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 topics such as financial statement analysis, time value of money, risk and return, capital budgeting, cost of capital, and working capital management. Students learn how financial decisions are made to maximize firm value, explore investment and financing strategies, and develop skills in analyzing financial performance. By integrating theoretical frameworks with practical applications, the course equips students with the tools necessary to make informed financial decisions and to understand the broader implications of finance in the business environment.
Recommended Textbook
Introduction to Corporate Finance 4th Edition by Sean Cleary
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Page 2
Chapter 1: An Introduction to Finance
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Sample Questions
Q1) Who are the biggest borrowers and lenders in Canada,respectively?
A) government and households
B) government and banks
C) banks and mutual funds
D) Crown corporations and banks
Answer: A
Q2) All common shares are comprised of which two components?
A) ownership and voting rights
B) ownership and dividend rights
C) voting and dividend rights
D) dividend and yield rights
Answer: A
Q3) The main difference between exchanges and dealer/OTC markets is
A) exchanges are a part of the primary market, while dealer and OTC markets are part of the secondary market.
B) transactions in dealer markets are conducted entirely by humans, not electronically.
C) exchanges have a physical location while dealer and OTC markets do not.
D) All of the above are differences between exchanges and dealer markets.
Answer: C
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Page 3
Chapter 2: Business Corporatefinance
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Sample Questions
Q1) Give two reasons for the importance and scope of finance.
Answer: First,the scale of operations of business firms has expanded greatly in recent years.The growing significance of large corporations and the increasing size of investments highlight the importance of long-range financial planning. Second,the widespread diversification of products and the global nature of today's business environment have increased the complexity of managing a business.We now have multiproduct,multidivisional,and multinational corporations.
Q2) Which of the following is NOT a form of business organization?
A) corporation
B) sole partnership
C) general partnership
D) sole proprietorship
Answer: B
Q3) Which of the following is an example of a capital structure decision?
A) issuing new shares
B) buying a new factory
C) reducing inventory levels
D) increasing purchases on credit
Answer: A
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Page 4
Chapter 3: Financial Statements
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Sample Questions
Q1) Fred is confused.He has just deposited $100 in his savings account and the cashier said: "Your account will be credited with $100." Fred knows that depositing the cash in his account has increased his assets and therefore his savings account should be debited,so why is the bank crediting his account?
Answer: Fred's savings account is his asset and the bank's liability.Therefore,when Fred increases his asset (deposits in the savings account),he increases the bank's liability.So Fred will view the deposit as a debit from his perspective,while the bank,from its perspective,will record a credit in its financial accounts.
Q2) The sale of depreciable assets cannot result in ____________.
A) capital gains
B) capital losses
C) CCA recapture
D) terminal losses
Answer: B
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Chapter 4: Financial Statement Analysis and Forecasting
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Sample Questions
Q1) Which of the following is not true?
A) The relationship between cash and sales can be determined by estimating the past relationship between sales levels and cash balances.
B) Interest expenses can be predicted with a reasonable degree of accuracy, especially when the firm uses variable interest rates on debt.
C) Selling expenses are commonly based on a percentage of sales.
D) A pro forma income statement also has to include projected dividend payments based on the firm's established dividend policies.
Q2) Voyage Company is in a very high growth industry while EZgoing Company is in a low growth industry.Comparing their dividend payout ratios we would expect:
A) Voyage's dividend payout ratio to be greater than EZgoing.
B) Voyage's dividend payout ratio to be less than EZgoing
C) The two firms to have the same dividend payout ratio
D) Can't compare them as they are in different industries.
Q3) List the different steps in the percentage of sales method of forecasting.
Q4) Identify three potential users of financial ratios,and explain the user's focus.
Q5) What is the major implication of the adoption of IFRS standards globally?
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Page 6
Chapter 5: Time Value of Money
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Sample Questions
Q1) Ingrid has invested $10,000 in a Guaranteed Investment Certificate that promises her 12% per year for the first 5 years and 4% per year for the next 10 years.The interest is compounded annually.At the end of the 15 years,the value of the investment will be closest to which value? (Round your answer to two decimals.)
A) $26,086.96
B) $31,721.69
C) $32,425.86
D) $36,372.55
Q2) You borrow $50,000 on a line of credit to finance your startup company,to be repaid in three equal,annual payments with 10% interest.Approximately how much of the principal is paid off on the first payment?
