Business Finance
Exam Bank
Course Introduction
Business Finance is an essential course that introduces students to the fundamental concepts and principles of financial management within a business context. The course covers key topics such as financial analysis, planning and forecasting, working capital management, capital structure, investment decisions, and budgeting processes. Students learn how managers use financial information for decision-making, the impact of financial markets and institutions, and the methods for maximizing shareholder value. Emphasis is placed on both theoretical understanding and practical application, equipping students with the skills necessary to analyze financial statements, assess risk, and make informed financial decisions that drive business success.
Recommended Textbook
Intermediate Financial Management 13th Edition by Eugene F. Brigham
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Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) Which of the following statements is CORRECT
A) corporations generally are subject to more favorable tax treatment and fewer regulations than partnerships and sole proprietorships, which is why corporations do most of the business in the united states.
B) managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value than are managers who do not face the threat of hostile takeovers.
C) one advantage of the corporate form of organization is that liability of the owners of the firm is limited to their investment in the firm.
D) because of their simplified organization, it is easier for sole proprietorships and partnerships to raise large amounts of outside capital than it is for corporations.
E) bond covenants are an effective way to resolve conflicts between shareholders and managers.
Answer: C
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3
Chapter 2: Risk and Return-Part I
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Q1) Returns for the Alcoff Company over the last 3 years are shown below. What's the standard deviation of the firm's returns? (Hint: This is a sample, not a complete population, so the sample standard deviation formula should be used.) \[\begin{array} { l l }
\text { Year } & { Retur } \\ 2010&21.00 \%\\
2009 & - 12.50 \% \\
2008 & 25.00 \% \end{array}\]
A) 20.08%
B) 20.59%
C) 21.11%
D) 21.64%
E) 22.18%
Answer: B
Q2) We would generally find that the beta of a single security is more stable over time than the beta of a diversified portfolio.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Risk and Return-Part II
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Q1) It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm are negative.
A)True
B)False
Answer: True
Q2) A stock with a beta equal to -1.0 has zero systematic (or market) risk.
A)True
B)False
Answer: False
Q3) If you plotted the returns of Selleck & Company against those of the market and found that the slope of your line was negative, the CAPM would indicate that the required rate of return on Selleck's stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue in the future.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Bond Valuation
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Q1) Which of the following statements is CORRECT?
A) if rates fall after its issue, a zero coupon bond could trade at a price above its par value.
B) if rates fall rapidly, a zero coupon bond's expected appreciation could become negative.
C) if a firm moves from a position of strength toward financial distress, its bonds' yield to maturity would probably decline.
D) if a bond is selling at a premium, this implies that its yield to maturity exceeds its coupon rate.
E) if a coupon bond is selling at par, its current yield equals its yield to maturity.
Q2) A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.
A)True
B)False
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Chapter 5: Financial Options
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Q1) Which of the following statements is most correct, holding other things constant, for XYZ Corporation's traded call options?
A) the higher the strike price on xyz's options, the higher the option's price will be.
B) assuming the same strike price, an xyz call option that expires in one month will sell at a higher price than one that expires in three months.
C) if xyz's stock price stabilizes (becomes less volatile), then the price of its options will increase.
D) if xyz pays a dividend, then its option holders will not receive a cash payment, but the strike price of the option will be reduced by the amount of the dividend.
E) the price of these call options is likely to rise if xyz's stock price rises.
Q2) The exercise value is also called the strike price, but this term is generally used when discussing convertibles rather than financial options.
A)True
B)False
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Chapter 6: Accounting for Financial Management
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Q1) TSW Inc. had the following data for last year: Net income = $800; Net operating profit after taxes (NOPAT) = $700; Total assets = $3,000; and Total operating capital = $2,000.
Information for the just-completed year is as follows: Net income = $1,000; Net operating profit after taxes (NOPAT) = $925; Total assets = $2,600; and Total operating capital = $2,500. How much free cash flow did the firm generate during the just-completed year?
A) $383
B) $425
C) $468
D) $514
E) $566
Q2) Net operating profit after taxes (NOPAT) is the amount of net income a company would generate from its operations if it had no interest income or interest expense.
A)True B)False
Q3) On the balance sheet, total assets must always equal total liabilities and equity.
A)True B)False
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Chapter 7: Analysis of Financial Statements
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Q1) Lindley Corp.'s stock price at the end of last year was $33.50, and its book value per share was $25.00. What was its market/book ratio?
A) 1.34
B) 1.41
C) 1.48
D) 1.55
E) 1.63
Q2) Northwest Lumber had a profit margin of 5.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE?
