Business Finance
Exam Materials
Course Introduction
Business Finance introduces students to the fundamental principles and practices of financial management within a business context. The course covers core topics such as financial statement analysis, budgeting, time value of money, capital structure, risk assessment, valuation of assets, and funding options. Students will learn how financial decisions are made within organizations, the role of financial markets, and the impact of financial management on business strategy and operations. Through case studies and practical examples, this course equips students with the analytical tools needed to evaluate financial performance and make informed financial decisions.
Recommended Textbook
Financial Management Concepts and Applications 1st Edition by Stephen Foerster
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14 Chapters
1072 Verified Questions
1072 Flashcards
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Page 2
Chapter 1: Overview of Financial Management
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102 Verified Questions
102 Flashcards
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Sample Questions
Q1) The ability to analyze the company's strengths and weaknesses is a fundamental concept that a nonfinancial manager should understand in order to:
A)better assess the current environment in which the firm operates.
B)better assess future financing requirements.
C)better understand the role of capital markets in raising long-term funds.
D)better measure and create value for the shareholder.
Answer: A
Q2) A corporate financial manager who is trying to create value for its shareholders:
A)is not concerned with ethics but rather with writing iron-clad contracts.
B)can safely ignore ethics as long as no laws are broken.
C)must behave ethically to stay out of jail.
D)is concerned with ethics because unethical behavior destroys trust,and businesses cannot function without a certain degree of trust.
Answer: D
Q3) The owners of a corporation enjoy limited liability.
A)True
B)False
Answer: True
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3
Chapter 2: Sizing up a Business: a Non-Financial Perspective
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93 Verified Questions
93 Flashcards
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Sample Questions
Q1) Consumer spending is the main driver of economic activity in the United States.
A)True
B)False
Answer: True
Q2) Sizing up human resource management involves:
A)identifying the firm's strengths and weaknesses related to human resource management.
B)an external assessment of the industry.
C)an internal assessment of the firm's strengths and weaknesses.
D)None of the above.
Answer: D
Q3) Intense rivalry among existing firms can result in:
A)the introduction of new products or services.
B)lower profit margins as competitors jockey for position.
C)decreased capacity.
D)Both A and B.
Answer: D
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Page 4
Chapter 3: Understanding Financial Statements
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93 Verified Questions
93 Flashcards
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Sample Questions
Q1) What changes in the balance sheet accounts would constitute sources of funds? What changes would be considered uses of funds?
Answer: Increases in liabilities and equity would be considered sources of funds.For example,increases in debt,A/P,N/P,R/E or equity.Uses of funds are increases in assets,such as increases in A/R,inventory,land,buildings,and equipment.At the same time,a reduction in assets could also be considered a sources of funds while a decrease in liabilities and equity would be uses of funds.
Q2) A firm reports the following balance sheet items: total current liabilities of $535,000; total assets of $2,500,000; fixed and other assets of $1,850,000; and long-term debt of $200,000.What is the amount of the firm's net working capital?
A)$115,000
B)$450,000
C)$335,000
D)$1,315,000
Answer: A
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Chapter 4: Measuring Financial Performance
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65 Verified Questions
65 Flashcards
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Sample Questions
Q1) The higher a firm's long-term-debt-to-capital ratio is,the LESS financial risk the firm is taking on.
A)True
B)False
Q2) Explain how to create a common size income statement and a common size balance sheet.Provide at least three reasons why analysts find the creation of common size statements to be a useful practice.
Q3) As long as a firm's cost of sales are primarily ________ then the firm's gross profit margin should be ________ from year to year.
A)variable; roughly equal
B)variable; vary widely
C)fixed; more likely to be the same
D)fixed; also fixed
Q4) Which of the following is likely to be a part of the firm's annual report?
A)The 10-K report
B)A letter from senior management to the shareholders
C)Footnotes to the financial statements
D)All of the above
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6
Chapter 5: Managing Day-To-Day Cash Flow
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72 Verified Questions
72 Flashcards
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Sample Questions
Q1) Which of the following actions could INCREASE a firm's working capital gap?
