Business Finance
Exam Solutions
Course Introduction
Business Finance provides students with a comprehensive understanding of the fundamental principles and practices of financial management within a business context. The course covers key topics such as financial analysis, planning and budgeting, sources of finance, cost of capital, risk assessment, investment decision-making, and working capital management. Emphasizing practical applications, students learn to interpret financial statements, evaluate projects, assess financing options, and make informed decisions to maximize shareholder value and ensure the long-term financial health of organizations.
Recommended Textbook
Principles of Finance 6th Edition by Scott Besley Eugene F. Brigham
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17 Chapters
1876 Verified Questions
1876 Flashcards
Source URL: https://quizplus.com/study-set/2575
Page 2
Chapter 1: An Overview of Finance
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42 Verified Questions
42 Flashcards
Source URL: https://quizplus.com/quiz/51225
Sample Questions
Q1) Which of the following statements is not correct?
A) Prior to the late 1950s and early 1960s,finance was taught primarily as a descriptive,institutional subject viewed more from the standpoint of an outsider than from that of the management of the firm.
B) History has shown that the types of investments and methods used to analyze investment opportunities have changed as the attitudes of both investors and regulators have changed.
C) When managerial finance emerged as a separate field of study in the early 1900s,the emphasis was on evaluation and analysis of investments because the economy was in excellent condition at the time,so most individuals had large sums of funds to invest in corporate securities.
D) One of the responsibilities of the financial manager is to help determine which assets the firm should acquire and the best way to finance those assets.
E) Sustainability is a long-run concept that focuses on improving the quality of life of all stakeholders,both current and future.
Answer: C
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3
Chapter 2: Financial Assets Instruments
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111 Verified Questions
111 Flashcards
Source URL: https://quizplus.com/quiz/51226
Sample Questions
Q1) The terms and conditions to which a bond is subject are set forth in its
A) Debenture.
B) Underwriting agreement.
C) Indenture.
D) Restrictive covenants.
E) Call provision.
Answer: C
Q2) Current liabilities are liabilities that must be paid during the next twelve months.
A)True
B)False
Answer: True
Q3) Restrictive covenants are designed so as to protect both the bondholder and the issuer even though they may constrain the actions of the firm's managers.Such covenants are contained in the bond's indenture.
A)True
B)False
Answer: True
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Chapter 3: Financial Markets and the Investment Banking Process
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47 Verified Questions
47 Flashcards
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Sample Questions
Q1) If you purchase commercial paper that matures in 180 days from the issuing firm this transaction will take place in ____ markets and ____ markets.
A) capital;primary
B) capital;secondary
C) money;primary
D) money;secondary
Answer: C
Q2) The derivatives market allows for
A) investors to speculate on price movements.
B) the purchase corporate debt.
C) the hedging of exposure to price movements
D) two of the above
E) all of the above
Answer: D
Q3) Market efficiency refers only to the speed at which financial transactions occur.
A)True
B)False
Answer: False
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Chapter 4: Financial Intermediaries and the Banking System
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98 Verified Questions
98 Flashcards
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Sample Questions
Q1) When the Federal Reserve sells an asset to the private sector,the money supply declines.
A)True
B)False
Q2) A(n)____ is an investment company that accepts money from savers and then use these funds to buy various types of financial assets.
A) savings and loans
B) insurance company
C) mutual savings bank
D) mutual fund
E) commercial bank
Q3) If the federal reserve purchases $100 million worth of government securities in open market operations,what is the maximum amount of change in the money supply if the reserve requirement is 8% and banks hold no excess reserves?
A) Decrease by $1.25 billion
B) Increase by $1.25 billion
C) Decrease by $1.15 billion
D) Increase by $1.15 billion
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Chapter 5: The Cost of Money Interest Rates
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65 Verified Questions
65 Flashcards
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Sample Questions
Q1) The real risk-free rate of interest is 3 percent.Inflation is expected to be 4 percent this coming year,jump to 5 percent next year,and run at 6 percent the year after (Year 3).According to the expectations theory,what should be the interest rate on 3-year,risk-free securities today?
A) 18%
B) 12%
C) 6%
D) 8%
E) 10%
Q2) 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%
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7
Chapter 6: Business Organizations and the Tax Environment
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96 Verified Questions
96 Flashcards
Source URL: https://quizplus.com/quiz/51230
Sample Questions
Q1) A firm's current value is related to its future growth opportunities,and corporations can attract funds more easily than unincorporated businesses to take advantage of growth opportunities.
A)True
B)False
Q2) Which of the following mechanisms is not used by shareholders to get managers to act in shareholders' best interests?
A) Threat of firing.
B) Managerial compensation.
C) Performance shares.
D) Threat of takeover.
