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 key topics such as financial analysis, planning and control, the management of working capital, valuation of assets, sources of financing, and the processes involved in capital budgeting. Emphasis is placed on understanding how financial information is used in decision-making to enhance the value of a firm, manage risk, and achieve strategic objectives. Through real-world examples and case studies, students develop the analytical and critical thinking skills necessary to address financial challenges in both small businesses and large corporations.
Recommended Textbook
Essentials of Corporate Finance 2nd Australia Edition by Stephen Ross
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Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) Which one of the following is most likely to create a situation where an agency conflict could arise?
A)increasing the size of a firm's operations
B)downsizing a firm
C)separating management from ownership
D)decreasing employee turnover
E)reducing both management and non-management salaries
Answer: C
Q2) Working capital management includes which one of the following?
A)deciding which new projects to accept
B)deciding whether to purchase a new machine or fix a current machine
C)determining which customers will be granted credit
D)determining how many new shares of stock should be issued
E)establishing the target debt-equity ratio
Answer: C
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3
Chapter 2: Financial Statements, Taxes, and Cash Flow
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Sample Questions
Q1) The cash flow from assets can be defined as:
A)the cash available to distribute to the creditors and to the stockholders
B)the cash flow to creditors minus the cash flow to stockholders
C)the net income plus depreciation plus the interest expense
D)the net income minus the change in net working capital
E)the net income minus the net capital spending minus the change in net working capital
Answer: A
Q2) The Plaza Cafe has an operating cash flow of $78 460,a depreciation expense of $8960,and taxes paid of $21 590.A partial listing of its balance sheet accounts is as follows:
What is the amount of the cash flow from assets?
A)$58 913
B)$61 246
C)$61 487
D)$63 909
E)$64 128
Answer: B
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Chapter 3: Working With Financial Statements
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Sample Questions
Q1) The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions?
A)no new external financing of any kind
B)no new debt but additional external equity equal to the increase in retained earnings
C)new debt and external equity in equal proportions
D)new debt and external equity,provided the debt-equity ratio remains constant
E)no new equity and a constant debt-equity ratio
Answer: E
Q2) Swagerman Incorporated has total assets of $6 842 200 and total debt of $3 000 000.What is the equity multiplier?
A)1.78
B)2.28
C)0.44
D)1.56
E)0.56
Answer: A
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Chapter 4: Introduction to Valuation: the Time Value of Money
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Sample Questions
Q1) Roger just deposited $13 000 into his account at Market Place Bank.The bank will pay 2.3 per cent interest,compounded annually,on this account.How much interest on interest will he earn over the next 15 years?
A)$638.16
B)$799.28
C)$821.03
D)$906.15
E)$923.70
Q2) Todd will be receiving a $10 000 bonus one year from now.The process of determining how much that bonus is worth today is called:
A)aggregating
B)discounting
C)simplifying
D)compounding
E)extrapolating
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Chapter 5: Discounted Cash Flow Valuation
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Sample Questions
Q1) If you were offered the chance of an investment in a mango orchard in North Queensland and you were promised a return of $12 000 at the end of each year for the next 10 years,what is the maximum amount you would be prepared to pay for such an investment if you required a return of 12 per cent?
A)$107 143
B)$210 584
C)$87 603
D)$120 000
E)$67 803
Q2) A credit card has an APR of 18 per cent and charges interest monthly.The effective annual rate on this account will:
A)be less than 18 per cent
B)be less than or equal to 18 per cent
C)equal 18 per cent
D)be greater than or equal to 18 per cent
E)be greater than 18 per cent
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) Which one of the following might be included in a bond's list of negative covenants?
A)maintaining a current ratio of 1.2 or more
B)providing audited financial statements in a timely manner
C)limiting cash dividends to $1 per share or less
D)maintaining a times interest earned ratio of 2 or more
E)maintaining a minimum cash balance of $1.2 million
Q2) On which one of the following dates is the principal amount of a bond repaid?
A)discount date
B)issue date
C)coupon date
D)maturity date
E)face date
Q3) When a bond's yield to maturity is less than the bond's coupon rate,the bond:
A)is selling at a discount
B)is priced at par
C)had to be recently issued
D)is selling at a premium
E)has reached its maturity date
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Chapter 7: Equity Markets and Stock Valuation
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Sample Questions
Q1) Fujian Tea company shares have a current price of $20 per share and paid a dividend of $1.40 per share during the year.Compute the dividend yield.