A)increase the age of accounts payable
B)decrease the age of accounts receivable
C)reduce the age of inventory
D)None of the above.
Q2) Ending cash = Sources of cash - Uses of cash + beginning cash balance
A)True
B)False
Q3) What is LIBOR,how are LIBOR interest rates determined,and for what are they used?
Q4) Most commercial paper is UNSECURED.
A)True
B)False
Q5) Which of the following actions could DECREASE a firm's working capital gap?
A)increase the age of accounts receivable
B)reduce the age of accounts payable
C)increase the age of inventory
D)None of the above.
Q6) Describe what an accounts receivable schedule might look like and why a firm may wish to prepare such a schedule.
Page 7
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Chapter 6: Projecting Financial Requirements and Managing Growth
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71 Flashcards
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Sample Questions
Q1) In constructing a pro forma balance sheet,which of the following fills the role of being the "plug" figure to balance the balance sheet?
A)external financing
B)the change in retained earnings
C)accounts payable
D)accounts receivable
Q2) Which of following is NOT a variable in the equation for sustainable growth?
A)profit ratio
B)net working capital ratio
C)asset turnover ratio
D)leverage ratio
Q3) Forecasted net cash flows are the difference between forecasted cash inflows and forecasted cash outflows.
A)True
B)False
Q4) Pro forma estimates of cash flows are rarely if ever correct.
A)True
B)False
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Chapter 7: Time Value of Money Basics and Applications
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77 Verified Questions
77 Flashcards
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Sample Questions
Q1) The ________ is used to determine the annual or semi-annual interest cash flow for a bond whereas the ________ is the rate used to determine the price of the bond.
A)coupon rate; yield to maturity
B)yield to maturity; coupon rate
C)yield to maturity; discount rate
D)current yield; yield to maturity
Q2) If a bond sells for less than its par value then the yield to maturity is greater than the coupon rate.
A)True
B)False
Q3) Autorola plans to invest money today at an interest rate of 6% compounded annually to have $40,000 available for the purchase of a car four years from now.How much does the firm need to invest today?
A)$50,499.08
B)$36,384.52
C)$31,683.75
D)$9,143.66
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9
Chapter 8: Making Investment Decisions
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74 Verified Questions
74 Flashcards
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Sample Questions
Q1) Ultimately,when faced with capital rationing,firms should choose the combination of capital projects that maximizes the NPV subject to the capital constraints.
A)True
B)False
Q2) Which of the following is NOT a strength of the payback method of capital budgeting?
A)The payback values are relatively simple to calculate.
B)When comparing projects the payback method decision is intuitive.
C)The payback method uses all project cash flows in establishing the project payback period.
D)It is a quick measure of the inherent risk of a project.
Q3) A firm's cost of capital may also be known as:
A)the cost of financing.
B)the internal rate of return.
C)modified internal rate of return.
D)the prime rate.
Q4) List the five steps of the decision-making framework outlined in chapter 8 and briefly explain the process and importance of each step.
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Page 10
Chapter 9: Overview of Capital Markets: Long-Term Financing Instruments
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Sample Questions
Q1) Non-U.S.firms may list their equity securities on U.S.exchanges by issuing negotiable certificates that represent an equivalent amount of stock ownership.These certificates are known as:
A)American Depositary Receipts.
B)Initial Public Offerings.
C)Seasoned Public Offerings.
D)Negotiable Certificates of Deposit.
Q2) ________ are the residual claimants of a firm's cash flows.
A)Preferred shareholders
B)Common shareholders
C)Bondholders
D)Bankers
Q3) Empirical evidence supports the notion that U.S.financial markets are generally ________ form efficient.
A)weak
B)semi-strong
C)strong
D)none of the above
Q4) List and describe the three methods used to distribute shares in an IPO.
Q5) What is a callable bond,who "calls" a bond,and under what circumstances?
