Business Finance
Exam Questions
Course Introduction
Business Finance introduces students to the fundamental concepts and tools of financial management in business organizations. The course covers key topics such as financial statement analysis, time value of money, risk and return, valuation of stocks and bonds, capital budgeting, cost of capital, and working capital management. Emphasis is placed on decision-making processes that enhance firm value, the role of financial markets, and the impact of financial decisions on business operations. By the end of the course, students will understand how to analyze financial data, evaluate investment opportunities, and make informed financial decisions that align with organizational objectives.
Recommended Textbook
Corporate Finance Core Principles and Applications 5th Edition by Stephen Ross
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Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) Since the implementation of Sarbanes-Oxley,the cost of corporate audits in the United States
A)has steadily increased.
B)has steadily decreased.
C)has remained about the same.
D)increased substantially,but over time has been decreasing.
E)decreased substantially,but over time has been increasing.
Answer: D
Q2) The goal of financial management focuses on the fact that
A)the company will grow in size.
B)employee salaries should increase over time.
C)the current stockholders are the owners of the corporation.
D)the firm should expand faster than its competitors.
E)the current corporate officers should be highly compensated.
Answer: C
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Chapter 2: Financial Statements AMCQ Cash Flow
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Q1) ________ is calculated by adding back noncash expenses to earnings before interest and taxes,subtracting taxes,and adjusting for any changes in total assets or current liabilities that affect cash flows.
A)Distributable cash flow
B)Capital spending
C)Cash flow from assets
D)Cash flow from investing activities
E)Cash flow to creditors
Answer: A
Q2) Assume both current and deferred taxes are positive values.Given this,deferred taxes will
A)reduce the current tax expense and thus increase net income.
B)increase expenses and increase operating cash flows.
C)increase expenses and lower operating cash flows.
D)reduce net income but not affect the operating cash flows.
E)reduce both net income and operating cash flows.
Answer: D
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Chapter 3: Financial Statements Analysis Amcq Financial
Models
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Sample Questions
Q1) Western Wear has net working capital of $5,200,net fixed assets of $128,000,sales of $114,000,and current liabilities of $9,800.From each $1 in total assets,the firm generates sales of
A)$1.25
B)$1.52
C)$0.80
D)$0.66
E)$1.29
Answer: C
Q2) Yesterday,ABC stock sold for $28 a share.Today,the overall market fell,and ABC stock is now selling for $22 a share.Which of these ratios for ABC will be affected by this market reaction? Assume all else is held constant.
A)Enterprise value multiple and price-earnings ratio
B)Earnings per share and price-earnings ratio
C)Return on equity and return on assets
D)Return on book equity and market-to-book ratio
E)Price-earnings ratio and return on book equity
Answer: A
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Chapter 4: Discounted Cash Flow Valuation
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Sample Questions
Q1) In which type of loan does the borrower initially receive the present value of the future lump sum loan repayment amount?
A)Pure discount loan
B)Both pure discount and interest-only loans
C)Amortized loan
D)Both interest-only and amortized loans
E)Interest-only loan
Q2) You are paying an effective annual rate of 18.87 percent on your credit card.The interest is compounded monthly.What is the annual percentage rate?
A)18.50%
B)17.41%
C)17.79%
D)17.91%
E)18.31%
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Chapter 5: Interest Rates AMCQ Bomcq Valuation
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Sample Questions
Q1) A crossover bond is a bond that
A)was previously in default but is now current with its debt obligations.
B)was issued by a non-U.S.entity but is held by a U.S.party.
C)has both an investment-grade and a low-grade rating.
D)was issued as investment-grade but is currently rated as low-grade.
E)is rated by both a U.S.and a non-U.S.rating agency.
Q2) A "make-whole" call provision on a bond provides for
A)call prices that vary with the funds available in a sinking fund.
B)a call price equal to the bond's approximate market value at the time of call.
C)decreasing call prices as interest rates decrease.
D)a call price equal to the face value plus all accrued interest to date.
E)a call price equal to the face value.
Q3) A discount bond has a coupon rate that
A)exceeds its current yield.
B)is less than the bond's yield to maturity.
C)exceeds both its current yield and its yield to maturity.
