Business Finance
Mock Exam
Course Introduction
Business Finance explores the fundamental principles and practices that underpin financial decision-making within organizations. The course covers key topics such as financial statement analysis, time value of money, risk and return, capital budgeting, cost of capital, and financial planning. Students will learn how businesses acquire, allocate, and manage financial resources to maximize shareholder value while considering ethical and strategic factors. By the end of the course, learners will be equipped with analytical tools and frameworks essential for evaluating investment opportunities, managing corporate finances, and understanding the broader financial environment in which firms operate.
Recommended Textbook
Foundations of Financial Management 17th Edition by Stanley B. Block
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21 Chapters
2363 Verified Questions
2363 Flashcards
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Page 2
Chapter 1: The Goals and Activities of Financial Management
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123 Verified Questions
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Sample Questions
Q1) Financial markets exist as a vast global network of individuals and financial institutions that may be lenders, borrowers, or owners of public companies worldwide.
A)True
B)False
Answer: True
Q2) Professor Merton Miller received the Nobel Prize in Economics for his work on
A) dividend policy.
B) investment theory.
C) working capital management.
D) capital structure theory.
Answer: D
Q3) With an S corporation
A) income is taxed as direct income to stockholders.
B) stockholders have the same liability as members of a partnership.
C) the number of stockholders is unlimited.
D) the life of the corporation is limited.
Answer: A
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Page 3
Chapter 2: Review of Accounting
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Sample Questions
Q1) Given the following, what is free cash flow?
\(\begin{array} { l }
\text { Cash flow from operating activities}&\$200,000 \\
\text { Cash flow from investing activities}&\$140,000 \\
\text {ash flow from financing activities }&\$ 56,000\\
\text { Building purchases}&\$50,000 \\
\text { Dividends Paid}&\$ 20,000\\ \end{array}\)
A) $396,000
B) $270,000
C) $326,000
D) $130,000
Answer: D
Q2) Assume that two companies both have a net income of $100,000. The firm with the highest depreciation expense will have the highest cash flow, assuming all other adjustments are equal.
A)True
B)False
Answer: True
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Chapter 3: Financial Analysis
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131 Verified Questions
131 Flashcards
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Sample Questions
Q1) If XYZ's receivables turnover is 4x, what does that mean?
A) XYZ's total sales are rotated four times a year.
B) XYZ has a really good receivables turnover rate.
C) XYZ is able to collect its receivables every 90 days, or 4 times a year.
D) XYZ generates four times as much sales through receivables than sales through cash.
Answer: C
Q2) The higher a firm's debt utilization ratios, excluding debt-to-total assets, the A) less risky the firm's financial position.
B) more risky the firm's financial position.
C) more easily the firm will be able to pay dividends.
D) None of the options
Answer: A
Q3) Asset utilization ratios can be used to measure the effectiveness of a firm's managers.
A)True
B)False
Answer: True
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Chapter 4: Financial Forecasting
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Sample Questions
Q1) A firm has targeted a 20% growth in sales this year. Last year's cash as a percent of sales was 10%, accounts receivable 30%, and inventory 25%. What percentage growth in current liabilities is required to support the growth in sales under the percent-of-sales forecasting method?
A) 32%
B) 13%
C) 8%
D) Not enough information to determine
Q2) The primary purpose of the cash budget is to allow the firm to anticipate the need for outside funding or excess funds to be invested.
A)True
B)False
Q3) In developing data for accounts receivable for the pro forma balance sheet, the analyst is most likely to turn to the A) pro forma income statement.
B) cash budget.
C) prior balance sheet.
D) statement of retained earnings.
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) Based on the example in the textbook, the calculation below is of a leveraged firm. DOL = \(\frac{\text {Percent change in operating income }}{\text {Percent change in unit volume }}\) = \(\frac { \frac { \$ 8,000 } { \$ 20,000 } \times 100 } { \frac { 20,000 } { 80,000 } \times 100 }\) = \(\frac { 40 \% } { 25 \% }\) = 1.6
A)True B)False
Q2) Cash break-even analysis eliminates the non-cash charges from fixed costs in order to obtain the amount of quantity sold which is necessary in order for cash inflow to equal the cash outflow.
