Business Finance
Exam Preparation Guide
Course Introduction
Business Finance introduces students to the fundamental principles and practices of financial management within a corporate context. The course covers key topics such as financial statement analysis, time value of money, risk and return, capital budgeting, cost of capital, and sources of business financing. Emphasis is placed on decision-making tools and strategies used by financial managers to maximize firm value, manage resources effectively, and ensure long-term financial stability. Through case studies and problem-solving exercises, students gain practical insights into financial planning, investment analysis, and the role of finance in achieving organizational objectives.
Recommended Textbook Fundamentals of Corporate Finance 2nd Canadian Edition by Jonathan Berk
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Chapter 1: Corporate Finance and the Financial Manager
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Sample Questions
Q1) Partnerships are the most common type of business firm in the world.
A)True
B)False
Answer: False
Q2) What is the most important duty of a financial manager?
A) to ensure that the firm has enough cash on hand to meet its commitments at any given time
B) to decide how to pay for investments
C) to manage working capital
D) to make investment decisions
E) to minimize taxes
Answer: D
Q3) A flow-through entity that holds all the debt and equity securities of a corporation is called
A) an energy trust.
B) a real estate investment trust.
C) a business income trust.
D) a parent corporation.
E) an ownership trust.
Answer: C
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel.Where would this purchase be reflected on the Statement of Cash Flows?
A) It would be an expense on the income statement, so it would be reflected in operating cash flows.
B) It would be an addition to property, plant and equipment, so it would be an investing activity.
C) It would be an addition to cash, so would be reflected in the change in cash.
D) It would be an increase in borrowing, so would be reflected in financing activities.
E) It would be a change in inventory, so would be reflected in operating activities.
Answer: B
Q2) In Canada,publicly traded companies can choose whether or not they wish to release periodic financial statements.
A)True
B)False
Answer: False
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4
Chapter 3: The Valuation Principle: the Foundation of Financial Decision Making
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Q1) Assuming you currently have 10,000 Bbls of WTI crude,the total benefits to you if you were to sell the 10,000 Bbls of WTI crude and use the proceeds to purchase and refine ANS crude is closest to:
A) $730,600
B) $770,000
C) $771,400
D) $773,908
E) $775,000
Answer: D
Q2) What is the present value (PV)of $85,000 received 15 years from now,assuming the interest rate is 3% per year?
A) $54,558
B) $85,000
C) $82,524
D) $132,427
E) $5,502
Answer: A
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Chapter 4: The Time Value of Money
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Q1) Investment X and Investment Y are both growing perpetuities with initial cash flow of $100.Both investments have the same interest rate (r).The present value of Investment X is $5,000,while the present value of Investment Y is $4,000.Which of the following is true?
A) Investment X has a higher growth rate than Investment Y.
B) Investment X has a lower growth rate than Investment Y.
C) Investment X has the same growth rate as Investment Y.
D) The answer cannot be determined without knowing the interest rate for both investments.
E) This makes no sense-with the same initial cash flow and the same interest rate Investment X and Investment Y should have the same present value.
Q2) Given that the interest rate is 10% per annum,what is the present value of an investment that has 5 equal payments of $50,000 each year for 5 years,starting today?
A) $250,000
B) $25,000
C) $208,493.27
D) $158,493.27
E) $ 178,493.27
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Page 6
Chapter 5: Interest Rates
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Q1) Everything else remaining the same,under what situation will APR and EAR be equal?
Q2) If the current inflation rate is 5%,then the nominal rate necessary for you to earn an 8% real interest rate on your investment is closest to:
A) 13.0%
B) 13.4%
C) 4.9%
D) 3.0%
E) 8.0%
Q3) You decide to take out a car loan at 4.5% APR for 60 months.If your monthly payments are $512.68,what is the price of your car?
A) $30,000
B) $10,581
C) $30,761
D) $32,145
E) $27,500
Q4) After examining the yield curve,what predictions do you have about interest rates in the future? About future economic growth and the overall state of the economy?
