Business Finance
Mock Exam
Course Introduction
Business Finance introduces students to the essential principles and practices of financial management within business organizations. The course covers topics such as financial statement analysis, time value of money, risk and return, capital budgeting, cost of capital, and working capital management. Students will explore how businesses make funding decisions, allocate financial resources, and evaluate investment opportunities. By examining case studies and real-world scenarios, students develop the analytical skills required to assess the financial health of a company and make informed strategic decisions, preparing them for further studies or careers in finance and related fields.
Recommended Textbook
CFIN5 5th edition by Scott Besley
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16 Chapters
1175 Verified Questions
1175 Flashcards
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Page 2
Chapter 1: An Overview of Managerial Finance
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Sample Questions
Q1) Which of the following statements is true of the concentrated organizational structures of non-U.S. firms?
A) The concentrated organizational structures of non-U.S. firms permit managers to focus more on short-term earnings.
B) The concentrated organizational structures of non-U.S. firms result in easier access to credit in times of financial difficulty.
C) The concentrated organizational structures of non-U.S. firms make it difficult to change managers.
D) The concentrated organizational structures of non-U.S. firms reduce the managerial focus on wealth maximization.
E) The concentrated organizational structures of non-U.S. firms result from the universal banking relationships that exist outside the United States.
Answer: E
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3
Chapter 2: Analysis of Financial Statements
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Sample Questions
Q1) The extent to which the operating income can decline before a firm is unable to meet its annual interest costs can be found in:
A) the fixed charge coverage ratio.
B) the debt ratio.
C) the times-interest-earned ratio.
D) the return on equity.
E) the profit margin.
Answer: C
Q2) What is the appropriate measure used to examine whether a management is maximizing the firm's stock price?
A) Retained earnings
B) Net income
C) Cash flows
D) Earnings per share
E) Accounting profits
Answer: C
Q3) A simple approach to trend analysis is to construct graphs.
A)True
B)False
Answer: True
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Chapter 3: The Financial Environment: Markets, Institutions, and Investment Banking
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Sample Questions
Q1) Which of the following financial intermediaries operates as a not-for-profit organization?
A) Commercial bank
B) Credit union
C) Thrift institution
D) Mutual fund
E) Whole-life insurance company
Answer: B
Q2) An individual investor is using the services of a broker to buy and sell stocks currently being traded in the stock market. This transaction is referred to as a primary market transaction.
A)True
B)False
Answer: False
Q3) Whole-life polices offer both insurance coverage and a savings feature, whereas term life policies do not.
A)True
B)False
Answer: True
Page 5
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Chapter 4: Time Value of Money
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Sample Questions
Q1) Mike is considering investing $18,500 in an investment that will have a maturity value of $32,500 in 8 years. If the interest is compounded monthly, what is the annual rate of return earned on the investment?
A) 4.29%
B) 5.66%
C) 6.52%
D) 7.06%
E) 8.78%
Q2) Which of the following types of annuity best describes the mortgage or rent that you have to pay at the beginning of each month?
A) Annuity due
B) Ordinary annuity
C) Deferred annuity
D) Annuity in arrears
E) Immediate annuity
Q3) Risk-adjusted required rate of return is the rate of return on the best available alternative investment of equal risk.
A)True
B)False
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Page 6
Chapter 5: The Cost of Money Interest Rates
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Sample Questions
Q1) During _____, both the demand for money and the rate of inflation tend to fall, which prompts the Fed to increase the money supply, and as a result, interest rates decline.
A) expansions
B) a fiscal deficit
C) recessions
D) economic booms
E) a foreign trade deficit
Q2) Assume that the current interest rate on a 1-year bond is 8 percent, the current rate on a 2-year bond is 10 percent, and the current rate on a 3-year bond is 12 percent. If the expectations theory of the term structure is correct, what is the 1-year interest rate expected during Year 3? (Base your answer on an arithmetic rather than geometric average.)
A) 12.0%
B) 16.0%
C) 13.5%
D) 10.5%
E) 14.0%
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Chapter 6: Bonds Debtcharacteristics and Valuation
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Q1) Which of the following statements is true about a zero coupon bond?
A) A zero coupon bond is taxed as a capital gain at the time the bond matures.
B) A zero coupon bond is issued at a substantial discount below its par value.
