Business Finance
Final Exam
Course Introduction
Business Finance introduces students to the fundamental principles and practices involved in financial management within a business context. The course examines the key concepts of financial analysis, planning, and control, including topics such as the time value of money, risk and return, capital budgeting, cost of capital, and working capital management. Students will develop an understanding of how financial decisions impact an organization's value and will gain practical skills in interpreting financial statements, making investment decisions, and managing corporate resources to achieve strategic objectives. Through case studies and real-world examples, the course prepares students to apply financial theories and tools in a dynamic business environment.
Recommended Textbook
Foundations of Finance 9th Edition by Arthur J. Keown
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Page 2
Chapter 1: An Introduction to the Foundations of Financial Management
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Sample Questions
Q1) The best form of business entity to attract new capital is the sole proprietorship because investors only need to deal with one owner.
A)True
B)False
Answer: False
Q2) Explain why large and growing firms tend to choose the corporate form.
Answer: The advantages of the corporation begin to dominate as the firm grows and needs access to the capital markets to raise funds.Because of the limited liability,the ease of transferring ownership through the sale of common shares,and the flexibility in dividing the shares,the corporation is the ideal business entity in terms of attracting new capital.
Q3) Shareholder wealth maximization means maximizing the price of the existing common stock.
A)True
B)False
Answer: True
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3
Chapter 2: The Financial Markets and Interest Rates
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Sample Questions
Q1) The term structure of interest rates usually indicates that longer terms to maturity have higher expected returns.
A)True
B)False
Answer: True
Q2) A basis point is equal to
A) one percent.
B) one-tenth of one percent.
C) one-hundredth of one percent.
D) one-half of one percent.
Answer: C
Q3) The investment banker does NOT underwrite the securities to be issued in which of the following?
A) initial public offering
B) primary market transaction
C) firm commitment
D) best efforts
Answer: D
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4
Chapter 3: Understanding Financial Statements and Cash Flows
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Sample Questions
Q1) Common-sized income statements restate the numbers in the income statement as a percentage of sales to assist in the comparison of a firm's financial performance across time and with competitors.
A)True
B)False
Answer: True
Q2) Which of the following represents an attempt to measure the net results of the firm's operations (revenues versus expenses)over a given time period?
A) balance sheet
B) statement of cash flows
C) income statement
D) sources and uses of funds statement
Answer: C
Q3) A firm's income statement reports the results from operating the business for a period of time,while the firm's balance sheet provides a snapshot of the firm's financial position at a specific point in time.
A)True
B)False
Answer: True
Page 5
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Chapter 4: Evaluating a Firms Financial Performance
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Sample Questions
Q1) The astute financial manager will seek to attain the highest current ratio possible.
A)True
B)False
Q2) How could an analyst determine whether a company's ratio is good or bad?
Q3) Assume that a firm issues a six-month note to purchase inventory.Which of the following is true if the current ratio before the purchase is 1.0?
A) The firm's current ratio must decrease.
B) The firm's quick ratio will stay the same.
C) The firm's current ratio will increase.
D) The firm's quick ratio might decrease.
Q4) Which of the following financial ratios is the best measure of the operating effectiveness of a firm's management?
A) times interest earned
B) net profit margin
C) operating return on assets
D) operating efficiency quotient
Q5) How does a firm use financial ratios? Who else might use financial ratios and why?
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6
Chapter 5: The Time Value of Money
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Sample Questions
Q1) You bought a racehorse that has had a winning streak for six years,bringing in $250,000 at the end of each year before dying of a heart attack.If you paid $1,155,720 for the horse 4 years ago,what was your annual return over this 4-year period?
A) 8%
B) 33%
C) 18%
D) 12%
Q2) In order to send your first child to Law School when the time comes,you want to accumulate $40,000 at the end of 18 years.Assuming that your savings account will pay 6% compounded annually,how much would you have to deposit if:
a.you want to deposit an equal amount at the end of each year? b.you want to deposit one large lump sum today?
Q3) The same underlying formula is used for computing both the future value and present value.
A)True
B)False
Q4) You borrow $30,000 and agree to pay it off with one lump sum payment of $40,000 in 6 years.What annual rate of interest will you be charged?
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Page 7
Chapter 6: The Meaning and Measurement of Risk and Return
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Sample Questions
Q1) Total risk equals systematic risk plus unsystematic risk.
A)True
B)False
Q2) Bankers Corp.has a very conservative beta of .7,while Biotech Corp.has a beta of 2.1.Given that the T-bill rate is 5%,and the market is expected to return 15%,what is the expected return of Bankers Corp.,Biotech Corp.,and a portfolio composed of 60% of Bankers Corp.and 40% Biotech Corp.?
a.Solve this problem first by weighting the betas to calculate a portfolio beta,and then using CAPM to calculate the portfolio expected return.
b.Then solve the problem again by calculating the expected return of each asset and weighting those returns to calculate the portfolio expected return.
c.Why is Biotech Corp.'s expected return NOT three times that of Bankers Corp.?
