Business Finance
Final Test Solutions
Course Introduction
Business Finance introduces students to the fundamental principles and practices of financial management within a business context. The course covers topics such as financial statement analysis, budgeting, time value of money, risk and return, capital structure, and working capital management. Students will learn how to assess financial performance, make investment decisions, and manage resources effectively to maximize a firms value. Through case studies and practical exercises, the course equips learners with the analytical tools needed to solve real-world financial problems and support strategic business decisions.
Recommended Textbook
Fundamentals of Corporate Finance 10th Alternate Edition by Stephen A. Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) Which one of the following statements is generally correct?
A) Private placements must be registered with the SEC.
B) All secondary markets are auction markets.
C) Dealer markets have a physical trading floor.
D) Auction markets match buy and sell orders.
E) Dealers arrange trades but never own the securities traded.
Answer: D
Q2) The articles of incorporation:
I.describe the purpose of the firm.
II.are amended periodically.
III.set forth the number of shares of stock that can be issued.
IV.detail the method that will be used to elect corporate directors.
A) I and III only
B) I and IV only
C) II and III only
D) II and IV only
E) I,III,and IV only
Answer: A
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Two: Financial Statements and Long-Term Financial Planning
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Sample Questions
Q1) Noncash items refer to:
A) accrued expenses.
B) inventory items purchased using credit.
C) the ownership of intangible assets such as patents.
D) expenses which do not directly affect cash flows.
E) sales which are made using store credit.
Answer: D
Q2) A firm has common stock of $6,200,paid-in surplus of $9,100,total liabilities of $8,400,current assets of $5,900,and fixed assets of $21,200.What is the amount of the shareholders' equity?
A) $6,900
B) $15,300
C) $18,700
D) $23,700
E) $35,500
Answer: C
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Chapter 3: Working With Financial Statements
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Sample Questions
Q1) A firm generated net income of $862.The depreciation expense was $47 and dividends were paid in the amount of $25.Accounts payables decreased by $13,accounts receivables increased by $28,inventory decreased by $14,and net fixed assets decreased by $8.There was no interest expense.What was the net cash flow from operating activity?
A) $776
B) $802
C) $882
D) $922
E) $930
Answer: C
Q2) The price-sales ratio is especially useful when analyzing firms that have which one of the following?
A) volatile market prices
B) negative earnings
C) positive PEG ratios
D) a negative Tobin's Q
E) increasing sales
Answer: B
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Chapter 4: Long-Term Financial Planning and Growthpart
Three: Valuation of Future Cash Flows
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Sample Questions
Q1) Which one of the following correctly defines the retention ratio?
A) one plus the dividend payout ratio
B) addition to retained earnings divided by net income
C) addition to retained earnings divided by dividends paid
D) net income minus additions to retained earnings
E) net income minus cash dividends
Q2) The Parodies Corp.has a 22 percent return on equity and a 23 percent payout ratio.What is its sustainable growth rate?
A) 18.68 percent
B) 19.25 percent
C) 19.49 percent
D) 20.39 percent
E) 22.00 percent
Q3) Identify the four primary determinants of a firm's growth and explain how each factor could either add to or limit the growth potential of a firm.
Q4) A)What are the assumptions that underlie the internal growth rate and B)what are the implications of this rate?
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Chapter 5: Introduction to Valuation: the Time Value of Money
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Sample Questions
Q1) Your grandmother has promised to give you $5,000 when you graduate from college.She is expecting you to graduate two years from now.What happens to the present value of this gift if you delay your graduation by one year and graduate three years from now?
A) remains constant B) increases C) decreases D) becomes negative
E) cannot be determined from the information provided
Q2) You are considering two lottery payment options: Option A pays $10,000 today and Option B pays $20,000 at the end of ten years.Assume you can earn 6 percent on your savings.Which option will you choose if you base your decision on present values? Which option will you choose if you base your decision on future values? Explain why your answers are either the same or different.
Q3) At 8 percent interest,how long would it take to quadruple your money?
A) 16.55 years
B) 16.64 years
C) 17.09 years
D) 18.01 years
E) 18.56 years
Page 7
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Chapter 6: Discounted Cash Flow Valuation
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Sample Questions
Q1) Samuelson Engines wants to save $750,000 to buy some new equipment four years from now.The plan is to set aside an equal amount of money on the first day of each quarter starting today.The firm can earn 4.75 percent on its savings.How much does the firm have to save each quarter to achieve its goal?
