Business Finance
Exam Materials
Course Introduction
Business Finance introduces students to the fundamental principles and practices of financial management within organizations. The course covers essential topics such as financial statement analysis, time value of money, risk and return, capital budgeting, cost of capital, and financial planning. Students will learn how financial managers make investment and financing decisions to maximize firm value, understand sources of business funding, and analyze the impact of financial markets on corporate strategies. Through case studies and practical exercises, students gain critical skills for making informed financial decisions in a dynamic business environment.
Recommended Textbook
Foundations of Financial Management 17th Edition by Stanley B. Block
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21 Chapters
2363 Verified Questions
2363 Flashcards
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Page 2
Chapter 1: The Goals and Activities of Financial Management
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Sample Questions
Q1) The Internet impacts e-commerce by creating a mechanism for improved communications between a business, its customers, and its suppliers.
A)True
B)False
Answer: True
Q2) Profits of sole proprietorships are taxed at corporate tax rates.
A)True
B)False
Answer: False
Q3) Higher returns always induce that stockholders should invest in a company.
A)True
B)False
Answer: False
Q4) A corporation is
A) owned by stockholders who enjoy the privilege of limited liability.
B) easily divisible between owners.
C) a separate legal entity with unlimited life.
D) All of the above
Answer: D
Page 3
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Chapter 2: Review of Accounting
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Sample Questions
Q1) When a firm's earnings are falling more rapidly than its stock price, its P/E ratio will
A) remain the same.
B) go up.
C) go down.
D) either go up or down.
Answer: B
Q2) Assuming a tax rate of 21%, the after-tax cost of a $100,000 dividend payment is
A) $100,000
B) $70,000
C) $30,000
D) None of the options
Answer: A
Q3) Which account represents the cumulative earnings of the firm since the firm started, minus dividends paid?
A) Paid-in capital
B) Common stock
C) Retained earnings
D) Accumulated depreciation
Answer: C
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Page 4
Chapter 3: Financial Analysis
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131 Verified Questions
131 Flashcards
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Sample Questions
Q1) Which of the following is a potential problem of utilizing ratio analysis?
A) Trends and industry averages are historical in nature.
B) Financial data may be distorted due to price-level changes.
C) Firms within an industry may not use similar accounting methods.
D) All of the options
Answer: D
Q2) A firm's long-term assets = $100,000, total assets = $400,000, inventory = $50,000 and current liabilities = $200,000. What are the firm's current ratio and quick ratio?
A) Current ratio = 0.5; quick ratio = 1.25
B) Current ratio = 1.0; quick ratio = 2.0
C) Current ratio = 1.5; quick ratio = 1.25
D) Current ratio = 2.5; quick ratio = 2.0
Answer: C
Q3) Which two ratios are used in the DuPont system to create return on assets?
A) Return on assets and asset turnover
B) Profit margin and asset turnover
C) Return on total capital and profit margin
D) Inventory turnover and return on fixed assets
Answer: B
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Page 5
Chapter 4: Financial Forecasting
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Sample Questions
Q1) The most significant purpose of the cash budget is to plan accounts payable payments.
A)True
B)False
Q2) In using a systems approach to financial planning, it is necessary to develop a A) pro forma income statement.
B) cash budget.
C) production plan.
D) All of the options are true.
Q3) Level production schedules usually have the advantage of reducing overall production costs.
A)True
B)False
Q4) When developing a pro forma income statement, which of the following steps are not used?
A) Establish a marketing projection.
B) Determine a production schedule and the associated use of new material, direct labor and overhead to arrive at gross profit.
C) Compute other expenses
D) Determine profit by completing the actual pro forma statement.
Page 6
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) Operating leverage primarily affects the asset side of the balance sheet, while financial leverage affects the liabilities and net worth side of the balance sheet.
A)True
B)False
Q2) A factory that relies on highly technical machinery may choose to reduce its overall leverage position by
A) selling its machinery.
B) increasing its accounts receivable.
C) utilizing a higher level of equity.
D) decreasing their variable costs per unit.
Q3) A firm's earnings per share is not impacted by its financing plan at the point when A) debt is equal to equity.
B) return on assets equals return on equity.
C) the cost of borrowed funds equals the return on equity.
D) the cost of borrowed funds equals the return on assets.
Q4) Operating leverage works best when product volume is increasing.
A)True
B)False
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) A business person's failure to realize the firm is carrying self-liquidating inventory can result in inadequate financing arrangements.
A)True
B)False
Q2) Retail companies like Target and Macy's exhibit sales patterns that are most typically influenced by A) cyclical economic indicators.
B) competitive prices. C) seasonality.
D) sales promotions.
Q3) A successful financial manager is very interested in the term structure of interest rates but is not concerned with the relative volatility or historical level of interest rates.
A)True
B)False
Q4) In periods of tight money, long-term rates are typically higher than short-term rates. A)True
B)False
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8
Chapter 7: Current Asset Management
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Sample Questions
Q1) For most firms, the primary motive for holding cash is the transaction motive.
