Business Finance
Final Test Solutions
Course Introduction
Business Finance introduces students to the fundamental principles and practices essential for effective financial management within organizations. The course covers key topics such as financial statement analysis, time value of money, capital budgeting, risk and return analysis, and the cost of capital. Students will also examine sources of short-term and long-term financing, working capital management, and financial planning. Emphasis is placed on using financial information to make strategic business decisions and understanding the impact of financial markets on organizational performance. Through case studies and practical applications, students develop the analytical and decision-making skills required for successful financial management in a dynamic business environment.
Recommended Textbook
Fundamentals of Corporate Finance 2nd Canadian Edition by Jonathan Berk
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25 Chapters
2674 Verified Questions
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Page 2
Chapter 1: Corporate Finance and the Financial Manager
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91 Verified Questions
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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) Katie owns 12.5% of the stock of the Gimli Corporation.The tax rate on dividend income is 24%.If Gimli makes a dividend payment of $25,000,000 paid proportionally to its shareholders,how much of this amount would Katie receive after taxes?
A) $750,000
B) $2,375,000
C) $3,125,000
D) $6,000,000
E) $19,000,000
Answer: B
Q3) The shares of private corporations are traded on a stock market.
A)True
B)False
Answer: False
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Chapter 2: Introduction to Financial Statement Analysis
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Sample Questions
Q1) Refer to the statement of financial position above.If in 2015 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share,then what is Luther's enterprise value?
A) -$63.3 million
B) $353.1 million
C) $389.7 million
D) $516.9 million
E) $163.2 million
Answer: C
Q2) Refer to the income statement above.Luther's return on equity (ROE)for the year ending December 31,2015 is closest to:
A) 2.0%
B) 6.5%
C) 8.4%
D) 12.7%
E) 32.5%
Answer: C
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Page 4
Chapter 3: The Valuation Principle: the Foundation of Financial Decision Making
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Sample Questions
Q1) If the one-year discount factor is equal to 0.90909,the interest must be equal to:
A) 5.0%
B) 9.1%
C) 9.5%
D) 10.0%
E) 10.5%
Answer: D
Q2) Diwali Airlines has a contract that gives them the opportunity to purchase up to 10,000,000 gallons of jet fuel at $2.00 per gallon.The current market price of jet fuel is $2.26 per gallon.Diwali believes they will only need 6,000,000 gallons of jet fuel.What is the value of this opportunity?
A) $1,560,000
B) $2,600,000
C) $1,040,000
D) $9,040,000
E) $12,000,000
Answer: B
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5
Chapter 4: The Time Value of Money
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Sample Questions
Q1) To calculate the future value of an annuity,we divide the annuity formula by the appropriate discount factor.
A)True
B)False
Q2) How do the growth perpetuity results differ with negative and positive growths of similar magnitude,assuming everything else remains unchanged?
Q3) Cash flows from an annuity occur every year in the future.
A)True
B)False
Q4) What is the difference between a perpetuity and an annuity?
Q5) Jackie & her husband started a savings account for their twin daughters when they were 2 years old.They have been saving $100,000 a year at an interest rate of 10%,and intend on keeping up with their annual contribution to the fund until the girls are 21.What is the future value of their investment?
A) $864,869.43
B) $836,492.01
C) $5,115,909.05
D) $6,400,249.94
E) $2,090,000
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Chapter 5: Interest Rates
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Sample Questions
Q1) What,typically,is used to calculate the opportunity cost of capital on a risk-free investment?
A) the best available expected return offered in any investment available in the market
B) the interest rate on Government of Canada securities with the same term
C) the interest rate of any investments alternatives that are available
D) the best rate of return offered by Government of Canada securities
E) the interest rate on short-term Government of Canada securities
Q2) What is a mortgage?
Q3) The effective annual rate (EAR)for a savings account with a stated APR of 4% compounded daily is closest to:
A) 4.00%
B) 4.10%
C) 4.08%
D) 4.06%
E) 4.05%
Q4) How are interest and return of principal handled in an amortizing loan payment?
Q5) Everything else remaining the same,under what situation will APR and EAR be equal?
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Chapter 6: Bonds
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Sample Questions
Q1) How much will the coupon payments be of a 10-year $10,000 bond with a 3% coupon rate and semi-annual payments?
A) $150
B) $120
C) $100
D) $300
E) $600
Q2) Assuming that this bond trades for $1112,then the YTM for this bond is closest to:
A) 8.0%
B) 3.4%
C) 6.8%
D) 9.2%
E) 11.2%
Q3) Under what situation can a zero-coupon bond be selling at par to its face value?
Q4) Bond traders generally quote bond yields rather than bond prices,since yield to maturity depends on the face value of the bond.
