Business Finance
Midterm Exam
Course Introduction
Business Finance explores the fundamental principles and practices essential for sound financial management in business organizations. The course covers key topics such as financial analysis, planning, and control; budgeting; capital structure; sources of funding; working capital management; risk assessment; and investment decision-making. Students will learn how financial concepts are applied to maximize value, support strategic objectives, and ensure the long-term financial health of firms. Emphasis is placed on real-world applications, use of financial tools, and interpretation of financial statements for effective decision-making.
Recommended Textbook
Corporate Finance A Focused Approach 6th Edition by Michael C. Ehrhardt
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16 Chapters
1341 Verified Questions
1341 Flashcards
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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41 Verified Questions
41 Flashcards
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Sample Questions
Q1) You recently sold 200 shares of Apple stock to your brother. The transfer was made through a broker, and the trade occurred on the NYSE. This is an example of:
A) A futures market transaction.
B) A primary market transaction.
C) A secondary market transaction.
D) A money market transaction.
E) An over-the-counter market transaction.
Answer: C
Q2) Recently, Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per share. Hale sold the stock to an investment banker, who in turn sold it to individual and institutional investors. This is a primary market transaction. A)True
B)False
Answer: True
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3
Chapter 3: Analysis of Financial Statements
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104 Verified Questions
104 Flashcards
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Sample Questions
Q1) The "apparent," but not the "true," financial position of a company whose sales are seasonal can differ dramatically, depending on the time of year when the financial statements are constructed.
A)True
B)False
Answer: True
Q2) Refer to the data for Pettijohn Inc. What is the firm's inventory turnover ratio? A) 4.17 B) 4.38 C) 4.59 D) 5.82 E) 5.07
Answer: A
Q3) Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.
A)True
B)False
Answer: True
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Chapter 4: Time Value of Money
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168 Verified Questions
168 Flashcards
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Sample Questions
Q1) Suppose Randy Jones plans to invest $1,000. He can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be somewhat less than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)
A)True
B)False
Q2) You would like to travel in South America 5 years from now, and you can save $3,100 per year, beginning one year from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these conditions, how much would you have just after you make the 5th deposit, 5 years from now?
A) $18,369
B) $19,287
C) $20,251
D) $21,264
E) $22,327
Q3) A time line is not meaningful unless all cash flows occur annually.
A)True
B)False
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Chapter 5: Bonds, Bond Valuation, and Interest Rates
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101 Verified Questions
101 Flashcards
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Sample Questions
Q1) A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.
A)True
B)False
Q2) Which of the following statements is CORRECT?
A) The most likely explanation for an inverted yield curve is that investors expect inflation to increase.
B) The most likely explanation for an inverted yield curve is that investors expect inflation to decrease.
C) If the yield curve is inverted, short-term bonds have lower yields than long-term bonds.
D) Inverted yield curves can exist for Treasury bonds, but because of default premiums, the corporate yield curve can never be inverted.
E) The higher the maturity risk premium, the higher the probability that the yield curve will be inverted.
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Chapter 6: Risk, Return, and the Capital Asset Pricing Model
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146 Verified Questions
146 Flashcards
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Sample Questions
Q1) Stock X has a beta of 0.7 and Stock Y has a beta of 1.7. Which of the following statements must be true, according to the CAPM?
A) Stock Y's realized return during the coming year will be higher than Stock X's return.
B) If the expected rate of inflation increases but the market risk premium is unchanged, the required returns on the two stocks should increase by the same amount.
C) Stock Y's return has a higher standard deviation than Stock X.
D) If the market risk premium declines, but the risk-free rate is unchanged, Stock X will have a larger decline in its required return than will Stock Y.
E) If you invest $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfolio would have a beta significantly lower than 1.0, provided the returns on the two stocks are not perfectly correlated.
Q2) A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.
A)True
B)False
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Chapter 7: Stocks, Stock Valuation, and Stock Market
Equilibrium
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) If a stock has a required rate of return r<sub>s</sub> = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.