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Chapter 6: Bonds
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Questions
Q1) A firm issues 20-year bonds with a coupon rate of 4.8%,paid semi-annually.The credit spread for this firm's 20-year debt is 1.2%.New 20-year Treasury notes are being issued at par with a coupon rate of 4.6%.What should the price of the firm's outstanding 20-year bonds be if their face value is $1000?
A) $882.53
B) $975.98
C) $977.48
D) $1000.86
E) $981.23
Q2) How much will the coupon payments be of a 10-year $10,000 bond with a 3% coupon rate and semi-annual payments?
A) $150
B) $120
C) $100
D) $300
E) $600
Q3) Why do bond prices increase as the next coupon payment gets closer?
Q4) How are the cash flows of a zero-coupon bond different from those of a coupon bond?
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Chapter 7: Valuing Stocks
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Q1) Bondi Company is expected to pay a quarterly dividend of $0.45 for the next five years.If the current price of Bondi stock is $17.62,and Bondi's equity cost of capital is 12% per year,what price would you expect Bondi's stock to sell for at the end of the five years?
A) $26.62
B) $17.62
C) $17.92
D) $19.11
E) $28.19
Q2) Kirkevue Industries pays out all its earnings as dividends and has a share price of $24.In order to expand,Kirkevue announces it will cut its dividend payments from $2.00 to $1.80 per share and reinvest the retained funds.What is the growth rate that should be achieved on the reinvested funds to keep the equity cost of capital unchanged?
A) 0.83%
B) 15.33%
C) 18.23%
D) 17.97%
E) 12.35%
Q3) What is the difference between common stock and preferred stock?
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Page 9
Chapter 8: Investment Decision Rules
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Sample Questions
Q1) What can you comment about the shape of the net present value (NPV)profile of a multiple IRR project?
Q2) Internal rate of return (IRR)can reliably be used to choose between mutually exclusive projects.
A)True
B)False
Q3) You have an investment opportunity in Germany that requires an investment of $250,000 today and will produce a cash flow of 208,650 in one year with no risk.Suppose the risk-free rate of interest in Germany is 7% and the current competitive exchange rate is 0.78 to $1.00.What is the net present value (NPV)of this project? Would you take the project?
A) NPV = 0; No
B) NPV = $2358; No
C) NPV = $2358; Yes
D) NPV = $13,650; Yes
E) NPV = $36,225; Yes
Q4) What is the general shape of the net present value (NPV)profile?
Q5) Under what situation can the net present value (NPV)profile be upward sloping?
Q6) What is the decision criteria using internal rate of return (IRR)rule?
Q7) What is the decision criteria using the Net Present Value rule?
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Chapter 9: Fundamentals of Capital Budgeting
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Sample Questions
Q1) Joe pre-orders a non-refundable movie ticket.He then reads a number of reviews of the movie in question that make him realize that he will not enjoy it.He goes to see it anyway,rationalizing that otherwise his money will have been wasted.Is Joe succumbing to the Sunk Cost Fallacy,and why?
A) Yes, since he invested a valuable asset, his time, in a project based on its previous costs.
B) No, because the cost of the movie was not recoverable and would have been lost whatever action he took.
C) No, because going to see the movie means that the product of his initial investment was realized as originally planned.
D) No, because he incurred no further costs by going to see the movie.
E) No, because he won't know for sure if he enjoys the movie until he sees it.
Q2) An announcement by the government that they will decrease corporate marginal tax rates in the future would increase the capital cost allowance (CCA)tax shield.
A)True
B)False
Q3) What are sunk costs?
Q4) What is the ultimate goal of capital budgeting?
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Page 11
Chapter 10: Risk and Return in Capital Markets
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Q1) The average annual return over the period 1926-2009 for the S&P 500 is 11.7%,and the standard deviation of returns is 20.5%.Based on these numbers,what is a 95% confidence interval for 2010 returns?
