Business Finance
Final Exam
Course Introduction
Business Finance provides an understanding of the fundamental principles and practices related to the financial management of businesses. The course covers key topics such as financial analysis, budgeting, working capital management, capital structure, investment appraisal, and sources of finance. Students will learn how to evaluate financial performance using tools like ratio analysis, prepare and analyze financial statements, and make informed decisions that enhance corporate value. Emphasis is placed on practical applications and decision-making processes, equipping students with the skills necessary to effectively manage financial resources in a dynamic business environment.
Recommended Textbook Fundamentals of Corporate Finance 2nd Canadian Edition by Jonathan Berk
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Page 2
Chapter 1: Corporate Finance and the Financial Manager
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Sample Questions
Q1) Explain some of the measures taken to reduce the principal-agent problem.
Answer: The principal-agent problem can be reduced by taking measures that align the managers' interests with those of the shareholders.For example,incentive-based compensation such as employee stock options help align the interests of these two constituents.
Q2) The financial manager of a well-regarded book publishing firm wishes to buy a small Internet publishing company to provide an avenue for sale of its materials online.In order to raise the funds to make this purchase,the financial manager decides to sell more stock in the company.How is the financial manager raising funds in this case?
A) by increasing the debt burden carried by the company
B) by raising the company's equity by encouraging new owners to take a stake in the company
C) by decreasing the ratio of equity to debt held by the company
D) by increasing the value of shares held by the existing owners of the company
E) by adding a new revenue stream from the Internet publishing company
Answer: B
Q3) What is the principal guiding factor for the financial manager?
Answer: Maximizing shareholder wealth is the paramount guiding factor for the financial manager.
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Page 3
Chapter 2: Introduction to Financial Statement Analysis
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Sample Questions
Q1) What will be the effect on the income statement if a firm buys a new processing plant through a new loan?
Answer: The effect on the income statement will be in the form of a depreciation expense for the first year on the new processing plant.
Q2) Farhan's Fences has retained earnings of $2.5 million,after paying dividends of $1.5 million.What was the firm's payout ratio?
A) 0.38
B) 0.60
C) 0.63
D) 1.50
E) 1.67
Answer: A
Q3) What is the need for the notes to the financial statements when the firm's operations are already documented in the financial statements?
Answer: Not all actions of the firm can be directly converted to an entry on the financial statements.For example,the firm may be involved in off balance sheet transactions,which have to be reported through notes to the financial statements.
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Chapter 3: The Valuation Principle: the Foundation of Financial Decision Making
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Sample Questions
Q1) You are scheduled to receive $10,000 in one year.An decrease in the interest rate will have what effect on the present value of this cash flow?
A) It will cause the present value to fall.
B) It will cause the present value to rise.
C) It will have no effect on the present value.
D) The effect cannot be determined with the information provided.
E) It will cause the present value to fall significantly.
Answer: B
Q2) The Law of One Price states that if equivalent goods or securities are traded simultaneously in different competitive markets,they will trade for the same price in each market.
A)True
B)False
Answer: True
Q3) What is one of the main obstacles in cost benefit analysis?
Answer: One of the main obstacles in cost benefit analysis is that not all benefits that are expected to occur in the future can be stated in dollar terms.
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Page 5
Chapter 4: The Time Value of Money
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Sample Questions
Q1) When evaluating investment opportunities,we can compare and combine cash flows that occur at different points in time.
A)True
B)False
Q2) A businessman wants to buy a truck.The dealer offers to sell the truck for either $120,000 now,or six yearly payments of $25,000.Which of the following is closest to the interest rate being offered by the dealer?
A) 5%
B) 7%
C) 9%
D) 11%
E) 8%
Q3) How do you calculate (mathematically)the present value (PV)of a(n):
(a)perpetuity
(b)annuity
(c)growing perpetuity
(d)growing annuity
Q4) Why must a growing perpetuity have a growth rate less than the discount rate?
Q5) Can we apply the growth perpetuity equation for negative growth as well?