E) Answers b and c above.
Q3) The proper goal of the financial manager should be to maximize the firm's expected profit,because this will add the most wealth to each of the individual shareholders (owners)of the firm.
A)True
B)False
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Page 8
Chapter 7: Analysis of Financial Statements
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123 Verified Questions
123 Flashcards
Source URL: https://quizplus.com/quiz/51231
Sample Questions
Q1) Selzer Inc.sells all its merchandise on credit.It has a profit margin of 4 percent,days sales outstanding equal to 60 days,receivables of $150,000,total assets of $3 million,and a debt ratio of 0.64.What is the firm's return on equity (ROE)?
A) 7.1%
Q2) If a firm borrows money from a bank or reduces its level of inventory,these are both examples of sources of funds.
A)True
B)False
Q3) In order to accurately estimate cash flow from operations,depreciation must be added back to net income.The reason for this is that even though depreciation is deducted from revenue it is really a non-cash charge.
A)True
B)False
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9
Chapter 8: Financial Planning and Control
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122 Verified Questions
122 Flashcards
Source URL: https://quizplus.com/quiz/51232
Sample Questions
Q1) Elephant Books sells paperback books for $7 each.The variable cost per book is $5.At current annual sales of 200,000 books,the publisher is just breaking even.It is estimated that if the authors' royalties are reduced,the variable cost per book will drop by $1.Assume authors' royalties are reduced and sales remain constant;how much more money can the publisher put into advertising (a fixed cost)and still break even?
A) $600,000
B) $466,667
C) $333,333
D) $200,000
E) None of the above.
Q2) The degree of financial leverage (DFL)is an index number that measures the effect of a change in sales on the financial breakeven point.
A)True
B)False
Q3) If a firm has no preferred stock,its financial breakeven point is the sales level that results in net income equal to zero.
A)True
B)False
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Chapter 9: Time Value of Money
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132 Verified Questions
132 Flashcards
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Sample Questions
Q1) When Richard evaluated a capital budgeting project a new machine needed to manufacture inventory using his firm's required rate of return,he discovered that the project's net present value (NPV)is negative.Based on this information,which of the following must be correct?
A) The project's internal rate of return is also negative.
B) The project's discounted payback period is greater than its economic life.
C) As long as the new machine's initial investment outlay is fairly low,the firm should purchase if it is used to replace an older machine that is required to produce inventory.
D) The project's traditional payback period must be greater than the maximum payback period that the firm has established.
E) Two or more of these scenarios must be correct.
Q2) Perpetuities represent a series of even cash flows over a finite period of time.
A)True
B)False
Q3) One of the potential benefits of investing early for retirement is that an investor can receive greater benefits from the compounding of interest.
A)True
B)False
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11
Chapter 10: Valuation Concepts
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126 Verified Questions
126 Flashcards
Source URL: https://quizplus.com/quiz/51234
Sample Questions
Q1) A share of stock has a dividend of D<sub>0</sub> = $5.The dividend is expected to grow at a 20 percent annual rate for the next 10 years,then at a 15 percent rate for 10 more years,and then at a long-run normal growth rate of 10 percent forever.If investors require a 10 percent return on this stock,what is its current price?
A) $100.00
B) $82.35
C) $195.50
D) $212.62
E) The data given in the problem are internally inconsistent,i.e. ,the situation described is impossible in that no equilibrium price can be produced.
Q2) All else equal,a higher required rate of return on a firm's stock will result in a higher market price for that firm's stock.
A)True
B)False
Q3) A discount bond is a bond that sells below its par value.
A)True B)False
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Chapter 11: Risk and Rates of Return
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104 Verified Questions
104 Flashcards
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Sample Questions
Q1) The Y-axis intercept of the SML indicates the return on the individual asset when the realized return on an average stock (beta = 1.0)is zero.
A)True
B)False
Q2) In a portfolio of three different stocks,which of the following could not be true?
A) The riskiness of the portfolio is less than the riskiness of each of the stocks if they were held in isolation.
B) The riskiness of the portfolio is greater than the riskiness of one or two of the stocks.
C) The beta of the portfolio is less than the beta of each of the individual stocks.
D) The beta of the portfolio is greater than the beta of one or two of the individual stock's betas.
E) None of the above (i.e. ,they all could be true,but not necessarily at the same time).
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13
Chapter 12: The Cost of Capital
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114 Verified Questions
114 Flashcards
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Sample Questions
Q1) Refer to Global Advertising Company.What is Global's cost of retained earnings?
A) 12.22%
B) 17.22%
C) 10.33%
D) 9.66%
E) 16.00%
Q2) The MCC schedule,as developed from the weighted average cost of capital,has a break point that occurs when retained earnings are used up.
