Business Finance
Mock Exam
Course Introduction
Business Finance provides an in-depth overview of the principles and practices involved in managing a firm's financial resources. The course covers fundamental topics such as financial analysis, planning and forecasting, time value of money, risk and return, capital budgeting, cost of capital, and sources of financing. Through case studies and real-world examples, students learn to evaluate investment opportunities, understand the financial markets, and make informed decisions aimed at maximizing shareholder value. The course equips students with the analytical tools required for sound financial management in a dynamic business environment.
Recommended Textbook
Intermediate Financial Management 13th Edition by Eugene F. Brigham
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Page 2
Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) Which of the following statements is CORRECT
A) a good goal for a firm's management is maximization of expected eps.
B) most business in the u.s. is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment.
C) because most stock ownership is concentrated in the hands of a relatively small segment of society, firms' actions to maximize their stock prices have little benefit to society.
D) corporations and partnerships have an advantage over proprietorships because a sole proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited.
E) the potential exists for agency conflicts between stockholders and managers.
Answer: E
Q2) Money markets are markets for A) foreign stocks.
B) consumer automobile loans.
C) u.s. stocks.
D) short-term debt securities.
E) long-term bonds.
Answer: D
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Chapter 2: Risk and Return-Part I
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Q1) The SML relates required returns to firms' systematic (or market) risk. The slope and intercept of this line can be influenced by a manager's actions.
A)True
B)False
Answer: False
Q2) Suppose that during the coming year, the risk free rate, rRF, is expected to remain the same, while the market risk premium (rM - rRF), is expected to fall. Given this forecast, which of the following statements is CORRECT?
A) the required return on all stocks will remain unchanged.
B) the required return will fall for all stocks, but it will fall more for stocks with higher betas.
C) the required return for all stocks will fall by the same amount.
D) the required return will fall for all stocks, but it will fall less for stocks with higher betas.
E) the required return will increase for stocks with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0.
Answer: B
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Chapter 3: Risk and Return-Part II
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Q1) Assume an economy in which there are three securities: Stock A with rA = 10% and A = 10%; Stock B with rB = 15% and B = 20%; and a riskless asset with rRF = 7%. Stocks A and B are uncorrelated (rAB = 0). Which of the following statements is most CORRECT?
A) the expected return on the investor's portfolio will probably have an expected return that is somewhat below 10% and a standard deviation (sd) of approximately 10%.
B) the expected return on the investor's portfolio will probably have an expected return that is somewhat below 15% and a standard deviation (sd) that is between 10% and 20%.
C) the investor's risk/return indifference curve will be tangent to the cml at a point where the expected return is in the range of 7% to 10%.
D) since the two stocks have a zero correlation coefficient, the investor can form a riskless portfolio whose expected return is in the range of 10% to 15%.
E) the expected return on the investor's portfolio will probably have an expected return that is somewhat above 15% and a standard deviation (sd) of approximately 20%.
Answer: B
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Chapter 4: Bond Valuation
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Q1) Which of the following statements is CORRECT?
A) if a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative.
B) if a bond is selling at a discount, the yield to call is a better measure of the expected return than the yield to maturity.
C) the current yield on bond a exceeds the current yield on bond b. therefore, bond a must have a higher yield to maturity than bond b.
D) if a coupon bond is selling at par, its current yield equals its yield to maturity.
E) if a coupon bond is selling at a premium, then the bond's current yield is zero.
Q2) Which of the following statements is CORRECT?
A) a bond is likely to be called if its market price is below its par value.
B) even if a bond's ytc exceeds its ytm, an investor with an investment horizon longer than the bond's maturity would be worse off if the bond were called.
C) a bond is likely to be called if its market price is equal to its par value.
D) a bond is likely to be called if it sells at a discount below par.
E) a bond is likely to be called if its coupon rate is below its ytm.
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Chapter 5: Financial Options
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Q1) Which of the following statements is CORRECT?
A) as the stock's price rises, the time value portion of an option on a stock increases because the difference between the price of the stock and the fixed strike price increases.
B) issuing options provides companies with a low cost method of raising capital.
C) the market value of an option depends in part on the option's time to maturity and also on the variability of the underlying stock's price.
D) the potential loss on an option decreases as the option sells at higher and higher prices because the profit margin gets bigger.
E) an option's value is determined by its exercise value, which is the market price of the stock less its striking price. thus, an option can't sell for more than its exercise value.