A) $42,337.00
B) $42,969.70
C) $43,192.05
D) $43,419.29
E) $43,911.08
Q2) Which one of the following accurately defines a perpetuity?
A) a limited number of equal payments paid in even time increments
B) payments of equal amounts that are paid irregularly but indefinitely
C) varying amounts that are paid at even intervals forever
D) unending equal payments paid at equal time intervals
E) unending equal payments paid at either equal or unequal time intervals
Q3) Kristie owns a perpetuity which pays $12,000 at the end of each year.She comes to you and offers to sell you all of the payments to be received after the 10<sup>th</sup> year.Explain how you can determine the value of this offer.
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Chapter 7: Interest Rates and Bond Valuation
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Sample Questions
Q1) Phil has researched TLM Technologies and believes the firm is poised to vastly increase in value.He wants to invest in this company.Phil has decided to purchase TLM Technologies bonds so that he can have a steady stream of interest income.However,he still wishes that he could share in the firm's success along with TLM's shareholders.Which one of the following bond features will help Phil fulfill his wish?
A) put provision
B) positive covenant
C) warrant
D) crossover rating
E) call provision
Q2) The Walthers Company has a semi-annual coupon bond outstanding.An increase in the market rate of interest will have which one of the following effects on this bond?
A) increase the coupon rate
B) decrease the coupon rate
C) increase the market price
D) decrease the market price
E) increase the time period
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Chapter 8: Stock Valuationpart Four: Capital Budgeting
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Sample Questions
Q1) The owner of one of the 1,366 trading licenses for the NYSE is called a:
A) broker.
B) member.
C) agent.
D) specialist.
E) dealer.
Q2) Great Lakes Health Care common stock offers an expected total return of 9.2 percent.The last annual dividend was $2.10 a share.Dividends increase at a constant 2.6 percent per year.What is the dividend yield?
A) 3.75 percent
B) 4.20 percent
C) 4.55 percent
D) 5.25 percent
E) 6.60 percent
Q3) What are the distributions to shareholders by a corporation called?
A) retained earnings
B) net income
C) dividends
D) capital payments
E) diluted profits
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Chapter 9: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows.What is the name given to this graph?
A) project tract
B) projected risk profile
C) NPV profile
D) NPV route
E) present value sequence
Q2) Kristi wants to start training her most junior assistant,Amy,in the art of project analysis.Amy has just started college and has no experience or background in business finance.To get her started,Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze.Which method is Kristi most apt to ask Amy to use in making her initial decisions?
A) discounted payback
B) profitability index
C) internal rate of return
D) payback
E) average accounting return
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11
Chapter 10: Making Capital Investment Decisions
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Sample Questions
Q1) Decreasing which one of the following will increase the acceptability of a project?
A) sunk costs
B) salvage value
C) depreciation tax shield
D) equivalent annual cost
E) accounts payable requirement
Q2) When using the equivalent annual cost as a basis for deciding which equipment should be purchased,the equipment under consideration must fit which two of the following criteria?
I.differing productive lives
II.differing manufacturers
III.required replacement at end of economic life
IV.differing initial cost
A) I and II
B) I and III
C) I and IV
D) II and IIII
E) II and IV
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Chapter 11: Project Analysis and Evaluationpart Five: Risk and Return
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Sample Questions
Q1) The president of Global Wholesalers would like to offer special sale prices to the firm's best customers under the following terms:
1)The prices will apply only to units purchased in excess of the quantity normally purchased by a customer.
2)The units purchased must be paid for in cash at the time of sale.
3)The total quantity sold under these terms cannot exceed the excess capacity of the firm.
4)The net profit of the firm should not be affected.
5)The prices will be in effect for one week only.
Given these conditions,the special sale price should be set equal to the:
A) average variable cost of materials only.
B) average cost of all variable inputs.
C) sensitivity value of the variable costs.
D) marginal cost of materials only.
E) marginal cost of all variable inputs.
Q2) What is forecasting risk and why is it important to the analysis of capital expenditure projects? What methods can be used to reduce this risk?