A) 12.79%
B) 13.47%
C) 14.18%
D) 14.88%
E) 15.63%
Q3) Since the ROA measures the firm's effective utilization of assets (without considering how these assets are financed), two firms with the same EBIT must have the same ROA.
A)True
B)False
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Chapter 8: Basic Stock Valuation
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Q1) Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?
A) stock b must have a higher dividend yield than stock a.
B) stock a must have a higher dividend yield than stock b.
C) if stock a has a higher dividend yield than stock b, its expected capital gains yield must be lower than stock b's.
D) stock a must have both a higher dividend yield and a higher capital gains yield than stock b.
E) if stock a has a lower dividend yield than stock b, its expected capital gains yield must be higher than stock b's.
Q2) If a firm's expected growth rate increased then its required rate of return would A) decrease.
B) fluctuate less than before.
C) fluctuate more than before.
D) possibly increase, possibly decrease, or possibly remain constant.
E) increase.
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Chapter 9: Corporate Valuation and Financial Planning
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Q1) Which of the following assumptions is embodied in the AFN equation?
A) accounts payable and accruals are tied directly to sales.
B) common stock and long-term debt are tied directly to sales.
C) fixed assets, but not current assets, are tied directly to sales.
D) last year's total assets were not optimal for last year's sales.
E) none of the firm's ratios will change.
Q2) If a firm's capital intensity ratio (A0*/S0) decreases as sales increase, use of the AFN formula is likely to understate the amount of additional funds required, other things held constant.
A)True
B)False
Q3) The capital intensity ratio is the amount of assets required per dollar of sales and it has a major impact on a firm's capital requirements.
A)True
B)False
Q4) A firm's AFN must come from external sources. Typical sources include short-term bank loans, long-term bonds, preferred stock, and common stock.
A)True
B)False
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Chapter 10: Corporate Governance
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Q1) Which one of the following statements is TRUE?
A) outside shareholders will pay less for stock if they think the original owners will consume perquisites.
B) creditors have a claim on a firm's earning stream through the dividend payments they receive.
C) an example of asset switching is an option to exchange one piece of real estate for another.
D) an agency cost is the wage required to pay someone who is hired to perform a service.
E) an example of an agency cost is when an attorney hires an expert witness for a trial.
Q2) Which of the following is NOT normally regarded as being a barrier to hostile takeovers?
A) targeted share repurchases.
B) shareholder rights provisions.
C) restricted voting rights.
D) poison pills.
E) abnormally high executive compensation.
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Page 12
Chapter 11: Determining the Cost of Capital
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Q1) As a consultant to Basso Inc., you have been provided with the following data: D1 = $0.67; P0 = $27.50; and gL = 8.00% (constant). What is the cost of common from reinvested earnings based on the dividend growth approach?
A) 9.42%
B) 9.91%
C) 10.44%
D) 10.96%
E) 11.51%
Q2) The lower the firm's tax rate, the lower will be its after-tax cost of debt and also its WACC, other things held constant.
A)True
B)False
Q3) The higher the firm's flotation cost for new common equity, the more likely the firm is to use preferred stock, which has no flotation cost, and reinvested earnings, whose cost is the average return on the assets that are acquired.
A)True B)False
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Chapter 12: Capital Budgeting: Decision Criteria
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Q1) Which of the following statements is CORRECT?
A) the npv profile graph for a normal project will generally have a positive (upward) slope as the life of the project increases.
B) an npv profile graph is designed to give decision makers an idea about how a project's risk varies with its life.
C) an npv profile graph is designed to give decision makers an idea about how a project's contribution to the firm's value varies with the cost of capital.
D) we cannot draw a project's npv profile unless we know the appropriate cost of capital for use in evaluating the project's npv.
E) an npv profile graph shows how a project's payback varies as the cost of capital changes.
Q2) The regular payback method is deficient in that it does not take account of cash flows beyond the payback period. The discounted payback method corrects this fault. A)True B)False
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Chapter 13: Capital Budgeting-Estimating Cash Flows and Analyzing Risk
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Q1) Which of the following rules is CORRECT for capital budgeting analysis?
A) only incremental cash flows, which are the cash flows that would result if a project is accepted, are relevant when making accept/reject decisions.
B) sunk costs are not included in the annual cash flows, but they must be deducted from the pv of the project's other costs when reaching the accept/reject decision.
C) a proposed project's estimated net income as determined by the firm's accountants, using generally accepted accounting principles (gaap), is discounted at the wacc, and if the pv of this income stream exceeds the project's cost, the project should be accepted.