A) 1.5%,, 22.0%
B) -8.8%, 32.2%
C) -29.3%, 52.7%
D) -29.3%, 73.2%
E) -14.4%, 26.2%
Q2) Suppose you invested $45 in TD Bank one month ago.It paid a dividend of $0.60,and you sold it right after the dividend was paid for $44.90.What was your dividend yield and capital gains yield on the investment?
A) 1.3%, -0.2%
B) -0.2%, 1.3%
C) 1.3%, 1.1%
D) 1.1%, -0.2%
E) 1.1%, 0.2%
Q3) Which type of investment has historically had the lowest volatility?
Q4) What are the two components of realized return from a stock investment?
Q5) What is the difference between systematic and unsystematic risk?
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Chapter 11: Systematic Risk and the Equity Risk Premium
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Q1) The systematic risk (beta)of a portfolio is ________ by holding more stocks,even if they each had the same systematic risk.
A) unchanged B) increased C) decreased D) eliminated E) doubled
Q2) Potash Corp stock has a beta of 1.1,while Tim Horton's stock has a beta of 1.4.The risk-free rate is 1.9%,and the expected return on a portfolio with 30% weight in Potash and the remainder in Tim Horton's is 9.76%.What is the market risk premium?
A) 7%
B) 7.9%
C) 6%
D) 6.9%
E) 7.2%
Q3) What role does the correlation of two assets play in computation of the expected return of the two asset portfolio?
Q4) Is it possible for a stock to have high total risk but low systematic risk?
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Chapter 12: Determining the Cost of Capital
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Q1) Apple computers has raised all its capital via equity rather than debt.Such a firm is also referred to as a(n)________ firm.
A) levered
B) margined
C) risk less
D) unlevered
E) risky
Q2) Verano Inc.has two business divisions-a software product line and a waste water clean-up product line.The software business has a cost of equity capital of 12% and the waste water clean-up business has a cost of equity capital of 8%.Verano has 50% of its revenue from software and the rest from the waste water business.Verano is considering a purchase of another company in the waste water business using equity financing.What is the appropriate cost of capital to evaluate the business?
A) 12%
B) 8%
C) 10%
D) 11%
E) 6%
Q3) Is it incorrect to use the coupon rate of debt toward cost of debt?
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Page 14
Chapter 13: Risk and the Pricing of Options
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Q1) Although the payouts on a long position in an options contract are never negative,the profit from purchasing and holding it could be negative.
A)True
B)False
Q2) Hedging is accomplished by holding contracts or securities whose payoffs are positively correlated with some risk exposure that already exists.
A)True
B)False
Q3) What effect does volatility of the underlying asset have on the price of the option?
Q4) Using an option to reduce the risk of a portfolio is called ________,while using options to bet on the direction of the market or an asset is called ________.
A) hedging, speculation
B) hedging, verification
C) verification, hedging
D) speculation, hedging
E) verification, speculation
Q5) When is an option in-the-money?
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Page 15
Chapter 14: Raising Equity Capital
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Q1) Which of the following is an advantage of a cash offer over a rights offer?
A) The underwriter can credibly attest to the issue's quality.
B) The overall costs are lower.
C) There is no loss imposed on the current holders of stock.
D) There are lower underwriting fees.
E) More capital is raised.
Q2) What will the offer price of these shares be if Luther is selling 1 million shares?
A) $17.00
B) $17.50
C) $17.25
D) $16.75
E) $18.00
Q3) What is a seasoned equity offering?
A) the sale of shares by the owners of a company
B) the raising of capital through retained earnings
C) the issuing of shares to the public in a proven private company
D) the issuing of shares by a company at a time after its IPO
E) the sale of shares to a private equity firm
Q4) What is the general long-run performance of an IPO?
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Chapter 15: Debt Financing
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Q1) Which of the following statements regarding a call provision is most accurate?
A) The issuer can repurchase a fraction of the outstanding bonds in the market or it can make a tender offer for the entire issue.
B) A call provision allows the issuer to repurchase the bonds at the market price.