Q3) A well-diversified portfolio includes investments in 50 securities.The portfolio's systematic risk is likely to be about
A) 50% of the total risk.
B) 40% of the total risk.
C) 25% of the total risk.
D) zero because risk is eliminated with a portfolio of 50 securities or more.
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Chapter 7: The Valuation and Characteristics of Bonds
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Sample Questions
Q1) Bond prices are inversely related to market interest rates.
A)True
B)False
Q2) A zero coupon bond is selling for $476.The bond has a face value of $1,000 and matures in 8 years.Your friend asks you if he should buy the bond.He tells you his required return is 9 percent.Would you recommend he buy the bond or not? Explain your answer.
Q3) What is the value of a bond that matures in 5 years,has an annual coupon payment of $110,and a par value of $2,000? Assume a required rate of return of 8.69%.
A) $938.50
B) $1,876.99
C) $1,891.36
D) $1,749.83
Q4) The interest on corporate bonds is typically paid
A) semiannually. B) annually. C) quarterly. D) monthly.
Q5) What are the three important elements of asset valuation?
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Chapter 8: The Valuation and Characteristics of Stock
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Sample Questions
Q1) Crandle's common stock is currently selling for $79.00.It just paid a dividend of $4.60 and dividends are expected to grow at a rate of 5% indefinitely.What is the required rate of return on Crandle's stock?
A) 11.11%
B) 11.76%
C) 12.2%
D) 14.21%
Q2) Beaver Corp.preferred stock has a market price of $14.50.If it has a yearly dividend of $3.50,what is your expected rate of return if you purchase the stock at its market price?
A) 41.43%
B) 19.45%
C) 22.36%
D) 24.14%
Q3) For a given constant required rate of return,the greatest portion of a preferred stockholder's return comes from increases in the price of preferred stock.
A)True B)False
Q4) What provisions are available to protect a preferred stockholder?
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Page 10
Chapter 9: The Cost of Capital
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Sample Questions
Q1) A company's capital structure mix is based on the proportion of fixed versus variable costs in its optimal production process.
A)True
B)False
Q2) QRM,Inc.'s marginal tax rate is 35%.It can issue 10-year bonds with an annual coupon rate of 7% and a par value of $1,000.After $12 per bond flotation costs,new bonds will net the company $966 in proceeds.Determine the appropriate after-tax cost of new debt for the firm to use in a capital budgeting analysis.
A) 2.62%
B) 4.87%
C) 7.50%
D) 7.8%
Q3) Alarm Systems Corporation's preferred stock pays a dividend of $3.60 and sells for $28.00.Alarm Systems Corporation has a marginal tax rate of 35%.What is the cost of preferred financing?
Q4) The preferred stock of Wells Co.sells for $17 and pays a $1.75 dividend.The net price of the stock after issuance costs is $15.30.What is the cost of capital for new preferred stock?
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Page 11
Chapter 10: Capital-Budgeting Techniques and Practice
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Q1) When capital rationing exists,the divisibility of projects is ignored and projects are funded in order of their PI's or IRR's.
A)True
B)False
Q2) Mutually exclusive projects have more than one IRR.
A)True
B)False
Q3) Project LMK requires an initial outlay of $400,000 and has a profitability index of 1.5.The project is expected to generate equal annual cash flows over the next twelve years.The required return for this project is 20%.What is project LMK's net present value?
A) $600,000
B) $150,000
C) $120,000
D) $80,000
Q4) Marketing is crucial to capital budgeting success because the goal of a good capital budgeting project is to maximize the company's sales.
A)True
B)False
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Chapter 11: Cash Flows and Other Topics in Capital Budgeting
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Q1) Capital budgeting projects that expand sales are more likely to involve increases in working capital than are projects that involve the replacement of existing assets.
A)True
B)False
Q2) The less-risky investment is always the more desirable choice.
A)True
B)False
Q3) Bill and Mary own a small chain of high fashion boutiques that represent almost 100% of their net worth.When considering capital budgeting projects for their boutiques,the appropriate measure of risk is
A) project standing alone risk.
B) systematic risk.
C) contribution-to-firm risk.
D) beta risk.
Q4) If the increase in net working capital is recovered entirely at the end of the project,then it may be ignored.
A)True
B)False
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Q5) Give an example of an option to abandon a project.Why might this be of value?
Chapter 12: Determining the Financing Mix
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Sample Questions
Q1) QuadCity Manufacturing,Inc.reported the following items: Sales = $6,000,000; Variable Costs of Production = $1,500,000; Variable Selling and Administrative Expenses = $550,000; Fixed Costs = $1,350,000; EBIT = $2,600,000; and the Marginal Tax Rate = 35%.QuadCity's break-even point in sales dollars is
A) $2,050,633.