C) A zero coupon bond is issued at a coupon rate that adjusts for inflation.
D) The interest received every year on a zero coupon bond is taxed as interest income.
E) The discount on the issue of a zero coupon bond is written off over its life in the investor's financial statement.
Q2) The principal value of debt is:
A) the amount added to interest payments to be repaid at the maturity date.
B) the amount owed to the lender.
C) the sum of all interest payments during the life of the debt.
D) the amount of adjustment in the maturity value of the debt due to interest rate fluctuations.
E) the sum of interest and inflation adjusted par value of debt.
Q3) Issuing zero coupon bonds might appeal to a company that is considering investing in a long-term project that will not generate positive cash flows for several years.
A)True
B)False
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Chapter 7: Stocks Equity Characteristics and Valuation
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Sample Questions
Q1) According to the convertibility provision, a common stock can be converted to a certain number of shares of preferred stock at the conversion price.
A)True
B)False
Q2) Scubapro Corporation currently has 500,000 shares outstanding and plans to issue 200,000 more shares in a seasoned equity offering. The current shareholders have preemptive rights on any new issue of stock by Scubapro Corporation. How many stocks would an investor with 20,000 shares, who exercises his preemptive rights on the new stock issue, have the right to buy?
A) 200,000 shares
B) 120,000 shares
C) 20,000 shares
D) 12,000 shares
E) 8,000 shares
Q3) A proxy fight is an attempt by a group to gain control of a firm by convincing its stockholders to give the group the authority to vote their shares in order to elect a new management team.
A)True
B)False
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Page 9
Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihood of unfavorable events.
A)True
B)False
Q2) Which of the following risks is relevant for the purpose of determining the risk premium of a security?
A) Financial risk
B) Inflation risk
C) Default risk
D) Stand-alone risk
E) Business risk
Q3) Liquidity risk is an unsystematic risk and can be diversified by the investors.
A)True
B)False
Q4) Risk is indicated by variability, whether the variability is considered positive or negative. Both the positive and negative outcomes must be evaluated when considering risk.
A)True
B)False
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Chapter 9: Capital Budgeting Techniques
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Sample Questions
Q1) Which of the following statements is correct about the use of the net present value (NPV) method and the internal rate of return (IRR) method for capital budgeting decisions?
A) The NPV method assumes that cash flows will be reinvested at the required rate of return while the IRR method assumes reinvestment opportunity at the IRR.
B) The NPV method assumes that cash flows will be reinvested at the risk-free rate while the IRR method assumes reinvestment at the required rate of return.
C) The NPV method assumes that cash flows will be reinvested at the required rate of return while the IRR method assumes reinvestment at the risk-free rate.
D) The NPV method assumes that cash flows are not influenced by the inflation rate while the IRR method uses a rate of return after inflation adjustment.
E) The NPV method assumes that the project generates no cash flows beyond the payback period while the IRR method assumes no cash flow in the first year of the life of a project.
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11
Chapter 10: Project Cash Flows and Risk
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Sample Questions
Q1) The Monte Carlo simulation:
A) can be useful for estimating a project's market risk.
B) uses probability distributions for variables as input data to estimate the project's net present value (NPV).
C) produces both an expected NPV (or IRR) and a measure of the riskiness of the NPV or IRR for different scenarios.
D) gives the exact outcome that can be expected from a project.
E) calculates NPV for a change in one key variable.
Q2) Carolina Insurance Company, an all-equity life insurance firm, is considering the purchase of a fire insurance company. The fire insurance company is expected to generate a return of 20 percent with a beta of 2.5. If the risk-free rate is 8 percent and the market risk premium is 6 percent, the expected return from the insurance company is
A) 10%
B) 23%
C) 14%
D) 29%
E) 8%
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Chapter 11: The Cost of Capital
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Sample Questions
Q1) Coral Inc.'s preferred stock currently sells for $90 a share and pays a dividend of $10 per share; however, the firm will net only $80 per share from the sale of new preferred stock. What is the firm's cost of newly issued preferred stock? (Round off the answer to two decimal places.)
A) 11.15 percent
B) 12.50 percent
C) 16.45 percent
D) 10.52 percent
E) 13.46 percent
Q2) Marigold Inc.'s common stock currently sells for $40 per share, but the firm will net only $34 per share from the sale of new common stock. The firm recently paid a dividend of $2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10 percent per year. Which of the following is the cost of newly issued common stock? (Round off the answer to two decimal places.)