A)True
B)False
Q3) Under which of the following conditions could the overuse of financial leverage be detrimental to the firm?
A) In a stable industry.
B) When there is cyclical demand for the firm's products.
C) During an upswing in the business cycle.
D) When there is low interest cost compared to return on assets.
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Page 7
Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) The use of point-of-sale terminals has made it easier for many retail store managers to manage their inventory.
A)True
B)False
Q2) Risk exposure due to heavy short-term borrowing can be compensated for by
A) carrying highly liquid assets.
B) carrying many illiquid assets.
C) carrying longer term, more profitable current assets.
D) carrying more receivables to increase cash flow.
Q3) A business person's failure to realize the firm is carrying self-liquidating inventory can result in inadequate financing arrangements.
A)True
B)False
Q4) The "term structure of interest rates" represents the competitive cost of funds for the various short-term sources of funds such as Treasury bills, commercial paper, and bank CDs.
A)True
B)False
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Chapter 7: Current Asset Management
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Sample Questions
Q1) Characteristics of a money market deposit account include
A) a lower risk than money market funds.
B) insurance by federal agencies.
C) generally a limit of three deposits or withdrawals per month.
D) All of the options are true.
Q2) For most modern corporations, the more cash they have, the better off they are.
A)True
B)False
Q3) If a company can implement cash management systems and save three days by reducing remittance time and one day by increasing disbursement time based on $2,000,000 in average daily remittances and $2,500,000 in average daily disbursements and its return on freed-up funds is 10%, what is the maximum that it should spend on the system?
A) $2,000,000
B) $650,000
C) $850,000
D) $1,000,000
Q4) Return on investment is the major decision criteria in credit decisions.
A)True
B)False
Page 9
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Chapter 8: Sources of Short-Term Financing
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117 Verified Questions
117 Flashcards
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Sample Questions
Q1) LIBOR is
A) a resource used in production.
B) an interest rate paid on Eurodollar loans in the London market.
C) an interest rate paid by European firms when they borrow Eurodollar deposits from U.S. banks.
D) the interest rate paid by the British government on its long-term bonds.
Q2) A blanket inventory lien is where items are not identified or tagged, and there is no physical transfer of control of the inventory by the borrower.
A)True
B)False
Q3) Kantorovich Company normally takes 30 days to pay for its average daily credit purchases of $2,000. It has average daily sales of $3,000, and collects accounts in 25 days. What is its net credit position?
A) $15,000
B) $1,000
C) ($1,000)
D) ($15,000)
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) The amount of annual payments necessary to accumulate a desired future total can be found by reference to the present value of an annuity table.
A)True
B)False
Q2) Dan would like to save $1,500,000 by the time he retires in 30 years and believes he can earn an annual return of 8%. How much does he need to invest in each of the following years to achieve his goal?
A) $13,241
B) $133,239
C) $10,727
D) $52,450
Q3) The present value of a positive future inflow can become negative as discount rates become higher and higher.
A)True
B)False
Q4) In determining the future value of an ordinary annuity, the final payment is not compounded at all.
A)True
B)False
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Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) An issue of common stock's most recent dividend is $1.75. Its growth rate is 5.7%. What is its price if the market's rate of return is 7.7%?
A) $24.63
B) $87.50
C) $92.50
D) None of these options are correct
Q2) The price of preferred stock may react strongly to a change in K<sub>p</sub> (required rate of return) because
A) preferred stock may be cumulative.
B) preferred stock dividends have to be paid before common stock dividends.
C) there is no maturity date.
D) corporate recipients of preferred stock dividends may receive a partial tax exemption.
Q3) A common stock that pays a constant dividend can be valued as if it were
A) a corporate bond.
B) a stock paying a growing dividend.
C) preferred stock.
D) a discount bond.