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Chapter 5: Interest Rates
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Q1) When the costs of an investment come before that investment's benefits,what will be the the effect of a rise in interest rates on the attractiveness of that investment to potential investors?
A) It will make it more attractive, since it will increase the investment's net present value (NPV).
B) It will make it more attractive, since it will decrease the investment's net present value (NPV).
C) It will make it less attractive, since it will increase the investment's net present value (NPV).
D) It will make it less attractive, since it will decrease the investment's net present value (NPV).
E) It will be unchanged, since NPV calculations ignore changes in interest rates to more accurately compare the NPVs of projects beginning at different times.
Q2) Quality adjustments to changes in the CPI most often result in reductions to the inflation rate calculated from it.
A)True
B)False
Q3) What is a mortgage?
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Chapter 6: Bonds
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Sample Questions
Q1) Before it matures,the price of any bond is always less than its face value.
A)True
B)False
Q2) Why do bond prices increase as the next coupon payment gets closer?
Q3) If the yield to maturity of all of the following bonds is 6%,which trades at the greatest discount per $100 face value?
A) a bond with a $10,000 face value, four years to maturity and 6.2% semi-annual coupon payments
B) a bond with a $500 face value, ten years to maturity and 5.2% annual coupon payments
C) a bond with a $5000 face value, seven years to maturity and 5.5% annual coupon payments
D) a bond with a $1000 face value, five years to maturity and 6.3% annual coupon payments
E) a bond with a $100 face value, 3 years to maturity and 6.0% annual coupon payments
Q4) How are the cash flows of a zero-coupon bond different from those of a coupon bond?
Q5) How are the cash flows of a coupon bond different from an amortizing loan?
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Chapter 7: Valuing Stocks
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Sample Questions
Q1) What are the major limitations of valuation using multiples?
Q2) Which of the following is the best statement of the efficient markets hypothesis?
A) Investors with information that a stock had a positive net present value (NPV) will buy it, while investors with information that a stock had a negative net present value (NPV) will sell it.
B) Investor's decisions are dependent on complete current information of a firm's cash flows and accurate predictions of future cash flows.
C) Competition between investors works to make the net present value (NPV) of all trading opportunities zero.
D) A share's price is the aggregate of the information of many investors.
E) Investors should only buy stocks with a positive net present value (NPV).
Q3) In an efficient market,investors will only find positive-NPV trading opportunities if they have some form of competitive advantage over other investors.
A)True
B)False
Q4) What is the relationship between the growth rate and the cost of equity implied in the dividend-discount model?
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Chapter 8: Investment Decision Rules
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Sample Questions
Q1) A firm decides to purchase a 3D printer at a cost of $25,000,with an estimated useful life of 10 years.The printer will require servicing at a cost of $1,500 per year.What is the equivalent annual annuity of this deal,given a cost of capital of 8%?
A) $5,226
B) $4,000
C) $3,704
D) $1,500
E) $35,065
Q2) What is a safe method to use when confronted with mutually exclusive projects?
Q3) The net present value (NPV)for project alpha is closest to:
A) $20.96
B) $16.92
C) $24.01
D) $14.41
E) $12.06
Q4) What is the decision criteria using internal rate of return (IRR)rule?
Q5) How can you calculate the y-intercept of a net present value (NPV)profile without using TVM concepts?
Q6) What is the decision criteria using the Net Present Value rule?
Page 10
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Chapter 9: Fundamentals of Capital Budgeting
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Sample Questions
Q1) The manufacturer of a brand of kitchen knives is investigating the likely effects that an increase in the cost of the raw materials required to make these knives will have on the the cost of manufacturing the knives,the selling price of the knives,the number of knives that will then be sold,and the project's net present value (NPV).Which of the following best describes what type of analysis the manager is performing?
A) scenario analysis
B) sensitivity analysis
C) break-even analysis
D) EBIT-break even analysis
E) EPS analysis
Q2) What are the most difficult parts of capital budgeting?
Q3) What is the major difference between scenario analysis and sensitivity analysis?
