Business Finance
Mock Exam
Course Introduction
Business Finance explores the fundamental principles and practices involved in managing an organizations financial resources. The course covers critical topics such as financial statement analysis, time value of money, capital budgeting, risk and return, cost of capital, and sources of financing. Students will examine decision-making processes regarding investments, financing, and dividend policies, learning how to optimize financial performance within various business environments. Through case studies and real-world examples, the course equips students with the analytical tools and frameworks necessary for effective financial management and strategic planning in both private and public sectors.
Recommended Textbook Principles of Finance 6th Edition by Scott Besley
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17 Chapters
1889 Verified Questions
1889 Flashcards
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Page 2
Chapter 1: An Overview of Finance
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Sample Questions
Q1) The major areas included in the study of finance are information technology, investments and managerial finance.
A)True
B)False
Answer: False
Q2) The average American is knowledgeable about personal finance and tends to manage their retirement needs and debt levels responsibly.
A)True
B)False
Answer: False
Q3) The three main functions in the investments area are sales, the decisions that firms make concerning their cash flows, and determining the optimal mix of securities for a given investor.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Financial Assets Instruments
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111 Flashcards
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Sample Questions
Q1) The interest rate paid on Eurodollar deposits depends on the particular bank's lending rate and on rates of return available on U.S.money market instruments.
A)True
B)False
Answer: False
Q2) Preferred stock can provide a financing alternative for some firms when market conditions are such that those firms can issue neither pure debt nor common stock at reasonable cost.
A)True
B)False
Answer: True
Q3) The sale of new common stock at a price greater than par value will affect which balance sheet accounts? (Choose the most complete answer.)
A) Common stock, paid-in capital, retained earnings.
B) Assets, common stock, paid-in capital.
C) Liabilities, common equity.
D) Common stock, retained earnings.
E) Common stock, paid-in capital.
Answer: B
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Page 4
Chapter 3: Financial Markets and the Investment Banking Process
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Sample Questions
Q1) After a new issue is brought to market it is the marginal investor who determines the price at which the stock will trade.
A)True
B)False Answer: True
Q2) The primary role of financial markets is to help bring together borrowers and savers by facilitating the flow of funds from individuals and businesses that have surplus funds to individuals, businesses, and governments that have needs for funds in excess of their income.
A)True
B)False Answer: True
Q3) If an individual investor buys and sells existing stocks through a broker, these are primary market transactions.
A)True
B)False Answer: False
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Page 5
Chapter 4: Financial Intermediaries and the Banking System
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Sample Questions
Q1) The deposits of federal credit unions are insured by the Federal Deposit Insurance Corporation.
A)True
B)False
Q2) Which statement is not true about life insurance companies?
A) They have relatively predictable inflows and outflows.
B) Their liabilities are long-term in nature.
C) They invest heavily in short-term highly marketable securities.
D) They sell contracts that offer financial protection against premature death.
E) All of the above.
Q3) U.S.bank regulators allow U.S.banks overseas to engage in all banking activities allowed by the host country.
A)True
B)False
Q4) Most of the financial panics experienced by the United States in the past can be traced to the behavior of financial intermediaries who either took on too much risk or behaved unethically.
A)True
B)False
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Chapter 5: The Cost of Money Interest Rates
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Sample Questions
Q1) The market segmentation theory of the term structure is, essentially, the expectations theory with the addition of maturity risk premiums.
A)True
B)False
Q2) Given the following data, find the expected rate of inflation during the next year. r* = real risk-free rate = 3%.
Maturity risk premium on 10-year T-bonds = 2%.It is zero on 1-year bonds, and a linear relationship exists.
Default risk premium on 10-year, A-rated bonds = 1.5%.
Liquidity premium = 0%.
Going interest rate on 1-year T-bonds = 8.5%.
A) 3.5%
B) 4.5%
C) 5.5%
D) 6.5%
E) 7.5%
Q3) Inflationary pressures are usually strongest during business booms.
A)True
B)False
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Chapter 6: Business Organizations and the Tax Environment
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Sample Questions
Q1) Most firms today use executive stock options, as opposed to other incentive methods, to induce management to act in the best interests of stockholders.
A)True
B)False
Q2) The riskiness inherent in a firm's earnings per share (EPS) depends on both the types of projects the firm takes on and the manner in which the projects are financed.
