Business Finance
Exam Materials
Course Introduction
Business Finance provides students with a foundational understanding of the principles and practices that guide financial decision-making in business organizations. The course explores key topics such as financial analysis, planning and control, capital budgeting, risk assessment, sources of financing, and the management of assets and liabilities. Students will learn to interpret financial statements, evaluate investment opportunities, understand financing options, and develop strategies for maximizing firm value. Emphasis is placed on applying theoretical concepts to real-world scenarios, preparing students for practical financial management in various business contexts.
Recommended Textbook
Corporate Finance Linking Theory to What Companies Do 3rd Edition by John Graham
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Page 2
Chapter 1: The Scope of Corporate Finance
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Sample Questions
Q1) When a corporation offers shares to the public for the first time that is an:
A) IPO
B) PPO
C) NPO
D) LBO
Answer: A
Q2) What is a fiduciary?
A) Someone who performs ratio analysis for a corporation.
B) Someone who invest and manages money on someone else's behalf.
C) Someone who manages the release of a initial public offering.
D) Someone who evaluates the performance of individual bonds.
Answer: B
Q3) What should be the objective of a focus on stakeholders?
A) Maximize the stakeholders' interests.
B) In situations of conflict pick stakeholders' interests over shareholders' interests.
C) Preserve stakeholders' interests.
D) Disregard shareholders' interests all together.
Answer: C
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3
Chapter 2: Financial Statement and Cash Flow Analysis
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Sample Questions
Q1) Calculate Bavarian Sausage,Inc.'s return on equity.
A) 24.00%
B) 13.62%
C) 15.74%
D) 25.20%
Answer: D
Q2) Which of the following items can be found on an income statement?
A) Accounts receivable
B) Long-term debt
C) Sales
D) Inventory
Answer: C
Q3) Which of the following statements is not required by the SEC for publicly traded firms?
A) the statement of cost of goods sold
B) the statement of retained earnings
C) the statement of cash flows
D) the balance sheet
Answer: A
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Page 4
Chapter 3: The Time Value of Money
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Sample Questions
Q1) You are asked to choose between a 4-year investment that pays 10% compound interest and a similar investment that pays 11.5% SIMPLE interest.Which investment will you choose?
A) the 10% compound interest investment
B) the 11.5% simple interest investment
C) you are indifferent between the investment choices
D) there is not enough information to answer the question
Answer: A
Q2) You wish to save $2,500,000 for your retirement by saving a certain sum every month for the next 40 years.If you can earn 9% compounded monthly,and you make your deposits at the BEGINNING of each month,how much would you have to deposit each month to achieve your objective?
A) $616.59
B) $534.04
C) $565.67
D) $530.06
E) None of the above
Answer: D
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Chapter 4: Valuing Bonds
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Sample Questions
Q1) With respect to the owner of a putable bond,
A) the value of the put increases as interest rates increase.
B) the value of the put increases as interest rates decrease.
C) the value of the put increases as the value of the stock decreases.
D) none of the above.
Q2) A 15-year,8%,$1000 face value bond is currently trading at $958.The yield to maturity of this bond must be
A) less than 8%.
B) equal to 8%.
C) greater than 8%.
D) unknown.
Q3) Bavarian Sausage just issued a 10-year 12% coupon bond.The face value of the bond is $1,000 and the bond makes ANNUAL coupon payments.If the required return on the bond is 10%,what is the bond's price?
A) $815.16
B) $1,000
C) $1,122.89
D) $1067.24
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Chapter 5: Valuing Stocks
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Sample Questions
Q1) Stone Cold Incorporated reported net income of $10 million for 2003.In addition,shareholder equity for the firm was $80 million at the end of 2003.The company was able to pay $3 million out as dividends to the shareholders for 2003.After 2003,excess paid-in-capital was $60 million.Given this information,what is the growth rate available for Stone Cold?
A) 3.75%
B) 5.00%
C) 7.50%
D) 8.75%
Q2) What is the term applied to several investment banks joining together to bring an IPO to market to limit risk exposure?
A) Selling group
B) Underwriting portfolio
C) Investment bank portfolio
D) Underwriting syndicate
Q3) The Over-the-Counter Market for trading equity securities is located
A) in New York City.
B) in Chicago.
C) in Boston.
D) none of the above
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Chapter 6: The Trade-Off Between Risk and Return
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Sample Questions
Q1) Which of the following statements is true?
A) It is very difficult for investors to remove their exposure to unsystematic risk.