D)equals its current yield.
E)equals its current yield provided the bond pays interest annually.
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Chapter 6: Stock Valuation
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Sample Questions
Q1) The owner of preferred stock
A)owns shares that generally have a stated liquidating value of $1,000 per share.
B)has the right to veto the outcome of an election held by the common shareholders.
C)has the right to collect payment on any unpaid dividends as long as the stock is noncumulative.
D)is entitled to a distribution of income prior to the common shareholders.
E)is guaranteed voting rights similar to a common shareholder.
Q2) Multiple classes of stock are primarily created to
A)allow certain shareholders to retain control of a firm.
B)replace cash dividends with share repurchases.
C)allow common stock to have cumulative privileges.
D)eliminate pre-emptive rights.
E)ensure all shareholders have equal rights.
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Chapter 7: Net Present Value AMCQ Other Investment Rules
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Sample Questions
Q1) Motor Sales is considering a project that costs $15,900 will produce cash inflows of $5,500 a year for 4 years.The project has a required rate of return of 11.25 percent.What is the discounted payback period?
A)3)70 years
B)3)91 years
C)3)82 years
D)3)64 years
E)Never
Q2) The payback method is a convenient and useful tool because
A)it provides a quick estimate of how rapidly an initial investment will be recouped.
B)it considers all of a project's relevant cash flows.
C)it considers the time value of money.
D)the required payback period for all of a firm's projects must be identical.
E)it only considers the cash flows within the current period of 12 months.
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Chapter 8: Making Capital Investment Decisions
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Sample Questions
Q1) Kay's Quilts is considering a project that will reduce inventory by $38,000,increase accounts payable by $55,000,and increase accounts receivables by 9 percent.Accounts receivable is currently $78,000.What is the cash flow at Time 0 for net working capital?
A)$100,020
B)$85,900
C)$99,000
D)$9,980
E)$8,120
Q2) The cash flows of a new project that come at the expense of a firm's existing projects are called
A)opportunity costs.
B)net working capital expenses.
C)erosion costs.
D)salvage value expenses.
E)sunk costs.
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Chapter 9: Risk Analysis, Real Options, AMCQ Capital Budgeting
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Sample Questions
Q1) William's Co.is considering spending $29,000 at Time 0 to test a new product.Depending on the test results,the firm may decide to spend $64,000 at Time 1 to start production.If the product is introduced and it is successful,it will produce after-tax cash flows of $48,000 a year for Years 2 through 4.If it is unsuccessful,there will be no cash flow in Year 1,after which the project will be terminated.There are no recovery costs at the end of Year 4.The probability of a successful test and investment is 58 percent.What is the net present value at Time 0 given a discount rate of 16 percent?
A)$5,881.15
B)$8,407.70
C)-$7,098.65
D)$1,133.15
E)-$3,594.43
Q2) Which type of analysis is most dependent upon the use of a computer?
A)Financial breakeven analysis
B)Monte Carlo simulation
C)Sensitivity analysis
D)Accounting profit breakeven analysis
E)Scenario analysis
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Chapter 10: Risk Amcq Return: Lessons From Market History
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Sample Questions
Q1) Over the past 3 years,a stock had annual returns of 6.4 percent,11.9 percent,and 14.8 percent.What is the mean return?
A)11.03%
B)7)47%
C)8)28%
D)16.55%
E)12.60%
Q2) Which one of the following types of securities has tended to produce the lowest real rate of return for the period 1926 to 2015?
A)Long-term corporate bonds
B)Long-term government bonds
C)Small-company stocks
D)Large-company stocks
E)U)S.Treasury bills
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Chapter 11: Return Amcq Risk: the Capital Asset Pricing
Model Capm
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Sample Questions
Q1) The portfolio expected return considers which of the following factors? I.The amount of money currently invested in each individual security
II)Various levels of economic activity
III)The performance of each stock given various economic scenarios
IV)The probability of various states of the economy occurring
A)I and III only
B)II and IV only
C)I,III,and IV only
D)II,III,and IV only
E)I,II,III,and IV only
Q2) You have a two-stock portfolio with an expected return of 11.7 percent.Stock A has an expected return of 13.8 percent while Stock B is expected to return 9.2 percent.What is the portfolio weight of Stock A?