Q4) The CCA tax shield for the Sisyphean Corporation's project in the first year is closest to:
A) $8000
B) $1575
C) $2800
D) $5200
E) $4500
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Chapter 10: Risk and Return in Capital Markets
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Sample Questions
Q1) What is the difference between systematic and unsystematic risk?
Q2) What are the two components of realized return from a stock investment?
Q3) You own shares in Yahoo that were purchased at a price of $21 per share.Microsoft has offered to purchase Yahoo and buy your shares at a price of $31 per share.What will be your return if you tender your shares to Microsoft and the deal is completed?
A) 47.62%
B) 33.45%
C) 49.65%
D) 43.34%
E) 37.71%
Q4) Historically,stocks have delivered a ________ return on average compared to Treasury bills but have experienced ________ fluctuations in values.
A) higher, higher
B) higher, lower
C) lower, higher
D) lower, lower
E) higher, similar
Q5) Why must riskier investments offer higher expected returns?
Q6) How does diversification affect systematic and unsystematic risk?
Page 12
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Chapter 11: Systematic Risk and the Equity Risk Premium
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Sample Questions
Q1) Since total risk is greater than systematic risk,should standard deviation be always greater than beta?
Q2) WestJet stock has a beta of 1.5.If the risk-free rate is 2.4%,and the expected market return is 10%,what is the expected return of WestJet stock,according to the CAPM?
A) 13.8%
B) 17.4%
C) 21.0%
D) 11.4%
E) 15.0%
Q3) The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:
A) 8%
B) 9%
C) 11%
D) 6%
E) 7%
Q4) What role does the correlation of two assets play in computation of the expected return of the two asset portfolio?
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Chapter 12: Determining the Cost of Capital
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Sample Questions
Q1) Ford Motor Company is discussing new ways to recapitalize the firm and raise additional capital.Its current capital structure has a 10% weight in equity,20% in preferred stock,and 70% in debt.The cost of equity capital is 15%,the cost of preferred stock is 10%,and the pretax cost of debt is 8%.What is the weighted average cost of capital for Ford if its marginal tax rate is 30%?
A) 7.01%
B) 7.42%
C) 7.98%
D) 8.01%
E) 8.73%
Q2) Epiphany is an all-equity firm with an estimated market value of $400,000.The firm sells $300,000 of debt and uses the proceeds to purchase outstanding equity.Compute the weight in equity and the weight in debt after the proposed financing and repurchase of equity.
A) 0.2, 0.8
B) 0.25, 0.75
C) 0.4, 0.6
D) 0.5, 0.5
E) 0.1, 0.3
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Page 14
Chapter 13: Risk and the Pricing of Options
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Sample Questions
Q1) The value of an otherwise identical call option is ________ if the strike price the holder must pay to buy the stock is ________.
A) higher, higher
B) lower, lower
C) higher, lower
D) unchanged, lower
E) unchanged, higher
Q2) A share of stock can be thought of as a put option on the firm's assets with a strike price equal to the face value of debt.
A)True
B)False
Q3) The value of an otherwise identical call option is ________ if the stock price is ________.
A) higher, higher
B) lower, higher
C) higher, lower
D) unchanged, higher
E) unchanged, lower
Q4) What are American options?
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Chapter 14: Raising Equity Capital
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Sample Questions
Q1) Newly listed firms tend to perform relatively poorly in the three to five years after their IPOs.
A)True
B)False
Q2) Regina Respiratory Devices stock trades at $21 per share and there are 14 million shares outstanding.The management would like to raise $80 million in an SEO.If the underwriter charges 5% of gross proceeds,how many shares must it sell?
A) 3.6 million
B) 3.8 million
C) 4 million
D) 4.5 million
E) 3.4 million
Q3) An IPO is offered at $6.75 per share for 2 million shares.The IPO underwriters had a spread of 9%.What was the total fee paid to the underwriters?
A) $13,500,000
B) $1,215,000
C) $12,285,000
D) $12,385,000
E) $1,800,000
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Page 16
Chapter 15: Debt Financing
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Sample Questions
Q1) A company issues a 10-year,callable bond at par with 8% annual coupon payments.The bond can be called at par in one year after issue or any time after that on a coupon payment date.The call price is $105 per $100 of face value.What is the yield to call if this bond is called in one year?
