Business Finance
Practice Exam
Course Introduction
Business Finance is a foundational course that introduces students to the core principles and tools necessary for making effective financial decisions within an organization. The course covers topics such as financial statement analysis, time value of money, risk and return, capital budgeting, cost of capital, and the financing choices available to businesses. Through case studies and problem-solving exercises, students learn how to evaluate investment opportunities, manage financial resources, and understand the impact of financial decisions on the organizations success. This course equips students with practical knowledge indispensable for careers in corporate finance, banking, and financial management.
Recommended Textbook
Fundamentals of Corporate Finance 9th Canadian Edition by Richard A Brealey
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Chapter 1: Goals and Governance of the Firm
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Sample Questions
Q1) Sole proprietorships face the same agency problems as those associated with corporations.
A)True
B)False
Answer: False
Q2) Unlimited liability is faced by the owners of:
A) corporations.
B) partnerships and corporations.
C) sole proprietorships and general partnerships.
D) all forms of business organization.
Answer: C
Q3) Which of the firm's financial managers is most likely to be involved with obtaining financing for the firm?
A) Treasurer
B) Controller
C) Chief Operating Officer
D) Board of directors
Answer: A
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Chapter 2: Financial Markets and Institutions
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Sample Questions
Q1) Which one of the following is the biggest provider of payment mechanisms?
A) Hedge funds
B) Banks
C) Mutual funds
D) Insurance companies
Answer: B
Q2) "Balanced" mutual funds:
A) invest in both stocks and bonds.
B) spread their investments equally over a specified geographic area.
C) spread their investments equally over various industries.
D) charge a management fee that is proportionate to the investment return.
Answer: A
Q3) Commodity and derivative markets:
A) are additional sources of financing for corporate projects.
B) enable the financial manager to adjust a firm's exposure to various business risks.
C) are always over-the-counter markets.
D) deal only in foreign currencies.
Answer: B
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4
Chapter 3: Accounting and Finance
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Sample Questions
Q1) An increase in the accounts receivable balance increases the cash flow of a firm.
A)True
B)False
Answer: False
Q2) Interest expense appears in the operations section of the statement of cash flows because:
A) firms cannot operate without incurring interest expense.
B) its payment is not within managerial discretion.
C) it is paid to finance a firm's inventory.
D) none of the options; interest expense appears in the financing section of the statement of cash flows.
Answer: B
Q3) Which of the firm's financial statements most clearly recognizes the payment for new equipment?
A) Balance sheet
B) Income statement
C) Statement of cash flows
D) Common-size balance sheet
Answer: C
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Page 5
Chapter 4: Measuring Corporate Performance
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Sample Questions
Q1) A firm's after-tax operating income was $1,000,000 in 2016.It started the year with total capital of $8,000,000 and raised an additional $1 million of capital during the year.The additional capital raised during 2016 only started to affect the operating income in 2017.Which value best represents the return on capital for 2016?
A) 12.5%
B) 11.8%
C) 11.1%
D) 10.0%
Q2) By how much must a firm reduce its assets in order to improve ROA from 10% to 12% if the firm's operating profit margin is 5% on sales of $4 million? Assume that the reduction in assets has no effect on sales or profit margin
A) $240,000
B) $333,333
C) $400,000
D) $516,167
Q3) The inventory turnover ratio times the average days in inventory equals 365.
A)True
B)False
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) Would you prefer a savings account that paid 7% interest compounded quarterly,6.8% compounded monthly,7.2% compounded weekly,or an account that paid 7.5% with annual compounding?
A) 7% compounded quarterly
B) 6.8% compounded monthly
C) 7.2% compounded weekly
D) 7.5% compounded annually
Q2) A furniture store is offering free credit on purchases over $1,000.You observe that a big-screen television can be purchased for nothing down and $4,000 due in one year.The store next door offers an identical television for $3,650 but does not offer credit terms.Which statement below best describes the cost of the "free" credit?
A) 8.75%
B) 9.13%
C) 9.59%
D) 0%
Q3) A dollar tomorrow is worth more than a dollar today.
A)True
B)False
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Chapter 6: Valuing Bonds
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Sample Questions
Q1) How much does the $1,000 to be received upon a bond's maturity in 4 years add to the bond's price if the appropriate discount rate is 6%?
A) $209.91
B) $260.00
C) $760.00
D) $792.09
Q2) The coupon rate of a bond equals:
A) its yield to maturity.
B) a defined percentage of its face value.