D) if a product is competitive with some of the firm's other products, this fact should be incorporated into the estimate of the relevant cash flows. however, if the new product is complementary to some of the firm's other products, this fact need not be reflected in the analysis.
E) the interest paid on funds borrowed to finance a project must be included in estimates of the project's cash flows.
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Page 15
Chapter 14: Real Options
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Q1) Real options are options to buy real assets, like stocks, rather than interest-bearing assets, like bonds.
A)True
B)False
Q2) Real options affect the size, but not the risk, of a project's expected cash flows.
A)True
B)False
Q3) Refer to the data for Nationwide Pharmaceutical Corporation (NPC). Assuming that all cash flows are discounted at 10%, if NPC chooses to wait a year before proceeding, how much will this increase or decrease the project's expected NPV in today's dollars (i.e., at t = 0), relative to the NPV if it proceeds today?
A) $77.23
B) $85.81
C) $95.34
D) $105.94
E) $116.53
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Page 16
Chapter 15: Distributions to Shareholders-Dividends and Repurchases
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Q1) Brinkley Resources stock has increased significantly over the last five years, selling now for $175 per share. Management feels this price is too high for the average investor and wants to get the price down to a more typical level, which it thinks is $25 per share. What stock split would be required to get to this price, assuming the transaction has no effect on the total market value Put another way, how many new shares should be given per one old share?
A) 6.65
B) 6.98
C) 7.00
D) 7.35
E) 7.72
Q2) Stock dividends and stock splits should, at least conceptually, have the same effect on shareholders' wealth.
A)True
B)False
Q3) The announcement of an increase in the cash dividend should, according to MM, lead to an increase in the price of the firm's stock.
A)True
B)False
Page 17
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Chapter 16: Capital Structure Decisions
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Q1) Firms HD and LD are identical except for their level of debt and the interest rates they pay on debt HD has more debt and pays a higher interest rate on that debt. Based on the data given below, what is the difference between the two firms' ROEs? \(\begin{array}{lcll}
{\text { Applicable to Both Firms }} & {\text { Firm HD's Data }} & \text { Firm LD's Data } \\
\text { Assets } & \$ 200 \text { Debt ratio } & 50 \% \text { Debt ratio } & 30 \% \\
\text { EBIT } & \$ 40 \text { Interest rate } & 12 \% \text { Interest rate } & 10 \% \\ \text { Tax rate } & 35 \% & & \end{array}\)
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Chapter 17: Dynamic Capital Structures and Corporate Valuation
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Q1) Refer to the data for NorthWest Water (NWW). What is the required after-tax refunding investment outlay, i.e., the cash outlay at the time of the refunding?
A) $5,049,939
B) $5,315,725
C) $5,595,500
D) $5,890,000
E) $6,200,000
Q2) The market value of Firm L's debt is $200,000 and its yield is 9%. The firm's equity has a market value of $300,000, its earnings are growing at a 5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Using the compressed adjusted present value model, what would Firm L's total value be if it had no debt
A) $358,421
B) $377,286
C) $397,143
D) $417,000
E) $437,850
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Q1) Which of the following statements is most CORRECT?
A) private placements occur most frequently with stocks, but bonds can also be sold in a private placement.
B) private placements are convenient for issuers, but the convenience is offset by higher flotation costs.
C) the sec requires that all private placements be handled by a registered investment banker.
D) private placements can generally bring in funds faster than is the case with public offerings.
E) in a private placement, securities are sold to private (individual) investors rather than to institutions.
Q2) If its managers make a tender offer and buy all shares that were not held by the management team, this is called a private placement.
A)True
B)False
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Page 20
Chapter 19: Lease Financing
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Q1) Stanley Inc. must purchase $6,000,000 worth of service equipment and is weighing the merits of leasing the equipment or purchasing. The company has a zero tax rate due to tax loss carry-forwards, and is considering a 5-year, bank loan to finance the equipment. The loan has an interest rate of 10% and would be amortized over 5 years, with 5 end-of-year payments. Stanley can also lease the equipment for 5 end-of-year payments of $1,790,000 each. How much larger or smaller is the bank loan payment than the lease payment? Note: Subtract the loan payment from the lease payment.
A) $177,169
B) $196,854
C) $207,215
D) $217,576
E) $228,455
Q2) Many leases written today combine the features of operating and financial leases. Such leases are often called "combination leases."
A)True
B)False
Q3) A sale and leaseback arrangement is a type of financial, or capital, lease.