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Chapter 10: Assessing the Cost of Capital: What Return Investors
Require
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76 Verified Questions
76 Flashcards
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Sample Questions
Q1) If a firm does not have publicly traded debt and therefore does not have a yield to maturity as an estimate for its cost of debt,a common practice is to estimate the cost of debt by adding a premium to the rate on:
A)the cost of accounts payable.
B)equity.
C)long-term government bonds.
D)collateralized debt obligations.
Q2) Picarello Corporation's next annual dividend is expected to be $4.64 per share,to be issued one year from today.The firm anticipates the growth rate in dividends will be 4% annually for the foreseeable future.If the current price is $51 per share,what is the required rate of return for the firm's equity?
A)13.46%
B)13.10%
C)8.44%
D)16.27%
Q3) The rate on 3-month Treasury Bills is always considered to be the risk-free rate when applying the CAPM.
A)True
B)False
Page 12
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Chapter 11: Understanding Financing and Payout Decisions
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71 Flashcards
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Sample Questions
Q1) The beauty of the Modigliani and Miller model is that if you relax the restrictive assumptions,it still demonstrates that capital structure does not impact the value of the firm.
A)True
B)False
Q2) The author cites a global study by Servaes and Tufano from 2006 which shows ________ as the dividend policy preferred by the vast majority (76%)of the firms surveyed.
A)a specific percentage amount
B)a specific target amount
C)a specific growth amount
D)no specific policy
Q3) According to data assembled for U.S.firms,the average level of debt as a percentage of capital is approximately equal across industries.
A)True
B)False
Q4) In what manner are share repurchases and dividend payments related to each other? Why would a firm choose to engage in a share repurchase?
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Chapter 12: Designing an Optimal Capital Structure
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70 Flashcards
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Sample Questions
Q1) For an all-equity firm,the cost of equity is equal to the overall cost of capital.
A)True
B)False
Q2) Larger firms and those with better credit ratings tend to also have less strict capital structure targets.
A)True
B)False
Q3) Managers need to take into account a number of perspectives when assessing the "first" criteria.The ________ focuses on comparing the firms capital structure with those of industry competitors.
A)competitive perspective
B)internal perspective
C)investor perspective
D)creditor perspective
Q4) Issuing equity automatically hurts existing shareholders.
A)True
B)False
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Chapter 13: Measuring and Creating Value
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73 Flashcards
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Sample Questions
Q1) Which of the following statements regarding Market Value Added (MVA)is TRUE?
A)MVA = market value of the firm - invested capital
B)A positive MVA indicates that the market believes the firm has created value for its stakeholders.
C)MVA represents the present value of anticipated EVAs,discounted at the appropriate cost of capital.
D)All of the statements are true.
Q2) Mason Construction Inc.had net sales of $480,000,costs of sales of $130,000,additional expenses of $200,000,depreciation of $40,000,and a tax rate of 30%.Use this information to determine the firm's after tax earnings on a cash basis.
A)$77,000
B)$105,000
C)$117,000
D)$145,000
Q3) Traditional financial statements include only interest costs associated with any debt and not the return required or expected by equity holders,which is included in the EVA approach.
A)True
B)False
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Page 15
Chapter 14: Comprehensive Case Study: Wal-Mart
Stores,inc
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61 Verified Questions
61 Flashcards
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Sample Questions
Q1) In 2012 Advantage Cable Inc.had $250,000 in invested capital,a WACC of 9.35%,EBIT of $75,000,and a tax rate of 30%.With this information please estimate the economic value added (EVA)for the firm.
A)$29,125
B)$23,375
C)$52,500
D)There is not enough information to answer this question.
Q2) Growing firms should be able to rely on internally generated funds since external funding is expensive and unreliable.
A)True
B)False
Q3) Conglomicorp Inc.has 10.5 million shares of stock outstanding with a book value of $25 per share and a market value of $93 per share.The firm also has $40 million in retained earnings and a required rate of return of 8%.What is the current market capitalization for the firm?
A)$904,166,667
B)$976,500,000
C)$1,097,820,000
D)$1,016,500,000
Page 16
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