A)True
B)False
Q5) Why do bond prices fall as interest rates rise?
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Chapter 7: Valuing Stocks
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Sample Questions
Q1) The ownership in a corporation is divided into shares of stock,which carry rights to share in the profits of the firm through future dividend payments.
A)True B)False
Q2) Conundrum Mining is expected to generate the above free cash flows over the next four years,after which they are expected to grow at a rate of 5% per year.If the weighted average cost of capital is 12% and Conundrum has cash of $80 million,debt of $60 million,and 30 million shares outstanding,what is Conundrum's expected current share price?
A) $10.84
B) $13.72
C) $16.16
D) $16.25
E) $17.15
Q3) What are the major limitations of the dividend-discount model?
Q4) A firm can either pay its earnings out to its investors,or it can keep them and reinvest them.
A)True B)False
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Chapter 8: Investment Decision Rules
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Sample Questions
Q1) The profitability index for project B is closest to:
A) 23.34
B) 12.64
C) 0.17
D) 0.12
E) 1.14
Q2) What is the decision criteria while using the payback rule?
Q3) Assume the appropriate discount rate for this project is 15%.The payback period for this project is closest to:
A) 3
B) 2.5
C) 2
D) 4
E) 1
Q4) What is a safe method to use when confronted with mutually exclusive projects?
Q5) When comparing mutually exclusive projects which have different scales,you must know the dollar impact of each investment rather than percentage returns.
A)True
B)False
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Chapter 9: Fundamentals of Capital Budgeting
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Sample Questions
Q1) The most difficult part of the capital budgeting process is accurately estimating cash flows and cost of capital.
A)True
B)False
Q2) What are project externalities?
Q3) A construction company spends $1.4 million to purchase a new crane.The crane will have a capital cost allowance (CCA)rate of 25%.If the opportunity cost of capital is 7%,and the company's marginal tax rate is 20%,what is the present value of the CCA tax shield?
A) $70,000
B) $350,000
C) $211,595
D) $250,779
E) $218,750
Q4) Capital budgeting is the process of allocating funds to the firm's investment projects.
A)True
B)False
Q5) What is the major difference between scenario analysis and sensitivity analysis?
Page 11
Q6) What do you understand by break-even analysis?
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Chapter 10: Risk and Return in Capital Markets
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Sample Questions
Q1) Suppose you invested $7.55 in Big Rock Brewery one month ago.Today,it paid a dividend of $0.10,and then you sold it for $7.35.What was the return on your investment?
A) 1%
B) -1%
C) -1.3%
D) 4.2%
E) 1.1%
Q2) If asset A's return is exactly two times asset B's return,then following risk return tradeoff,the standard deviation of asset A should be ________ times the standard deviation of asset B.
A) 3
B) 2
C) 1
D) 4
E) 5
Q3) Why must riskier investments offer higher expected returns?
Q4) How does diversification affect systematic and unsystematic risk?
Q5) Which type of investment has historically had the highest volatility?
Q6) Is volatility a reasonable measure of risk when evaluating large portfolios?
Page 12
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Chapter 11: Systematic Risk and the Equity Risk Premium
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Sample Questions
Q1) CIBC stock has a beta of 1.2.If the risk-free rate is 1.8%,and the market risk premium is 6.5%,what is the expected return of CIBC stock,according to the CAPM?
A) 7.44%
B) 8.3%
C) 9.6%
D) 7.8%
E) 10%
Q2) Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The value of your portfolio over the year is:
A) $21,000
B) $20,000
C) $20,700
D) $21,500
E) $22,000
Q3) What diversification,if any,is achieved if two stocks in a portfolio are perfectly positively correlated?
Q4) What role does the standard deviations of two assets play in computation of the expected return of the two asset portfolio?
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Page 13
Chapter 12: Determining the Cost of Capital
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Sample Questions
Q1) Epiphany is an all-equity firm with an estimated market value of $300,000.The firm sells $100,000 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) 0.67, 0.33
D) 0.5, 0.5
E) 0.75, 0.25
Q2) Leverage is the amount of ________ on a firm's balance sheet.
A) equity
B) debt
C) preferred stock
D) assets
E) liabilities
Q3) What is the assumption about risk when using WACC to evaluate a project?
Q4) Internal financing is more costly than external financing because of issuance costs.
A)True
B)False
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Chapter 13: Risk and the Pricing of Options
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Sample Questions
Q1) Using options to reduce risk is called
A) speculation.
B) a naked position.
C) hedging.
D) a covered position.
E) risk-taking.
Q2) A call option on a stock has an exercise price of $12.15.If the stock price at expiration is $11,what is the option payoff for a short call position?