A)True
B)False
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Page 21
Chapter 20: Hybrid Financing Preferred Stock-Warrants and Convertibles
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Q1) Refer to the data for the Neuman Corporation's convertible bonds. What is the bond's conversion value?
A) $698.15
B) $734.89
C) $773.57
D) $814.29
E) $857.14
Q2) The "preferred" feature of preferred stock means that it normally will provide a higher expected return than will common stock.
A)True
B)False
Q3) Corporations that invest surplus funds in floating-rate preferred stock benefit from getting a relatively stable price, which is desirable for liquidity portfolios, and they also benefit from the 70% tax exemption on preferred dividends received.
A)True
B)False
Q4) A warrant is an option, and as such it cannot be used as a "sweetener."
A)True
B)False
22
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Chapter 21: Supply Chains and Working Capital Management
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Q1) Refer to the data for Hardwig, Inc.Assume now that the company believes that if it adopts a restricted policy, its sales will fall by 15% and EBIT will fall by 10%, but its total assets turnover, debt ratio, interest rate, and tax rate will all remain the same. In this situation, what's the difference between the projected ROEs under the restricted and relaxed policies?
A) 2.24%
B) 2.46%
C) 2.70%
D) 2.98%
E) 3.27%
Q2) Dimon Products' sales are expected to be $5 million this year, with 90% on credit and 10% for cash. Sales are expected to grow at a stable, steady rate of 10% annually in the future. Dimon's accounts receivable balance will remain constant at the current level, because the 10% cash sales can be used to support the 10% growth rate, other things held constant.
A)True
B)False
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Page 23
Chapter 22: Providing and Obtaining Credit
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Q1) If sales are seasonal, the days sales outstanding will fluctuate from month to month, even if the amount of time customers take to pay remains unchanged.
A)True
B)False
Q2) Suppose that you're planning a vacation and borrow $2,000 from a bank for one year at a stated annual interest rate of 14 percent, with interest prepaid (a discounted loan). Also, assume that the bank requires you to maintain a compensating balance equal to 20 percent of the initial loan value. What effective annual interest rate are you being charged?
A) 14.00%
B) 8.57%
C) 16.28%
D) 21.21%
E) 28.00%
Q3) The credit period is the amount of time it takes to do a credit search on a potential customer.
A)True
B)False
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Chapter 23: Other Topics in Working Capital Management
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Q1) Each year, Holly's Best Salad Dressing, Inc. (HBSD) purchases 50,000 gallons of extra virgin olive oil. Ordering costs are $100 per order, and the carrying cost, as a percentage of inventory value, is 80 percent. The purchase price to HBSD is $0.50 per gallon. Management currently orders the EOQ each time an order is placed. No safety stock is carried. The supplier is now offering a quantity discount of $0.03 per gallon if HBSD orders 10,000 gallons at a time. Should HBSD take the discount?
A) from a cost standpoint, hbsd is indifferent.
B) no, the cost exceeds the benefit by $500.
C) no, the cost exceeds the benefit by $1,000.
D) yes, the benefit exceeds the cost by $500.
E) yes, the benefit exceeds the cost by $1,120.
Q2) Refer to Exhibit Cartwright Computing. How many orders should Cartwright place during the year?
A) 12
B) 25
C) 30
D) 40
E) 60
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Page 25
Chapter 24: Enterprise Risk Management
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Q1) Suppose the December CBOT Treasury bond futures contract has a quoted price of 80'07. If annual interest rates go up by 1.00 percentage point, what is the gain or loss on the futures contract?(Assume a $1,000 par value, and round to the nearest whole dollar.)
A) $78.00
B) $82.00
C) $86.00
D) $90.00
E) $95.00
Q2) Which of the following statements is most CORRECT?
A) futures contracts generally trade on an organized exchange and are marked to market daily.
B) goods are never delivered under forward contracts, but are almost always delivered under futures contracts.
C) there are futures contracts for currencies but no forward contracts for currencies.
D) futures contracts don't have any margin requirements but forward contracts do.
E) one advantage of forward contracts is that they are default free.
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Chapter 25: Bankruptcy-Reorganization and Liquidation
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Q1) In the event of bankruptcy under the federal bankruptcy laws, debtholders have a prior claim to a firm's income and assets before both common and preferred stockholders. Moreover, in a bankruptcy all debtholders are treated equally as a single class of claimants.
A)True
B)False
Q2) What would be the priority of the claims as to the distribution of assets in a liquidation under Chapter 7 of the Bankruptcy Act? 1 is the highest claim, 5 is the lowest.