A)True
B)False
Q3) Which of the following mechanisms is not used by shareholders to get managers to act in shareholders' best interests?
A) Threat of firing.
B) Managerial compensation.
C) Performance shares.
D) Threat of takeover.
E) Answers b and c above.
Q4) The U.S.corporate tax rate is lower than most industrialized nations.
A)True
B)False
Page 8
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Chapter 7: Analysis of Financial Statements
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Sample Questions
Q1) The Charleston Company is a relatively small, privately owned firm.Last year the company had after-tax income of $15,000, and 10,000 shares were outstanding.The owners were trying to determine the market value for the stock, prior to taking the company public.A similar firm which is publicly traded had a price/earnings ratio of 5.0.Using only the information given, estimate the market value of one share of Charleston's stock.
A) $10.00
B) $7.50
C) $5.00
D) $2.50
E) $1.50
Q2) The ____ provides a good indication of the firm's ability to meet its current obligations.
A) debt ratio
B) profit margin
C) days sales outstanding
D) quick ratio
E) return on equity
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Page 9
Chapter 8: Financial Planning and Control
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Sample Questions
Q1) Refer to Trident Food Corporation.What is the financial breakeven point for Trident Foods?
A) EBIT = $146,500
B) Sales = 4,800 units
C) EBIT = $10,000
D) Net income = $10,000
E) EBIT = $11,400
Q2) Two firms that have the same financial leverage must also have the same ROE, because both financial leverage and ROE measure the risk associated with equity financing.
A)True
B)False
Q3) The purpose of financial breakeven analysis is to determine the level of sales a firm needs in order to cover the fixed and variable costs associated with producing and selling inventory items.
A)True
B)False
Q4) Operating costs include variable costs, depreciation and interest charges.
A)True
B)False
Page 10
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Chapter 9: Time Value of Money
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Sample Questions
Q1) You are currently at time period 0, and you will receive the first payment on an annual payment annuity of $100 in perpetuity at the end of this year.Six full years from now you will receive the first payment on an additional $150 in perpetuity, and at the end of time period 10 you will receive the first payment on an additional $200 in perpetuity.If you require a 10 percent rate of return, what is the combined present value of these three perpetuities?
A) $2,349.50
B) $2,526.85
C) $2,685.42
D) $2,779.58
E) $2,975.40
Q2) If you presently have $6,000 invested at a rate of 15 percent, how many years will it take for your investment to triple? (Round up to obtain a whole number of years if necessary.)
A) 2 years
B) 4 years
C) 6 years
D) 8 years
E) 10 years
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Chapter 10: Valuation Concepts
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Sample Questions
Q1) The value of a financial asset is positively related to the size of the cash flows and the discount rate appropriate for the riskiness of the cash flows.
A)True
B)False
Q2) A discount bond is a bond that sells below its par value.
A)True
B)False
Q3) If the expected rate of return on a stock exceeds the required rate,
A) The stock is experiencing supernormal growth.
B) The stock should be sold.
C) The company is probably not trying to maximize price per share.
D) The stock is a good buy.
E) Dividends are not being declared.
Q4) A premium bond is a bond whose par value is greater than the market value of that bond.
A)True B)False
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Page 12
Chapter 11: Risk and Rates of Return
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104 Verified Questions
104 Flashcards
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Sample Questions
Q1) Which of the following statements concerning measures of risk is correct?
A) Combining stocks together in portfolios reduces risk as long as the correlation between the returns on the securities is not perfect .
B) Even if the correlation between the returns on two different securities is perfectly positive, if the securities are combined in the correct unequal proportions, the resulting portfolio can have less risk than either security held alone.
C) The coefficient of variation, calculated as the expected return divided by the standard deviation, is a standardized measure of the correlation of risk and return.
D) The tighter the probability distribution of expected future returns the smaller the risk of a given investment as measured by both the variance and the standard deviation.
E) Variance is a measure of the variability of returns and because it involves squaring each deviation of the required return from the expected return, it is always larger than its square root, the standard deviation.
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Chapter 12: The Cost of Capital
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Sample Questions
Q1) The cost of equity obtained by retaining earnings is generally regarded as being the rate of return stockholders require on the firm's common stock.
A)True
B)False
Q2) For a typical firm with a given capital structure, which of the following is correct?