A) $5000.00
B) $16,666.67
C) $15,105.74
D) $20,105.74
Q3) Explain the difference between simple interest and compound interest.
Q4) Explain why the interest rates publicized by credit card companies do not reflect the real cost of borrowing incurred on the charges to these cards.
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Page 7
Chapter 6: Bond Valuation and Interest Rates
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Sample Questions
Q1) What is the major concern about the liquidity preference theory of the yield curve?
Q2) An investor bought a bond at par (=$1,000)and held it for one month.If the coupon rate is 5 percent,residual maturity of the bond is 8 years,and the selling price was $937.90,what is the holding period return?
A) 5%
B) 5.79%
C) -5.79%
D) -1.79%
Q3) The current yield (CY)is:
A) The ratio of the semi-annual coupon interest divided by the bond's maturity value.
B) The ratio of the semi-annual coupon interest divided by the bond's current market price.
C) The ratio of the annual coupon interest divided by the bond's current market price.
D) The ratio of the annual coupon interest divided by the bond's maturity value.
Q4) Discuss the reasoning behind interest rate parity.Why don't firms always issue bonds in the country where interest rates are the lowest?
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Page 8
Chapter 7: Equity Valuation
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Sample Questions
Q1) BC Electrics Inc.pays a constant dividend of $2 every year.What will the stock sell for three years from now if the required rate of return is 9 percent?
A) $22.22
B) $21.30
C) $25.70
D) $28.78
Q2) Montreal Growers Inc.issued 1 million preferred shares at a par value of $20 and the dividend rate is 10%.If the risk-free rate is 4% and the risk premium is 3%,what is the preferred share price?
A) $50.00
B) $28.57
C) $35.00
D) $14.00
Q3) Explain how an evolution in accounting rules will help in the use of relative pricing methods.
Q4) If you were using a constant-dividend growth model to price a stock,what would happen if the growth rate was greater than the required rate of return?
Q5) What are the two basic types of Dividend Discount Models?
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Page 9
Chapter 8: Risk, return, and Portfolio Theory
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Sample Questions
Q1) Melanie bought a share of MPT Company for $53.98 one year ago.The stock paid a quarterly dividend of $0.52 throughout the year.What is the income yield if the stock is selling for $57.10 today?
A) 0.91%
B) 0.96%
C) 3.85%
D) 3.64%
Q2) Distinguish between systematic and non-systematic risk.
Q3) In a two-security portfolio 25% of your money is invested in Security X and the remainder in Security Y.If the standard deviations of Securities X and Y are 22 % and 7 %,respectively,and the portfolio variance is 0.01155625,what is the correlation between the two securities?
A) -0.003275
B) 0.03275
C) 1.0
D) -1.0
Q4) Does diversification always reduce the overall risk?
Q5) Discuss the difference between expected returns using subjective probabilities and expected returns based on historical values.
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Chapter 9: The Capital Asset Pricing Model Capm
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Sample Questions
Q1) By combining the risk-free asset and the efficient frontier,the _____________ will be created.
A) capital market line
B) efficient frontier
C) security market line
D) attainable set
Q2) Stock Y has a beta of 0.8 and a required rate of return of 10 percent.What is the market risk premium if the risk-free rate is 5 percent?
A) 5.00%
B) 4.75%
C) 6.25%
D) 7.50%
Q3) What is the expected return for a portfolio that has $2,500 invested in a risk-free asset with a 5 percent rate of return,and $7,500 invested in a risky asset with a 17 percent rate of return and a 28 percent standard deviation?
A) 8.00%
B) 10.75%
C) 14.00%
D) 22.25%
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Chapter 10: Market Efficiency
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Q1) Which of the following is NOT an underlying assumption of the existence of an efficient market?
A) A large number of rational, profit-maximizing investors exist.
B) Information is costless and widely available to market participants.
C) Information arrives at predetermined times.
D) Investors react quickly and fully to new information.
Q2) If security markets are efficient,then:
A) the net present value of all securities should be positive.
B) the net present value of all securities should be zero.
C) the net present value of all securities should be negative.
D) there are no implications on the net present value of securities.
Q3) Which one of the following is NOT an example of market efficiency?
A) Stock price changes after earning announcements.
B) Stock price decreases every third day by 0.5% from the opening price.
C) Stock price has a beta of 1.
