Business Finance
Midterm Exam
Course Introduction
Business Finance is a foundational course that explores the principles and practices of managing an organization's financial resources. The course covers key topics such as financial statement analysis, time value of money, risk and return, capital budgeting, cost of capital, and working capital management. Students will learn how to evaluate investment opportunities, assess financial performance, and make decisions that maximize the value of a business. Through case studies and practical exercises, the course equips students with the analytical tools and financial techniques essential for effective decision-making in both corporate and entrepreneurial settings.
Recommended Textbook Essentials of Corporate Finance 2nd Australia Edition by Stephen Ross
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Page 2
Chapter 1: Introduction to Financial Management
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Q1) Secondary markets:
A)allow borrowers to raise long-term funds
B)facilitate capital-raising in the primary market
C)allow borrowers to raise short-term funds
D)do not raise new funds but offer liquidity
E)facilitate all of the given answers
Answer: E
Q2) Which one of the following statements correctly applies to a sole proprietorship?
A)The business entity has an unlimited life.
B)The ownership can easily be transferred to another individual.
C)The owner enjoys limited liability for the firm's debts.
D)Debt financing is easy to arrange in the firm's name.
E)Obtaining additional equity is dependent on the owner's personal finances.
Answer: E
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Chapter 2: Financial Statements, Taxes, and Cash Flow
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Q1) The balance sheet of a firm shows beginning net fixed assets of $348 200 and ending net fixed assets of $371 920.The depreciation expense for the year is $46 080 and the interest expense is $11 460.What is the amount of net capital spending?
A)-$22 360
B)-$4780
C)$23 720
D)$58 340
E)$69 800
Answer: E
Q2) 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
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4
Chapter 3: Working With Financial Statements
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Q1) The Bondi Tourist Shop has an average inventory level of $535 000.If the cost of goods sold for the year are $3 150 000 what is the inventory turnover ratio?
A)4.66
B)5.89
C)8.68
D)5.75
E)6.46
Answer: B
Q2) The cash ratio is defined as cash divided by:
A)current assets
B)current liabilities
C)total assets
D)total debt
E)total equity
Answer: B
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Page 5
Chapter 4: Introduction to Valuation: the Time Value of Money
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Q1) Today,Tony is investing $16 000 at 6.5 per cent,compounded annually,for 4 years.How much additional income could he earn if he had invested this amount at 7 per cent,compounded annually?
A)$323.22
B)$389.28
C)$401.16
D)$442.79
E)$484.08
Q2) Terry invested $2000 today in an investment that pays 6.5 per cent annual interest.Which one of the following statements is correct,assuming all interest is reinvested?
A)Terry will earn the same amount of interest each year.
B)Terry could have the same future value and invest less than $2000 initially if he could earn more than 6.5 per cent interest.
C)Terry will earn an increasing amount of interest each and every year even if he should decide to withdraw the interest annually rather than reinvesting the interest.
D)Terry's interest for year two will be equal to $2000 ´ 0.065 ´ 2.
E)Terry will be earning simple interest.
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Chapter 5: Discounted Cash Flow Valuation
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Q1) Kristi is considering an investment that will pay $5000 a year for 7 years,starting one year from today.How much should she pay for this investment if she wishes to earn a 12 per cent rate of return?
A)$17 899.08
B)$18 023.88
C)$20 186.75
D)$22 818.78
E)$24 507.19
Q2) Karl can afford car payments of $235 a month for 48 months.The bank will lend him money to buy a car at 7.75 per cent interest.How much money can he afford to borrow?
A)$9672.48
B)$9734.95
C)$9899.60
D)$10 022.15
E)$10 422.09
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Chapter 6: Interest Rates and Bond Valuation
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Q1) Which one of the following is the rate of return an investor earns on a bond before adjusting for inflation?
A)real rate
B)nominal rate
C)coupon rate
D)clean rate
E)dirty rate
Q2) Which one of the following refers to the relationship between nominal returns,real returns,and inflation?