Q2) Because of the time value of money, the longer before an option expires, the less valuable the option will be, other things held constant.
A)True B)False
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Chapter 6: Accounting for Financial Management
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Q1) Which of the following factors could explain why Regal Industrial Fixtures had a negative net cash flow last year, even though the cash on its balance sheet increased?
A) the company repurchased 20% of its common stock.
B) the company sold a new issue of bonds.
C) the company made a large investment in new plant and equipment.
D) the company paid a large dividend.
E) the company had high amortization expenses.
Q2) On the balance sheet, total assets must always equal total liabilities and equity.
A)True
B)False
Q3) The time dimension is important in financial statement analysis. The balance sheet shows the firm's financial position at a given point in time, the income statement shows results over a period of time, and the statement of cash flows reflects changes in the firm's accounts over that period of time.
A)True
B)False
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8
Chapter 7: Analysis of Financial Statements
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Q1) Which of the following statements is CORRECT?
A) if firms x and y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same.
B) if firms x and y have the same p/e ratios, then their market-to-book ratios must also be the same.
C) if firms x and y have the same net income, number of shares outstanding, and price per share, then their p/e ratios must also be the same.
D) if firms x and y have the same earnings per share and market-to-book ratio, they must have the same price earnings ratio.
E) if firm x's p/e ratio exceeds that of firm y, then y is likely to be less risky and also to be expected to grow at a faster rate.
Q2) Ratio analysis involves analyzing financial statements in order to appraise a firm's financial position and strength.
A)True
B)False
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Chapter 8: Basic Stock Valuation
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Q1) Which of the following statements is CORRECT?
A) if a stock has a required rate of return rs = 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, p0 = d1/(rs 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) According to the basic FCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.
A)True
B)False
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Page 10
Chapter 9: Corporate Valuation and Financial Planning
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Q1) Two firms with identical capital intensity ratios are generating the same amount of sales. However, Firm A is operating at full capacity, while Firm B is operating below capacity. If the two firms expect the same growth in sales during the next period, then Firm A is likely to need more additional funds than Firm B, other things held constant.
A)True
B)False
Q2) The AFN equation assumes that the ratios of assets and liabilities to sales remain constant over time. However, this assumption can be relaxed when we use the forecasted financial statement method. Three conditions where constant ratios cannot be assumed are economies of scale, lumpy assets, and excess capacity.
A)True
B)False
Q3) The fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.
A)True
B)False
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Chapter 10: Corporate Governance
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Q1) Which one of the following statements is TRUE?
A) a corporate golf club membership is an example of a nonpecuniary benefit
B) firms borrowing money have greater flexibility to use that money when there are debt covenants.
C) when lenders protect themselves from the risk of asset switching by raising the interest rate, the firm's wacc can decrease.
D) a lender calling in a corporate loan and then lending the funds out to a safer borrower is an example of asset switching.
E) a supplier substituting a lower-quality raw material without approval is an example of asset switching.
Q2) Which one of the following statements is TRUE?
A) one tool of corporate governance is monitoring management.
B) one tool of corporate governance is the choice of how much dividends to pay.
C) a company's matching contribution to a retirement plan is a nonpecuniary benefit
D) one tool of corporate governance is stock repurchases.
E) corporate governance is better when directors are also employees of the company so they know the business very well.
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Page 12
Chapter 11: Determining the Cost of Capital
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Q1) To help them estimate the company's cost of capital, Smithco has hired you as a consultant. You have been provided with the following data: D1 = $1.45; P0 = $22.50; and gL = 6.50% (constant). Based on the dividend growth approach, what is the cost of common from reinvested earnings?
A) 11.10%
B) 11.68%
C) 12.30%
D) 12.94%
E) 13.59%
Q2) The Lincoln Company sold a $1,000 par value, noncallable bond several years ago that now has 20 years to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sells for $925 and the company's tax rate is 40%. What is the component cost of debt for use in the WACC calculation?
A) 4.28%
B) 4.46%
C) 4.65%
D) 4.83%
E) 5.03%
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Chapter 12: Capital Budgeting: Decision Criteria
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Q1) Which of the following statements is CORRECT?
A) one defect of the irr method versus the npv is that the irr does not take account of the time value of money.
B) one defect of the irr method versus the npv is that the irr does not take account of the cost of capital.
C) one defect of the irr method versus the npv is that the irr values a dollar received today the same as a dollar that will not be received until sometime in the future.
D) one defect of the irr method versus the npv is that the irr does not take proper account of differences in the sizes of projects.