A)-6.25%
B)6.25%
C)7%
D)12.50%
E)14%
Q2) The rate at which the value of an investment grows is called the:
A)required return
B)capital return
C)maturity yield
D)dividend yield
E)capital gains yield
Q3) What is true about a preference share?
A)All of the given answers are true.
B)Holders of the preference shares usually have no voting rights.
C)The preference share is a form of equity from a legal standpoint.
D)Unpaid preference share dividends are not debts of the company.
E)The preference share has preference over ordinary shares in the payment of dividends.
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Chapter 8: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as:
A)duplication
B)the net present value profile
C)multiple rates of return
D)the AAR problem
E)the dual dilemma
Q2) You are considering a project which has an internal rate of return that is equal to the required return.This means that:
A)the net present value is negative in an amount equal to the initial investment
B)the project is returning the minimal amount that is acceptable to you
C)the profitability index is greater than one
D)the average accounting return exceeds the project's required return
E)the project will lower the value of the firm
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10
Chapter 9: Making Capital Investment Decisions
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Sample Questions
Q1) The analysis of the effect that a single variable has on the net present value of a project is called ________ analysis
A)sensitivity
B)erosion
C)cost reduction
D)scenario
E)benefit
Q2) A 9-year project is expected to generate annual revenues of $114 500,variable costs of $73 600,and fixed costs of $14 000.The annual depreciation is $3500 and the tax rate is 34 per cent.What is the annual operating cash flow?
A)$14 301
B)$14 788
C)$15 052
D)$17 506
E)$18 944
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Chapter 10: Some Lessons From Capital Market History
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Sample Questions
Q1) The lower the standard deviation of returns on a security,the _____ the expected rate of return and the _____ the risk.
A)lower;lower
B)lower;higher
C)higher;lower
D)higher;higher
E)You cannot determine anything about the expected rate of return from the standard deviation.
Q2) Assume that long-term corporate bonds had an average return of 6.3 per cent and a standard deviation of 8.3 per cent for a 30-year period.What range of returns would you expect to see on these bonds 68 per cent of the time?
A)-2.0 per cent to 14.6 per cent
B)-2.0 per cent to 22.9 per cent
C)-10.3 per cent to 14.6 per cent
D)-10.3 per cent to 17.4 per cent
E)-10.3 per cent to 22.9 per cent
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Chapter 11: Risk and Return
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Sample Questions
Q1) Total risk is:
A)another term for systematic risk
B)another term for diversifiable risk
C)measured by beta
D)measured by standard deviation
E)another term for the market risk premium
Q2) Suppose an investor created the following portfolio:
What is the expected return on this portfolio?
A)9.7%
B)10%
C)12.5%
D)15%
E)8.5%
Q3) The addition of a risky security to a fully diversified portfolio:
A)will increase the unsystematic risk of the portfolio
B)may or may not affect the portfolio beta
C)must decrease the portfolio's expected return
D)must increase the portfolio beta
E)will have no effect on the portfolio beta or its expected return
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Page 13
Chapter 12: Long-Term Financing
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Sample Questions
Q1) The Whitehorse Book Company has 140 million shares outstanding.The market price of one share is currently $2.The company's debentures are publicly traded and their market price is equal to 93% of its face value.The debentures have a total book value of $50 000 000 and the current yield to maturity of corporate debenture is 12% per annum.The risk-free rate is 8.50% and the market risk premium is 5.20%.Market analysts estimated that the Whitehorse Book Company has a beta of 0.90.The corporate tax rate is 30%.What is the company's weighted average cost of capital (WACC)under the classical tax system?
A)13.18%
B)11.10%
C)12.50%
D)14.24%
E)15.00%
Q2) The cost of capital for a project should:
A)be adjusted based on the size of the project
B)remain constant even if a decision on accepting the project is delayed for two years
C)meet or exceed the internal rate of return of the project
D)never exceed the cost of capital for the overall firm
E)be adjusted based on the risk of the project
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Page 14
Chapter 13: Leverage and Capital Structure
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Sample Questions
Q1) Which one of the following statements is the core principle of M&M Proposition I,without taxes?
A)A firm's WACC is directly related to the firm's debt-equity ratio.
B)Levered firms have greater value than unlevered firms.
C)The interest tax shield increases the value of a firm.