C) The call price is generally set at or below, and expressed as a percentage of, the bond's face value.
D) A call feature forces the issuer of the bond to retire all outstanding bonds on (or after) a specific date for the call price if the call price exceeds the market price.
E) A call feature gives the bondholder the option to convert each bond owned into a fixed number of shares of common stock.
Q2) The chief advantage of debt financing over financing through raising equity capital is that the former does not dilute the current owner's share of the business.
A)True
B)False
Q3) Why do corporations choose to have a Canada call provision rather than leaving the bonds as non-callable?
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Chapter 16: Capital Structure
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Q1) The relative proportions of debt,equity,and other securities that a firm has outstanding constitute its
A) capital structure.
B) leverage.
C) retained earnings.
D) paid-out capital.
E) debt-to-value ratio.
Q2) Aside from direct costs of bankruptcy,a firm may also incur other indirect costs such as
A) loss of customers and loss of suppliers.
B) loss of interest receipts.
C) loss of dividend receipts.
D) increase in raw material costs.
E) increase in salvage costs.
Q3) The direct costs of bankruptcy are estimated to be far greater,as a percent of assets,than the indirect costs of bankruptcy.
A)True
B)False
Q4) What are the issues in determining the present value (PV)of financial distress?
Q5) What are the issues in determining the optimal leverage for a firm?
Page 18
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Chapter 17: Payout Policy
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Q1) Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.Omicron's ex-dividend price is closest to:
A) $40.00
B) $5.00
C) $50.00
D) $45.00
E) $35.00
Q2) A firm has $500 million of assets that includes $50 million of cash and 10 million shares outstanding.The firm uses $50 million of its cash to pay dividends.If an investor has 1000 shares,how many shares must he sell to create a homemade dividend of $6575?
A) 25 shares
B) 30 shares
C) 35 shares
D) 40 shares
E) 45 shares
Q3) What is the bird-in-the-hand fallacy in dividend theory under perfect capital markets?
Q4) What is the effect on the stock price when a firm repurchases its shares?
Q5) Why do firms issue stock dividends or split their stock?
Page 19
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Chapter 18: Financial Modelling and Pro Forma Analysis
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Q1) The amount of net working capital for Ideko in 2015 is closest to:
A) $22,750
B) $35,195
C) $30,510
D) $26,420
E) $29,330
Q2) For valuing a planned expansion,in addition to forecasting cash flows we need to estimate the firm's continuation value.
A)True
B)False
Q3) What is the free cash flow to equity holders for a firm with free cash flow of $7000,after-tax interest expense of $1000,and an increase in debt of $3000?
A) $6000
B) $7000
C) $8000
D) $9000
E) $10,000
Q4) What is common starting point for forecasting?
Q5) What is net new financing?
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Chapter 19: Working Capital Management
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Q1) Luther's Accounts Receivable days is closest to:
A) 42 days
B) 39 days
C) 32 days
D) 59 days
E) 47 days
Q2) Gencom International has inventory days of 22,and accounts payable days of 37.If its cash conversion cycle is 28 days,what is Gencom's accounts receivable days?
A) 43 days
B) 31 days
C) 13 days
D) 87 days
E) 29 days
Q3) Which of the following would decrease a firm's cash conversion cycle?
A) increase the inventory days
B) increase the accounts receivable days
C) increase the accounts payable days
D) increase the cash days
E) decrease the average daily sales
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Page 21
Chapter 20: Short Term Financial Planning
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Q1) In which quarter(s)are Fancy's seasonal working capital needs the smallest?
A) 1
B) 2
C) 3
D) 4
E) 3 and 4
Q2) What is permanent working capital?
A) the amount that a firm must keep invested in its short-term assets to support its continuing operations
B) the difference between the actual level of investment in short-term assets and the amount that a firm must keep invested in its short-term assets to support its continuing operations
C) the amount that a firm keeps invested in its short-term assets to support its continuing operations which is financed by short-term debt
D) the amount that a firm keeps invested in its short-term assets to support its continuing operations which is financed by long-term debt
E) the amount that a firm keeps invested in its short-term assets which is financed by debt
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Chapter 21: Risk Management
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Q1) A provision in an insurance policy in which an initial amount of loss is not covered by the policy and must be paid by the insured is known as a
A) security deposit.