C) the yield to maturity when the bond sells at a discount.
D) the annual interest divided by the current market price.
Q3) If an investor purchases a 3%,5-year TIPS at its par value of $1,000 and the CPI increases 3% over each of the next 5 years,what will be the real value of the principal at maturity?
A) $1,000.00
B) $1,030.00
C) $1,060.90
D) $1,061.36
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Chapter 7: Valuing Stocks
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Sample Questions
Q1) A negative free cash flow for a business is always sign that it is not performing well.
A)True
B)False
Q2) Market value,unlike book value and liquidation value,treats the firm as a going concern.
A)True
B)False
Q3) Dani's just paid an annual dividend of $6 per share.What is the dividend expected to be in five years if the growth rate is 4.2%?
A) $7.07
B) $7.37
C) $7.14
D) $7.44
Q4) If the market is efficient,stock prices should be expected to react only to new information.
A)True
B)False
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Chapter 8: Net Present Value and Other Investment Criteria
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Sample Questions
Q1) How many IRRs are possible for the following set of cash flows? CF<sub>0</sub> = $1,000,C<sub>1</sub> = $500,C<sub>2</sub> = $300,C<sub>3</sub> = $1,000,C<sub>4</sub> = $200.
A) One
B) Two
C) Three
D) Four
Q2) Both the NPV and the internal rate of return methods recognize that the timing of cash flows affects project value.
A)True
B)False
Q3) What happens to the equivalent annual cost of a project as the opportunity cost of capital decreases?
A) It increases.
B) It decreases.
C) It is not affected.
D) It depends on whether or not the projects are mutually exclusive.
Q4) A risky dollar is worth more than a safe one.
A)True
B)False
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Chapter 9: Using Discounted Cash-Flow Analysis to Make Investment Decisions
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Sample Questions
Q1) The present value of the total depreciation tax shield will be higher when an asset uses MACRS than when depreciated straight-line.
A)True
B)False
Q2) Sunk costs remain the same whether or not you accept the project.
A)True
B)False
Q3) A firm invests in a 7-year project that requires the purchase of a $135,000 machine tool.This will be depreciated using 5-year MACRS and will have no salvage value.When will this equipment affect the project's tax payments?
A) Every year for 5 years
B) At the time of purchase only
C) Every year for 6 years
D) Every year for 7 years
Q4) Which one of these represents a cash outflow for a project?
A) A sunk cost
B) Increase in accounts receivable
C) Depreciation
D) Accrued expenses
11
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Chapter 10: Project Analysis
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Sample Questions
Q1) The option to abandon a project becomes more valuable as the possible outcomes become more varied.
A)True
B)False
Q2) Soft capital rationing may be beneficial to a firm if it:
A) reduces a firm's taxes.
B) weeds out proposals with NPVs that have been overstated.
C) allows managers to select their favorite projects.
D) lowers the cost of capital.
Q3) A project that simply breaks even on an accounting basis gives you your money back but does not cover the opportunity cost of the capital tied up in the project.
A)True
B)False
Q4) Conflicts of interest between shareholders and managers may result in the sacrifice of attractive capital budgeting proposals.
A)True
B)False
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Chapter 11: Introduction to Risk, Return, and the Opportunity
Cost of Capital
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Sample Questions
Q1) The appropriate opportunity cost of capital is the return that investors give up on alternative investments that:
A) possess the same level of risk.
B) earn the risk-free rate of return.
C) are included in the S&P 500 index.
D) earn the average market rate of return.
Q2) The historical record fails to show that investors have received a risk premium for holding risky assets.
A)True
B)False
Q3) When the annual rate of return on U.S.Treasury bills is historically high,investors expect the return on the stock market:
A) considerably lower than normal.
B) about average.
C) also to be high.
D) approximately equal to zero.
Q4) Cyclical stocks tend to perform well when other stocks are performing well also.
A)True
B)False
13
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Chapter 12: Risk,Return,and Capital Budgeting
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Sample Questions
Q1) Which one of the following statements best explains the fact that cyclical firms tend to have high betas?
A) Their earnings are particularly sensitive to the state of the economy.
B) Their stocks are overpriced.
C) Their earnings are less diversifiable.
D) Their profit margins are small.
Q2) If the company cost of capital is 20% and a proposed project's cost of capital is 15%,then discounting the projects' cash flows at 20% would:
A) determine where the project plots in relation to the security market line.
B) make the project look more attractive than it should be.