B) It is very easy for investors to remove their exposure to systematic risk.
C) It is very easy for investors to remove their exposure to unsystematic risk.
D) Both (a) and (b) are true
E) None of the above statements is true
Q2) According to historical data,in the last 106 years returns on stocks in the U.S.have been negative about ____ of the time.
A) 50%
B) 20%
C) 26%
D) 42%
E) 33%
Q3) Refer to Big Diesel Incorporated.What is the average return over the five year time period?
A) 6.00%
B) 6.20%
C) 6.40%
D) 6.60%
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Chapter 7: Risk, return, and the Capital Asset Pricing Model
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Sample Questions
Q1) Active managers:
A) generate lower expenses for their shareholders than passive managers.
B) trade more frequently than passive managers
C) always use trading rules to decide when to buy and sell stocks.
D) all of the above.
Q2) Which of the following statements is true?
A) Because expected returns on stocks exceeds expected returns on bonds, stocks should actually outperform bonds in any given year.
B) Because expected returns on stocks exceeds expected returns on bonds, it is more reasonable to expect that stocks will outperform bonds in any given year.
C) Expected return is the return one will actually receive.
D) Both (a) and (c)
E) All of the above statements are true.
Q3) Given Exhibit 7-1,what is the expected return?
A) 13.00%
B) 15.96%
C) 16.00%
D) 17.75%
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Chapter 8: Capital Budgeting Process and Decision Criteria
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Sample Questions
Q1) The main virtue of the payback method is its:
A) simplicity.
B) complexity.
C) completeness.
D) thoroughness.
Q2) When the IRR is equal to the discount rate,the NPV is:
A) positive.
B) equal to zero.
C) negative.
D) cannot be determined without knowing the discount rate.
Q3) Suppose a particular investment project will generate an immediate cash inflow of $1,000,000 followed by cash outflows of $500,000 in each of the next three years.What is the project's IRR? Suppose a company's hurdle rate is 15%,should it accept the project?
A) 23%; reject the project
B) 23%; accept the project
C) 15%; reject the project
D) 15%; accept the project
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Chapter 9: Cash Flow and Capital Budgeting
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Sample Questions
Q1) Sunk costs:
A) are irrelevant.
B) should be considered when determining an investment's relevant cash flows.
C) are equal to the firm's opportunity costs.
D) all of the above.
Q2) Sam's Insurance must choose between two types of printers.Both printers meet the firm's quality standard.Printer A costs $3,500 and is expected to last 3 years with operating costs of $380 per year.Printer B costs $2,500 and is expected to last 2 years with operating costs of $400 per year.Assume a discount rate of 10%.Which printer should Sam's Insurance purchase? What is the equivalent annual cost of this machine?
A) Printer B; $3,194
B) Printer A; $1,625
C) Printer B; $2,904
D) Printer A; $1,787
Q3) Refer to DSSS Corporation.What is the NPV of the project?
A) $14.732
B) $12,986
C) $19,983
D) -$19,983
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Page 11
Chapter 10: Risk and Capital Budgeting
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Sample Questions
Q1) Assuming no taxes,what is Never-crash Airline's WACC?
A) 7%
B) 19.22%
C) 24.45%
D) 17.12%
Q2) Which approach estimates NPV by taking a distribution of values for each of the model's assumptions?
A) Forecasting simulation
B) Monte Carlo simulation
C) Sensitivity analysis
D) Scenario analysis
Q3) You are a gold producer and have noticed that the value of your business may increase even though the price of gold falls.Your explanation for this phenomenon is
A) that the relationship between the value of future cash flows and interest rates is positive.
B) that increased risk may increase the real option value of the firm.
C) that cheaper gold prices are good for the economy and that must be good for the firm.
D) none of the above
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Page 12
Chapter 11: Raising Long-Term Financing
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Sample Questions
Q1) If you are anticipating purchasing shares of companies that will be offering shares to the public for the first time,your most profitable strategy for purchasing those shares will be
A) to buy them in the primary market.
B) to buy them in the secondary market.
C) buy options on the shares before the IPO date.
D) none of the above.
Q2) Refer to Sea Grove Beach Corporation.What is the initial return earned by investors allocated shares in the IPO?
A) 20.27%
B) 27.27%
C) 30.50%
D) 37.50%
Q3) Which law mandated the separation of investment and commercial banking?