A) $-11
B) $11
C) $1.15
D) -$1.15
E) $0
Q3) A European option on a stock is more valuable than an otherwise similar American option on the same stock.
A)True
B)False
Q4) When is an option out-the-money?
Q5) What is the short position of an options contract?
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Chapter 14: Raising Equity Capital
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Sample Questions
Q1) A cash offer differs from a rights offer in that in the latter shares are offered to both existing shareholders and investors at large.
A)True
B)False
Q2) Assuming that this is the venture capitalist's first investment in your firm,what percentage of the firm will the venture capitalist own?
A) 50%
B) 40%
C) 25%
D) 33%
E) 60%
Q3) Newly listed firms tend to perform relatively poorly in the three to five years after their IPOs.
A)True
B)False
Q4) What is the general long-run performance of an IPO?
Q5) How many types of seasoned equity offerings are there?
Q6) What are the four IPO puzzles?
Q7) What are some of the highlights of Google's IPO process?
Page 16
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Chapter 15: Debt Financing
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Sample Questions
Q1) A company issues a callable (at par)five-year,7% 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 $110 per $100 of face value.What is the yield to maturity of this bond when it is released?
A) 1.40%%
B) 2.80%
C) 4.71%
D) 5.66%
E) 7.00%
Q2) BC Brewery issues $50 million in straight bonds at an original issue discount of 1% and a coupon rate of 7.5%.The firm also pays underwriting fees of 3.5% on the face value of the bonds.What are the net proceeds to BC Brewery from the bond issue?
A) $49.5 million
B) $50 million
C) $47.75 million
D) $48.25 million
E) $44 million
Q3) How might equity holders benefit from bond covenants?
Q4) What is the difference between secured and unsecured debt?
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Chapter 16: Capital Structure
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Sample Questions
Q1) Equity in a firm with no debt is called
A) risk-free equity.
B) risky equity.
C) shareholders' equity.
D) unlevered equity.
E) levered equity.
Q2) Assume that in addition to 1.25 billion common shares outstanding,Luther has stock options given to employees valued at $2 billion.The market value of Luther's non-cash assets is closest to:
A) $22 billion
B) $20 billion
C) $25 billion
D) $18 billion
E) $27 billion
Q3) The probability of financial distress depends on the
A) likelihood that a firm will be unable to meet its debt commitments.
B) chance that a firm's raw material costs will increase.
C) likelihood of dividend payments.
D) likelihood of asset growth.
E) likelihood of issuing new debt.
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Chapter 17: Payout Policy
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Sample
Questions
Q1) Palo Alto Enterprises has $200,000 in cash.They wish to invest the money in Treasury bills at 5% and use the returns to pay dividends to shareholders after a year.Alternately they can pay a dividend and allow shareholders to make the investment.In perfect capital markets,which option will shareholders prefer?
A) immediate cash dividend
B) dividend after one year
C) prefer half from each source
D) indifferent between options
E) most paid now, the balance paid in one year
Q2) What is the bird-in-the-hand fallacy in dividend theory under perfect capital markets?
Q3) What is a firm's payout policy?
Q4) Assume that Omicron uses the entire $50 million in excess cash to pay a special dividend.Omicron's ex-dividend price is closest to:
A) $40.00
B) $5.00
C) $50.00
D) $45.00
E) $35.00
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Chapter 18: Financial Modelling and Pro Forma Analysis
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Sample Questions
Q1) If XYZ has no excess cash and has a corporate tax rate of 25%,what is the free cash flow to the firm?
A) $1.09 million
B) $1 million
C) $1.59 million
D) $1.11 million
E) $1.21 million
Q2) Calgary Doughnuts had sales of $200 million in 2015.Its cost of sales were $160 million.If sales are expected to grow at 10% in 2016,compute the forecasted costs using the percent of sales method.
A) $160 million
B) $170 million
C) $173 million
D) $176 million
E) $180 million
Q3) The amount of net working capital for Ideko in 2016 is closest to:
Q4) Why is EBITDA multiple used for valuation rather than sales or earnings?
Q5) What is the major shortcoming of the percent of sales method for firms experiencing rapid growth?
Q6) What is net new financing?
Page 20
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Chapter 19: Working Capital Management
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Sample
Questions
Q1) ABX corporation had sales of $47.6 million this year and an average accounts receivable of $6.3 million per day.Its credit terms specify "1/10 net 30." On average,how long does it take to collect on its sales?
A) 7.56 days
B) 12.17 days
C) 18.25 days
D) 21.49 days
E) 48.31 days
Q2) Jerome Industries has inventory days of 31,accounts payable days of 28,and a cash conversion cycle of 56 days.What is its accounts receivable days?