A)59.09%
B)57.82%
C)63.33%
D)54.35%
E)60.33%
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Chapter 12: Risk, cost of Capital, AMCQ Valuation
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Sample Questions
Q1) Jeanette's Medical Supply has a beta of 1.47 and its R<sub>WACC</sub> is 11.8 percent.The market risk premium is 7.4 percent,and the risk-free rate is 3.6 percent.The firm's cash flow at Time 3 is $73,900 with a growth rate of 2.2 percent.What is the terminal value of the firm at Time 3?
A)$748,056.60
B)$786,727.08
C)$667,229.73
D)$844,329.90
E)$649,688.15
Q2) A company's cost of debt will decrease when
A)market interest rates increase.
B)the coupon rate on the company's bonds increase.
C)tax rates increase.
D)inflation rates increase.
E)interest is paid semiannually versus annually.
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Chapter 13: Efficient Capital Markets Amcq Behavioral Challenges
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Q1) Based on the efficient market hypothesis,a stock's abnormal return at Time t is an indicator of
A)semistrong form inefficiency.
B)cumulative market expectations.
C)a release of new information at Time t.
D)conservatism.
E)weak form inefficiency.
Q2) Your best friend works in the finance office of the Delta Corporation.You are aware that this friend trades Delta stock based on information he overhears in the office.You know that this information is not known to the general public.Your friend continually brags to you about the profits he earns trading Delta stock.Based on this information,you would tend to argue that the financial markets are at best ________ form efficient.
A)weak
B)semistrong
C)semiweak
D)strong
E)perfect
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Chapter 14: Capital Structure: Basic Concepts
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Q1) What does the present value of the tax shield from debt formula assume?
A)The interest rate on the debt is less than cost of equity.
B)The debt will not be replaced when paid.
C)Interest on the debt is paid only when the debt matures.
D)The interest is paid semiannually.
E)The debt is perpetual.
Q2) Which one of these proposes that the value of a levered firm exceeds the value of an unlevered firm by the present value of the tax shield?
A)MM Proposition I,with and without taxes
B)MM Proposition I,with tax
C)MM Proposition II,with tax
D)MM Proposition I,without tax
E)MM Proposition II,without tax
Q3) Which one of these represents the difference between the value of a levered and an unlevered firm?
A)R<sub>0</sub> - R<sub>S</sub>
B)R<sub>S</sub> × t<sub>c</sub>B
C)V<sub>U</sub> + R × t<sub>c</sub>B
D)(B / S)(1 - t<sub>c</sub>)( R<sub>0</sub> - R<sub>S</sub>)
E)t<sub>c</sub>B
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Chapter 15: Capital Structure: Limits to the Use of Debt
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Sample Questions
Q1) In a world with corporate taxes,MM theory implies that that all firms should
A)maintain a constant value.
B)decrease in value as the leverage of the firm increases.
C)choose an all-debt capital structure.
D)select the capital structure that maximizes the firm's WACC.
E)select the capital structure that equates the marginal cost of debt with the marginal benefits.
Q2) Which one of the following statements is correct concerning a Chapter 7 bankruptcy?
A)A firm reorganizes its operations in an effort to return to being a viable concern.
B)A trustee will assume control of the firm's assets until those assets can be liquidated.
C)Chapter 7 bankruptcies are always involuntary on the part of the firm.
D)The claims of creditors are paid prior to the bankruptcy administrative costs.
E)The firm generally issues new shares of stock prior to coming out of bankruptcy.
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Chapter 16: Dividemcqs AMCQ Other Payouts
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Q1) Companies are more apt to choose repurchases over dividends if doing so will enable them to I.take advantage of a market undervaluation of their shares.
II)maintain or increase the value of executive stock options.
III)offset the dilution created by the exercise of executive stock options.
IV)distribute revenue increases that are considered to be temporary or short-term in nature.
A)I and II only
B)II and IV only
C)I,II,and IV only
D)II,III,and IV only
E)I,II,III,and IV
Q2) If you want to receive the recently declared dividend on ABG stock,you must purchase your shares ________ or more business day(s)prior to the date of record.
