank before debt but after ordinary shares.
   3. C.Both share classes rank equally with the company’s debt.
   4. D.Debt ranks before preference shares, which rank before ordinary shares.Correct answer: D

   Explanation: The workbook states: "On a windingup, both preference and ordinary shareholders rank behind all debt holders and other creditors of the company." Debt claims precede shareholder claims; preference shareholders then precede ordinary shareholders. The alternatives reverse creditor priority, reverse preference priority or wrongly equate equity with debt.

   Reference: CISI Corporate Finance Technical Foundations learning workbook — Chapter 2, §1.2 Preference Shares

8. 8Why may identical reported earnings multiples give misleading comparisons between two companies using materially different accounting policies?

   1. A.The multiples replace earnings with cash received from shareholders.
   2. B.The multiples remove every difference in earnings recognition.
   3. C.The policies can change reported earnings without matching economic differences.Correct answer: C
   4. D.The policies make market capitalisations identical at the reporting date.

   Explanation: The workbook states: "Weaknesses of the P/E ratio relate to the differences in accounting policies between the comparable companies being analysed" Accounting policies can alter reported earnings and therefore the apparent multiple, weakening comparability. P/E uses earnings rather than shareholder cash receipts, does not automatically standardise accounting policies and does not equalise market prices.

   Reference: CISI Corporate Finance Technical Foundations learning workbook — Chapter 3, §3.3.1 Prospective P/E Ratio, weaknesses of P/E

9. 9A listed parent separates a subsidiary by floating it on a stock exchange as an independent quoted entity. Which transaction does the workbook’s terminology describe?

   1. A.A trade sale to an industrial buyer.
   2. B.An asset sale to an existing supplier.
   3. C.A spin-off or demerger.Correct answer: C
   4. D.A merger of two continuing companies.

   Explanation: The workbook states: "Spin-off/demerger – the disposal of a subsidiary of a public company by way of flotation of the subsidiary on a stock exchange, as a separate quoted entity." The workbook uses spin-off/demerger for the stated separation and flotation. A trade sale transfers a business to a commercial acquirer; an asset sale transfers assets; a merger combines companies rather than separating a quoted subsidiary.

   Reference: CISI Corporate Finance Technical Foundations learning workbook — Chapter 4, §1.1 M&A – Terminology

10. 10Which document establishes an adviser’s scope of services, remuneration and responsibilities for a corporate finance assignment?

    1. A.The engagement letter.Correct answer: A
    2. B.The intercreditor agreement.
    3. C.The disclosure letter.
    4. D.The provisional allotment letter.

    Explanation: The workbook states: "The engagement letter is intended to establish a clear understanding on both sides as regards the adviser’s and the company’s roles and responsibilities" The engagement letter sets the adviser-client mandate and normally covers services and fees. An intercreditor agreement governs competing lenders, a disclosure letter qualifies transaction warranties, and a PAL records rights entitlements.

    Reference: CISI Corporate Finance Technical Foundations learning workbook — Chapter 5, §2.2 Engagement Letters