Course Introduction
Business Finance
Chapter Exam Questions
Business Finance introduces students to the fundamental concepts and techniques used in financial management within a business environment. The course covers essential topics such as financial statement analysis, time value of money, capital budgeting, risk and return, cost of capital, and working capital management. Students will learn how businesses make investment and financing decisions, manage resources to maximize value, and address challenges posed by global financial markets. Through case studies and practical examples, the course equips students with the analytical tools necessary for effective financial decision-making in both small businesses and large corporations.
Recommended Textbook Fundamentals of Investment Management 9th Edition by Geoffrey A. Hirt
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Page 2
Chapter 1: The Investment Setting
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Sample Questions
Q1) Common stock dividends are now taxed at a maximum rate of
A)10 percent
B)15 percent
C)20 percent
D)30 percent
E)38.8 percent
Answer: B
Q2) Rare painting and baseball cards may be considered as forms of an investment.
A)True
B)False
Answer: True
Q3) The two types of investments that provide the highest and lowest yields in the Ibbotson study of Stocks,Bonds,Bills and Inflation are
A)Large company stocks; U.S.treasury bills
B)Large company stocks; Long-term government bonds
C)Small company stocks; U.S.Treasury bills
D)Small company stocks; preferred stock
E)U.S.treasury bills; small company stocks
Answer: C
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Page 3
Chapter 2: Security Markets: Present and Future
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Sample Questions
Q1) A difference between the primary market and the secondary market is A)Liquidity
B)That primary markets allow corporations,government units,and others to raise needed funds for the expansion of their capital base
C)Price competition in the secondary markets between different risk-return classes enables the primary market to price new issues at higher prices to reflect existing risk-return relationships
D)The secondary market is much more competitive than the primary market.
Answer: C
Q2) When an investment bank sells securities on a best efforts basis,it assumes all risk of the offering.
A)True
B)False
Answer: False
Q3) Under the Securities Act of 1933,the SEC can certify that a stock is fairly priced.
A)True
B)False
Answer: False
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4
Chapter 3: Participating in the Market
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Sample Questions
Q1) Margin percentages are set by the Board of Governors of the Federal Reserve System.
A)True
B)False
Answer: True
Q2) ________________ represents 75 percent of the total value of firms listed on the NYSE,while ____________________ includes 1700 individual firms.
A)The Dow Jones Industrial Average; Value Line Average
B)Wilshire 5000 Russell 2000
C)The Value Line Average; Standard and Poor's Composite
D)The Dow Jones Composite Average; the Standard and Poor's Industrials
E)The Standard and Poor's 500 Index; Value Line Average
Answer: E
Q3) The following are all value-weighted indexes,except:
A)The S&P 500
B)The Dow Jones Industrial Average
C)Midcap 400
D)The S&P Industrials (400 stocks)
E)Wilshire 5000
Answer: B
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Chapter 4: Sources of Investment Information
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Q1) Because the SEC has the power to regulate trading on the exchanges and to require corporate disclosure of information relevant to stockholders of publicly traded companies,they do not publish or make this information available to the public.
A)True
B)False
Q2) The Federal Reserve Bank of St.Louis publishes _____ weekly,which contains comprehensive data on the monetary base,bank reserves,the money supply,interest rates,and other topics.
A)Federal Reserve Bulletin
B)U.S.Financial Data
C)Economic Perspectives
D)Survey of Current Business
Q3) The Survey of Current Business contains a monthly update and evaluation of GNP,business inventories,personal consumption,fixed investment,exports,labor market statistics,financial data,and more.
A)True
B)False
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Chapter 5: Economic and Industry Analysis
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Q1) Since late 2002 the Bush administration has followed a weak dollar policy and
A)The euro has fallen against the dollar
B)The euro has risen against the dollar
C)The Chinese renmimbi has declined against the dollar
D)None of the above have happen
Q2) While the money supply has historically been popular as an indicator of the stock market,
A)Studies have shown there is not a strong relationship between the two variables
B)Money supply growth and stock prices have turning points too similar to really be of value
C)Money supply does not really explain the majority of economic behavior
D)More than one of the above
Q3) Since the stock market is the most accurate and reliable of the ten leading indicators,
A)Investors need indicators which provide more lead time than the stock market
B)Investors are able to reduce or eliminate uncertainty about trading stocks
C)Investors are unable to forecast changes in stock prices
D)None of the above
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Chapter 6: Industry Analysis
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Q1) The pharmaceutical industry has submitted almost 2000 drugs per year to the U.S.Food and Drug Administration between 1995 and 2005 and the approval rate is close to
A)3.3 percent
B)8.2 percent
C)10.0 percent
D)22.2 percent
Q2) The lack of barriers to entry tends to help established firms by giving them power to increase prices and profits.