A)conversion ratio
B)bid-ask spread
C)fisher effect
D)call premium
E)clean-dirty spread
Q3) The primary purpose of protective covenants is to help:
A)convert bearer bonds into registered form
B)reduce interest rate risk
C)the issuer in case of default
D)protect bondholders from issuer actions
E)bondholders whose bonds are called
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Chapter 7: Equity Markets and Stock Valuation
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Q1) If shareholders are granted a preemptive right they will be:
A)granted shares that receive additional voting privileges
B)given the choice of receiving dividends in cash or in additional shares of stock
C)paid dividends prior to the preferred shareholders during the pre-emptive period
D)able to determine who the candidates should be for any open seats on the board
E)given the first right to purchase any new shares that are issued
Q2) Ordinary shareholders have all the following rights except:
A)the right to priority in the event of company liquidation
B)the right to share proportionally in dividends paid
C)the right to share proportionally in assets remaining after liabilities have been paid in a company liquidation
D)the right to vote on matters of great importance as set out in the constitution of the company
E)the right to elect directors
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9
Chapter 8: Net Present Value and Other Investment Criteria
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Q1) The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted,given which one of the following?
A)One of the time periods within the investment period has a cash flow equal to zero.
B)The initial cash flow is negative.
C)The investment has cash inflows that occur after the required payback period.
D)The investment is mutually exclusive with another investment under consideration.
E)The cash flows are conventional.
Q2) Nagle's Machinery is spending $97 500 to update its equipment.This is necessary if the firm wishes to be competitive in the market place and provide a wide array of product models.The company estimates that these updates will improve their cash inflows by $18 500 a year for five years.What is the payback period?
A)1.37 years
B)2.84 years
C)3.29 years
D)5.49 years
E)this project never pays back
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Chapter 9: Making Capital Investment Decisions
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Q1) The Bondi Pizza Palace is looking at a new pizza oven with an installed cost of $438 000.This cost will be depreciated straight-line to zero over the project's four-year life,at the end of which the system can be scrapped for $69 000.The pizza system will save the firm $129 000 per year in pre-tax operating costs,and the system requires an initial investment in net working capital of $29 000,which will be recouped at project end.If the tax rate is 35 per cent and the discount rate is 9 per cent,what is the NPV of this project?
A)-$18 870
B)-$6320
C)$2560
D)$14 410
E)$26 880
Q2) Ignoring the option to wait:
A)may overestimate the internal rate of return on a project
B)may underestimate the net present value of a project
C)ignores the ability of a manager to increase output after a project has been implemented
D)is the same as ignoring all strategic options
E)ignores the value of discontinuing a project early
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Chapter 10: Some Lessons From Capital Market History
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Q1) The arithmetic average return of 8,12,2,and 16 per cent is computed as:
A)the square root of (8 + 12 + 2 + 16)
B)the ¼ root of (8 + 12 + 2 + 16)
C)(8 + 12 + 2 + 16) \(\times\) 4
D)(8 + 12 + 2 + 16) \(\div\) 4
E)(8 + 12 + 2 + 16) \(\div\) 2
Q2) The higher the standard deviation of 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)more constant;more constant
Q3) If the financial markets are semi-strong form efficient,then:
A)only the most talented analysts can determine the true value of a security
B)only individuals with private information have a marketplace advantage
C)technical analysis provides the best tool to use to gain a marketplace advantage
D)no one individual has an advantage in the marketplace
E)every security offers the same rate of return
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Page 12
Chapter 11: Risk and Return
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Q1) Bondi Beachwear has an expected return of 12.9 per cent and a beta of 1.21.The expected return on the market is 11.7 per cent.What is the risk-free rate?
A)3.87 per cent
B)5.99 per cent
C)5.38 per cent
D)4.24 per cent
E)4.61 per cent
Q2) You own a portfolio equally invested in a risk-free asset and two stocks.If one of the stocks has a beta of 1.04 and the total portfolio is equally as risky as the market,what must the beta be for the other stock in your portfolio?
A)1.37
B)1.54
C)2.97
D)1.96
E)2.30
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Chapter 12: Long-Term Financing
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Q1) Which one of the following statements is correct concerning capital structure weights?
A)The issuance of additional shares of ordinary shares will increase the weight of the preferred shares.
B)An increase in the debt-equity ratio will increase the weight of the ordinary shares.
C)Target rates are less relevant to a project than historical rates are.
D)The repurchase of preferred shares will increase the weight of debt.
