Business Finance
Exam Solutions
Course Introduction
Business Finance introduces students to the fundamental principles and techniques used in managing a firm's financial resources. The course covers key topics such as financial statement analysis, time value of money, risk and return, capital budgeting, cost of capital, and various forms of financing available to businesses. Students will learn how financial decisions are made within organizations to maximize value, understand the impact of financial markets, and apply quantitative tools to real-world business scenarios. By the end of the course, students will be able to analyze financial information, evaluate investment and financing options, and develop strategies for effective financial management in a business environment.
Recommended Textbook
Financial Management for Decision Makers 2nd Canadian Edition by Peter Atrill
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14 Chapters
590 Verified Questions
590 Flashcards
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Chapter 1: Introduction to Financial Management
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42 Verified Questions
42 Flashcards
Source URL: https://quizplus.com/quiz/29560
Sample Questions
Q1) Share options are used by shareholders to reward senior managers because managers will
A) Become shareholders and their interests will become more closely aligned with the shareholders who hired them
B) Value the reward as they can sell the shares immediately for cash
C) Try to increase the Company's short-term gain, to sell their shares for greater profit
D) Avoid taking risks, to ensure the price of their shares does not calling
E) Appreciate any potential tax benefits from owning Canadian shares
Answer: A
Q2) A key principle underlying modern financial management is that the primary objective of a business is
A) Profit maximization
B) Minimization of costs
C) Minimization of government regulation
D) Shareholder wealth maximization
E) Marketshare maximization
Answer: D
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Chapter 2: Accounting - the Language of Business
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42 Verified Questions
42 Flashcards
Source URL: https://quizplus.com/quiz/29561
Sample Questions
Q1) On May 15 RAJ Inc. received prepayment of $132,000 representing the total amount to cover a purchase order requiring delivery of the custom blended product in four equal monthly shipments. The first shipment was scheduled for June 23. RAJ Inc.'s income statement showed
A) The full amount on the September statement
B) The full amount on the May statement
C) The full amount on the June statement
D) $33,000 on the May statement
E) $33,000 on the June statement
Answer: E
Q2) The Matching Principle used in accounting is consistent with A) Cash based accounting practices
B) The timing of cash inflows and outflows
C) Calendar based accounting practices
D) Accrual based accounting practices
E) Standard credit and collections practices
Answer: D
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Chapter 3: Financial Planning and Pro Forma Financial Statements
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44 Verified Questions
44 Flashcards
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Sample Questions
Q1) Company XYZ makes insect repellent and pays $3000 for rent, $32,000 for raw materials, $70,000 for salaries, $12,000 for depreciation and $15,000 for spray bottles. Variable costs are
A) $15,000
B) $47,000
C) $70,000
D) $85,000
E) $117,000
Answer: B
Q2) Which of the following best describes the contribution margin?
A) It refers to the selling price less the fixed cost per unit.
B) It refers to the selling price divided by the fixed cost per unit.
C) It refers to the selling price less the variable cost per unit.
D) IIt refers to the selling price divided by the variable cost per unit.
E) It refers to the selling price divided by the difference between the selling price and the fixed cost per unit.
Answer: C
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5
Chapter 4: Analyzing and Interpreting Financial Statements
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45 Verified Questions
45 Flashcards
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Sample Questions
Q1) At the end of this year the Full Glass Company has cash of $100,000, accounts receivable of $200,000, inventory of $300,000 and total assets of $1,000,000. The corresponding figures at the end of last year were $65,000, $140,000, $225,000, and $730,000 respectively. What is the percentage change in inventory?
A) 25% by horizontal analysis
B) 43% by vertical analysis
C) 25% by vertical analysis
D) 33% horizontal analysis
E) 33% by vertical analysis
Q2) Mehal Mechanics Ltd's leverage ratio moved from 15.3% to 9% between 2005 and 2007. No common or preferred shares were issued in the year. Which of the following situations is most likely to achieve this result?
A) Higher net income and a decrease in the dividend payout ratio
B) Higher net income and increase in the dividend payout ratio
C) Lower return on capital employed and a higher debt to equity ratio
D) Higher return on capital employed and a higher debt to equity ratio
E) Higher net income regardless of dividend payout ratio
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Chapter 5: The Time Value of Money
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44 Flashcards
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Sample Questions
Q1) CapiCal Industries is issuing bonds at 7% interest but would be willing to buy back the debt at any time after the first 12 months. CapiCal Industries is looking to issue
A) A Retractable bond
B) A Debenture
C) A Redeemable bond
D) An Open bond
E) A convertible debenture
Q2) Which of the following best describes the financial loss involved in choosing a less profitable option?