(Note: r<sub>a</sub> = WACC, and all rates are after taxes.)
A) r<sub>d</sub> > r<sub>e</sub> > r<sub>s</sub> > r<sub>a</sub>.
B) r<sub>s</sub> > r<sub>e</sub> > r<sub>d</sub> > r<sub>a</sub>.
C) r<sub>a</sub> > r<sub>e</sub> > r<sub>s</sub> > r<sub>d</sub>.
D) r<sub>e</sub> > r<sub>s</sub> > r<sub>a</sub> > r<sub>d</sub>.
E) None of the statements above is correct.
Q3) Refer to Rollins Corporation.What is Rollins' component cost of debt?
A) 10.0%
B) 9.1%
C) 8.6%
D) 8.0%
E) 7.2%
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Page 14
Chapter 13: Capital Budgeting
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Sample Questions
Q1) The capital budgeting director of Sparrow Corporation is evaluating a project which costs $200,000, is expected to last for 10 years and produce after-tax cash flows, including depreciation, of $44,503 per year.If the firm's required rate of return is 14 percent and its tax rate is 40 percent, what is the project's IRR?
A) 8%
B) 14%
C) 18%
D) 5%
E) 12%
Q2) The internal rate of return is that discount rate which equates the present value of the cash outflows (or costs) with the present value of the cash inflows.
A)True
B)False
Q3) When risk is explicitly accounted for in capital budgeting, a project will be acceptable to a firm if its IRR is greater than the firm's average required rate of return.
A)True
B)False
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Chapter 14: Capital Structure and Dividend Policy Decisions
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Sample Questions
Q1) If you know that your firm is facing relatively poor prospects but needs new capital, and you know that investors do not have this information, signaling theory would predict that you would
A) Issue debt to maintain the returns of equity holders.
B) Issue equity to share the burden of decreased equity returns between old and new shareholders.
C) Be indifferent between issuing debt and equity.
D) Postpone going into capital markets until your firm's prospects improve.
E) Convey your inside information to investors using the media to eliminate the information asymmetry.
Q2) Changing the capital structure of the firm will affect the riskiness inherent in the firm's common stock, which will affect the return demanded by stockholders and the stock's
A)True
B)False
Q3) A firm's capital structure and dividend policy can affect the firm's cash position but has no impact on the market value of the firm's stock.
A)True
B)False
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Page 16
Chapter 15: Working Capital Management
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174 Flashcards
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Sample Questions
Q1) Refer to Fashion Clothiers Inc.What is Fashion Clothiers' minimum cost of ordering and holding inventory?
A) $6,254
B) $10,733
C) $11,560
D) $13,563
E) $19,825
Q2) If a firm's sales and those of its customers are closely correlated with economic conditions, it is possible for a firm's total investment in accounts receivable to decrease while its days sales outstanding increases.
A)True
B)False
Q3) Trade credit is an inexpensive source of short-term financing if no discounts are offered.
A)True
B)False
Q4) Factoring involves the outright sale of accounts receivable.
A)True
B)False
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Chapter 16: Investment Concepts
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Sample Questions
Q1) Refer to Portfolio.What was the one-year holding period return for the portfolio in 2011? Assume any dividend payments are included in the market value shown above.
A) 11.8%
B) 20.1%
C) 39.9%
D) 10.5%
E) 25.2%
Q2) The total value of a firm's stock which can be computed by multiplying the number of shares outstanding by the market price per share is called what?
A) Market weighted
B) Market capitalization
C) Market beta
D) Market return
Q3) Because an investor borrowing funds for margin trading pays a fixed rate to borrow funds from his broker, the margin trading returns are magnifies the returns on the assets value.
A)True
B)False
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Chapter 17: Security Valuation and Selection
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110 Verified Questions
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Sample Questions
Q1) Investment professionals probably would recommend that an investor who likes to gamble should have a portfolio that includes only speculative securities such as options and futures, interest-rate swaps, and so forth.
A)True
B)False
Q2) If an investor wishes to better diversify her investment portfolio, which consists of the common stocks of many of the firms that are in the Dow Jones Industrial Average, she probably should invest in some companies that are in those industries that are classified as cyclical.
A)True
B)False
Q3) Because financial statement analysis is based on examination of accounting statements, which often do not represent economic earnings, they should not be included in investment analysis.
A)True
B)False
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