Business Finance
Exam Questions
Course Introduction
Business Finance explores the fundamental principles and practices involved in managing the financial resources of organizations. The course covers core topics such as financial analysis, planning and control, capital budgeting, cost of capital, sources of financing, and risk management. Students will learn how to interpret financial statements, assess investment opportunities, and make informed decisions to maximize shareholder value. Through practical case studies and real-world scenarios, the course prepares students to understand the role of finance in strategic decision-making and the impact of financial decisions on overall business performance.
Recommended Textbook
CFIN5 5th edition by Scott Besley
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Page 2
Chapter 1: An Overview of Managerial Finance
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Sample Questions
Q1) Which of the following statements is true of the terms under which companies compete?
A) The governments of subsidiary countries establish the terms of competition and trade on various transactions.
B) The terms under which companies compete is determined by the fluctuations in the exchange rate of the currencies of subsidiary countries.
C) The terms under which companies compete is determined by direct negotiation between the host government and the multinational corporation.
D) The ability to curtail unprofitable operations determines the terms under which companies compete.
E) The terms under which companies compete in a competitive marketplace are established by the host government.
Answer: C
Q2) The term multinational corporation is used to describe a firm that operates in two or more countries.
A)True
B)False
Answer: True
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Chapter 2: Analysis of Financial Statements
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Q1) A firm has total interest charges of $10,000 per year, sales of $1 million, a tax rate of 40 percent, and a net profit margin of 6 percent. The firm's times interest earned ratio is:
A) 16 times.
B) 10 times.
C) 7 times.
D) 11 times.
E) 20 times.
Answer: D
Q2) _____ is an example of a long-term investment of a firm.
A) Retained earnings
B) Equipment
C) Accounts receivable
D) Common stock
E) Long-term bonds
Answer: B
Q3) The book value of shares are often equal to their market value.
A)True
B)False
Answer: False
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Page 4
Chapter 3: The Financial Environment: Markets, Institutions, and Investment Banking
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Q1) The provision of dual listing of stocks has defeated the efforts made to increase competition in the stock markets.
A)True
B)False
Answer: False
Q2) Zinc Corporation, a large, well-known public company that frequently issues securities, files a master registration statement with the Securities and Exchange Commission (SEC) and then updates it with a short-form statement just prior to each individual offering. The company is making use of which of the following procedures?
A) Underwriting registration
B) Shelf registration
C) Best-effort registration
D) Securities diversification
E) Initial public offering registration
Answer: B
Q3) Dual listing of a stock leads to a decrease in the liquidity of the stock.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Time Value of Money
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Sample Questions
Q1) Rebecca is currently working, but is planning to start a college in few years. For this purpose, she would need $20,000. Today she can start investing $750 monthly in an investment account that pays 6 percent compounded monthly. How long would it take her to have enough money to start college?
A) 21.25 months
B) 27.78 months
C) 25.10 months
D) 22.56 months
E) 30.25 months
Q2) Joey is planning to invest his savings in a fixed income fund. He manages to deposit $700 at the end of the first year, $500 at the end of the second year, $300 at the end of the third year, and $600 at the end of the fourth year. If the fund earns 6 percent interest each year, the terminal value of this uneven cash flow stream at the end of Year 4 is
A) $1,918
B) $1,855
C) $2,097
D) $2,355
E) $1,784
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Page 6
Chapter 5: The Cost of Money Interest Rates
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Q1) Assume that a 3-year Treasury note has no maturity premium, and that the real, risk-free rate of interest is 3 percent. If the T-note carries a yield to maturity of 13 percent, and if the expected average inflation rate over the next 2 years is 11 percent, what is the implied expected inflation rate during Year 3?
A) 7%
B) 8%
C) 9%
D) 17%
E) 18%
Q2) Which of the following indicates that the cost of money will increase?
A) Increase in inflation of an economy.
B) Increase in liquidity of an asset.
C) Decrease in federal deficit of a country.
D) Decrease in money supply in the market.
E) Decrease in tax rates for corporates.
Q3) The expectations theory postulates that the term structure of interest rates is based on expectations regarding future inflation rates.