A) Marginal Cost
B) Suboptimization
C) Opportunity Cost
D) Interest Loss
E) Terminal Loss
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Chapter 6: Making Capital Investment Decisions
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Sample Questions
Q1) In addition to most capital investment decisions, what additional investment is usually needed?
A) Tax deferral
B) Current asset investment
C) Sales and marketing expense
D) Interest rate projections
E) Infrastructure commitments
Q2) Chrome Brite Plating Inc. is considering a purchase of a new nickel plating machine for $35,000. It expects that for the following five years, cash inflow will be $10,000, $20,000, $50,000, $70,000 and $75,000 as its business expands. If the company requires a return of 14% on new investment, the net present value (NPV) is
A) $103,314
B) $138,314
C) $173,314
D) $182,102
E) $339,102
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8
Chapter 7: Making Capital Investment Decisions: Further Issues
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Sample Questions
Q1) Mercury Metals has up to $100 million budgeted to purchase high efficiency smelters. The company has an 12% hurdle rate. A part of a smelter cannot be purchased. If Smelter A will cost $55 million and provide an expected income before depreciation of $16 million for each of 20 years and Smelter B will cost $90 million and provide an expected income before depreciation of $22 million in each of 20 years, which is the project Mercury Metals should undertake?
A) Project A with the higher profitability index at 2.2.
B) Project B has the higher profitability index at 1.8.
C) Project A has the higher NPV at $64.5 million.
D) Project A has the higher IRR at 29%.
E) Project B with the higher NPV at $74.3 million.
Q2) An investment opportunity with identified risks and returns has been consistently rejected in competition with other opportunities. This is most likely because
A) The project is available over the next few years and so can be delayed
B) The project would require the hiring of new staff
C) The project is not offering sufficient compensation for its risks
D) A company cannot invest in all the opportunities it faces
E) The project is outside the usual business of the company
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Chapter 8: Financing a Business 1: Sources of Funds
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43 Flashcards
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Sample Questions
Q1) Which form of long-term financing, if available, is usually used before any other?
A) Debt
B) Common shares
C) Preferred shares
D) Retained Earnings
E) Leases
Q2) Cameron Financial Corporation provides auto dealerships in its region with a direct loan program to be made available to the purchasers of cars and trucks. In addition to normal consumer loan obligations, each loan also has a lien against the purchased vehicle which serves as collateral for the loan. The loans which Cameron provides are then packaged together and are sold to investors. What is the name for the sale of this type of investment package?
A) Asset-backed bond issue.
B) Loan leveraging.
C) Subordinate financing.
D) Meta-financing.
E) Securitization.
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Page 10
Chapter 9: Financing a Business 2: Raising Long-Term Funds
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Sample Questions
Q1) The ratio of the amount of shares in publicly traded companies being owned by individuals compared to professionally managed funds has changed in the past fifty years. Which of the following best describes what has been observed in the stock market?
A) Most share ownership is by professionally managed companies and individual traders are always out positioned in the stock market.
B) Most share ownership is by individuals who have more limited access to information than investment professionals so the market cannot be efficient.
C) Most share ownership is by professionally managed funds and there has been a concurrent rise in the activity of shareholders in corporate governance.
D) Most share ownership is by professionally managed funds so individuals no longer impact corporate governance.
E) Most share ownership is by individuals and corporate governance is now fragmented and weak.
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11
Chapter 10: The Cost of Capital and the Capital Structure
Decision
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Sample Questions
Q1) Company A has $45 million worth of common share capital, $3.5 million in retained earnings, $30 million in long-term debt and $2.5 million in preferred shares. Company B has $22.5 million of common share capital, $3 million in retained earnings, $51 million in long-term debt and $4.5 million in preferred shares. If both companies face a tax rate of 32%, cost of common share capital of 11%, cost of debt capital of 8%, cost of preferred share capital of 9.5%, which company is more highly levered?