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12
Chapter 11: Cost of Capital
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Sample Questions
Q1) In determining the optimum capital structure, it is assumed that the firm will raise capital in the same proportions every year.
A)True
B)False
Q2) The general rule for using the weighted average cost of capital (WACC) in capital budgeting decisions is to accept all projects with A) rates of return greater than or equal to the WACC. B) rates of return less than the WACC. C) rates of return equal to or less than the WACC.
D) positive rates of return.
Q3) Firm X has a tax rate of 21%. The price of its new preferred stock is $75 and its flotation cost is $3.15. The cost of new preferred stock is 8%. What is the firm's dividend?
A) $7.18
B) $5.75
C) $7.56
D) $4.03
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13
Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) All of the following is information required to create a net present value profile except for which one?
A) NPV at a 0 discount rate
B) NPV at the risk-free rate
C) NPV at the cost of capital
D) IRR of investment
Q2) In most capital budgeting decisions, the emphasis should be on reported earnings rather than cash flows.
A)True
B)False
Q3) Project X has a cost of $100,000 and provides the following annual earnings: year 1 $35,000; year 2 $25,000; year 3 $175,000; and year 4 $10,000. Under the payback method, in which year is the investment recouped?
A) Year 2
B) Year 3
C) Year 4
D) Not enough information is given to determine an answer.
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14
Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) The standard deviation can be defined as
A) \(\sqrt { \sum ( D - D ) ^ { 2 } P }\)
B) \(\sqrt { \sum ( D - D ) P }\)
C) \(\sqrt { ( D - D ) ^ { 2 } P }\)
D) \(\sqrt { ( D - D ) P }\)
Q2) The lower the coefficient of correlation, the greater the A) risk when projects are combined.
B) risk reduction when projects are combined.
C) return when projects are combined.
D) standard deviation when projects are combined.
Q3) A common stock with a beta of 1.0 is said to be of equal risk with the market. A)True
B)False
Q4) If possible outcomes are D and probabilities are P, the standard deviation is defined as ? =
\(\sqrt { \sum ( D - D ) ^ { 2 } P }\)
A)True
B)False
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Chapter 14: Capital Markets
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Sample Questions
Q1) The 1994 North American Free Trade Agreement was established between the U.S., Canada, and Mexico which helped
A) reduce trade barriers.
B) allow trade to happen between these countries.
C) lower the amount of illegal trading.
D) all of the answers are correct.
Q2) The Securities Act of 1933 is primarily concerned with
A) original issues of securities.
B) secondary trading of securities.
C) the national securities markets.
D) protecting customers of bankrupt securities firms.
Q3) Money markets are the simplest form of capital markets because they involve trading in U.S. dollars.
A)True
B)False
Q4) Financial intermediaries channel funds into the capital markets from the household sector.
A)True B)False
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Chapter 15: Investment Banking: Public and Private
Placement
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Sample Questions
Q1) In today's market environment, most investment banking houses specialize in underwriting and do not engage in the dealer-broker function.
A)True
B)False
Q2) Which of the following is not true about SEC Rule 415?
A) It permits companies to file one comprehensive registration statement, which outlines the firm's plans for future long-term financing.
B) It allows firms to issue securities when market conditions are appropriate, without further SEC approval.
C) It is consistent with the traditional requirements of the SEC.
D) All of these options are true.
Q3) If the retail price of a stock issuance is $17.50 and the syndicate members' price is $15.50, the total spread is 11.4%.
A)True
B)False
Q4) Only a small amount of security issues are sold on a "best-efforts" basis.
A)True
B)False
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) An advantage of the zero coupon bond is that there is no coupon, so the yield to maturity is locked in for the life of the bond.
A)True
B)False
Q2) A corporation's underwriting cost on a newly issued bond
A) is an immediate outflow and immediate tax write-off.
B) is an immediate tax write-off with a deferred outflow.
C) is a deferred outflow and deferred tax write-off.
D) is an immediate outflow and deferred tax write-off.