B) The stock valuation model, P<sub>0</sub> = D<sub>1</sub>/(r<sub>s</sub> g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.
C) The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.
D) The constant growth model cannot be used for a zero growth stock, where the dividend is expected to remain constant over time.
E) The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.
Q2) Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.
A)True B)False
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Chapter 8: Financial Options and Applications in Corporate Finance
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28 Flashcards
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) Call options generally sell at a price less than their exercise value.
B) If a stock becomes riskier (more volatile), call options on the stock are likely to decline in value.
C) Call options generally sell at prices above their exercise value, but for an in-the-money option, the greater the exercise value in relation to the strike price, the lower the premium on the option is likely to be.
D) Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock.
E) If the underlying stock does not pay a dividend, it makes good economic sense to exercise a call option as soon as the stock's price exceeds the strike price by about 10%, because this permits the option holder to lock in an immediate profit.
Q2) Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock, provided the strike prices for the put and call are the same.
A)True
B)False
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Page 9
Chapter 9: The Cost of Capital
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) Since its stockholders are not directly responsible for paying a corporation's income taxes, corporations should focus on before-tax cash flows when calculating the WACC.
B) An increase in a firm's tax rate will increase the component cost of debt, provided the YTM on the firm's bonds is not affected by the change in the tax rate.
C) When the WACC is calculated, it should reflect the costs of new common stock, reinvested earnings, preferred stock, long-term debt, short-term bank loans if the firm normally finances with bank debt, and accounts payable if the firm normally has accounts payable on its balance sheet.
D) If a firm has been suffering accounting losses that are expected to continue into the foreseeable future, and therefore its tax rate is zero, then it is possible for the after-tax cost of preferred stock to be less than the after-tax cost of debt.
E) Since the costs of internal and external equity are related, an increase in the flotation cost required to sell a new issue of stock will increase the cost of reinvested earnings.
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Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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108 Flashcards
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) One drawback of the regular payback is that this method does not take account of cash flows beyond the payback period.
B) If a project's payback is positive, then the project should be accepted because it must have a positive NPV.
C) The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.
D) One drawback of the discounted payback is that this method does not consider the time value of money, while the regular payback overcomes this drawback.
E) The shorter a project's payback period, the less desirable the project is normally considered to be by this criterion.
Q2) The IRR method is based on the assumption that projects' cash flows are reinvested at the project's risk-adjusted cost of capital.
A)True
B)False
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11
Chapter 11: Cash Flow Estimation and Risk Analysis
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78 Verified Questions
78 Flashcards
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) If a firm is found guilty of cannibalization in a court of law, then it is judged to have taken unfair advantage of its customers. Thus, cannibalization is dealt with by society through the antitrust laws.
B) If cannibalization exists, then the cash flows associated with the project must be increased to offset these effects. Otherwise, the calculated NPV will be biased downward.
C) If cannibalization is determined to exist, then this means that the calculated NPV if cannibalization is considered will be higher than the NPV if this effect is not recognized.
D) Cannibalization, as described in the text, is a type of externality that is not against the law, and any harm it causes is done to the firm itself.
E) If a firm is found guilty of cannibalization in a court of law, then it is judged to have taken unfair advantage of its competitors. Thus, cannibalization is dealt with by society through the antitrust laws.
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12
Chapter 12: Financial Planning and Forecasting Financial Statements
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Sample Questions
Q1) If a firm's capital intensity ratio (A<sub>0</sub>*/S<sub>0</sub>) decreases as sales increase, use of the AFN formula is likely to understate the amount of additional funds required, other things held constant.
A)True
B)False
Q2) Which of the following assumptions is embodied in the AFN equation?
A) Accounts payable and accruals are tied directly to sales.
B) Common stock and long-term debt are tied directly to sales.
C) Fixed assets, but not current assets, are tied directly to sales.
D) Last year's total assets were not optimal for last year's sales.
E) None of the firm's ratios will change.