A) Company A with a leverage ratio that equals 40.1%
B) Company B with a leverage ratio that equals 68.5%
C) Company A with a leverage ratio that equals 8.9%
D) Company B with a leverage ratio that equals 7.4%
E) Company B with a leverage ratio that equals 71.2%
Q2) A company has 1.5 million 5% preferred shares with a nominal value of $50 and a market capitalization of $91.5 million. What is the cost of capital for the preferred shares?
A) 4.1%
B) 7.5%
C) 8.2%
D) 10.0%
E) 13.7%
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Chapter 11: Developing a Dividend Policy
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40 Flashcards
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Sample Questions
Q1) What does the term Record Date for dividends refer to?
A) The date on which the names of the company owners who will receive dividends appear in the company share register.
B) The date when the financial position of the company is assessed to compute the dividend payable.
C) The date that the auditors sign their release of the company's financial statements.
D) The date that the company auditors authorize the dividend payout.
E) The date on which the quoted share price excludes the accrued dividend.
Q2) At REL Ltd., earnings per share over a five year period were (from earliest to latest)
$2.00, $0.50, $1.20, $2.40, $1.75. In the same period, dividends per share were $0.50, $0,50, $0,50, $0.75, $0.75. What best describes this result?
A) Stock dividends.
B) Share repurchases.
C) dividend signalling.
D) Dividend smoothing.
E) Residual dividends.
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Page 13
Chapter 12: Managing Working Capital
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Sample Questions
Q1) ProLogic Chips Ltd. has an average inventory turnover period of 30 days, an average payment period of 40 days, and an average collection period of 50 days. SoftChip Inc. has an average inventory turnover period of 50 days, an average payment period of 70 days, and an average collection period of 40 days. Which company is likely to have greater financial risks?
A) SoftChip because it has a longer operating cash cycle.
B) ProLogic because its operating cash cycle is twice as long as SoftChip.
C) Softchip because there are 30 days between paying it bills and collecting its receivables.
D) ProLogic because there are 10 days between paying it bills and collecting its receivables.
E) SoftChip because the ratio of payment period to collection period is greater.
Q2) What is the risk in using a bank overdraft as a source of financing?
A) The company's indebtedness will grow beyond its ability to handle it.
B) Its cost exceeds that of the company's weighted average cost of capital.
C) It will negatively impact the credit rating of the company.
D) Interest costs cannot be deducted from income taxes.
E) It may have to be paid in full with little prior notice.
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Page 14
Chapter 13: Measuring and Managing for Shareholder
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Sample Questions
Q1) Cardomaine Seaway Inc. is looking to make a share bid for Laker Transportation's 20 million common shares. Laker is struggling to turn the company around and carry a debt at a market value of $30 million. Laker's cost of capital is 9%. Sales revenue for this year is expected to be $50 million and Cardomaine believes Laker will be increasing it by 5% annually for the next four. Operating expenses are 75% of sales revenue with depreciation expenses equalling investment in replacement assets. Income taxes can be estimated at 24% of operating income. The company has published plans of additional asset investment at $5 million this year, $5 million next year and $7 million in each of the following three years. Working capital is 30% of sales revenue and the company expects to drop this by $3.2 million this year with additional declines of $3.2 in each of the following four years. What price per share would Cardomaine offer Laker's shareholders that would leave them as well off as before?
A) $2.76
B) $3.28
C) $4.13
D) $5.41
E) $6.35
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Chapter 14: Mergers, Acquisitions, and the Valuation of Shares
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Sample Questions
Q1) Live in Colour! Inc. is a steadily growing regional company-owned chain of home decorating stores with two million shares outstanding. Its share price at the start of the year was $31.50 with a P/E of 10. The founder and president, an award winning designer, retained 15% of the shares. The rest traded sporadically on the TSX and were held principally in lots of less than 500 by small investors. Peri Paint and Wallpaper is a US-based chain looking for entry into Canada and at Live in Colour!'s mall locations. It purchased 20% of Live In Colour! shares causing a flurry on the TSX and a price gain to $42.25 a share. Live in Colour!'s president purchased another 100,000 shares and gained assurances from shareholders who own another 15% of shares that they would not sell or vote out the current Board of Directors who are opposed to the takeover. Assuming analysts are right and they believe that the P/E ratio will go to 25 before ownership of the company is decided, what would the maximum cash outlay that a white squire would have to be prepared to pay?
A) $47.25 million
B) $78.75 million
C) $13.52 million
D) $102.48 million
E) $23.60 million
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Page 16