Business Finance
Final Exam
Course Introduction
Business Finance is a foundational course that introduces students to the principles and practices of financial management within business organizations. The course covers key topics such as financial analysis, budgeting, capital structure, risk assessment, and investment decision-making. Students learn how to interpret financial statements, utilize various financial tools to assess organizational performance, and make informed decisions regarding the acquisition and allocation of financial resources. Emphasis is placed on understanding the relationship between financial theory and real-world business practices, preparing students to effectively manage financial challenges in dynamic business environments.
Recommended Textbook
Contemporary Financial Management 13th Edition by R. Charles Moyer
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Page 2
Chapter 1: The Role and Objective of Financial Management
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Sample Questions
Q1) The net present value of an investment made by a firm represents the contribution of that investment to the of the firm.
A)book value
B)profit
C)value
D)cash flow
Answer: C
Q2) Among the most important agency relationships in the context of finance is (are) the relationship(s) between .
A)stockholders and creditors
B)management and workers
C)stockholders and creditors, and management and workers
D)management and creditors
Answer: A
Q3) The success of a firm is linked to its stakeholders.This group includes:
A)community neighbors
B)suppliers
C)employees
D)all of these
Answer: D
Page 3
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Chapter 2: The Domestic and International Financial Marketplace
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Sample Questions
Q1) There are three forms of market efficiency.All of the following statements are correct EXCEPT:
A)The weak form efficiency states that no investor can earn excess returns based on historical price information.
B)The strong form of efficiency states that no investor can consistently earn excess returns since all public and private information is reflected in stock prices.
C)The semi-strong form of efficiency states that no investor can earn excess returns based on an investment strategy using public information.
D)Market efficiency is a hard and fast rule that has been verified in real-world situations.
Answer: D
Q2) The Dow Jones Industrial Average is calculated using the A)total market value of 30 stocks
B)price of 30 stocks
C)a weighted index of 30 stocks
D)industrial, railroad, financial, and utility stocks
Answer: B
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Chapter 3: Evaluation of Financial Performance
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Sample Questions
Q1) What is the return on stockholders' equity for a firm with a net profit margin of 5.2 percent, sales of $620,000, an equity multiplier of 1.8, and total assets of $380,000?
A)8.48%
B)5.74%
C)15.27%
D)9.36%
Answer: C
Q2) Financial ratios can be used to analyze a firm's performance from A)day to day
B)period to period
C)purchase to purchase
D)sale to sale
Answer: B
Q3) Primary sources of comparative financial data include
A)Dun and Bradstreet
B)New York Times
C)Richard Moore, Inc.
D)Framingham Financial Library
Answer: A
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Chapter 4: Financial Planning and Forecasting
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Sample Questions
Q1) In preparing a statement of cash flows, the method involves adjusting net income to reconcile it to net cash flows from operating activities.
A)direct
B)indirect
C)accrual
D)none of the answers is correct
Q2) In the percent-of-sales forecasting method, all of the following balance sheet and income statement items are assumed to increase proportionately with sales EXCEPT:
A)dividends
B)accounts payable
C)long-term debt
D)neither dividends nor long-term debt increase
Q3) A good operational plan incorporates a plan for:
A)the unionization of its business.
B)a solid organizational chart with detailed job descriptions.
C)the resources a firm will need to obtain its long term objectives.
D)all of the answers are correct
Q4) Explain the cash flow generation process:
Q5) What information does a long-term financial plan offer?
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) Roy, who has just turned 40, would like to have an annual annuity of $20,000 paid over a 20 year period, the first payment occurring on his 66th birthday.How much must Roy save each year (end of year) for the next 25 years to have this annuity, if the investment will earn 12 percent compounded annually?
A)$16,000
B)$19,046
C)$1,120
D)$944.10
Q2) Annuity due calculations are most common when dealing with:
A)cash dividends
B)loan repayments
C)lease contracts
D)interest payments
Q3) If the present value of a given sum is equal to its future value, then
A)the discount rate must be very high
B)there is no inflation
C)the discount rate must be zero
D)none of the answers is correct
Q4) Explain a perpetuity and list some investment vehicles that can be perpetuities.
Q5) Explain the sinking fund problem.
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Chapter 5: A: The Time Value of Money
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Sample Questions
Q1) If interest is at 8% and it is compounded continuously, what is the effective interest rate?