Q3) What are the key features of the accounting,cash,and financial break-even points?
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Chapter 12: Some Lessons From Capital Market History
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Sample Questions
Q1) Last year,you purchased a stock at a price of $47.10 a share.Over the course of the year,you received $2.40 per share in dividends while inflation averaged 3.4 percent.Today,you sold your shares for $49.50 a share.What is your approximate real rate of return on this investment?
A) 6.30 percent
B) 6.79 percent
C) 7.18 percent
D) 9.69 percent
E) 10.19 percent
Q2) A stock had returns of 14 percent,13 percent,-10 percent,and 7 percent for the past four years.Which one of the following best describes the probability that this stock will lose no more than 10 percent in any one year?
A) greater than 0.5 but less than 1.0 percent
B) greater than 1.0 percent but less than 2.5 percent
C) greater than 2.5 percent but less than 16 percent
D) greater than 84 percent but less than 97.5 percent
E) greater than 95 percent
Q3) Define and explain the three forms of market efficiency.
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Page 14
Six: Cost of Capital and Long-Term Financial Policy
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Sample Questions
Q1) The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:
A) number of shares owned of each stock.
B) market price per share of each stock.
C) market value of the investment in each stock.
D) original amount invested in each stock.
E) cost per share of each stock held.
Q2) The principle of diversification tells us that:
A) concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk.
B) concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk.
C) spreading an investment across five diverse companies will not lower the total risk.
D) spreading an investment across many diverse assets will eliminate all of the systematic risk.
E) spreading an investment across many diverse assets will eliminate some of the total risk.
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Chapter 14: Cost of Capital
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Sample Questions
Q1) The dividend growth model:
A) is only as reliable as the estimated rate of growth.
B) can only be used if historical dividend information is available. C) considers the risk that future dividends may vary from their estimated values.
D) applies only when a firm is currently paying dividends.
E) uses beta to measure the systematic risk of a firm.
Q2) Electronics Galore has 950,000 shares of common stock outstanding at a market price of $38 a share.The company also has 40,000 bonds outstanding that are quoted at 106 percent of face value.What weight should be given to the debt when the firm computes its weighted average cost of capital?
A) 42 percent
B) 46 percent
C) 50 percent
D) 54 percent
E) 58 percent
Q3) Explain how the use of internal equity rather than external equity affects the analysis of a project.
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Chapter 15: Raising Capital
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Sample
Questions
Q1) Barstow Industrial Supply has decided to raise $27.52 million in additional funding via a rights offering.The firm will issue one right for each share of stock outstanding.The offering consists of a total of 860,000 new shares.The current market price of the stock is $38.Currently,there are 5.16 million shares outstanding.What is the value of one right?
A) $0.97
B) $0.86
C) $0.48
D) $0.52
E) $0.60
Q2) Which of the following should be considered when selecting a venture capitalist?
I.level of involvement
II.past experiences
III.termination of funding
IV.financial strength
A) I and III only
B) II and IV only
C) I,III,and IV only
D) I,II,and IV only
E) I,II,III,and IV
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17
Chapter 16: Financial Leverage and Capital Structure Policy
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Sample Questions
Q1) Naylor's is an all equity firm with 60,000 shares of stock outstanding at a market price of $50 a share.The company has earnings before interest and taxes of $102,000.Naylor's has decided to issue $750,000 of debt at 7.5 percent.The debt will be used to repurchase shares of the outstanding stock.Currently,you own 500 shares of Naylor's stock.How many shares of Naylor's stock will you continue to own if you unlever this position? Assume you can loan out funds at 7.5 percent interest.Ignore taxes.
A) 322 shares
B) 350 shares
C) 362 shares
D) 425 shares
E) 502 shares
Q2) Which one of the following makes the capital structure of a firm irrelevant?
A) taxes
B) interest tax shield
C) 100 percent dividend payout ratio
D) debt-equity ratio that is greater than 0 but less than 1
E) homemade leverage
Q3) Explain how a firm loses value during the bankruptcy process from both a creditors and a shareholders perspective.