E)The weights are unaffected when a bond issue matures.
Q2) The PMP Insurance Company preference shares are trading on the ASX at $9 each and a dividend of 63 cents has just been paid.The face value of the issue is $10.What is the cost of preference shares for PMP?
A)6.30%
B)9.00%
C)1.11%
D)14.29%
E)7.00%
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14
Chapter 13: Leverage and Capital Structure
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Q1) The corporate tax rate is 37%.The MaPol Company has a $100 million debenture issue outstanding with a coupon rate of 6.84% per annum.Face value of one debenture is $10 000 and investors require a 7% return on debentures with similar credit rating.What is the present value of the tax shield?
A)$25 300 800
B)$7 000 000
C)$6 840 000
D)$30 160 000
E)$37 000 000
Q2) The BaPol Company has a cost of equity of 14% and a weighted average cost of capital of 13.02%.What is the company's cost of debt,if BaPol Company maintains the debt-equity ratio of 0.44? Consider that there are no taxes.
A)16.68%
B)13.48%
C)12.26%
D)10.80%
E)17.59%
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Chapter 14: Dividends and Dividend Policy
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Q1) Rural Feed Lots Ltd is an all-equity firm with positive net income.Which one of the following will result if the firm pays a cash dividend?
A)total equity will increase
B)total assets will remain constant
C)number of shares outstanding will increase
D)earnings per share will decrease
E)price-earnings ratio will decrease
Q2) Which one of the following dates is the date on which the board of directors voted to pay a dividend?
A)payment date
B)settle date
C)record date
D)ex-dividend date
E)declaration date
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16
Chapter 15: Raising Capital
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Q1) Which of the following are true statements?
I.Venture capitalists tend to be long-term investors in a firm.
II.Venture capital is relatively easy to obtain for most new firms.
III.Venture capitalists generally have an exit strategy.
IV.Venture capitalists tend to specialise in one type of financing for a select type of firm.
A)III and IV only
B)I and II only
C)II and IV only
D)I and IV only
E)I and III only
Q2) Venture capital is most apt to be the source of funding for which one of the following?
A)global expansion for an established firm
B)bankruptcy reorganisation
C)new,high-risk venture
D)seasonal production
E)daily operations for an established,profitable firm
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Chapter 16: Short-Term Financial Planning
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Q1) Gilbert and Sons has sales for the year of $24 800 and cost of goods sold of $14
200.The firm carries an average inventory of $3100 and an average accounts payable balance of $2400.What is the inventory period?
A)80 days
B)85 days
C)75 days
D)78 days
E)83 days
Q2) Manly Manufacturing Pty Ltd is compiling a cash balance projection by quarter for next year.Which one of the following adjustments to this projection will decrease the cumulative surplus?
A)increasing the dividend per share on the firm's outstanding ordinary shares
B)decreasing the accounts receivable period by changing the firm's credit policy effective the first of next year
C)reducing payroll costs from its current projection amount
D)receiving more favourable credit terms from the firm's suppliers
E)refinancing the firm's long-term debt at a lower interest rate
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Chapter 17: Working Capital Management
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Q1) You purchased an item costing $5700 on July 13.The terms of sale were 1/5,net
20.What is the last day you can pay the discounted price?
A)July 18
B)August 2
C)August 5
D)July 20
E)July 28
Q2) Which one of the following is the bill given to a customer for goods he or she purchased?
A)shipping receipt
B)remittance advice
C)invoice
D)docket
E)account aging
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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Chapter 18: International Aspects of Financial Management
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Q1) Which of the following are participants in the foreign exchange market?
I.importers,who pay for goods in foreign currencies
II.exporters,who receive payment in foreign currencies
III.domestic share brokers,who service local clients
IV.portfolio managers,who purchase foreign securities
A)II,III and IV only
B)I and III only
C)II and IV only
D)I,III and IV only
E)I,II and IV only
Q2) Which one of the following is the best definition of Eurocurrency?
A)any paper money used by a country that has adopted the euro as its common currency
B)both paper and coins officially adopted under the euro system of coinage
C)money deposited in a financial institution outside of the country whose currency is involved
D)US dollars owned by any country which has adopted the euro as its currency
E)any exchange of funds between two countries that have adopted the euro as their official currency
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