A)True
B)False
Q2) Electronic funds transfer will likely increase the use of float.
A)True
B)False
Q3) Money market funds
A) are modeled after money market deposit accounts.
B) are insured up to $100,000.
C) have a minimum balance of $2,500.
D) earn competitive market rates of return.
Q4) When selecting marketable securities, the company should always select securities with longer maturities if they offer higher yields.
A)True
B)False
Q5) Inventory should have a higher required return than cash because it is less liquid.
A)True
B)False
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) Mr. Jones borrows $4,500 for 90 days and pays $75 interest. What is his approximate effective rate of interest?
A) 9.3%
B) 6.7%
C) 11.7%
D) 1.7%
Q2) Ms. Smith borrowed $2,000 at an 8% stated rate of interest and was to pay back the loan in 24 monthly payments. What is her effective rate of interest using the installment loan formula?
A) 10.5%
B) 15.4%
C) 18.9%
D) 22.0%
Q3) At historically low interest rate levels, compensating balances increase.
A)True
B)False
Q4) Approximately 40% of all short-term financing is in the form of accounts payable or trade credit.
A)True
B)False
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) Mr. Nailor invests $5,000 in a money market account at his local bank. He receives annual interest of 8% compounded for four years. How much total return will his investment earn during this time period?
A) $3,675
B) $1,800
C) $6,254
D) $8,570
Q2) As the time period until receipt increases, the present value
A) decreases.
B) remains the same.
C) increases.
D) Not enough information is given to tell.
Q3) Time value of money considers which of the following item(s) that change the value of money?
A) Inflation
B) Interest
C) Currency changes
D) All of the options are true
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11
Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) The longer the time to maturity
A) the greater the bond price increase from an increase in interest rates.
B) the less the bond price increase from an increase in interest rates.
C) the greater the bond price increase from a decrease in interest rates.
D) the less the bond price decrease from a decrease in interest rates.
Q2) A bond that has a "yield to maturity" greater than its coupon interest rate will sell for a price
A) below par.
B) at par.
C) above par.
D) that is equal to the face value of the bond plus the value of all interest payments.
Q3) The inflation premium is based on past and current inflation levels.
A)True
B)False
Q4) The longer the maturity of a bond, the greater the impact on price to changes in market interest rates.
A)True
B)False
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Chapter 11: Cost of Capital
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Sample Questions
Q1) In computing the cost of common equity, if the dividend (D<sub>1</sub>) goes downward and market price (P<sub>0</sub>) goes up, required rate of return (K<sub>e</sub>) will
A) go up.
B) go down.
C) stay the same.
D) slowly increase.
Q2) The cost of capital refers to the cost that a company takes on to purchase a big project.
A)True
B)False
Q3) Earnings before interest, taxes, depreciation and amortization is lower than EBIT as long as the company has depreciation or amortization expenses.
A)True
B)False
Q4) As the risk-free rate increases, the required rate of return for common stock decreases.
A)True
B)False
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Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) The internal rate of return assumes that funds are reinvested at the A) cost of capital.
B) yield on the investment.
C) minimal acceptable rate to the corporation.
D) yield to maturity.
Q2) Depreciation is important in calculating projected cash flows because it lowers the profits, but does not affect the cash account.
A)True
B)False
Q3) The net present values' weakness is that it does not provide a decision for mutually exclusive investments.
A)True
B)False
Q4) In a general sense, "cash flow" can be said to equal
A) operating income less taxes plus depreciation.
B) operating income less taxes.
C) operating income before depreciation and taxes plus depreciation.
D) operating income after taxes minus depreciation.
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Page 14
Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) Choosing projects with returns equal to the company norm but having a higher level of risk will most likely lower the company's stock price.
A)True
B)False
Q2) A correlation coefficient of zero indicates A) the projects have the same expected value.
B) there is no correlation and no risk reduction when the projects are combined. C) there is no correlation, but there is some risk reduction when the projects are combined.
D) the projects have the same standard deviation.
Q3) If we are risk-averse, a risky investment with an 8% return will be preferred over an 8% risk-free investment.
A)True
B)False
Q4) As the time horizon increases, the standard deviation for each forecast of cash flow normally increases.
A)True
B)False
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Chapter 14: Capital Markets
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Sample Questions
Q1) Securities issued by states and municipalities are referred to as statutory bonds and municipal bonds, respectively.
A)True
B)False
Q2) Which of the following was NOT a major supplier of funds to credit markets in 2008?
A) Households
B) Government sponsored agencies
C) Mutual funds and ETFs
D) All of the options were major suppliers of funds
Q3) The "strong form" of the efficient market hypothesis states that prices reflect all public information only.
A)True
B)False
Q4) Interest rates stayed relatively low during the 2012-2015 time frame, so more and more companies took on long-term debt rather than short-term debt.