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Page 18
Chapter 17: Dividends and Payout Policypart Seven: Short-Term
Financial Planning and Management
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Q1) Prezario's has 25,000 shares of stock outstanding with a par value of $1 per share.The current market value of the firm is $847,000.Currently,the retained earnings account balance is $428,000 and the capital in excess of par value account balance is $187,000.The company just announced a 3-for-1 stock split.What is the common stock account balance after the stock split?
A) $8,333
B) $25,000
C) $75,000
D) $77,333
E) $232,000
Q2) Delaware Trust has 450 shares of common stock outstanding at a market price per share of $27.Currently,the firm has excess cash of $400,total assets of $28,900,and net income of $1,320.The firm has decided to pay out all of its excess cash as a cash dividend.What will the earnings per share be after this dividend is paid?
A) $2.69
B) $2.86
C) $2.93
D) $3.07
E) $3.24
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Chapter 18: Short-Term Finance and Planning
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Sample Questions
Q1) Which one of the following managers determines which customers must pay cash and which can charge their purchases?
A) purchasing manager
B) credit manager
C) controller
D) production manager
E) payables manager
Q2) Merryl Enterprises currently has an operating cycle of 59 days.The firm is analyzing some operational changes,which are expected to increase the accounts receivable period by 2 days and decrease the inventory period by 5 days.The accounts payable turnover rate is expected to increase from 42 to 46 times per year.If all of these changes are adopted,what will the firm's new operating cycle be?
A) 51 days
B) 54 days
C) 56 days
D) 59 days
E) 65 days
Q3) List and describe the three basic types of secured inventory loans.Compare the advantages and disadvantages of these loans.
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Page 20
Chapter 19: Cash and Liquidity Management
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Sample Questions
Q1) Adjustment costs is another name for which one of the following?
A) borrowing costs
B) shortage costs
C) cash transfer costs
D) cash wire costs
E) excess cash costs
Q2) A firm has $16,718 in outstanding checks that have not cleared the bank.The firm also has $13,450 in deposits that have been recorded by the firm but not by the bank.The current available balance is $11,407.What is the status of the net float?
A) net collection float of $8,138
B) net collection float of $2,043
C) net collection float of $13,450
D) net disbursement float of $3,268
E) net disbursement float of $5,311
Q3) Explain how the unethical use of uncollected funds has been impacted by the growth of on-line retailing and banking.
Q4) Explain what a zero-balance account is,how it is used,and how it affects cash management.
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Page 21
Topics in Corporate Finance
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Sample Questions
Q1) A firm sells 4,500 units of an item each year.The carrying cost per unit is $2.15 and the fixed costs per order are $69.What is the economic order quantity?
A) 374 units
B) 421 units
C) 497 units
D) 537 units
E) 623 units
Q2) Your current sales consist of 32 units per month at a price of $225 a unit.You are weighing the pros and cons of switching to a net 30 credit policy from your current cash only policy.If you decide to switch your credit policy you also plan to increase the sales price to $240 a unit.If you make the switch you do not expect your total monthly sales quantity to change but you do expect a 3 percent default rate.The monthly interest rate is 1.5 percent.What is the net present value of the proposed credit policy switch?
A) $6,727
B) $6,893
C) $7,965
D) $9,440
E) $9,481
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Chapter 21: International Corporate Finance
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Sample Questions
Q1) Long-run exposure to exchange rate risk relates to:
A) daily variations in exchange rates.
B) variances between spot and future rates.
C) unexpected changes in relative economic conditions.
D) differences between future spot rates and related forward rates.
E) accounting gains and losses created by fluctuating exchange rates.
Q2) International bonds issued in multiple countries but denominated solely in the issuer's currency are called:
A) Treasury bonds.
B) Bulldog bonds.
C) Eurobonds.
D) Yankee bonds.
E) Samurai bonds.
Q3) Describe the foreign currency and home currency approaches to capital budgeting for a foreign project.Which is better? Which approach would you recommend a U.S.firm use? Justify your answer.
Q4) What conditions are necessary for absolute purchasing power parity (PPP)to exist? Is it realistic to believe PPP can exist within a country let alone across national borders?
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Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) AB Industries is an all-equity firm that has $10 per share in cash and a book value per share of $12.At which one of the following market prices would you know with absolute certainty that the stock was mispriced?
A) $9
B) $10
C) $11
D) $12
E) $13
Q2) A sudden and severe decline in market prices is best described as a market: A) crash.