(1) Trustees' costs to administer and operate the firm.
(2) Common stockholders.
(3) General, or unsecured, creditors.
(4) Secured creditors, who have a claim to the proceeds from the sale of specific property pledged to secure a loan.
(5) Taxes due to federal and state governments.
A) 5, 4, 1, 3, 2
B) 4, 1, 5, 3, 2
C) 5, 1, 4, 2, 3
D) 1, 5, 4, 3, 2
E) 1, 4, 3, 5, 2
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Page 27
Chapter 26: Mergers and Corporate Control
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Q1) A spin-off is a type of divestiture in which the assets of a division are sold to another firm.
A)True B)False
Q2) The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.
A)True B)False
Q3) The primary reason managers give for most mergers is to acquire more assets so as to increase sales and market share.
A)True
B)False
Q4) The present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm's operations if it had no debt.
A)True B)False
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Page 28
Chapter 27: Multinational Financial Management
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Q1) When the value of the U.S. dollar appreciates against another country's currency, we may purchase more of the foreign currency with a dollar.
A)True
B)False
Q2) Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure. Essentially, the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate.
A)True
B)False
Q3) A box of chocolate candy costs 28.80 Swiss francs in Switzerland and $20 in the United States. Assuming that purchasing power parity (PPP) holds, what is the current exchange rate?
A) 1 u.s. dollar equals 0.69 swiss francs
B) 1 u.s. dollar equals 0.85 swiss francs
C) 1 u.s. dollar equals 1.21 swiss francs
D) 1 u.s. dollar equals 1.29 swiss francs
E) 1 u.s. dollar equals 1.44 swiss francs
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Chapter 28: Time Value of Money
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Q1) A time line is not meaningful unless all cash flows occur annually.
A)True
B)False
Q2) Your uncle just won the weekly lottery, receiving $375,000, which he invested at a 7.5% annual rate. He now has decided to retire, and he wants to withdraw $35,000 at the end of each year, starting at the end of this year. What is the maximum number of whole payments that can be withdrawn before the account is exhausted, i.e., before the account balance would become negative? (Hint: Round down to the nearest whole number.)
A) 22
B) 23
C) 24
D) 25
E) 26
Q3) A "growing annuity" is any cash flow stream that grows over time.
A)True
B)False
Q4) A time line is meaningful even if all cash flows do not occur annually.
A)True
B)False
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Chapter 29: Basic Financial Tools: A review
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249 Verified Questions
249 Flashcards
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Sample Questions
Q1) Which of the following bank accounts has the highest effective annual return?
A) an account that pays 8% nominal interest with daily (365-day) compounding.
B) an account that pays 8% nominal interest with monthly compounding.
C) an account that pays 8% nominal interest with annual compounding.
D) an account that pays 7% nominal interest with daily (365-day) compounding.
E) an account that pays 7% nominal interest with monthly compounding.
Q2) McGaha Enterprises expects earnings and dividends to grow at a rate of 25% for the next 4 years, after the growth rate in earnings and dividends will fall to zero, i.e., g = 0. The company's last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock?
A) $26.77
B) $27.89
C) $29.05
D) $30.21
E) $31.42
Q3) Diversification will normally reduce the riskiness of a portfolio of stocks.
A)True
B)False
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Chapter 30: Pension Plan Management
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10 Verified Questions
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Sample Questions
Q1) The performance measurement of stock portfolio managers must recognize the risk inherent in the investment portfolio. One way to incorporate risk into performance measurement is to examine the portfolio's alpha, which measures the vertical distance of the portfolio's return above or below the Security Market Line.
A)True
B)False
Q2) If employees have a right to receive pension benefits even if they leave the company prior to retirement, their pension rights are said to be vested.
A)True
B)False
Q3) From a pure cost standpoint, a firm with a defined contribution plan would be more likely to hire older workers than a firm with a defined benefit plan.
A)True
B)False
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Chapter 31: Financial Management in Not for Profit
Businesses
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Sample Questions
Q1) The net present social value model formally recognizes that not-for-profit firms must consider the social value along with the financial value of proposed new projects.
A)True
B)False
Q2) Not-for-profit firms have fund capital in place of equity capital. Since fund capital does not have to provide a return to stockholders, the appropriate cost of fund capital in a cost of capital estimate is zero.
A)True
B)False
Q3) Since not-for-profit firms do not pay taxes, they receive no tax benefits whatsoever from using debt financing.
A)True
B)False
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