A)True
B)False
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Chapter 15: Investment Banking: Public and Private
Placement
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Sample Questions
Q1) Newdex has net income of $3,000,000 (INCLUDING the effect of expected out-of-pocket costs) and 1,000,000 shares outstanding. It needs to raise $5,000,000 in funds for a new asset. Its investment banker plans to sell an issue of common stock to the public for $40, less a spread of 10%. How much must Newdex's after-tax income increase by to prevent dilution of earnings per share?
A) $40,000
B) $416,667
C) $350,000
D) $375,000
Q2) Which of the following characteristics is not a disadvantage of being a publicly traded company?
A) Compliance costs because of various public disclosure requirements.
B) Prestige is helpful in bank negotiations, executive recruitment and the marketing of products.
C) Company must make all information available to the public through SEC and State filings.
D) Tremendous pressure for short-term performance placed on the firm by analysts and large institutional investors.
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) The fact that interest payments on debt are fixed is both an advantage and a drawback to both parties involved.
A)True
B)False
Q2) A call feature allows
A) the bondholder to redeem the bond before the maturity date.
B) the corporation to redeem the bond before the maturity date.
C) the corporation to convert the bond to common stock.
D) the bondholder to demand increased collateral.
Q3) Buchanan Corp. is refunding $10 million worth of 10% debt. The new bonds will be issued for 8%. The corporation's tax rate is 35%. The call premium is 9%. What is the net cost of the call premium after taxes?
A) $390,000
B) $1,080,000
C) $585,000
D) $702,000
Q4) As interest rates decline, bond refunding should become more common.
A)True
B)False
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Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) The "convertible exchangeable" feature of preferred shares gives companies the sole right to force preferred stock holders to exchange for common stock.
A)True
B)False
Q2) Participating preferred stock is advantageous to common stockholders because it receives more dividends.
A)True
B)False
Q3) Which of the following is not a true statement?
A) Common stockholders have a residual claim to income.
B) Bondholders may force a corporation into bankruptcy for failure to make interest payments.
C) Common stockholders are legally entitled to some dividend.
D) A minority interest can still elect members to the Board of Directors under cumulative voting even though someone else owns 51% of the stock.
Q4) Stock purchased through a rights offering may carry lower margin requirements.
A)True
B)False
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Page 19
Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) In Stage II of a firm's life cycle, expansion continues, but at a decreasing rate.
A)True
B)False
Q2) Investors in the retirement phase of their life cycle tend to prefer steady cash dividends from firms.
A)True
B)False
Q3) Dobson's Auto earned $500,000 last year and had a 20% dividend payout ratio. How much did the firm add to its retained earnings?
A) $325,000
B) $425,000
C) $250,000
D) $400,000
Q4) Research shows that firms that repurchase their shares exhibit positive stock price returns.
A)True
B)False
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Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) The Burma Hat Company's warrant is trading for $10.20. The warrant carries the option to purchase two shares of common stock for $48. What is the speculative premium if the stock price is $51.30?
A) $3.30
B) $3.60
C) $6.60
D) $10.20
Q2) A convertible bond carries an element of downside risk if its "floor value" were to exceed the price of the company's stock.
A)True B)False
Q3) The conversion premium will be large
A) if investors have great expectations for the price of the common stock.
B) if interest rates decline.
C) when the conversion value is much greater than the pure bond value.
D) when the stock price is very stable.
Q4) A "put option" is the right to purchase securities at a predetermined price.
A)True B)False
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) The two-step buyout is a recent merger ploy that has which of the following characteristics?
A) It is negotiated in a social, rather than a business setting.
B) The acquiring firm offers to pay a very high price for the target company's stock, and a short time later announces another price that may be higher or lower.
C) The acquiring firm offers to pay a very high price for the target company's stock for a limited time only, after which it will pay a lower price.
D) It forces stockholders to sell out.
Q2) Synergy is
A) the 2 + 2 = 3 effect.
B) the 2 + 2 = 4 effect.
C) the 2 + 2 = 5 effect.
D) always present in a merger.
Q3) The typical merger premium is ________.
A) 0-20%
B) 40%
C) 40-60%
D) 80-100%
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22
Chapter 21: International Financial Management
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Sample Questions
Q1) In the Eurobond market,
A) the interest rate is very high.
B) the security is denominated in a currency that is different from that of the nation in which the bonds are issued.
C) the Swiss franc is the most important currency.
D) disclosure requirements are very strict.
Q2) A tactic a country can use to promote cheap exports may be to deliberately pursue a policy of maintaining an undervalued currency.
A)True
B)False
Q3) The Overseas Private Investment Corporation (OPIC)
A) loans money to multinational firms.
B) does feasibility studies for multinational firms.
C) sells insurance policies to qualified multinational firms.
D) sells foreign investments.
Q4) The possibility of political risk may be excluded when an investor considers maximizing expected returns.
A)True
B)False
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