C) be correct from a theoretical perspective.
D) be incorrect and could cause the project to be erroneously rejected.
Q3) A stock with a beta greater than 1.0 would be termed:
A) an aggressive stock, expected to increase more than the market increases.
B) a defensive stock, expected to decrease more than the market increases.
C) an aggressive stock, expected to decrease more than the market increases.
D) a defensive stock, expected to increase more than the market decreases.
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Page 14
Chapter 13: The Weighted-Average Cost of Capital and Company Valuation
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Sample Questions
Q1) A firm is considering expanding its current operations and has estimated the internal rate of return on that expansion to be 12.2%.The firm's WACC is 11.8%.Given this,you know that the:
A) project will have a lower debt-equity ratio than the firm's current operations. B) appropriate discount rate for the project is between 11.8% and 12.2%.
C) project has slightly more risk than the firm's current operations. D) expansion should be undertaken as it has a positive net present value.
Q2) If the firm decreases its debt ratio,both the debt and the equity will become riskier.The debtholders and equityholders will require a higher return to compensate for the increased risk.
A)True
B)False
Q3) The weighted-average cost of capital for a firm with a 65/35 debt/equity split,8% pre-tax cost of debt,15% cost of equity,and a 35% tax rate is:
A) 8.63%.
B) 9.12%.
C) 10.45%.
D) 13.80%.
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Chapter 14: Introduction to Corporate Financing and Governance
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Sample
Questions
Q1) Corporations generally need shareholder approval to do which one of the following?
A) Select a new CEO
B) Increase the number of authorized shares
C) Purchase Treasury stock
D) Pay a regular dividend
Q2) When new shares of stock are sold at a price greater than par value,the excess over par is recorded as:
A) capital surplus.
B) retained earnings.
C) treasury stock.
D) authorized capital.
Q3) When a firm issues 50,000 shares with a par value of $5 and a market price of $22 per share,additional paid in capital will:
A) decrease by $250,000.
B) increase by $250,000.
C) increase by $850,000.
D) increase by $1,100,000.
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Page 16
Chapter 15: Venture Capital, IPOs, and Seasoned Offerings
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Sample Questions
Q1) Prospective investors are advised of a stock's potential risks by the:
A) underwriter.
B) underpricing laws.
C) prospectus.
D) initial public offering.
Q2) Privately placed securities may be difficult to resell.
A)True
B)False
Q3) A general cash offer is necessary when issuing a private placement.
A)True
B)False
Q4) A secondary offering IPO occurs when:
A) new shares are sold to provide the company with additional funds.
B) the second public issue of equity becomes available.
C) the company's founders or venture capitalists market a portion of their shares.
D) not all of the shares in a primary IPO were sold.
Q5) One advantage to private placements is the low cost.
A)True
B)False
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Chapter 16: Debt Policy
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Sample Questions
Q1) If the present value of the interest tax shield on debt equals the present value of the costs of financial distress,then the trade-off theory implies that the:
A) firm is using the optimal level of debt.
B) firm is paying too high an interest rate.
C) firm's market value equals its book value.
D) firm should increase its use of debt.
Q2) Which one of the following statements is false according to MM's proposition I?
A) Firm value is unaffected by the firm's capital structure.
B) Proposition I is also called the debt-irrelevance proposition.
C) Shareholders should care about the firm's debt policy.
D) After restructuring, the firm's value should be the same as it was prior to restructuring.
Q3) At moderate debt levels the probability of financial distress is trivial and therefore the tax advantages of debt dominate.
A)True
B)False
Q4) According to MM,debt restructuring will not change the firm's overall value.
A)True
B)False
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Page 18
Chapter 17: Payout Policy
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Sample Questions
Q1) Kappa Corp has just raised its dividend from $2.50 to $5 per share.(It plans to reduce its repurchases by a similar amount.)Caterina Chekov,who owns 100 shares of Kappa does not need the extra cash.What can she do to offset the change in dividend policy?
A) reinvest the extra dividend in Kappa stock.
B) sell $250 of Kappa stock each year.
C) borrow $250 and invest it in Kappa stock.
D) Nothing. She should sell out and invest elsewhere.
Q2) A two-for-one stock split is like a 200% stock dividend
A)True
B)False
Q3) Stock repurchases may be interpreted by investors as a signal that:
A) future repurchases will be forthcoming.
B) the firm's shares are underpriced.
C) the firm has an increasing number of positive-NPV opportunities.
D) stock repurchases will gradually replace the stock dividends.