E) one defect of the irr method versus the npv is that the irr does not take account of cash flows over a project's full life.
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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14
Chapter 13: Capital Budgeting-Estimating Cash Flows and Analyzing Risk
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Q1) Which of the following statements is CORRECT?
A) sunk costs must be considered if the irr method is used but not if the firm relies on the npv method.
B) a good example of a sunk cost is a situation where a bank opens a new office, and that new office leads to a decline in deposits of the bank's other offices.
C) a good example of a sunk cost is money that a banking corporation spent last year to investigate the site for a new office, then expensed that cost for tax purposes, and now is deciding whether to go forward with the project.
D) if sunk costs are considered and reflected in a project's cash flows, then the project's calculated npv will be higher than it otherwise would be.
E) an example of a sunk cost is the cost associated with restoring the site of a strip mine once the ore has been depleted.
Q2) If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land.
A)True
B)False
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Page 15
Chapter 14: Real Options
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Q1) Refer to the data for Nationwide Pharmaceutical Corporation (NPC). Calculate the effect of waiting on the project's risk, using the same data. By how much will delaying reduce the project's coefficient of variation? (Hint: Use the expected NPV.) A) 2.23
Q2) Refer to the data for Nationwide Pharmaceutical Corporation (NPC). Assuming that all cash flows are discounted at 10%, if NPC chooses to wait a year before proceeding, how much will this increase or decrease the project's expected NPV in today's dollars (i.e., at t = 0), relative to the NPV if it proceeds today?
A) $77.23
B) $85.81
C) $95.34
D) $105.94
E) $116.53
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16
Chapter 15: Distributions to Shareholders-Dividends and Repurchases
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Q1) Which of the following statements is correct?
A) the clientele effect can explain why so many firms change their dividend policies so often.
B) one advantage of adopting the residual dividend policy is that this policy makes it easier for corporations to develop a specific and well-identified dividend clientele.
C) new-stock dividend reinvestment plans are similar to stock dividends because they both increase the number of shares outstanding but don't change the firm's total amount of book equity.
D) investors who receive stock dividends must pay taxes on the value of the new shares in the year the stock dividends are received.
E) if a firm follows the residual dividend policy, then a sudden increase in the number of profitable projects is likely to reduce the firm's dividend payout.
Q2) Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk.
A)True
B)False
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Page 17
Chapter 16: Capital Structure Decisions
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Q1) If Miller and Modigliani had incorporated the costs of bankruptcy into their model, it is unlikely that they would have concluded that 100% debt financing is optimal.
A)True
B)False
Q2) Which of the following statements is CORRECT?
A) since debt financing is cheaper than equity financing, raising a company's debt ratio will always reduce its wacc.
B) increasing a company's debt ratio will typically reduce the marginal cost of both debt and equity financing. however, this action still may raise the company's wacc.
C) increasing a company's debt ratio will typically increase the marginal cost of both debt and equity financing. however, this action still may lower the company's wacc.
D) since a firm's beta coefficient it not affected by its use of financial leverage, leverage does not affect the cost of equity.
E) since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its wacc.
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18
Chapter 17: Dynamic Capital Structures and Corporate Valuation
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Q1) In the compressed adjusted present value model, the appropriate discount rate for the tax shield is the WACC.
A)True
B)False
Q2) Refer to data for Kitto Electronics. Using the compressed adjusted present value model, what is the value of Kitto's tax shield?
A) $156,385
B) $164,616
C) $173,280
D) $182,400
E) $192,000
Q3) Suppose a company issued 30-year bonds 4 years ago, when the yield curve was inverted. Since then long-term rates (10 years or longer) have remained constant, but the yield curve has resumed its normal upward slope. Under such conditions, a bond refunding would almost certainly be profitable.
A)True
B)False
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Page 19
Chapter
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Q1) Which of the following statements about listing on a stock exchange is most CORRECT?
A) any firm can be listed on the nyse as long as it pays the listing fee.
B) listing provides a company with some "free" advertising, and it may enhance the firm's prestige and help it do more business.
C) listing reduces the reporting requirements for firms, because listed firms file reports with the exchange rather than with the sec.
D) the otc is the second largest market for listed stock, and it is exceeded only by the nyse.
E) listing is a decision of more significance to a firm than going public.
Q2) If its managers make a tender offer and buy all shares that were not held by the management team, this is called a private placement.