A)True
B)False
Q3) Refer to J.Ross and Sons.What is the firm's cost of retained earnings?
A) 10.0%
B) 12.5%
C) 15.5%
D) 16.5%
E) 18.0%
Q4) Flotation costs lower the cost of capital to a firm when issuing new securities.
A)True B)False
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Chapter 13: Capital Budgeting
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192 Verified Questions
192 Flashcards
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Sample Questions
Q1) Other things held constant,an increase in the required rate of return will result in a decrease of a project's IRR.
A)True
B)False
Q2) Carolina Insurance Company,an all-equity life insurance firm,is considering the purchase of a fire insurance company.If the purchase is made,Carolina will be 50 percent larger than before.Currently,Carolina's stock has a beta of 1.2 and the return required is 15.2 percent.The fire insurance company is expected to generate a return of 20 percent with a beta of 2.5.If the risk-free rate is 8 percent and the market risk premium is 6 percent,should Carolina make the investment?
A) No;the expected return is less than the required return.
B) No;the IRR is less than the appropriate required rate of return.
C) Yes;the IRR is greater than the appropriate required rate of return.
D) Yes;the expected return is greater than the required return.
E) Yes;the project's risk/return combination lies above the SML.
Q3) Only the incremental after-tax cash flows associated with a capital project are relevant in capital budgeting.
A)True
B)False
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Page 15
Chapter 14: Capital Structure and Dividend Policy Decisions
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120 Verified Questions
120 Flashcards
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Sample Questions
Q1) The announcement of an increase in the cash dividend always causes an increase in the price of the firm's common stock.
A)True
B)False
Q2) Which of the following statements is correct?
A) There have been no significant observed differences in the capital structures of U.S.corporations in comparison to their German and Japanese counterparts.
B) Different countries use essentially the same international accounting conventions with respect to reporting assets on a historical versus replacement cost basis.
C) An analysis of both bankruptcy and equity reporting costs leads to the conclusion that U.S.firms should have more equity and less debt than firms in Japan and Germany.
D) Equity monitoring costs are higher in the United States than in Japan and Germany.
E) Debt monitoring costs are probably lower in the United States than in Japan and Germany.
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16
Chapter 15: Working Capital Management
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174 Verified Questions
174 Flashcards
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Sample Questions
Q1) Factoring involves the outright sale of accounts receivable.
A)True
B)False
Q2) Which of the following statements is correct?
A) If a firm's volume of credit sales declines,then its DSO will also decline.
B) If a firm changes its credit terms from 1/20,net 40 days,to 2/10,net 45 days,the impact on sales can't be determined because the increase in the discount is offset by the longer net terms which tends to reduce sales.
C) The DSO of a firm with seasonal sales can vary because while the sales per day figure is usually based on the total annual sales,the accounts receivable balance will be high or low depending on the season.
D) An aging schedule is used to determine what portion of customers pay cash and what portion buy on credit.
E) Aging schedules can be constructed from the summary data provided in the firm's financial statements.
Q3) The aging schedule is a commonly used method of monitoring receivables.
A)True
B)False
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17
Chapter 16: Investment and Securities
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102 Verified Questions
102 Flashcards
Source URL: https://quizplus.com/quiz/51240
Sample Questions
Q1) The expected return on a portfolio is
A) the sum of the square root of the expected returns on the individual stocks included in the portfolio times the beta of the individual stocks.
B) the simple arithmetic average of the expected returns on the individual stocks included in the portfolio.
C) the geometric average of the expected returns on the individual stocks included in the portfolio.
D) the weighted average of the expected returns on the individual stocks included in the portfolio.
Q2) An investor who trades on margin generally will receive a margin call when the stock price increases significantly because the broker needs to determine whether the investor wants to liquidate the position to take advantage of the profits that are available.
A)True B)False
Q3) The primary reason people invest is to supplement current income.
A)True B)False
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Chapter 17: Investment Analysis and Valuation Techniques
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108 Verified Questions
108 Flashcards
Source URL: https://quizplus.com/quiz/51241
Sample Questions
Q1) Financial statement analysis should be included in investment analysis because
A) A firm's business conditions can be compared with similar firms to determine whether its current operations are average or above or below average.
B) We can predict earnings and dividends by forecasting the future financial conditions.
C) We can use the accounting statements and information regarding current and forecasted business conditions to form expectations regarding the risk of the firm's future operations.
D) Only a and b are valid reasons.
E) a,b and c are all valid reasons.
Q2) The value of any asset can be described as the present value of the cash expected to be generated by the asset during its life.
A)True
B)False
Q3) When there is deficit spending in the United States,the amount of goods and services that is imported exceed the amount that is exported.
A)True
B)False
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19