A)True
B)False
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Page 7
Chapter 6: Bonds Debtcharacteristics and Valuation
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Q1) The indentures for publicly traded bonds are approved by:
A) the state government.
B) the Securities and Exchange Commission.
C) the federal government.
D) the Public Company Accounting Oversight Board.
E) the local government.
Q2) Revenue bonds are used to:
A) raise funds to repay loans borrowed from the federal government.
B) raise funds for projects that will generate revenues.
C) raise funds to pay interest on T-bills issued by the state government.
D) raise funds to repay loans borrowed by the local government.
E) raise funds for projects that require additional funding by increasing tax rates.
Q3) Eurobonds have a higher level of required disclosure than normally applies to bonds issued in domestic markets, particularly in the United States.
A)True
B)False
Q4) A bond's value will increase with increases in interest rate over time.
A)True
B)False
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Chapter 7: Stocks Equity Characteristics and Valuation
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Q1) A proxy fight is an attempt by a group to gain control of a firm by convincing its stockholders to give the group the authority to vote their shares in order to elect a new management team.
A)True
B)False
Q2) A firm has an EBIT of $22 million, total invested capital of $74 million, and the average cost of funds of 12%. The firm has a marginal tax rate of 35% and 4.2 million shares of the firm are outstanding. What is the EVA of the firm?
A) $4.83 million
B) $5.42 million
C) $6.33 million
D) 3.61 million
E) $7.97 million
Q3) Which of the following is a nonvoting stock?
A) Common stock
B) Preferred stock
C) Founders' shares
D) Preemptive stock
E) Growth stock
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Chapter 8: Risk and Rates of Return
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Q1) The only condition under which the unsystematic portfolio risk can be reduced to zero is to combine securities that are perfectly negatively correlated (r = 1.0) with each other.
A)True
B)False
Q2) A portfolio would offer maximum diversification benefits when _____.
A) the constituent stocks have a coefficient of correlation of 0
B) the constituent stocks have a coefficient of correlation of +1
C) the constituent stocks have a coefficient of correlation of -1
D) the constituent stocks have a coefficient of variation of 0
E) the constituent stocks have a coefficient of variation of -1
Q3) The risk that is limited to a particular industry is also known as _____.
A) unsystematic risk
B) non-diversifiable risk
C) market risk
D) relevant risk
E) combined risk
Q4) Liquidity risk is an unsystematic risk and can be diversified by the investors.
A)True
B)False
Page 10
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Chapter 9: Capital Budgeting Techniques
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Q1) The modified IRR (MIRR) method has wide appeal to academics, but most business executives prefer the NPV method to either the regular or modified IRR.
A)True
B)False
Q2) Los Angeles Lumber Company (LALC) is considering a project with a cost of $1,000 at Year 0 and inflows of $300 at the end of Years 1-5. LALC's cost of capital is 10 percent. What is the project's modified IRR (MIRR)? (Round off the answer to two decimal places.)
A) 10.04 percent
B) 12.87 percent
C) 15.23 percent
D) 18.34 percent
E) 20.72 percent
Q3) A firm's effective capital budgeting procedures result in:
A) lower net present values (NPVs).
B) a higher stock price.
C) a higher expected rate of return.
D) lower internal rates of return.
E) a higher number of projects having multiple internal rates of return.
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11
Chapter 10: Project Cash Flows and Risk
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Q1) One problem with Monte Carlo simulation analysis is that while the simulation may provide some insights into the riskiness of a project, the analysis does not lead to a clear-cut accept versus reject decision.
A)True
B)False
Q2) Sun State currently has a required rate of return of 18 percent, U.S. Treasury bonds yield 7 percent, and the market risk premium is 5 percent. Which of the following is the value of the beta?
A) 1.64
B) 2.20
C) 0.91
D) 2.98
E) 0.14
Q3) Capital budgeting decisions must be based on the accounting income the project generates since stockholders are concerned with the reported net income the firm generates.
A)True
B)False
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Page 12
Chapter 11: The Cost of Capital
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Q1) The after-tax cost of debt is used to calculate the weighted average cost of capital since we are concerned with the after-tax cash flows of the firm.