A)True
B)False
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20
Chapter 19: Lease Financing
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Q1) Operating leases help to shift the risk of obsolescence from the user to the lessor.
A)True
B)False
Q2) Heavy use of off-balance sheet lease financing will tend to
A) make a company appear less risky than it actually is because its stated debt ratio will appear lower.
B) affect a company's cash flows but not its degree of risk.
C) have no effect on either cash flows or risk because the cash flows are already reflected in the income statement.
D) affect the lessee's cash flows but only due to tax effects.
E) make a company appear more risky than it actually is because its stated debt ratio will be increased.
Q3) Assume that a piece of leased equipment has a relatively high rather than low expected residual value. From the lessee's viewpoint, it might be better to own the asset rather than lease it because with a high residual value the lessee will likely face a higher lease rate.
A)True
B)False
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Chapter 20: Hybrid Financing Preferred Stock-Warrants and Convertibles
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Q1) Firms generally do not call their convertibles unless the conversion value is greater than the call price.
A)True B)False
Q2) Refer to the data for the Neuman Corporation's convertible bonds. What is the bond's straight-debt value?
A) $684.78
B) $720.82
C) $758.76
D) $798.70
E) $838.63
Q3) A warrant holder is not entitled to vote, but he or she does receive any cash dividends paid on the underlying stock.
A)True
B)False
Q4) A warrant is an option, and as such it cannot be used as a "sweetener."
A)True B)False
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Chapter 21: Supply Chains and Working Capital Management
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Q1) The cash budget and the capital budget are handled separately, and although they are both important, they are developed completely independently of one another.
A)True
B)False
Q2) Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?
A) depreciation.
B) cumulative cash.
C) repurchases of common stock.
D) payment for plant construction.
E) payments lags.
Q3) Trade credit can be separated into two components: free trade credit, which is credit received after the discount period ends, and costly trade credit, which is the cost of discounts not taken.
A)True B)False
Q4) The calculated cost of trade credit can be reduced by paying late.
A)True
B)False
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Chapter 22: Providing and Obtaining Credit
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Q1) Refer to Exhibit Brother's Loan. How large are your brother's monthly payments?
A) $6,250
B) $7,000
C) $7,500
D) $5,250
E) $6,875
Q2) Danby Design Inc. has approached the bank with its plan to borrow $12,000. The bank offers the choice of a 12 percent discount interest loan or a 10.19 percent add-on, one-year installment loan, payable in 4 equal quarterly payments. What is the approximate (nominal) rate of interest on the 10.19 percent add-on loan?
A) 5.10%
B) 10.19%
C) 12.00%
D) 20.38%
E) 30.57%
Q3) Cash discounts are mostly used to get new customers in the door since existing customers almost always use the delayed payment terms.
A)True
B)False
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Page 24
Chapter 23: Other Topics in Working Capital Management
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Q1) Refer to Exhibit Duckett Group. According to the Baumol model, what should be Duckett's average cash balance?
A) $35,356
B) $3,536
C) $22,157
D) $70,711
E) $42,918
Q2) Gemini Inc.'s optimal cash transfer amount, using the Baumol model, is $60,000. The firm's fixed cost per cash transfer of marketable securities to cash is $180, and the total cash needed for transactions annually is $960,000. On what opportunity cost of holding cash was this analysis based?
A) 19.2%
B) 10.4%
C) 6.3%
D) 12.1%
E) 9.6%
Q3) If a company increases its safety stock, then its average inventory will go up.
A)True
B)False
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25
Chapter 24: Enterprise Risk Management
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Q1) In theory, reducing the volatility of its cash flows will always increase a company's value.
A)True
B)False
Q2) Suppose the December CBOT Treasury bond futures contract has a quoted price of 80'07. What is the implied annual interest rate inherent in the futures contract?
A) 6.86%
B) 7.22%
C) 7.60% D) 8.00% E) 8.40%
Q3) Interest rate swaps allow a firm to exchange fixed for floating-rate payments, but a swap cannot reduce actual net interest expenses.
A)True
B)False
Q4) One objective of risk management can be to reduce the volatility of a firm's cash flows.
A)True B)False
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Chapter 25: Bankruptcy-Reorganization and Liquidation
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Q1) Which of the following statements is most CORRECT?
A) the primary test of feasibility in a reorganization is whether every claimant agrees with the reorganization plan.
B) the basic doctrine of fairness states that all debtholders must be treated equally.
C) since the primary issue in bankruptcy is to determine the sharing of losses between owners and creditors, the "public interest" is not a relevant concern.