Q3) A firm will use spontaneous funds to the extent possible; however, due to credit terms, contracts with workers, and tax laws there is little flexibility in their usage.
A)True
B)False
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Page 13
Chapter 13: Corporate Valuation, Value-Based
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Sample Questions
Q1) Two important issues in corporate governance are (1) the rules that cover the board's ability to fire the CEO and (2) the rules that cover the CEO's ability to remove members of the board.
A)True
B)False
Q2) A poison pill is also known as a corporate restructuring.
A)True
B)False
Q3) Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
A) To enable the firm to borrow at a below-market interest rate.
B) To make it easier to grant stock options to employees.
C) To help prevent a hostile takeover.
D) To help retain valued employees.
E) To increase worker productivity.
Q4) ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent hostile takeovers.
A)True
B)False
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Chapter 14: Distributions to Shareholders: Dividends and Repurchases
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Sample Questions
Q1) If a firm adheres strictly to the residual dividend policy, the issuance of new common stock would suggest that
A) the dividend payout ratio is increasing.
B) no dividends were paid during the year.
C) the dividend payout ratio is decreasing.
D) the dollar amount of investments has decreased.
E) the dividend payout ratio has remained constant.
Q2) In the real world, dividends
A) are usually more stable than earnings.
B) fluctuate more widely than earnings.
C) tend to be a lower percentage of earnings for mature firms.
D) are usually changed every year to reflect earnings changes, and these changes are randomly higher or lower, depending on whether earnings increased or decreased.
E) are usually set as a fixed percentage of earnings, e.g., at 40% of earnings, so if EPS = $2.00, then DPS will equal $0.80. Once the percentage is set, then dividend policy is on "automatic pilot" and the actual dividend depends strictly on earnings.
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Chapter 15: Capital Structure Decisions
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Sample Questions
Q1) Refer to the data for Best Bagels, Inc. (BB). Now assume that BB is considering changing from its original capital structure to a new capital structure with 45% debt and 55% equity. This results in a weighted average cost of capital equal to 10.4% and a new value of operations of $576,923. Assume BB raises $259,615 in new debt and purchases T-bills to hold until it makes the stock repurchase. What is the stock price per share immediately after issuing the debt but prior to the repurchase?
A) $14.42
B) $19.36
C) $23.91
D) $28.85
E) $35.62
Q2) When a firm has risky debt, its equity can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the debt. A)True B)False
Q3) Whenever a firm borrows money, it is using financial leverage. A)True B)False
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Chapter 16: Working Capital Management
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Sample Questions
Q1) Buchholz Corporation follows a moderate current asset investment policy, but it is now considering a change, perhaps to a restricted or maybe to a relaxed policy. The firm's annual sales are $400,000; its fixed assets are $100,000; its target capital structure calls for 50% debt and 50% equity; its EBIT is $35,000; the interest rate on its debt is 10%; and its tax rate is 40%. With a restricted policy, current assets will be 15% of sales, while under a relaxed policy they will be 25% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?
A) 4.25%
B) 4.73%
C) 5.25%
D) 5.78%
E) 6.35%
Q2) A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality receipts are concentrated at the beginning of each month.
A)True
B)False
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Page 17
Chapter 17: Multinational Financial Management
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Sample Questions
Q1) Suppose that 1 British pound currently equals 1.62 U.S. dollars and 1 U.S. dollar equals 1.62 Swiss francs. What is the cross exchange rate between the pound and the franc?
A) 1 British pound equals 3.2400 Swiss francs
B) 1 British pound equals 2.6244 Swiss francs
C) 1 British pound equals 1.8588 Swiss francs
D) 1 British pound equals 1.0000 Swiss francs
E) 1 British pound equals 0.3810 Swiss francs
Q2) A foreign currency will, on average, depreciate against the U.S. dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.
A)True
B)False
Q3) Due to advanced communications technology and the standardization of general procedures, working capital management for multinational firms is no more complex than it is for large domestic firms.
A)True
B)False
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