D) Stock price decreases when the market goes up.
Q4) Liam,the manager of The Snoring Gryphon,your local Irish pub,is very confused.He has observed that the stock of Gryphon earns higher returns in January than in March.He expected the stock to do better around St.Patrick's Day when the pub's sales are the highest.Explain these two observations to Liam.
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Chapter 11: Forwards,futures,and Swaps
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Sample Questions
Q1) Use the following statements to answer this question:
A) I is correct, II is incorrect
B) I and II are correct
C) I and II are incorrect
D) I is incorrect, and II is correct
I.Credit default swaps (CDS)are insurance on the default of issuers of the debt.
II.The CDS market is heavily regulated to limit excessive exposure to risk.
Q2) Nanci enters into a long position in 6,000 futures contracts that require a $6,000 initial margin and has a maintenance margin that is 75% of this amount.The futures price associated with this contract is $10.Assume that the spot price of the underlying asset closes at the following prices for the next five days: $10.50,$10.75,$11.00,$9.75 and $9.25.Estimate the daily profit (loss)for Nanci as well as her equity position.(Assume no cash deposits or withdrawals are made from the account.)
Q3) A "fixed for floating" interest rate swap is also referred to as:
A) plain vanilla
B) fixed swap
C) currency swap
D) plain swap
Q4) What are the differences between forwards and futures contracts?
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Chapter 12: Options
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Sample Questions
Q1) When can put-call parity be applied?
A) Only I is required
B) Only I and II are required
C) Only I, II, and III are required
D) I, II, III, and IV are required
I.Call and put have the same strike price
II.Call and put have the same time to expiration and are held until expiration
III.Call and put are created using the same underlying asset
IV.Call and put have the same premium
Q2) Which of the following types of option is more valuable?
A) American put option
B) European put option
C) Need additional information
D) Neither one
Q3) Which of the following statements is true?
A) An increase in interest rates increases the value of a put option.
B) An increase in volatility increases the value of a put option.
C) A decrease in volatility increases the value of a put option.
D) A decrease in the underlying asset's price decreases the value of a put.
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Page 14
Chapter 13: Capital Budgeting, risk Considerations, and Other Special Issues
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Sample Questions
Q1) Consider a ten-year project that costs $40,000 today,which is expected to generate $6,000 at the end of the second year and then the cash flows will increase by $1,000 for three years and then stagnate for the rest of the project life.The cost of capital is 8 percent.What is discounted payback period?
A) 8.99 years
B) 8.34 years
C) 7.71 years
D) 7.17 years
Q2) Name the five practical difficulties that firms may encounter in applying the NPV evaluation process to foreign direct investments.
Q3) Suppose the Canadian Space Agency has two mutually exclusive projects: landing a woman on Mars and landing a man on Venus.Project Mars has an IRR of 12 percent and project Venus has an IRR of 15 percent.The crossover rate is 9 percent.The project's appropriate discount rate is 18 percent.
A) Accept project Mars.
B) Accept project Venus.
C) Accept both projects.
D) Accept neither project.
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Chapter 14: Cash Flow Estimation and Capital Budgeting
Decisions
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Sample Questions
Q1) A firm is considering a project that requires an initial cash outflow of $1,000,000 for the purchase of a capital asset,which has an eight-year life and a CCA rate of 20 percent,with the asset class remaining open.The expected salvage value of the asset is $75,000 at the end of eight years.The project will generate sales revenue of $450,000 in the first year,which will grow at 5 percent per year in the subsequent years.Variable costs will be $200,000 for the first year,which will also grow at 5 percent per year.The firm's marginal tax rate is 40 percent and required return is 12 percent.What is the project's NPV?
A) $123,498
B) $166,707
C) $1,402,183
D) $1,509,326
Q2) A Bromont ski equipment manufacturer is thinking about developing and producing a new line of super-side-cut skis.The finance department has estimated that the NPV of this standalone project would be significantly positive relative to the initial investment.However,the CFO has serious concerns about the NPV analysis because it fails to take into account the significant negative interdependencies.What is the most likely issue here and how should it be accounted for?
Q3) Discuss the two ways inflation impacts capital budgeting.
Page 16
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Chapter 15: Mergers and Acquisitions
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Q1) The book value of current assets of the bidder is $25,000,the book value of current assets of the target is $3,500,and the fair market value of current assets of the target is $2,900.What is the book value of current assets post acquisition?