A)four
B)one
C)two
D)three
E)five
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Chapter 17: Options Amcq Corporate Finance
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Q1) Which variable within the Black-Scholes option pricing formula is the delta?
A)S
B)e<sup> Rt</sup>
C)N(d<sub>2</sub>)
D)N(d<sub>1</sub>)
E)E
Q2) Assume the delta of a call option on a firm's assets is 0.481.This means that a new $498,000 project will increase the value of equity by
A)$336,259
B)$349,725
C)$239,538
D)$280,790
E)$208,244
Q3) A 35 put option on FKL stock expires today.The current price of the stock is $36.The put is
A)at the money.
B)out of the money.
C)in the money.
D)funded.
E)unfunded.
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Chapter 18: Short-Term Finance Amcq Planning
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Sample Questions
Q1) Martinique's Boutique has a 45-day collection period.Sales for the next four quarters are estimated at $1,500,$1,600,$2,100,and $1,900,respectively,starting with the first quarter of the year.Given this information,which one of the following statements is correct? Assume a 360-day year.
A)The firm will collect $1,575 in Quarter 2.
B)The accounts receivable balance at the beginning of Quarter 4 will be $950.
C)The firm will collect $750 from Quarter 2 sales in Quarter 3.
D)The firm will have an accounts receivable balance of $950 at the end of the year.
E)The firm will collect a total of $2,100 in Quarter 4.
Q2) Your firm collects 20 percent of sales in the month of sale,65 percent of sales in the month following the month of sale,and 13 percent of sales in the second month following the month of sale.The remainder of the sales are uncollectible.Given this,you will collect ________ sales during the month of May.
A)65 percent of May
B)20 percent of March
C)13 percent of May
D)65 percent of March
E)13 percent of March
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Chapter 19: Raising Capital
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Sample Questions
Q1) Which one of these statements is true concerning issue costs?
A)Issue costs tend to be higher for debt than for equity issues.
B)Underwriter spreads for IPOs tend to range from 10 to 15 percent.
C)The costs of SEOs generally exceed the costs of IPOs.
D)Convertible bonds generally have the lowest issue costs.
E)Underwriting spreads tend to decrease as issue size increases.
Q2) Marti owns 300 shares of ABC stock with a current value of $26 a share.The firm just issued one right for each of the 14,200 shares outstanding.The purchase of a share through the offering requires four rights plus $23.Assume Marti decides to sell her rights.All else constant,Marti will have ________ in cash and stock valued at ________ once the rights offering is completed.
A)$240;$7,740
B)$180;$7,620
C)$380;$7,600
D)$60;$7,920
E)$220;$7,760
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Chapter 20: International Corporate Finance
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Q1) Which one of these must be true if absolute purchasing power parity is to absolutely hold?
A)Customer preferences for an item must be identical across markets.
B)There must be greater demand for the item in one area as compared to another area.
C)Forward rates must equal spot rates.
D)The goods traded must have a feature unique to each individual market.
E)Transaction costs must be imposed on both ends of a trade.
Q2) Assume the spot exchange rate is 6.22 Chinese yuan per U.S.dollar.If the inflation rate in China is expected to be double that in the U.S.for the next 2 years,then the
A)exchange rate will be unaffected as inflation is irrelevant to exchange rates.
B)dollar will weaken against the yuan.
C)yuan will appreciate relative to all other currencies.
D)dollar will remain constant against the yuan.
E)dollar will strengthen against the yuan.
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Chapter 21: Mergers Amcq Acquisitions Web Only
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Sample Questions
Q1) The sale of all,or any part of,Firm A's assets to Firm B is referred to as A)a reversal.
B)a divestiture.
C)an equity carve-out.
D)a spin-off.
E)a split-up.
Q2) Wilson's has 6,000 shares of stock outstanding at a market price per share of $19.Neilsen's has 22,000 shares outstanding that sell for $33 a share.By merging,$11,000 of synergy can be created.Neilsen's is acquiring Wilson's for $115,005 worth of Neilsen stock.What is the postmerger value per share?
A)$33.39
B)$33.00
C)$29.97
D)$29.42
E)$28.15
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