A) 28 days
B) 25 days
C) 56 days
D) 53 days
E) 59 days
Q3) 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
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Page 21
Chapter 20: Short Term Financial Planning
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Sample Questions
Q1) How can the application of the matching principle increase firm value?
Q2) Ahab's Army Surplus has a commited line of credit with a maximum of $1.2 million and interest rate of 3.5% (EAR).The loan has a commitment fee of 0.45% (EAR).If the firm borrows $900,000 at the start of the year and repays it at the end of the year,what is the total cost of the loan?
A) $42,000
B) $35,550
C) $43,350
D) $32,850
E) $31,500
Q3) What are Blunderstone's temporary working capital requirements in the third quarter?
A) $2,700,000
B) $3,400,000
C) $5,450,000
D) $6,100,000
E) $1,750,000
Q4) What are loan origination fees and what effect does it have on the loan?
Q5) Why should permanent working capital be financed with long-term sources of funds?
Page 22
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Chapter 21: Risk Management
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Sample Questions
Q1) Which of the following best describes how adverse selection affects the price of insurance?
A) Since insurers can acquire complete information regarding the riskiness of borrowers, they can charge actuarially fair premiums.
B) Since firms may have private information about how risky they are, insurers must raise premiums to compensate for the existence of this uncertainty.
C) Since purchasing insurance reduces the firm's incentive to avoid risk, insurers must raise premiums to compensate for the increase in risk.
D) Since purchasing insurance reduces the firm's risk, insurers can lower premiums to compensate for the reduction in risk.
E) Since high premiums will drive away the low-risk firms, insurers must lower premiums in order to attract low-risk borrowers.
Q2) Two firms can use vertical integration to hedge risks,because an increase in price represents an increase in revenues for one firm,offsetting an increase in costs for the other firm.
A)True
B)False
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23
Chapter 22: International Corporate Finance
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Sample Questions
Q1) Hedging with currency options involves a commitment by a firm to buy currency at a fixed rate.
A)True
B)False
Q2) Suppose the WACC for a Canadian company is 7.6%,and the Canadian risk-free interest rate is 4%.If the European risk-free interest rate is 2.5%,what is the company's European WACC?
A) 6%
B) 6.1% C) 9.1% D) 9.2% E) 7.6%
Q3) The one-year forward exchange rate is 45 INR/USD.If the one-year interest rate in the United States is 5% and in India is 8%,what is the spot exchange rate so as to preclude arbitrage?
A) 43.23
B) 43.75 C) 43.99 D) 44.32 E) 44.51
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Chapter 23: Leasing
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Q1) If your firm's borrowing cost is 8% and the tax rate is 30%,what is the NPV of buying and leasing?
A) $20,479
B) $5,422
C) -$2,676
D) -$5,422
E) $2,676
Q2) Because finance leases increase the apparent leverage on the firm's balance sheet,firms sometimes prefer to have a lease categorized as an operating lease to keep it off the balance sheet.
A)True
B)False
Q3) If a lease contract is characterized as a true lease in bankruptcy,the lessor is in a somewhat inferior position than the lender if the firm defaults.
A)True
B)False
Q4) What is the difference between a fixed price lease and a fair market value cap lease?
Q5) What is a lease-equivalent loan?
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Chapter 24: Mergers and Acquisitions
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Sample Questions
Q1) Which of the following is an example of a merger undertaken in order to achieve economies of scale?
A) A car manufacturer acquires a car parts supplier.
B) A breakfast cereal producer acquires another breakfast cereal producer and the combined firm is able to negotiate a reduced cost for the grain used in its cereal.
C) A telecommunications firm acquires another telecommunications firm and the combined firm serves a large percentage of the market.
D) An accounting firm acquires another accounting firm and the combined firm is able to eliminate duplication among administrative positions.
E) A video game development firm acquires another video game development firm that specializes in designing games for a new gaming system.
Q2) The synergies of a merger add so much value to the combined firm that,upon announcement of a merger,the stock prices of both the target and the acquirer increase substantially.
A)True
B)False
Q3) What is a conglomerate merger?
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Chapter 25: Corporate Governance
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Sample Questions
Q1) What is a proxy contest?
Q2) Examples of cross-holdings include: I.Japanese keiretsu
II)German Gruppe
III)Australian foundations
IV)Korean chaebol
A) I, II, and IV
B) I, II, and III
C) I and IV
D) I, II, III, and IV
E) II and III
Q3) Which monitors of a firm,other than the board of directors,are most likely to detect outright fraud?
A) securities analysts
B) lenders
C) employees
D) regulators
E) shareholders
Q4) What are some of the negative effects of increasing the sensitivity of managerial pay to firm performance?
Q5) What is corporate governance?
27
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