A)7.25%
B)5.14%
C)8.33%
D)9.76%
Q2) You have just won a lottery that promises to pay you $1,000,000 in 5 years.What is the present value of this lottery win at the continuously discounted rate of 10%?
A)$621,000
B)$606,531
C)$648,720
D)$904,837
Q3) What is the value of $10,000 invested for 5 years at 8% compounded continuously?
A)$14,693
B)$14,928
C)$14,918
D)$13,064
Q4) With continuous compounding, why is the effective rate higher than the nominal rate?
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Chapter 6: Fixed-Income Securities: Characteristics and Valuation
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Sample Questions
Q1) The quality of a debenture depends on the
A)general credit-worthiness of the issuing company
B)value of the assets used as collateral
C)the coupon rate of the debenture
D)length of time to maturity
Q2) The largest user of mortgage bonds is
A)credit unions.
B)commercial banks.
C)utility companies.
D)small companies.
Q3) Unsecured income bonds are considered securities.
A)strong
B)government
C)weak
D)non-corruptible
Q4) Which of the following is NOT one of the various types of long-term debt?
A)Junior debentures
B)Secured loans
C)Senior debentures
D)Preferred stock
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Chapter 7: Common Stock: Characteristics, Valuation, and Issuance
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Sample Questions
Q1) When Facebook launched its IPO, the sale of the stock did not go as planned. In fact, class action lawsuits have been filed. What is the accusation against Facebook?
Q2) Lawton Company common stock currently sells for $38 and pays (year 0) a dividend of $2.Determine the implied growth rate for Lawton assuming that an investor's required rate of return is 12% and that the stock can be evaluated using a constant growth valuation model.
A)6.74%
B)17.26%
C)6.40%
D)3.80%
Q3) The returns investors receive from holding common stocks may be in two forms.They are
A)cash dividend payments and capital gains
B)future earnings and treasury stock
C)stock splits and stock dividends
D)cash dividends and stock dividends
Q4) List the responsibilities of investment bankers.
Q5) What are some of the costs associated with new security offerings?
Q6) List the various rights of common stockholders.
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Chapter 8: Analysis of Risk and Return
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Sample Questions
Q1) A diversified portfolio has many stocks as opposed to a single stock.Diversification can occur with a little as stocks.
A)5
B)10
C)20
D)100
Q2) The risk-free rate of return is composed of which of the following elements:
A)risk premium and inflation
B)cost of capital and risk premium
C)real rate of return and risk premium
D)real rate of return and inflation
Q3) The security market line
A)is defined as the slope of a line relating an individual security's return to the returns of other securities in that firm's primary industry.
B)provides a picture of the risk-return tradeoff required by diversified investors considering various risky assets.
C)has as its slope the beta of the security
D)is determined by the prevailing level of risk-free interest rates minus a risk premium
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Chapter 9: Capital Budgeting and Cash Flow Analysis
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Sample Questions
Q1) Which of the following is a basic principle when estimating a project's cash flows?
A)cash flows should be measured on a pretax basis
B)cash flows should ignore depreciation because it is a non-cash charge
C)only direct effects of a project should be included in cash flow calculations
D)cash flows should be measured on an incremental basis
Q2) List the steps that a firm uses in the capital budgeting process:
Q3) What type of tax consequence is associated with the recovery of net working capital?
A)A firm must pay tax and a penalty.
B)There is no tax consequence
C)The firm must pay capital gains tax
D)The firm must pay ordinary income tax
Q4) There are several reasons why managers might produce biased cash flow estimates when preparing capital expenditure project proposals. List some of them.
Q5) Depreciation reported profits and it taxes paid by a firm.
A)increases, reduces B)reduces, reduces C)reduces, increases
D)increases, increases
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Chapter 10: Capital Budgeting: Decision Criteria and Real Option Considerations
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Sample Questions
Q1) Calculate the profitability index for a project that has a net present value equal to -$10,000.The project's net investment is $20,000, and the firm has a 40 percent marginal tax rate.
A)-0.5
B)0
C)0.8
D)None of these
Q2) A digital assembly system that costs $160,000 is expected to operate for 8 years.The estimated salvage value at the end of 8 years is $12,000.The system is expected to save the company $38,000 in labor costs before taxes and depreciation.The company will depreciate this system on a 5-year MACRS schedule.If the firm's cost of capital is 12% and its marginal tax rate is 35%, compute the NPV for the project.(Note: Requires MACRS tables)
A)$4,045
B)$7,196
C)$20,873
D)$167,196
Q3) Why are there differences in the capital expenditure analysis practice between large and entrepreneurial firms?