Q3) A bond with a call provision would generally be sold to yield
A) less than a noncallable bond of similar character.
B) the same as a similar noncallable bond.
C) more than a noncallable bond of similar character.
D) the same as similar convertible bonds.
Q4) A debenture represents
A) debt not secured by a specific asset.
B) secured debt.
C) a long document covering every detail of a bond issue.
D) debt that is subordinate to preferred stock.
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Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) An increasing proportion of shares in the U.S. are owned by A) individual investors.
B) corporations (Treasury stock).
C) institutions.
D) governments.
Q2) Preferred stock is often sold by companies
A) wanting to balance their capital structures.
B) that have a large amount of debt relative to equity.
C) looking for the taxable advantages of preferred dividends over common stock dividends.
D) that have a large amount of debt relative to equity and that want to balance their capital structures.
Q3) Due to the 2017 Tax Cuts and Jobs Act, for companies owning between 20 and 80 percent of another company, any dividends received from that company are taxed at 35 percent, however most companies don't fall into this category.
A)True
B)False
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Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) In Stage II of a firm's life cycle, expansion continues, but at a decreasing rate.
A)True
B)False
Q2) A rapid growth firm can often expect a shift in the type of its typical stockholder as the firm moves into maturity.
A)True
B)False
Q3) CBA Inc. has 400,000 shares outstanding with a $5 par value. The shares were issued for $12. The stock is currently selling for $34. CBA has $5,000,000 in retained earnings and has declared a stock dividend that will increase the number of outstanding shares by 6%. What will be the "capital in excess of par account" after the stock dividend?
A) $7,685,000
B) $2,685,000
C) $3,496,000
D) $2,385,000
Q4) With a dividend reinvestment plan, an investor might receive fractional shares.
A)True
B)False
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Page 20
Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) The price of a convertible bond
A) has downside as well as upside limitations.
B) has only upside limitations.
C) has only downside limitations.
D) has no upside or downside limitations.
Q2) Which of the following is true?
A) As the price of common stock increases, the market price of a convertible bond and the conversion premium increase.
B) As the price of common stock increases, the market price of a convertible bond and the conversion value increase.
C) As the price of common stock increases, the conversion value and the floor price increase.
D) Two of the options are true.
Q3) A warrant is of huge benefit to the warrant holder when the stock rises far above the exercise price.
A)True
B)False
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) Goodwill is created when the purchasing firm pays more than what the acquired firm is worth.
A)True
B)False
Q2) The portfolio effect in a merger has to do with
A) increasing EPS.
B) reducing risk.
C) creating tax advantages.
D) writing off goodwill.
Q3) The rising ratio of divestitures to new acquisitions that occurred in the past suggests that
A) poison pills are no longer effective as a defense against takeovers.
B) too much diversification strained the operating capabilities of many firms.
C) the portfolio effect has been a highly successful method of reducing risk.
D) multinational firms are increasingly considered high risk investments.
Q4) An example of a horizontal merger would be
A) Pepsi and Sears.
B) McDonald's and Pillsbury.
C) Pepsi and Frito Lay.
D) Coca-Cola and Dr Pepper.
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Chapter 21: International Financial Management
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Sample Questions
Q1) The value of a country's currency may increase by A) continuous excessive government spending.
B) a stock market rally in that country.
C) an increase in that country's money supply.
D) More than one of the options is correct.
Q2) While shopping in the Mexican market, you find that limes cost 11 pesos each. You remember that back in the U.S., they cost 80 cents each. If the purchasing power parity theory holds, the rate of exchange is
A) 13.75 pesos/dollar or 7.3 cents/peso.
B) 80 pesos/dollar or 1.25 cents/peso.
C) 7.3 pesos/dollar or 13.75 cents/peso.
D) 11 pesos/dollar or 0.80 cents/peso.
Q3) The North American Free Trade Association (NAFTA) continues to generate more foreign trade despite some negative political views.
A)True
B)False
Q4) Currency exchange rates may be either floating or fixed.
A)True
B)False
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