A) $25,000
B) $28,500
C) $27,900
D) $2,900
Q2) Which one of the following is an example of economies of scope?
A) Acquiring a firm to improve bargaining power in price negotiations
B) Acquiring a firm to gain access to foreign markets
C) Acquiring a firm to improve the production process
D) Acquiring a firm to reduce the overall cost of production
Q3) A firm decides to defend itself from a hostile takeover.Management tries to solicit competing takeover bids from other firms.This defense involves the use of a:
A) Poison pill
B) White knight
C) Shareholders' rights plan
D) Tender offer
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Chapter 16: Leasing
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Q1) A firm is considering leasing a new machine.The firm can borrow at 12%,and the cost of capital is 14%.What is the approximate discount rate for valuing the lease if the corporate tax rate is 40%?
A) 12%
B) 14%
C) 2.7%
D) 7.2%
Q2) The CFO of Alberta Country Record Company has decided to use operating leases because this will result in the firm reporting higher net income and lower debt ratios.He feels this will reduce the cost of debt for the firm thereby increasing the value of the firm.If the market is efficient then his statement
A) is a valid reason to use operating leases.
B) is not a valid reason to use operating leases.
C) is incorrect as operating leases result in firms reporting lower net income.
D) is incorrect as lowering the cost of debt will not increase the value of the firm.
Q3) What is the impact of shifting the purchase of equipment to operating leases?
Q4) How should a CFO decide between leasing and debt financing? What criteria should she use?
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Page 18
Chapter 17: Investment Banking and Securities Law
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Sample Questions
Q1) In determining whether a security exists,the OSC looks at:
A) whether the promoter raises money and leads the investor to expect a profit.
B) whether the investor has any control on how the money is spent.
C) whether there is risk involved.
D) all of the above.
Q2) The overallotment or green-shoe option allows:
A) the issuing firm to take back any unsold shares from the underwriter so that an underwriting fee need not be paid for these shares.
B) the underwriting firm to charge a higher price for the shares in cases of very high demand.
C) the underwriting firm to buy more shares from the issuing firm if investor demand is strong.
D) the founder of the firm to sell his or her shares at a higher issue price in the case of strong investor demand.
Q3) Discuss the differences between a letter of intent from the underwriter to the issuer and an underwriting agreement.
Q4) Briefly explain the term "underpricing."
Q5) Discuss some challenges with initial public offerings (IPOs).
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Chapter 18: Debt Instruments
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Sample Questions
Q1) Which of the following securities is secured by assets?
A) ABCP
B) A fixed interest rate loan
C) A debenture
D) All of the above
Q2) Use the following statements to answer this question:
A) I and II are correct.
B) I and II are incorrect.
C) I is incorrect and II is correct.
D) I is correct and II is incorrect.
I.The major implication of backing money market funds by risky assets is an increase in money market spreads.
II.Bankers' acceptances yields are always lower than commercial paper yields.
Q3) Toronto Skaters has issued $100 million in bonds paying 6% interest per year.The firm has a tax rate of 45%.The firm's annual interest payments are ______ and the after-tax cost of the debt is ______ per year.
A) $6 million, $6 million
B) $6 million, $2.7 million
C) $6 million, $3.3 million
D) $3.3 million, $2.7 million
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Chapter 19: Equity and Hybrid Instruments
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Q1) Warrants attached to a bond:
A) are used as sweeteners to make bond issues less attractive.
B) always increase the risk of the bond.
C) always decrease the risk of the bond.
D) all of the above.
Q2) Discuss how preferred shares have features of both debt and equity instruments.
Q3) Which one of the following is the reason for paying a different price for different classes of shares in the case of a takeover?
A) Prices depend on the tax treatment of each class.
B) Prices depend on the dividend yield offered by the class.
C) Prices depend on the voting rights of the shares.
D) Prices depend on the floating of shares.
Q4) Hudson Bay Fishing Corporation has just issued a 10-year,9 percent annual-pay bond with a $1,000 face value.In addition,the bond was issued with 50 detachable warrants.The bond was issued at par.Each warrant gives the owner the right to purchase 2 shares of the company's stock for $15 each.Bonds with equivalent risk but with no attached warrants currently yield 11 percent.What is the value of one warrant?
Q5) Explain how the value of convertible debt varies as a function of the common share price.