Page 13
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Chapter 10: A: Capital Budgeting: Decision Criteria and Real
Option Considerations
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Sample Questions
Q1) What is the equal annual annuity for Scorch & Burn Fire Extinguishers if their cost of capital is 8% and the initial investment is $75,000 (rounded)?
\[\begin{array} { | c | c | }
\hline \text { Year } & \text { Cash Inflows } \\
\hline 1 & \$ 25,000 \\
\hline 2 & \$ 25,000 \\
\hline 3 & \$ 45,000 \\
\hline
\end{array}\]
A)$5,304
B)$6,271
C)$2,058
D)$4,157
Q2) Under most conditions the equivalent annual annuity method will give the same decision as:
A)the net present value method
B)linear programming
C)the replacement chain method
D)the internal rate of return
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Chapter 11: Capital Budgeting and Risk
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Sample Questions
Q1) The certainty equivalent approach adjusts the for risk in the of the net present value equation.
A)net cash flows, numerator
B)risk-free rate, numerator
C)required return, numerator
D)net cash flows, denominator
Q2) are needed for sensitivity analysis and have made the application simple and inexpensive.
A)risk tolerance tables
B)financial statements
C)financial calculators
D)computer spreadsheets
Q3) A major disadvantage of the risk-adjusted discount rate approach is that it
A)can lead to selecting only above-average risk projects
B)provides the decision maker with a range of numbers
C)can lead to selecting only below-average risk projects
D)is difficult to estimate the appropriate risk premium for a project
Q4) List the ways that a company's decision maker can adjust for total project risk in capital budgeting.
Q5) What are the weaknesses of the net present value/payback approach?
Page 15
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Chapter 12: The Cost of Capital, Capital Structure, and Dividend Policy
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Sample Questions
Q1) PDQ Inc.has a weighted cost of capital of 14.6 percent and has an opportunity to invest in the following average risk projects: Project Cost Annual Cost Flow Project life \[\begin{array} { l l l l }
1 & \$ 10,000 & \$ 1,992.43 & 10 \text { years } \\
2 & \$ 21,000 & \$ 4,526.84 & 8 \text { years } \\
3 & \$ 18,500 & \$ 4,500.34 & 7 \text { years } \end{array}\]
In which projects should PDQ invest? Assume no capital rationing.
A)1 & 2
B)2 & 3
C)1 & 3
D)cannot be determined from the information provided
Q2) What does the optimal capital budget maximize? How it is determined?
Q3) Sources of debt capital to small firms are limited.Generally, what are the sources of funds for the small firm?
Q4) What is the investment opportunity curve and how is it accomplished?
Q5) What are the reasons that the cost of external equity is greater than the cost of internal equity?
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Chapter 13: Capital Structure Concepts
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Sample Questions
Q1) What is the market value of Barings, a firm with total assets of $100 million and $30 million in perpetual debt in its capital structure? Barings' cost of equity is 15% and its cost of debt is 10%.Expected perpetual net operating income (EBIT) will be $17 million and the marginal tax rate is 40%.
A)$86.0 million
B)$104.0 million
C)$98.0 million
D)$92.7 million
Q2) How do signaling effects impact the firm's capital structure decision?
Q3) When a corporation must get external financing, the first place to look for funds is with debt.There are various reasons for this preference.List the reasons why debt is generally issued first.
Q4) Modigliani and Miller show that the value of a firm is capital structure given perfect capital markets and no corporate income taxes.
A)maximized by having no debt in the B)independent of C)maximized by having an optimal D)dependent on the
Q5) There are many factors that influence a firm's business risk.List them.
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Chapter 14: Capital Structure Management in Practice
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Sample Questions
Q1) A DFL (degree of financial leverage) of 3.0 indicates that a 27% increase in EPS is the result of a increase in EBIT.
A)81%
B)3%
C)9%
D)6%
Q2) There are three categories of costs: fixed costs, variable costs and semi-variable costs.Which of the following is a semi-variable cost?
A)depreciation
B)labor costs
C)raw materials
D)management salaries
Q3) Kenzel has an EPS of $4.20 and sales are $9 million.If the firm has a degree of operating leverage of 4.0 and a degree of financial leverage of 5.2, forecast EPS if the firm expects a 4% sales decline.