A)True
B)False
Q3) Patents are important to the pharmaceutical industry because patents
A)protect companies from low cost generic drugs
B)keep other drug companies from developing competitive drugs for the same disease
C)allow the companies to earn a high enough rate of return in the early years of a drug to continue research and development efforts on new drugs
D)A and C
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Chapter 7: Valuation of the Individual Firm
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Q1) The use of many valuation models provides the analyst with A)One model that gives the right answer
B)Multiple models of how the market might value the firm's stock price
C)A confusing array of answers
D)The ability to choose the best model that matches his or her previous judgement
Q2) In order for any dividend valuation model to reflect a valid stock price for a company,
A)The company must pay dividends
B)The dividend growth rate must remain constant
C)The required rate of return (discount rate)must remain constant
D)More than one of the above is true
Q3) F 18.Empirical evidence indicates that rising dividends are no guarantee that the associated common stock price will also rise in the short run.
A)True
B)False
Q4) All things being equal,the more rapid growth a firm enjoys the higher the P/E ratio.
A)True
B)False
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Chapter 8: Financial Statement Analysis
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Sample Questions
Q1) The Beaver and Altman bankruptcy studies indicated that ratios of failing firms signal failure as much as five years ahead of bankruptcy.
A)True
B)False
Q2) When a company repurchases shares of their own common stock?
A)The earnings per share will rise
B)The dividends paid out in total will decline
C)The earnings per share growth rate will rise
D)All of the above will happen
Q3) An increase in assets is considered a source of funds.
A)True
B)False
Q4) The statement of cash flows tells us
A)Accounting profit or loss
B)How cash was created
C)Actual profit or loss
D)Actual value of assets and liabilities
E)Source and use of net income
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Chapter 9: A Basic View of Technical Analysis and Market Efficiency
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Q1) Odd-lot traders have never outguessed professional traders.
A)True
B)False
Q2) A point and figure chart is used to demonstrate
A)Advances and declines of stock prices
B)High,low and closing price on a daily basis
C)Changes of two points or more
D)More than one of the above
Q3) A support level signals new demand.
A)True
B)False
Q4) Volume of short sales represents a contrary opinion rule because
A)Short sellers generally do not know what they are doing
B)Short sellers tend to overreact
C)Short sales generate potential demand for stocks
D)More than one of the above
Q5) High mutual fund cash positions would represent withdrawal from the market and thus a possible future market decline.
A)True
B)False
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Chapter 10: Investment in Special Situations and Anomalies
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Q1) Acceptance of the weak form of the EMH would indicate that charting can lead to profits.
A)True
B)False
Q2) Professor Fama and French maintain that the ratio of book value to market value is more important than either the size effect or the P/E effect in explaining superior stock performance.
A)True
B)False
Q3) Specialists and mutual fund managers tend to enjoy superior market performance on a risk adjusted basis.
A)True
B)False
Q4) The requirements for an exchange listing tend to be highly restrictive.
A)True
B)False
Q5) To take maximum advantage of new issues,an investor should own a stock for at least one year.
A)True
B)False
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Chapter 11: Bond and Fixed Income Fundamentals
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Q1) The primary difference between jumbo and small Certificates of Deposit,besides dollar amount,is
A)That jumbo certificates have a variable interest rate
B)That small certificates are considered to be risk-free
C)There is no secondary market for small certificates of deposit
D)None of the above
Q2) A provision in which semiannual or annual contributions are made by a corporation into a fund administered by a trustee for purposes of debt retirement is referred to as a:
A)Call provision
B)Put provision
C)Sinking-fund
D)Serial payment
Q3) The IRS taxes zero coupon bonds as if interest were paid semiannually even though no cash flow is received until maturity.
A)True
B)False
Q4) Jumbo C.D.'s are $10,000 or greater in size.
A)True
B)False
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Chapter 12: Principles of Bond Valuation and Investment
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Q1) When should an investor calculate both yield to maturity and yield to call?
A)Whenever there is a call provision
B)When the sum of the present values of the interest payments exceeds the call price
C)When the market price is greater than or equal to the call price
D)Whenever the funds can be reinvested
E)When interest rates increase above the coupon rate
Q2) A descending term structure reflects the view that rates will increase in the future.
A)True
B)False
Q3) What effect,if any,will decrease in interest rates have on bond values?
A)Bond values will increase
B)Bond values will decrease
C)Bond values may increase or decrease,depending on the maturity,quality and coupon rate
D)None of the above
Q4) Lower quality bonds tend to be in high demand during a recession.