B) revolver.
C) bubble.
D) limit.
E) mispricing.
Q3) General rules used as the basis for decision making are referred to as: A) a loss aversion technique.
B) heuristics.
C) self-attribution.
D) narrow framing.
E) confirmation bias.
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Chapter 23: Enterprise Risk Management
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Q1) What are the primary motives for a hedger and a speculator in the derivatives market? If a wheat farmer sells wheat futures,is that hedging or speculating? Explain.
Q2) Which one of the following actions will provide you with the right,but not the obligation,to sell the underlying asset at a specified price during a specified period of time?
A) purchase of a call option
B) sale of a call option
C) purchase of a put option
D) sale of a put option
E) swap
Q3) Sue recently purchased a right to buy 100 shares of ABC stock for $27.50 a share if she so chooses at any time within the next four months.Which one of the following does Sue own?
A) futures contract
B) call option
C) put option
D) straddle
E) strangle
Q4) Explain why a swap is effectively a series of forward contracts.
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Chapter 24: Options and Corporate Finance
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Q1) The price of Time Squared Corp.stock will be either $80 or $95 at the end of the year.Call options are available with one year to expiration.T-bills currently yield 6 percent and the current price of Time Squared Corp.stock is $85.What is the value of a call option if the exercise price is $75 per share?
A) $14.25
B) $15.06
C) $18.78
D) $24.25
E) $25.06
Q2) Employee stock options:
A) usually have a positive intrinsic value when issued.
B) must be backdated at least six months to comply with Sarbanes-Oxley.
C) are generally "underwater" when issued.
D) are frequently repriced if the options are in-the-money.
E) are generally issued with a zero intrinsic value.
Q3) Explain how the floor and the ceiling prices for a convertible bond are determined.
Q4) Explain the rationale behind the idea that equity is a call option on a firm's assets.When would a shareholder allow this call to expire?
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Chapter 25: Option Valuation
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Q1) The current market value of the assets of Nano Tek is $19.5 million.The market value of the equity is $7.5 million.The risk-free rate is 4.5 percent and the outstanding debt matures in 5 years.What is the market value of the firm's debt?
A) $8.50 million
B) $9.98 million
C) $12.00 million
D) $19.42 million
E) $23.84 million
Q2) Which one of the five factors included in the Black-Scholes model cannot be directly observed?
A) risk-free rate
B) strike price
C) standard deviation
D) stock price
E) life of the option
Q3) Explain how option pricing theory can be used to argue that acquisitive firms pursuing conglomerate mergers are not acting in the shareholders' best interest.
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Chapter 26: Mergers and Acquisitions
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Q1) Which of the following statements correctly apply to a merger?
I.The titles to individual assets of the acquired firm must be transferred into the acquiring firm's name.
II.The merged firm will retain the use of the acquiring company's name.
III.The acquiring firm does not have to seek approval for the merger from its shareholders.
IV.The shareholders of the acquired company must approve the merger.
A) I and III only
B) II and IV only
C) I,II,and III only
D) I,II,and IV only
E) I,II,III,and IV
Q2) If Paul's Hardware were to acquire Suburban Hardware,the acquisition would be classified as a _____ acquisition.
A) horizontal
B) longitudinal
C) conglomerate
D) vertical
E) integrated
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Chapter 27: Leasing
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Q1) Baxter Contractors is evaluating the lease versus the purchase of a $329,000 machine.The machine will be depreciated using MACRS over a 4-year period,after which the machine will be worthless.MACRS allows for 33.33 percent,44.44 percent,14.82 percent,and 7.41 percent depreciation over years 1 to 4,respectively.The machine could be leased for $105,000 a year for 4 years.The firm can borrow money at 9.5 percent and has a 35 percent tax rate.The firm does not expect to pay any taxes for the next 5 years.What is the net advantage to leasing?
A) -$4,587
B) -$7,471
C) -$18,640
D) -$21,651
E) -$30,277
Q2) Explain the differences between purchasing an asset and leasing an asset.
Q3) The party who owns a leased asset is called the:
A) lessee.
B) lessor.
C) guarantor.
D) trustee.
E) manager.
Q4) What are some "good" reasons for opting to lease rather than purchase an asset?
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