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Chapter 20: Cost of Capital
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Q1) Which of the following statements is/are true about the marginal cost of capital?
A) It is the weighted average cost of the next dollar of financing raised.
B) For most levels of financing, it equals the weighted average cost of capital.
C) It exceeds the weighted average cost of capital due to flotation costs.
D) All of the above are true.
Q2) Which of the following is not needed to determine a firm's WACC?
A) The book value of the equity.
B) The market value of the debt.
C) The current share price.
D) The current yield on preferred shares.
Q3) Use the following statements to answer this question:
A) I and II are correct.
B) I and II are incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.
I.The source of volatility in operating income is caused by fixed costs.
II.Operating leverage does not necessarily increase with increases in the volatility of net income.
Q4) What is the cost of internally generated funds?
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Chapter 21: Capital Structure Decisions
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Q1) James Bay Water Park Company operates in a world with zero taxes and no financial distress.The firm has a debt/equity ratio of 1.The cost of equity is 15 percent and the cost of debt is 8 percent.The only difference between Lanudiere Resort Company and James Bay Water Park is that Lanudiere Resort has a debt/equity ratio of 2.What is the cost of equity for Lanudiere Resort?
A) 11.5%
B) 13.25%
C) 15.0%
D) 18.5%
Q2) The static trade-off capital structure theory ignores
A) the effect of informational differences among shareholders, creditors, and management.
B) managers' own interests.
C) the risk aversion of the investors.
D) all of the above.
E) a and b
Q3) If a corporation needs to raise money,where will it try to raise the funds? What is the order?
Q4) Briefly explain the trade-off theory of capital structure.
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Chapter 22: Dividend Policy
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Q1) Which of these factors is not a motivation for share repurchases:
A) offset the exercise of executive stock options
B) repurchase dissident shares
C) take the firm private
D) to reduce the firm's levels of debt
Q2) Which of the following is not a motivation for a share repurchase?
A) Offsetting the exercise of executive stock options
B) Repurchase of shares from dissident shareholders
C) Pay free cash flows to shareholders without generating an expectation of continued dividends
D) To indicate that the management feels the stock is overvalued
Q3) Typically,when is the ex-dividend date?
A) The same as the payment date
B) The same as the declaration date
C) The record date
D) Two days before the record date
Q4) Toronto Trust Corp.is expecting an earnings increase this year.The CEO thinks that the earnings increase may be temporary.Instead of raising dividends,she decides to repurchase stock.Why does she choose stock repurchases over dividend increases?
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Chapter 23: Working Capital Management: General Issues
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Q1) The inventory turnover ratio is defined as:
A) The ratio of cost of goods sold to sales
B) A ratio measuring the sales that are generated per dollar of receivables
C) A ratio measuring how fast inventory is paid for
D) A ratio of sales to average inventory
Q2) A good value for the quick ratio is
A) 1
B) 1.5
C) 2
D) Varies from industry to industry
Q3) The manager of your receivables' department states that the firm's accounts receivable turn over 25 times per year.What does this mean?
A) It takes about 25 days, on average, for customers to pay for their orders
B) It takes about 15 days, on average, for customers to pay for their orders QUOTE
C) It takes about 2 days, on average, for customers to pay for their orders
D) None of the above
Q4) Explain what the break-even sales growth rate means and what impact it has on the development of a firm's operations and credit granting (financial)policy.
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Page 25
Chapter 24: Working Capital Management: Current Assets and
Current Liabilities
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Q1) A company's trade credit decision is largely set by all of the following criteria except
A) the nature of the product sold.
B) the industry the firm operates in.
C) the company's profitability.
D) competitors' credit policies.
Q2) What is credit analysis? When is it done? And,generally,what are the steps involved in the process?
Q3) A firm may hold a large amount of cash balances because:
A) these balances are required by the bank.
B) the company has few bank accounts and it is difficult to manage their cash.
C) the company is aggressive in cash management.
D) a and b
Q4) Which of the following firms will have the highest cash balance?
A) A firm with low cash requirements but unpredictable cash needs
B) A firm with high cash requirements but unpredictable cash needs
C) A firm with high cash requirements but predictable cash needs
D) A firm with low cash requirements but predictable cash needs
Q5) Can trade credit be labelled as a financing strategy? Provide an example of a firm that uses this strategy in their business model.
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