D) while a firm is in bankruptcy, the existing management is always allowed to retain control, though the court will monitor its actions closely.
E) to a large extent, the decision to dissolve a firm through liquidation versus keeping it alive through reorganization depends on a determination of the value of the firm if it is rehabilitated versus the value of its assets if they are sold off individually.
Q2) Bankruptcy plays no role in settling labor disputes and product liability suits. Such issues are outside the bounds of bankruptcy law and are covered by other statutes.
A)True
B)False
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Chapter 26: Mergers and Corporate Control
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Q1) If the capital structure is stable, and free cash flows are expected to be growing at a constant rate at the horizon date, then the horizon value is calculated by discounting the free cash flows plus the expected future tax shields at the weighted average cost of capital.
A)True
B)False
Q2) Although goodwill created in a merger may not be amortized for shareholder reporting purposes, it may be amortized for Federal tax purposes.
A)True
B)False
Q3) Since the primary rationale for any operating merger is synergy, in planning such mergers, the development of accurate pro forma cash flows is the single most important action.
A)True
B)False
Q4) Currently (2018), mergers can be accounted for using either the purchase method or the pooling method.
A)True
B)False
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Chapter 27: Multinational Financial Management
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Q1) Which of the following is NOT a reason why companies move into international operations?
A) to develop new markets for the firm's products.
B) to better serve their primary customers.
C) because important raw materials are located abroad.
D) to increase their inventory levels.
E) to take advantage of lower production costs in regions where labor costs are relatively low.
Q2) LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to smaller U.S. corporations.
A)True
B)False
Q3) Legal and economic differences among countries, although important, do NOT pose significant problems for most multinational corporations when they coordinate and control worldwide operations of subsidiaries.
A)True
B)False
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29
Chapter 28: Time Value of Money
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Q1) Suppose you earned a $275,000 bonus this year and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years?
A) $28,532
B) $29,959
C) $31,457
D) $33,030
E) $34,681
Q2) Your Aunt Elsa has $500,000 invested at 6.5%, and she plans to retire. She wants to withdraw $40,000 at the beginning of each year, starting immediately. What is the maximum number of whole payments that can be withdrawn before the account is exhausted, i.e., before the account balance would become negative? (Hint: Round down to the nearest whole number.)
A) 18
B) 19
C) 20
D) 21
E) 22
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Chapter 29: Basic Financial Tools: A review
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249 Verified Questions
249 Flashcards
Source URL: https://quizplus.com/quiz/6753
Sample Questions
Q1) You have purchased a U.S. Treasury bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate will you earn on this bond?
A) 3.82%
B) 4.25%
C) 4.72%
D) 5.24%
E) 5.77%
Q2) Managers should under no conditions take actions that increase their firm's risk relative to the market, regardless of how much those actions would increase the firm's expected rate of return.
A)True
B)False
Q3) If the returns of two firms are negatively correlated, then one of them must have a negative beta.
A)True
B)False
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Chapter 30: Pension Plan Management
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10 Verified Questions
10 Flashcards
Source URL: https://quizplus.com/quiz/6754
Sample Questions
Q1) If employees have a right to receive pension benefits even if they leave the company prior to retirement, their pension rights are said to be vested.
A)True
B)False
Q2) From a pure cost standpoint, a firm with a defined contribution plan would be more likely to hire older workers than a firm with a defined benefit plan.
A)True
B)False
Q3) Under a defined contribution plan, employees agree to contribute some percentage of their salaries, up to 20 percent, to the firm's pension fund.
A)True
B)False
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32
Chapter 31: Financial Management in Not for Profit
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Sample Questions
Q1) Which of the following statements about a not-for-profit firm's sources of capital is most correct?
A) fund capital is obtained by retaining earnings if all earnings are paid out as dividends, no fund capital is created.
B) preferred stock is never used by not-for-profit firms.
C) not-for-profit firms are not allowed to raise capital by borrowing.
D) not-for-profit firms usually have high dividend payouts.
E) since not-for-profit firms are tax exempt, there is no tax advantage to debt capital.
Q2) The net present social value model formally recognizes that not-for-profit firms must consider the social value along with the financial value of proposed new projects.
A)True
B)False
Q3) The primary goal of investor-owned firms is shareholder wealth maximization, while the primary goal of not-for-profit firms is typically stated in terms of some mission; for example, to provide health care services to the communities served.
A)True
B)False
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