A) 5%
B) 8%
C) 10%
D) 11%
E) 13%
Q2) What is a sinking fund?
Q3) A company issues a callable (at par)ten-year coupon bond with annual coupon payments.The bond can be called at par in one year after release or any time after that on a coupon payment date.On release,it has a price of $102.50 per $100 of face value,and has a yield to call of 4.8%.What is the bond's coupon rate?
A) 5.12%
B) 4.8%
C) 7.10%
D) 7.42%
E) 8.54%
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Page 17
Chapter 16: Capital Structure
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Sample Questions
Q1) The tradeoff theory of optimal capital structure weighs the benefits of debt against the costs of
A) financial distress.
B) interest payments.
C) dividend reinvestment.
D) input factors.
E) equity.
Q2) Firms in industries such as real estate tend to have ________ distress costs because of a large proportion of tangible assets.
A) high
B) low
C) unexpected
D) varying
E) constant
Q3) What are the issues in determining the optimal leverage for a firm?
Q4) What are direct costs of financial distress?
Q5) What are indirect costs of financial distress?
Q6) The presence of leverage can influence the behaviour of the managers of a firm.
A)True
B)False
Page 18
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Chapter 17: Payout Policy
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Sample Questions
Q1) Repurchases and special dividends are useful for making ________ and ________ distributions to shareholders.
A) small, frequent
B) small, infrequent
C) large, infrequent
D) large, frequent
E) medium, frequent
Q2) The WTC Corporation will pay a constant dividend of $3.20 per share,per year,in perpetuity.If all investors pay a 15% tax on dividends,there is no capital gains tax,and the cost of capital for investing in WTC stock is 9%,what is the price for a share of WTC stock?
A) $30.22
B) $26.67
C) $18.77
D) $16.45
E) $15.76
Q3) What is the bird-in-the-hand fallacy in dividend theory under perfect capital markets?
Q4) What is greenmail?
Q5) What are the characteristics of special dividend?
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Chapter 18: Financial Modelling and Pro Forma Analysis
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Sample Questions
Q1) A firm forecasts its free cash flow will be $100,000 one year from today.Free cash flows are expected to grow at 4% for the following 4 years.At the forecast horizon,the firm's growth results in an EBITDA forecast of $650,000.If its EBITDA multiple is 11 and the discount rate is 6%,what is the value of the firm?
A) $6.6 million
B) $5 million
C) $5.8 million
D) $5.3 million
E) $4.9 million
Q2) The ________ method assumes that as sales grow,many income statement and balance sheet items will grow,remaining the same percent of sales.
A) percent of income
B) percent of liabilities
C) percent of sales
D) percent of assets
E) percent of earnings
Q3) Why is EBITDA multiple used for valuation rather than sales or earnings?
Q4) How do we compute net new financing?
Q5) How do we know if expansion is a good idea for the firm?
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Chapter 19: Working Capital Management
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Sample Questions
Q1) Which of the following best describes short-term debt issued by banks that are insured up to $100,000?
A) certificates of deposit
B) repurchase agreements
C) banker's acceptances
D) commercial paper
E) bearer deposit notes
Q2) Collection float is the amount of time it takes for a firm to be able to use funds after a customer has paid for its goods.
A)True
B)False
Q3) What is the effective annual cost of credit terms of 1/10 net 30,if the firm stretches the accounts payable to 45 days?
A) 8.49 %
B) 10.91%
C) 11.05%
D) 18.03%
E) 9.64%
Q4) What are the advantages of holding inventory?
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Chapter 20: Short Term Financial Planning
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Sample Questions
Q1) What is the term used for a short-term,unsecured debt sold by a large company to investors?
A) commercial paper
B) retail paper
C) wholesale paper
D) unsecured paper
E) junk bond
Q2) In which quarter(s)are Fancy's seasonal working capital needs the greatest?