A)True
B)False
Q2) Tangerine Inc.'s target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm's marginal tax rate is 40 percent. The firm's policy is to use a risk premium of 4 percentage points when using the bond-yield-plus-risk-premium method to find the cost of retained earnings. Which of the following is Tangerine's component cost of retained earnings?
A) 8 percent
B) 10 percent
C) 12 percent
D) 14 percent
E) 16 percent
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13
Chapter 12: Capital Structure
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Q1) Copybold Corporation is a start-up that has a capital structure that calls for a debt/assets ratio of 0.75. There are two possible scenarios with respect to the firm's operations: Feast andFamine. The Feast scenario has a 60 percent probability of occurring, and the forecast earnings before interest and taxes (EBIT) in this scenariois $60,000. The Famine scenariohas a 40 percent chance of occurring, and the EBIT is expected to be $20,000. Further, the cost of debt for this capital structure will be 12 percent. The firm will have $400,000 in total assets, and it will face a marginal tax rate of 40 percent. The company has 10,000 outstanding shares. What is the difference between the earnings per share (EPS) forecasts for Feast and Famine?
A) $0
B) $2.40
C) $1.48
D) $0.62
E) $0.98
Q2) If the debt/assets ratio increases, the costs of both debt and equity decrease. A)True B)False
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Page 14
Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
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Q1) Which of the following policies represents a compromise between a stable, predictable dividend and a constant payout ratio?
A) The Free cash flow policy
B) The Residual dividend policy
C) The Dividend reinvestment policy
D) The Constant payout ratio policy
E) The Low regular dividend plus extras policy
Q2) Which of the following statements is true about the free cash flow hypothesis?
A) Firms should distribute earnings based on investors' preferences toward current income and future income.
B) Firms should distribute earnings that can be reinvested at a very profitable rate.
C) Firms should pay dividends when free cash flows in excess of capital budgeting needs exist.
D) Firms that retain free cash flows have higher values than firms that distribute free cash flows.
E) Firms should never distribute their free cash flows.
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Chapter 14: Managing Short-Term Financing Liabilities
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Q1) A revolving credit agreement is:
A) created because of recurring short-term liabilities such as wages and taxes that change spontaneously with operations.
B) the credit created when one firm buys on credit from another firm.
C) an outright sale of receivables.
D) an unsecured, short-term promissory note issued by large, financially sound firms to raise funds.
E) a formal, committed arrangement in which a bank agrees to lend up to a specified maximum amount of funds during a designated period.
Q2) The average liquidity measure (for example, current ratio) was significantly greater for U.S. firms than for European firms.
A)True
B)False
Q3) The inventory conversion period of a firm is equivalent to the average age of its inventory.
A)True
B)False
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Chapter 15: Managing Short-Term Assets
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Q1) What type of system allows a customer's bank to periodically transfer funds from its account to a selling firm's bank account for payment of bills?
A) Disbursement agreement
B) Preauthorized debit system
C) Lockbox agreement
D) Concentration banking system
E) Zero-balance account
Q2) Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year and has calculated its economic order quantity as 3000 units. If the cost per order is $5, the total ordering cost incurred by Aberwald is:
A) $500.
B) $425.
C) $210.
D) $310.
E) $620.
Q3) A firm should adopt a new credit policy if it reduces the value of the firm.
A)True
B)False
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17
Chapter 16: Financial Planning and Control
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Q1) Excess capacity means more external financing is required to support increases in operations than would be needed if a firm previously operated at full capacity.
A)True
B)False
Q2) To determine the additional funds needed to support the level of forecasted operations, _____.
A) subtract the spontaneously generated funds from the sales forecast
B) subtract all the operating costs from the sales forecast
C) add the funds generated internally to the spontaneously generated funds
D) subtract the funds generated internally from the required funds
E) add the spontaneously generated funds to the retained earnings plus
Q3) Which of the following is the first step involved in constructing pro forma financial statements?
A) Forecasting the next period's balance sheet
B) Determining the additional funds needed (AFN) to support expected growth
C) Forecasting the income statement
D) Implementing the financing feedbacks
E) Determining the operating breakeven point
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