A) Gramm-Leach-Bliley Act
B) McFadden Act
C) Glass-Steagall Act
D) none of the above
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13
Chapter 12: Capital Structure
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Sample Questions
Q1) A graphical representation of The Trade-Off Model is shown.Various components of the graph are labeled.Which of the following corresponds to line 5?
A) Present value of interest tax shields on debt
B) Present value of expected bankruptcy and agency costs
C) Value of levered firm with bankruptcy costs
D) Value of levered firm in the absence of bankruptcy and agency costs
E) Value of firm under all-equity financing
Q2) Roxy Corporation finances its operations with $20 million in stock and $30 million in bonds.If the firm issues $5 million in additional bonds and uses the proceeds to retire $5 million worth of equity.What will be the firm's new debt to equity ratio? (Assume zero taxes and perfect capital markets)
A) 0.75
B) 2.33
C) 0.86
D) 1.75
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14
Chapter 13: Long-Term Debt and Leasing
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Sample Questions
Q1) The user of an asset in a leasing arrangement is called the A) lessor
B) lessee
C) trustee
D) none of the above
Q2) Quiz Company has a 12 year lease,with payments of $250,000 made at the beginning of each year.If no purchase option exists,and the company is in the 40% tax bracket,what is the annual after-tax cash outflow on the lease?
A) $416,667
B) $250,000
C) $150,000
D) $100,000
Q3) Refer to Bavarian Brew Bond.What are the annual tax savings from the amortization of the discount on the old bond?
A) $1,500,000
B) $30,600
C) $160,000
D) $61,200
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15
Chapter 14: Payout Policy
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Sample Questions
Q1) Emma International has earnings per share of $3.29; just paid dividend $1.25 and expects a ROI next year (and the foreseeable future)of 14% What is the retention ratio?
A) 37.99%
B) 14.00%
C) 62.01%
D) 23.99%
Q2) If managers make dividend decisions only after taking all positive-NPV projects,they are following
A) a constant payout ratio policy
B) a low-regular-and-extra policy
C) a constant nominal payment policy
D) a residual payment policy
Q3) A firm's dividend policy refers to all of the following except to its choice of
A) whether to pay shareholders a cash dividend.
B) how large the cash dividend should be.
C) how frequently a cash dividend should be distributed.
D) who should receive a cash dividend.
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Chapter 15: Financial Planning
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Sample Questions
Q1) Consider the cash receipts projections of Emma Inc.that is developing a cash budget for October ,November and December; sales in August and September were $200,000 and $500,000 respectively.The forecast sales are $800,000,$900,000 and $200,000 for October,November and December respectively.15 % of sales are cash sales and 85% are credit sales; collects about 60% of each month's sales in the next month but waiting until the following month for the remaining 25% of sales.Bad debts are negligible.The Firm is expectsing cash dividend of $25,000 in December from a subsidiary.What are the total cash receipts in November? (In thousands)
A) $795
B) $770
C) $740
D) $825
Q2) The cash budget:
A) is the same as a bank statement.
B) typically spans a one-year time period.
C) relies upon the sales forecast as a key input.
D) is a statement of the firm's planned inflows and outflows of cash.
E) All of the above except (a)
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Page 17
Chapter 16: Cash Conversion, inventory, and Receivables Management
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Sample Questions
Q1) Emma International is considering easing credit standards to increase sales,and potentially profits.Currently the firm sells 500,000 units at a sales price of $22 per unit and variable cost of $13 per unit.Currently the average collection period is 25 days and the bad debt expense is 2% of sales.The required return on investment is 12%.If credit standards are eased,the sales will increase to 600,000 units; the ACP will increase to 35 days; and the bad debt expense will increase to 3% All else will remain the same.What is the increase in bad debt expense?
A) $2,200,000.00
B) $ 176,000.00
C) $ 396,000.00
D) $ 220,000.00
Q2) Between 1981 and 2002,the median level of current assets as a portion of total assets for large firms has A) decreased.
B) remained the same. C) increased.
D) not been studied.
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Page 18
Chapter 17: Cash, payables, and Liquidity Management
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Sample Questions
Q1) Emma is evaluating a Treasury Bill.It is a $1 million face value with a discount of 2.55% and maturing in 91 days.What is the bond equivalent yield?
A) 2.550%
B) 2.585%
C) 2.567%
D) 2.602%
Q2) What would be the benefit of a lock-box system that reduced mail float by 1.5 days,eliminated processing float,and reduced clearing float by 1 day,if Coyote Valley Products faces a 9% opportunity cost of funds?
A) $112,500
B) $157,500
C) $180,000
D) $67,500
Q3) Funds that have been sent by the payer but are not yet usable funds to the payee are
A) float.