A) 12.24 percent
B) 13.56 percent
C) 14.12 percent
D) 16.47 percent
E) 17.53 percent
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Page 13
Chapter 12: Capital Structure
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Sample Questions
Q1) The combination of debt and equity that maximizes a firm's value is known as the:
A) degree of financial leverage (DFL).
B) maximum weighted average cost of capital (WACC).
C) maximum business risk.
D) optimal capital structure.
E) indifference point.
Q2) The probability of incurring bankruptcy increases as a firm's debt/equity ratio decreases.
A)True
B)False
Q3) If a high percentage of a firm's operating costs are fixed and hence do not decline when demand falls off, this will _____.
A) decrease financial leverage
B) optimize the capital structure of the firm
C) increase the business risk of the firm
D) decrease the firm-specific risk of the firm
E) intensify the risk borne by thefirm's common stockholders
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Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases
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Sample Questions
Q1) Firms using the constant payout ratio dividend policy offer to reinvest dividends in the stocks of the dividend-paying firm.
A)True
B)False
Q2) Which of the following is an advantage of stock repurchases?
A) Stock repurchases signal that the stock is overpriced.
B) Companies cannot distribute excess cash through stock repurchases.
C) Stock repurchases are generally irregular in nature.
D) Stock repurchases provide protection against a takeover attempt.
E) Stock repurchases make it difficult to exercise employee options.
Q3) A_____ is an action taken by a firm to decrease the per-share price of its stock.
A) stock appreciation
B) stock split
C) stock issue
D) stock repurchase
E) stock redemption
Q4) A firm repurchases stock to distribute excess funds.
A)True
B)False
15
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Chapter 14: Managing Short-Term Financing Liabilities
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Sample Questions
Q1) All else equal, a firm that purchases raw materials on credit will experience:
A) a decrease in trade credit with a given increase in purchases.
B) no change in trade credit with a given increase in purchases.
C) an increase in trade credit with a given increase in purchases.
D) no change in trade credit with a given decrease in purchases.
E) an increase in trade credit with a given decrease in purchases.
Q2) Lima Corporation makes purchases on credit, and its suppliers grant it credit terms of 2/15, net 30. Assuming there are 360 days in a year, the effective annual rate of non-free trade credit if the firm did not take discounts but did pay on the due date is:
A) 17.53%.
B) 78.87%.
C) 52.78%.
D) 27.42%.
E) 62.36%.
Q3) The moderate approach to current asset financing is the least profitable but the safest of all the three approaches.
A)True
B)False
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Chapter 15: Managing Short-Term Assets
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Sample Questions
Q1) If a firm's credit terms are 2/10 net 30 days, then customers settling their bills within 30 days will get a 2% discount.
A)True
B)False
Q2) Firms following a restricted current asset investment policy:
A) have uncertain sales and operations.
B) have relatively low levels of accounts receivable.
C) have a lower return on investment, especially on current assets.
D) have the longest cash conversion cycle in the industry.
E) have the highest inventory conversion in the industry.
Q3) The target cash balance is the difference between total cash receipts and total cash disbursements.
A)True
B)False
Q4) A lockbox arrangement is:
A) a method for the safe-keeping of marketable securities.
B) used to identify inventory safety stocks.
C) a system for slowing down cash disbursements.
D) a system for speeding up a firm's collections of checks received.
E) a system for speeding up a firm's disbursement of checks to the customers.
Page 17
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Chapter 16: Financial Planning and Control
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Sample Questions
Q1) If a firm does not meet its forecasted sales level, leverage will result in a magnified increase in income compared to what is expected.
A)True
B)False
Q2) A firm needs external financing to support increases in operations if:
A) the firm is operating at full capacity.
B) the firm is accounting for a very less amount of financing feedbacks.
C) the firm has a large amount of spontaneously generated funds.
D) the firm is having economies of scale.
E) the firm is operating at the breakeven point.
Q3) The process of determining whether the forecast meets the firm's financial targets is known as _____.
A) operating breakeven analysis
B) economies of scale
C) leverage analysis
D) financial statement analysis
E) strategic planning
Q4) Any deviation from projections must be dealt with to improve future forecasts.
A)True
B)False
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