A)$0.71
B)$3.49
C)$4.03
D)$3.33
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Chapter 14: A: Capital Structure Management in Practice
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Q1) The Fanny Nanny Weight Monitors Corporation offers an annual diet plans for sale each year with information about nutrition, diet tips and food substitutes.The finished product sells for $60 with a variable cost per unit of $27.The company has fixed operating costs of $1,250,000.What is its breakeven point?
A)22,187
B)37,879
C)56,124
D)48,961
Q2) The contribution margin per unit is the difference between:
A)the selling price per unit and fixed costs
B)the fixed costs and the variable costs
C)the variable cost per unit and the selling price per unit
D)the variable costs and the number of units sold
Q3) Breakeven analysis can be used:
A)when planning renovations
B)when planning expansions
C)when planning financial resources
D)when planning new product development
Q4) What are the possible uses for breakeven analysis?
Q5) List the limitations of breakeven analysis:
Page 19
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Chapter 15: Dividend Policy
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Q1) The capital impairment restriction, a legal constraint on dividend payments, states that
A)only the current year's earnings may be used for dividend payments
B)dividends may not be paid out of stockholder's equity
C)a firm's permanent capital cannot be used to make dividend payments
D)a firm's capital surplus can be used to make dividend payments
Q2) A passive residual dividend policy suggests that the firm will:
A)pay the same dollar amount of dividends every year
B)pay the same percentage of earnings in dividends every year
C)pay a dividend only after all viable investment projects have been exhausted
D)omit a dividend in the next period
Q3) According to Miller and Modigliani, it is that really determines a firm's value.
A)investment policy
B)dividend policy
C)payout ratio
D)transaction costs
Q4) What is a DRIP and how does it work?
Q5) What are the procedures for repurchasing stock?
Q6) What is the signaling effect of dividend payments?
Q7) What are the factors that determine the dividend policy of a firm?
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Chapter 16: Working Capital Management
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Q1) The relationship between the maturity of debt and its associated cost (interest rate) is referred to as:
A)term structure of interest rates
B)investment opportunity curve
C)risk-return tradeoff function
D)both the term structure of interest rates and the investment opportunity curve.
Q2) The size and nature of a firm's investment in current assets is a function of a number of different factors including all of the following except
A)how efficient the firm manages its fixed assets
B)the length of the operating cycle
C)the sales level
D)credit policies
Q3) The size of a firm's investment in current assets is a function of all of the following factors except
A)sales level
B)inventory policies
C)credit policies
D)stockholders equity
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Chapter 17: The Management of Cash and Marketable Securities
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Sample Questions
Q1) The firm's optimal liquid asset balance occurs where the sum of the opportunity holding and costs is minimized.
A)borrowing
B)compensating balance
C)shortage
D)capital
Q2) consists of short-term unsecured promissory notes issued by large, well-known corporations and finance companies.
A)Negotiable certificates of deposit
B)Commercial paper
C)Repurchase agreements
D)Bankers' acceptances
Q3) , which are similar to other checks except they are not payable on demand, are used primarily to provide for centralized control over payments authorized in field offices.
A)Preauthorized checks
B)Drafts
C)Mail depository transfer checks
D)Electronic depository transfer checks
Q4) Why do firms hold liquid asset balances?
22
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Chapter 18: The Management of Accounts Receivable and Inventories
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Q1) When a company measures its marginal costs and marginal returns it is developing:
A)target capital structure
B)optimal credit extension policy
C)required rate of return
D)a financing decision
Q2) In determining the creditworthiness of a customer from financial statements, the statements can indicate all of the following EXCEPT:
A)Financial strength
B)Ability to repay credit obligations
C)Length of time needed to repay on credit
D)Proposed budgetary expenses for the near future
Q3) Potential losses can occur in the credit evaluation process when
A)credit is denied to a credit-worthy customer
B)the credit decision is delayed too long
C)credit is denied to a customer who is not credit worthy
D)credit is denied to a credit-worthy customer and the credit decision is delayed too long
Q4) What are the "five Cs of credit" and how are they used?
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Q5) What information could be used to judge the credit worthiness of a customer?
Chapter 19: Lease and Intermediate-Term Financing
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Q1) Leasing accounts for more than percent of all business investment in equipment.