A)True
B)False
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14
Chapter 13: Duration and Reinvestment Concepts
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Sample Questions
Q1) Compute the duration for the data in this problem using a discount rate of 12%.
\[\begin{array} { | c | c | }
\hline & \text { Cash } \\
\hline \text { Year, t } & \text { Flow } \\
\hline 1 & 90 \\
\hline 2 & 90 \\
\hline 3 & 90 \\
\hline 3 & 1000 \\
\hline \end{array}\]
A)3.00 years
B)2.95 years
C)2.85 years
D)2.75 years
E)2.65 years
Q2) It is possible that a bond with a shorter maturity than another bond may actually have a longer duration and be more sensitive to interest rate changes.
A)True
B)False
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Chapter 14: Convertible Securities and Warrants
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Q1) What factor(s)would cause the pure bond value to go up?
A)A decrease in the market interest rate
B)An increase in stock price
C)A change in the conversion ratio
D)More than one of the above
Q2) Convertible bonds tend to pay better interest rates than straight bonds,since convertibles are of lower risk.
A)True
B)False
Q3) When is the best time to convert a convertible bond to common stock?
A)When the call price exceeds the conversion value
B)After the conversion ratio decreases
C)When the conversion value is below the pure bond value
D)None of the above
Q4) A company usually would not want to issue convertible securities if its stock is undervalued in the market.
A)True
B)False
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Chapter 15: Put and Call Options
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Q1) Investors can buy put and call options on stock indexes such as the Dow Jones Industrial Average and the Standard & Poor's 500.
A)True
B)False
Q2) At the time of expiration,the premium (price)on a call option
A)Reflects risk in addition to intrinsic value
B)Will be equal to the intrinsic value
C)May be above or below the intrinsic value
D)None of the above
Q3) Long-term equity anticipation securities (LEAPS)are nothing more than a long-term option.
A)True
B)False
Q4) Option writers must own common stock in order to write call options on that particular stock.
A)True
B)False
Q5) The longer the time to expiration the higher the speculative premium per day.
A)True
B)False
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Chapter 16: Commodities and Financial Futures
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Sample Questions
Q1) Commodity trading is based on the use of:
A)Actual dollars
B)A margin
C)A hedge
D)Fictitious money
Q2) Assume you have just purchased a corn futures contract - 5,000 bushels at $3.24 per bushel.What will your percentage profit on the cash investment be if the price of corn rises $ .10 per bushel in 4 months? Your initial margin requirement was $1,500.
A)3.1 percent
B)33 percent
C)9.2 percent
D)None of the above
Q3) To close a position,the seller./buyer of a contract would buy/sell a similar contract. A)True
B)False
Q4) Cash prices and spot prices are very different in nature.
A)True
B)False
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18
Chapter 17: Stock Index Futures and Options
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Q1) One of the major uses of a stock index future is the ability:
A)To use it to hedge
B)To make an unlimited amount of money
C)To increase risk
D)All of the above
Q2) In order to effectively hedge a stock portfolio,the portfolio manager must know the total dollar value of the portfolio,the current index futures price and
A)The number of contracts available in the market
B)The portfolio P/E ratio
C)The relative volatility of the portfolio to the market
D)More than one of the above
Q3) Stock index options have very low speculative premiums since the unsystematic risk is almost zero.
A)True
B)False
Q4) Value Line future contracts tread on the Kansas City Board of trade.
A)True
B)False
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Chapter 18: Mutual Funds
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Q1) An end load fund has
A)No charge upon purchase,but a fixed charge upon sale
B)A smaller charge on purchase,and another small charge again on sale
C)No charge upon purchase,and a declining charge based on time owned,on sale
D)Two of the above
Q2) Exchange Traded Funds offer the investor many advantages over open-end and closed-end mutual funds.Which of the following are comparative advantages?
A)There are global and international funds to choose
B)There are over 80 broad based domestic equity index funds
C)They are bought and sold like common stocks
D)All of the above are comparative advantages
Q3) Bond mutual funds can be divided into corporate,government and municipal funds.
A)True
B)False
Q4) Mutual funds which provide tax-free income are ________ and certain types of A)Stock funds; bond funds
B)Money market funds; balanced funds
C)Municipal bond funds; money market funds
D)None of the above
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Chapter 19: International Securities Markets
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Q1) ADR's (American Depository Receipts)represent an ownership interest in a foreign company's common stock.
A)True
B)False
Q2) Countries are divided into developed and emerging markets based on the market capitalization of their stock market.
A)True
B)False
Q3) The market capitalization of General Electric,Microsoft,and Exxon combined,would rank ahead of any emerging market's capitalization,including China.
A)True
B)False
Q4) Multinational corporations are firms that:
A)Are located in one country and invest in another
B)Operate in one country and export those goods to other countries
C)Operate in several countries
D)Have clients in several countries
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Chapter 20: Investment in Real Assets
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Q1) Equity participation:
A)Is popular in commercial real estate
B)Lets the lender provide borrowed capital
C)Lets the lender provide part of the equity or ownership funds
D)All of the above
Q2) Real assets may offer an opportunity as an inflation hedge because inflation means higher replacement costs for real estate,precious metals,and other physical items.