B) overdrawn funds.
C) still available for the use of the payer.
D) none of the above.
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Page 19
Chapter 18: International Financial Management
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Sample Questions
Q1) If you are a U.S.based company making sales in Europe,you would benefit from
A) a strengthening U.S. dollar.
B) a weakening U.S. dollar.
C) a weakening Euro.
D) none of the above.
Q2) You are trying to determine the appropriate risk-adjusted rate,in U.S.dollars for a project in Britain.You know that the correct risk-adjusted discount rate in pounds is 15% and the risk-free rate in pounds is 9%.If the risk-free rate in dollars is 5%,then what is the correct risk-adjusted discount rate in dollars? Round to the nearest .01%
A) 10.80%
B) 5.50%
C) 0.48%
D) none of the above
Q3) The risk that a firm's value will fluctuate due to exchange price movements
A) Transactions exposure
B) Translation exposure
C) Economic exposure
D) Political Risk
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Chapter 19: Options
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Sample Questions
Q1) You need to find the price of a European call option on a stock that does not pay dividends.The current price of the shares are $100 and the strike price on the option is $80.The expiration date is 9 months from now and the risk-free rate applicable is 8% per annum.If the standard deviation on the returns on the stock is 50%,what is the price of a single call option?
A) $19.71
B) $27.20
C) $30.39
D) $36.65
Q2) According to the Black and Scholes option pricing model,which of the following will lead to an increase in the value of a call option?
A) the price of the underlying asset decreases
B) the risk free rate increases
C) the time to expiration decreases
D) none of the above
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Chapter 20: Entrepreneurial Finance and Venture Capital
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Q1) If the venture capital investor pushes for a 40% per year expected return,what share of IGBB's equity will it receive in exchange for its $8 million investment?
A) 34%
B) 39%
C) 30%
D) 26%
Q2) A rapidly growing source of new money for institutional venture capital funds is
A) bank loans
B) pension funds
C) individuals
D) government grants
Q3) Which of the following had a significant impact on the change that the venture capital industry went through in the early 1970's?
A) the lowered top personal tax rate on capital gains from 35% to 28%
B) the adoption of the "Prudent Man Rule"in 1979
C) the restructuring of the economy in 1975
D) a and b
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Chapter 21: Mergers, acquisitions, and Corporate Control
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Sample Questions
Q1) For Smith and Miller,what is the stock price of the new firm after a cash acquisition?
A) $29
B) $28.80
C) $18
D) $21.50
Q2) Now suppose Smart Products acquires a competitor of one of its divisions and the new shares of revenues are 60,25,and 15 percent.Is Smart Products more or less focused?
A) less focused; the HI increases to 0.445
B) less focused; the HI decreases to 0.25
C) more focused; the HI decreases to 0.25
D) more focused; the HI increases to 0.445
Q3) Generally speaking,the return associated with acquisitions are higher for
A) debt financed transactions.
B) equity financed transactions.
C) cash transactions.
D) the acquirer than for the target.
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23
Chapter 22: Bankruptcy and Financial Distress
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Sample Questions
Q1) The section of the Bankruptcy Reform Act of 1978 that outlines the procedures for reorganizing a failed or failing firm is
A) chapter 7
B) chapter 11
C) chapter 13
D) none of the above
Q2) Gizmo Co.has a Z-score based on its most recent financial information of 2.3.Based on this,
A) Gizmo has a high probability of failure.
B) Gizmo has a low probability of failure.
C) Gizmo's probability of failure is uncertain.
D) None of these, since the Z-score does not predict firm failure.
Q3) For Case II,what settlement will the accounts payable holders receive?
A) $3 million
B) $3.34 million
C) $4.65 million
D) $6 million
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Chapter 23: Risk Management
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Q1) In historical terms,although not necessarily the case now,risk management has focused on firm-specific events such as
A) currency risk.
B) interest rate risk.
C) worker's compensation claims.
D) none of the above.
Q2) Refer to Exhibit 23-2.What was the highest contract price that the September coffee future has traded for over its lifetime?
A) $40,125
B) $56,625
C) $40,500
D) $42,375
Q3) If the current spot exchange rate on the Euro is 0.7805/$ and the one year risk free rate for borrowing in dollars is 3% and 4% for borrowing in Euros,what should be the one year $/ forward exchange rate?
A) 1.2689
B) 0.7881
C) 1.2936
D) 0.7730
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Page 25