B) market imperfection.
C) policy limit.
D) deductible.
E) loss premium.
Q2) A firm can borrow at fixed AA rates minus 1% for long-term loans.If it swaps its long-term payments so that it receives the fixed AA rate and pays a AA floating rate,what is the rate of interest on its borrowing if the floating rate is r%?
A) r + 1%
B) r - 1%
C) r%
D) 1%
E) 2%
Q3) How do futures contracts eliminate credit risk?
Q4) What is an actuarially fair price?
Q5) What is a duration mismatch?
Q6) How might a decrease in interest rates reduce firm value?
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Chapter 22: International Corporate Finance
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Q1) The Law of One Price asserts that we will obtain the same valuation of a project whether
(a)we use the domestic cost of capital of the domestic currency equivalent cash flows at the forward exchange rates or (b)we use the corresponding foreign cost of capital and then convert the present value (PV)of the foreign currency value of the cash flows at the spot rate.
A)True
B)False
Q2) How can deferring repatriation of earnings benefit a firm?
Q3) One British pound can be purchased for $1.80.What is the exchange rate in terms of pounds per dollar?
A) 0.451
B) 0.491
C) 0.526
D) 0.556
E) 0.547
Q4) When would a firm be affected by exchange rate risk?
Q5) What is covered interest parity?
Q6) What is the importer-exporter dilemma?
24
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Chapter 23: Leasing
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Q1) For a lease in which the lessor bears the risk of the residual value,why does the lease improve incentives and lower agency costs when the lessor is the manufacturer of the asset?
Q2) If Danby's borrowing cost is 7%,and its tax rate is 35%,what is the amount of the lease-equivalent loan for the crane?
A) $96,747
B) $369,671
C) $348,253
D) -$363,441
E) $75,329
Q3) A lease in which the lessor borrows from a bank or other lender to obtain the initial capital for the purchase of an asset and using the lease payments to pay the interest and principal on the loan is called a
A) sales-type lease.
B) direct lease.
C) sale and leaseback.
D) leveraged lease.
E) synthetic lease.
Q4) What is the difference between an operating lease and a finance lease?
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Chapter 24: Mergers and Acquisitions
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Q1) Consider two firms,Bob Company and Cat Enterprises,both with earnings of $10 per share and 5 million shares outstanding.Cat is a mature company with few growth opportunities and a stock price of $25 per share.Bob is a new firm with much higher growth opportunities and a stock price of $40 per share.Assume Bob acquires Cat using its own stock and the takeover adds no value.What is the change in Bob's price-earnings ratio as a result of the acquisition?
A) 0
B) -2
C) 4
D) -0.75
E) 1.25
Q2) In addition to the presence of takeover defences,what is the most likely explanation for the large premiums that acquirers pay to the target company's shareholders?
Q3) What are synergies?
Q4) Revenue enhancement synergies are more common and easier to achieve than cost-reduction synergies.
A)True
B)False
Q5) What is the difference between economies of scale and economies of scope?
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Chapter 25: Corporate Governance
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Q1) Why is insider trading problematic?
A) If insiders trade on their information, they cause unnecessary share price fluctuations that drive away outside investors.
B) If insiders trade on their information, the firm is automatically fined and there will be a net loss in firm value.
C) If insiders trade on their information, outside investors will benefit from the increase in the share price and thus there is a free rider problem.
D) If insiders trade on their information, it increases the conflicts between shareholders and managers.
E) If insiders trade on their information, their profits come at the expense of outside investors, making outside investors less willing to invest in corporations.
Q2) Which of the following countries has employees appoint some board members?
A) Canada
B) the United States
C) Turkey
D) Germany
E) Australia
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