A)True
B)False
Q3) Depreciation
A)On residential real estate property can be written off over 31 1/2 years
B)On commercial real estate can be written off over 31 1/2 years
C)Can be accelerated for commercial real estate
D)None of the above
Q4) Diamonds have enjoyed an enviable record of no price declines over the past few years.
A)True
B)False
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Chapter 21: A Basic Look at Portfolio Management and Capital Market Theory
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Q1) According to the text,a risk averse investor
A)Demands a premium for assuming risk
B)Will only participate in low risk or risk-free investments
C)Is one of a small minority in the United States
D)More than one of the above
Q2) An investor is indifferent between points on a risk-return indifference curve,though not indifferent to achieving the highest curve possible.
A)True
B)False
Q3) The standard deviation for a portfolio is a weighted average of the individual securities' standard deviations.
A)True
B)False
Q4) If the _____ of any individual stock is known,an investor can use the _____ to determine the expected rate of return on that stock
A)Beta; capital market line
B)Beta; security market line
C)Standard deviation; capital market line
D)None of the above
all
23
and
Chapter 22: Measuring Risks and Returns of Portfolio Managers
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Q1) Under the _____ approach,excess returns on a portfolio are compared to the total risk of the portfolio.
A)Sharpe
B)Treynor
C)Jensen
D)More than one of the above
Q2) The Jensen study indicates that mutual fund managers tend to have very superior performances.
A)True
B)False
Q3) Firms in industries that are subject to the business cycle do not have highly variable earnings.
A)True
B)False
Q4) The least risk exposure would be appropriate for a mutual fund which
A)Generates income for investors living on a fixed income
B)Is oriented toward capital gains for wealthy investors
C)Is designed for young,upwardly mobile professionals
D)None of the above
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Chapter 23: Sustainable Growth Model
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Q1) The sustainable growth model is appropriate for highly cyclical firms.
A)True
B)False
Q2) A firm had earnings per share of $3.25 for the year.The book value per share at the beginning of the year was $13.The firm paid out $.975 in dividends per share at the end of the year.If the rate of return on book value remains constant from year to year,and the firm maintains the same earnings retention ratio,what will the sustainable growth rate be for the foreseeable future?
A)35.7%
B)7.5%
C)8.3%
D)17.5%
E)25%
Q3) Based on the sustainable growth model,an increase in the dividend payout ratio (1the retention ratio)will increase the growth in earnings per share in the future.
A)True
B)False
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Chapter 24: a Black Scholes Option Pricing Model
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Q1) The Black and Scholes option pricing model makes an assumption that markets have no taxes or transactions costs.
A)True
B)False
Q2) For call options the price is positively related to
A)The stock's price changes and the volatility of the stock price changes
B)To the time to maturity and the riskless rate of interest
C)The strike price
D)A)and B)
Q3) The Black and Scholes option pricing model makes an assumption that markets have taxes and transactions costs.
A)True
B)False
Q4) The Black and Scholes option pricing model makes an assumption that the option could only be exercised at maturity.
A)True
B)False
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Chapter 26: A Comprehensive Analysis for Real Estate
Investment Decisions
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Q1) An apartment complex has net operating income of $15,000,depreciation of $8,000,and interest expense of $13,000.The tax rate is 30 percent.
(a)What is taxable income or loss?
(b)what is the tax shield benefit or tax owed?
Q2) A duplex was purchases for $120,000 and depreciation of $3,300 has been taken for the last seven years.The net proceeds from the sale of the property is $135,000.
(a)Assuming the property qualifies for capital gains treatment at a 15% rate,what is the tax owed?
(b)What are the net funds from the sale?
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Chapter 25: Unit Investment Trusts Uits
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Q1) Unit investment trusts have all of the following features except
A)They usually invest in tax-exempt municipals
B)Stipulated end to the life of the fund
C)Little interest rate risk
D)Actively trading the bonds in the portfolio
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Chapter 27: The Makeup of Institutional Investors
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Q1) Pension funds represent a declining segment of the institutional market.
A)True
B)False
Q2) Organizations responsible for bringing together large pools of capital for purposes of reinvestment are called:
A)Individual investors
B)Institutional investors
C)Social security clubs
D)B and C
Q3) Which of the following are NOT examples of institutional investors?
A)Mutual funds and pension funds
B)Insurance companies
C)Commercial Banks
D)All of the above are institutional investors
Q4) The largest category of institutional investor's are:
A)Foundations
B)Personal trusts
C)Mutual savings banks
D)Pension funds
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