D)A firm's cost of equity is directly related to the firm's debt-equity ratio.
E)The capital structure of a firm is totally irrelevant.
Q2) Southern Fried Foods has a $12 million bond issue outstanding with a coupon rate of 6.75 per cent and a yield-to-maturity of 7.27 per cent.What is the present value of the tax shield if the tax rate is 35 per cent?
A)$283 500
B)$3 053 400
C)$3 560 000
D)$305 340
E)$4 200 000
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15
Chapter 14: Dividends and Dividend Policy
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Sample Questions
Q1) The common stock of Basek and Basek goes ex-dividend tomorrow.The stock closed at a price of $38.13 a share today.This quarter,the company is paying a cash dividend of $0.15 a share and a liquidating dividend of $2.50 a share.Ignoring taxes and assuming that all else is constant,the opening ex-dividend price is expected to be:
A)$36.33
B)$35.33
C)$35.63
D)$35.48
E)$37.98
Q2) George owns 20 000 shares in Australian Meat Snacks,Inc.A market price for 1 share is currently $17.In December 2007,the company declared a dividend of $0.51 per share.George decided to participate in the dividend reinvestment plan and received ____ new shares on 8 January 2008.He ____ include the dividend in his 2007-2008 assessable income in the same manner as cash dividends.
A)600;will
B)200;will not
C)1 177;will not
D)1 177;will
E)600;will not
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Page 16
Chapter 15: Raising Capital
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Sample Questions
Q1) Which one of the following statements is correct?
A)Informed managers tend to issue new securities when the existing securities are underpriced.
B)The financial market generally reacts in the same way to a new issue of equity as it does to a new issue of debt as long as the issuer is the same.
C)A decline in the price of existing stock when a new issue is released is a direct cost of selling securities.
D)Issuing new equity shares is always viewed by the market as a positive event.
E)A firm's existing shareholders would prefer that new securities be issued when those securities are overpriced rather than underpriced.
Q2) The spread is the difference between the underwriter's purchase price and:
A)the market price
B)the price listed in the prospectus
C)the opening price
D)the first day's closing price
E)the offer price
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17
Chapter 16: Short-Term Financial Planning
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Sample Questions
Q1) Which one of the following is directly related to increases in a firm's current assets?
A)carrying costs
B)re-order costs
C)restocking costs
D)out-of-stock events
E)shortage costs
Q2) Which one of the following is the length of time that a retailer owes its supplier for an inventory purchase?
A)inventory period
B)operating cycle
C)cash cycle
D)accounts payable period
E)accounts receivable period
Q3) Which one of the following is a use of cash?
A)increasing accounts payable
B)issuing new shares of stock
C)decreasing inventory
D)decreasing fixed assts
E)increasing accounts receivable
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Page 18
Chapter 17: Working Capital Management
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Sample Questions
Q1) An increase in a firm's average collection period generally indicates that:
A)the cash flows of the firm have increased
B)the majority of a firm's receivables are delinquent
C)an increased number of customers are taking advantage of the cash discount offered
D)at least some customers are taking longer to pay
E)customers are paying more promptly
Q2) The economic order quantity approach states that inventory order sizes should be determined in which of the following manners?
A)computing the amount of the derived demand
B)dividing annual item sales by the carrying cost per item and multiplying by 2
C)dividing the inventory into various groups based on the value per item
D)computing the average number of items sold each month
E)equating restocking costs with carrying costs
Q3) Which one of the following best states the primary goal of inventory management?
A)Minimise total inventory costs
B)Minimise the number of orders per year
C)Minimise the level of inventory for the most expensive items
D)Minimise the average inventory level
E)Minimise opportunity costs
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Page 19
Chapter 18: International Aspects of Financial Management
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Sample Questions
Q1) Which one of the following must be significantly eliminated if interest rate parity is to exist?
A)absolute purchasing power parity
B)short-run exposure to exchange rate risk
C)covered interest arbitrage opportunities
D)relative purchasing power parity
E)translation exposure
Q2) The market where euros,pesos,dollars,and pounds are traded is referred to as which one of the following?
A)ADR market
B)LIBOR market
C)euromarket
D)foreign exchange market
E)gilt market
Q3) Rembrandt,Samurai,Yankee,Matilda and Bulldog are all names given to:
A)foreign bonds
B)domestic interest rates
C)domestic bonds
D)foreign interest rates
E)Eurobonds
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