B) $2,197,500.
C) $2,438,750.
D) $2,785,000.
Q2) When using an EPS-EBIT chart to evaluate a pure debt financing and pure equity financing plan,
A) the debt financing plan line will graph with a steeper slope than the equity financing plan line.
B) the debt financing plan line will have a lower level of EBIT at EPS = 0.
C) the line of the two financing plans will intersect on the EBIT axis.
D) the slope of the equity financing plan line will be steeper than the debt financing plan line below the intersection of the two lines.
Q3) A key tool for evaluating business risk is break-even analysis.
A)True B)False
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Page 14
Chapter 13: Dividend Policy and Internal Financing
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Sample Questions
Q1) Which of the following dividend policies will cause dividends per share to fluctuate the most?
A) constant dividend payout ratio
B) stable dollar dividend
C) small, low, regular dividend plus a year-end extra
D) no difference between the various dividend policies
Q2) When Firm X makes the decision to pay dividends,they also make the decision not to reinvest the cash in the firm.
A)True
B)False
Q3) A corporation with very high growth prospects and many positive NPV projects to fund may want to increase its dividend based on
A) the tax bias against capital gains.
B) the residual dividend theory.
C) the information effect.
D) the very low agency costs of the corporation.
Q4) The ex-dividend date occurs prior to the declaration date.
A)True
B)False
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Chapter 14: Short-Term Financial Planning
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Sample Questions
Q1) The key ingredient in a firm's financial planning is an accurate sales forecast.
A)True
B)False
Q2) Using the percentage of sales method,forecasted retained earnings balance is equal to
A) prior year retained earnings plus projected net income less projected dividends.
B) the ratio of retained earnings to sales for the current year multiplied by projected sales for next year.
C) the retained earnings balance for the current year as no changes are made to this financing account when using the percent of sales method.
D) the ratio of retained earnings to sales for the current year multiplied by projected sales for next year, minus dividends paid.
Q3) Monthly cash receipts in the cash budget are typically made up of cash sales during the month and collections from credit sales from prior months.
A)True
B)False
Q4) What are some examples of spontaneous and discretionary sources of financing?
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Chapter 15: Working-Capital Management
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Sample Questions
Q1) Your company needs to pay $10,000 for the overhaul of five trucks.A bank offers you a loan at 18 percent per annum with a compensating balance requirement of 15 percent of the loan amount.You plan to borrow the money for 9 months and currently do not have any account with this bank.What is the effective cost of the loan?
Q2) An inventory loan agreement in which the inventories pledged as collateral are physically separated from the firm's other inventory and placed under the control of a third-party is called
A) a floating lien agreement.
B) a chattel mortgage agreement.
C) a field warehouse agreement.
D) a securitized inventory loan arrangement.
Q3) How does the use of current liabilities enhance profitability and also increase the firm's risk of default on its financial obligations?
Q4) List and describe at least three advantages accrue to the user of commercial paper.
Q5) Discuss the similarities and differences between a line of credit and a revolving credit agreement.
Q6) What three actions can a firm take to minimize its net working capital?
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Page 17
Chapter 16: International Business Finance
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Sample Questions
Q1) Investments in capital markets in foreign countries are motivated by the desire to earn higher returns and reduce risk through international diversification.
A)True
B)False
Q2) Suppose the current spot rate in New York is .0119 dollars per yen.Inflation for the coming year in the United States is expected to be 3%,while inflation for the coming year is Japan is expected to be only 1%.Using the purchasing power parity theory,what is the expected spot rate at the end of the year should be
A) .0110147 dollars per yen.
B) .0108159 dollars per yen.
C) .0138373 dollars per yen.
D) .0121356 dollars per yen.
Q3) Covered interest arbitrage can be taken advantage of when premiums in forward rates are not exactly equal to the interest rate differential between two countries.
A)True
B)False
Q4) What does the law of one price say?
Q5) What does the law of one price say?
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Chapter 17: Cash,receivables,and Inventory Management
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Sample Questions
Q1) The speed of the collections process is determined by three types of float: mail float,processing float,and transit float.
A)True
B)False
Q2) Brett's,Inc.is a national distributor of women's apparel.The company expects to receive 95,000 checks during the coming year totaling $78 million.A large bank has offered to install a lock-box system at a charge of $0.45 per processed check.If Brett's,Inc.is able to earn 5 percent before tax on additional funds,what is the minimum amount of total float days that must be saved to make the system worthwhile? Use a 365-day year.
Q3) A lockbox system can reduce all of the following elements of float EXCEPT
A) mail float.
B) processing float.
C) transit float.
D) disbursing float.
Q4) EOQ model recommendations may be replaced by anticipatory buying during periods of high inflation.
A)True
B)False
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