A) 1
B) 2
C) 3
D) 4
E) 1 and 2
Q3) The temporary working capital needs for Hasbeen Toys in quarter 1 is closest to:
A) $0 million
B) $340 million
C) $770 million
D) $845 million
E) $640 million
Q4) How can a conservative financing policy reduce firm value?
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Chapter 21: Risk Management
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Q1) An operator of an oil well has a 0.5% chance of experiencing a catastrophic failure.This failure will cost the operator $500 million.If the risk-free rate is 2%,the expected return on the market is 8%,and the beta of the risk is -1.2,what is the actuarially fair insurance premium?
A) $2,500,000
B) $2,637,131
C) $2,550,000
D) $2,753,304
E) $2,145,000
Q2) To cover the costs that result if some aspect of the business causes harm to a third party or someone else's property,a firm would purchase
A) business interruption insurance.
B) property insurance.
C) business liability insurance.
D) key personnel insurance.
E) damage insurance.
Q3) Being long a futures contract is equivalent to purchasing a put option.
A)True
B)False
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Page 23
Chapter 22: International Corporate Finance
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Q1) Firms must consider the impact of exchange rate risk if ________ of the project are affected by exchange rate changes.
A) cash flows
B) revenues
C) costs
D) capital costs
E) depreciation expenses
Q2) The spot exchange rate for the Mexican peso is 12.35 MXN/CAD.If the one-year Canadian interest rate is 5.5% and the one-year Mexican interest rate is 3.75%,compute the implied one-year forward rate in CAD/MXN.
A) 0.079 CAD/MXN
B) 0.080 CAD/MXN
C) 0.082 CAD/MXN
D) 0.085 CAD/MXN
E) 0.081 CAD/MXN
Q3) Canadian tax policy requires Canadian corporations to pay taxes on their foreign income at the same rate as profits earned in Canada.
A)True
B)False
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Chapter 23: Leasing
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Q1) A lease that gives the lessee the option to purchase the asset at its fair market value at the termination of the lease is called a
A) fair market value cap lease.
B) fair market value lease.
C) $1.00 out lease.
D) fixed price lease.
E) synthetic lease.
Q2) If your firm's borrowing cost is 12% and the tax rate is 25%,what is the NPV of buying and leasing?
A) $20,479
B) $5,844
C) -$14,694
D) -$5,844
E) $14,694
Q3) Explain the reduced resale costs argument for leasing.
Q4) To evaluate a lease correctly,the appropriate comparison is not lease versus buy,but rather,lease versus borrow.
A)True
B)False
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Chapter 24: Mergers and Acquisitions
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Q1) Consider two firms,Left Company and Right Enterprises,both with earnings of $2.50 per share and 15 million shares outstanding.Left is a mature company with few growth opportunities and a stock price of $7 per share.Right is a new firm with much higher growth opportunities and a stock price of $16 per share.Assume Right acquires Left using its own stock and the takeover adds no value.What is the change in Right's price-earnings ratio as a result of the acquisition?
A) 0
B) 3.0
C) -3.2
D) -3.6
E) -1.8
Q2) The fact that a large company can enjoy savings from producing goods in high volume that are not available to a small company is called A) economies of scale.
B) horizontal integration. C) vertical integration.
D) economies of scope.
E) monopoly gains.
Q3) What is the difference between a friendly takeover and a hostile takeover?
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Page 26
Chapter 25: Corporate Governance
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Q1) What is backdating?
Q2) What is corporate governance?
Q3) Describe the "stakeholder" model of corporate governance.
Q4) Which of the following countries has employees appoint some board members?
A) Canada
B) the United States
C) Turkey
D) Germany
E) Australia
Q5) How does shareholder voice serve to discipline poorly performing managers?
Q6) Having a founder and top executive also be a major shareholder
A) always results in agency conflicts that are bad for minority shareholders.
B) can sometimes, as in the case of Google, have benefits that outweigh the costs.
C) is illegal in Canada and most other industrialized countries.
D) is never beneficial to employees.
E) inevitably leads to insider trading.
Q7) What are some of the negative effects of increasing the sensitivity of managerial pay to firm performance?
Q8) What is tunnelling?
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