A)10
B)25
C)50
D)90
Q2) In considering the advantages of leasing, which of the statements is/are correct?
A)Leasing provides approximately 50% of the necessary financing.
B)Leasing can decrease the firm's liquidity.
C)Both a and b are correct.
D)Neither a nor b is correct.
Q3) Explain a leveraged lease.
Q4) Disadvantages of leasing include all of the following except
A)leasing usually decreases a firm's liquidity
B)leasing is often more expensive than purchasing
C)loss of the asset's salvage value
D)lessee may have difficulty getting approval to make property improvements on leased real estate
Q5) In a leveraged lease, what items secure the mortgage bonds of the lender?
Q6) What is a term loan?
24
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Chapter 20: Financing with Derivatives
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Q1) The conversion value (i.e., stock value) of a convertible bond is defined as the times the .
A)conversion ratio, conversion price
B)conversion premium, exercise price
C)conversion ratio, common stock market price
D)conversion ratio, exercise price
Q2) To raise capital funds, Twixt, Inc.issued $2 million worth of debentures with warrants attached.The warrants had an exercise price of $15 and each warrant entitled the holder to two shares of common stock.If the current market price per share of Twixt is $20, what is the formula value of a Twixt warrant?
A)$10
B)$5
C)$20
D)$0
Q3) are forms of options.
A)Warrants
B)Convertible securities
C)Leases
D)Warrants and convertible securities
Q4) What variables affect the call option valuation?
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Chapter 20: A: Financing with Derivatives
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Q1) Bond refunding occurs when a company redeems a callable issue and
A)sells an equity issue, thereby reducing outstanding debt
B)sells a new issue with a lower coupon rate
C)sells a preferred issue with a low dividend rate
D)none of these is correct
Q2) In a bond refunding analysis, the net investment calculation includes
A)aftertax call premium
B)flotation cost of new debt
C)overlapping interest
D)all of these
Q3) When considering bond refunding, all of the following are important input items EXCEPT:
A)interest payments of old issue
B)weighted cost of capital
C)interest payments of new issue
D)after-tax cost of debt
Q4) Why is the after-tax cost of debt used in bond refunding analysis?
Q5) What is the principal inflow and what is the principal outflow from a bond refunding situation?
Q6) Why would a corporation consider bond refunding?
Page 26
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Chapter 21: Risk Management
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Q1) All of the following are methods whereby a hedge is accomplished EXCEPT:
A)Using derivative securities
B)Owning several shares of a company's stock
C)Buying or selling a forward contract
D)Using an option in the cash market
Q2) Forward contracts are most common in markets.
A)stock
B)agricultural
C)currency
D)bond
Q3) In the futures market, losers must pay winners each day.This is called:
A)paying up
B)selling short
C)taking a long position
D)marking to market
Q4) Which of the following is the current price in a futures contract?
A)volatile price
B)spot price
C)short price
D)long price
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Chapter 22: International Financial Management
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Q1) Basic hedging techniques include all of the following except A)money market hedge
B)forward market hedge
C)primary market hedge
D)none, because all are basic hedging techniques
Q2) The law of one price, an economic principle, means that the price of a product in different markets should be:
A)the same if the raw materials were obtained from a single source.
B)the same if adjusted for inflation.
C)the same if taxes are adjusted based on a single currency.
D)the same if there are no significant costs associated with moving between markets.
Q3) A less restrictive form of purchasing power parity is:
A)Omnipotent purchasing power parity
B)Relative purchasing power parity
C)Absolute purchasing power parity
D)Exchange parity
Q4) There are two methods used to forecast future exchange rates.What are they and how do companies use them to protect against risk?
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Chapter 23: Corporate Restructuring
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Q1) equals the proceeds that would be received from the sale of the firm's assets minus its liabilities.
A)Market value
B)Equity value
C)Going-concern value
D)Liquidation value
Q2) Explain the motivation for a company to divest through a spin-off or equity carve-out.
Q3) A form of business combination in which two (unaffiliated) companies contribute financial and/or physical assets, as well as personnel, to a new company to engage in some economic activity is known as a .
A)joint venture
B)conglomerate merger
C)merger
D)consolidation
Q4) Explain a form of business combination called a holding company and how the combination is achieved.
Q5) A new takeover defense is boardmail.How does it work?
Q6) What are some informal alternatives for salvaging a failing business?
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