Q4) Corporate dividends are less volatile than corporate earnings.
A)True
B)False
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Page 19
Chapter 18: Long-Term Financial Planning
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Sample Questions
Q1) Which one of the following statements regarding financial planning models is false?
A) The models should include as much detail as possible.
B) The results of a model are pro forma financial statements.
C) The plug variable maintains consistency.
D) Financial analysis is not used in financial planning.
Q2) Percentage of sales models are planning models in which the sales forecasts are the driving variables and most other variables are proportional to sales.
A)True
B)False
Q3) What is the internal growth rate for a firm with an ROE of 20%,a dividend payout ratio of 40%,and an equity-to-debt ratio of 60%?
A) 4.50%
B) 5.39%
C) 8.00%
D) 12.00%
Q4) Adaptability is not a desirable feature in financial plans.
A)True
B)False
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20
Chapter 19: Short-Term Financial Planning
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Sample Questions
Q1) A toy store does not pay for its purchases of toys from manufacturers until one month later.Suppose that in October it starts to stock up in anticipation of a surge in toy sales in December,when is it most likely to have a negative operating cash flow?
A) It should never have a negative operating cash flow as long as its business is profitable.
B) In October because this is when it starts to stock up.
C) In November because this is when it will need to pay for the increased inventory.
D) In December because this is when the toys will start to move off the shelves.
Q2) The planning horizon for cash budgeting is usually at least five years.
A)True
B)False
Q3) Which of the following transactions would not be a source of cash:
A) The firm issues $1 million of short-term debt and invests the proceeds in inventory.
B) A customer pays an outstanding bill.
C) The firm sells $10 million of marketable securities.
D) The firm receives $10 million from an insurance company to compensate for flood damage earlier that month.
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Page 21
Chapter 20: Working Capital Management
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Sample Questions
Q1) If the marginal order cost exceeds the marginal carrying cost of inventory,then the firm:
A) has minimized its total carrying costs.
B) should increase its order size.
C) should decrease its order size.
D) has maximized its order costs.
Q2) Absent any possibility of repeat orders,if the default probability is less than the profit margin,you should extend credit for the sale.
A)True
B)False
Q3) The decision to offer credit depends on the probability of payment.You should grant credit if the expected profit from doing so is greater than the profit from refusing.
A)True
B)False
Q4) Since defaults can be costly,it is cost-effective to undertake a full credit analysis of all customers.
A)True
B)False
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Page 22
Chapter 21: Mergers,Acquisitions,and Corporate Control
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Sample Questions
Q1) One indication that investors expect no synergy from a merger would be that the:
A) total market value of the merged firms does not change.
B) P/E ratio of the merged firms' changes.
C) acquiring firm financed the merger with cash.
D) merged firms are from different industries.
Q2) The free-cash-flow theory supports the notion that the market gain from an LBO is basically the present value of the firm's future cash flows that would otherwise have been wasted.
A)True
B)False
Q3) Conglomerate mergers involve companies in:
A) similar lines of business.
B) different stages of the corporate life cycle.
C) unrelated lines of business.
D) different countries.
Q4) Diversification is often a poor motive for mergers because:
A) vertical integration is rarely successful.
B) investors can diversify on their own account.
C) it does not produce economies of scale.
D) the increase in taxes overcomes any gains in earnings.
Page 23
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Chapter 22: International Financial Management
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Sample Questions
Q1) You can value overseas investments using the NPV of the cash flows.Which of the following adjustment is necessary to calculate the NPV?
A) Adjust the cost of capital by the forward exchange rate and then discount the foreign cash flows
B) Convert the foreign cash flows into domestic currency and use the domestic opportunity cost of capital for discounting
C) Use the domestic discount rate to discount the foreign cash flows
D) Convert the foreign cash flow into domestic currency and use the foreign cost of capital for discounting
Q2) Suppose the one-year interest rate in the United States is 7%.What would you expect the interest rate to be in the UK if expected inflation is 4% in the United States and 8% in the UK?
A) 5.19%
B) 7.93%
C) 9.08%
D) 11.12%
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24
Chapter 23: Options
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Sample Questions
Q1) Kingston Lisle shares are currently selling at $75.The value of a call option on the company's shares with an exercise price of $60 and several months to expiration is:
A) less than $15.
B) greater than $15.
C) equal to $15.
D) zero.
Q2) It is May and you own a June call on ABC Corp.with an exercise price of $50.The option trades at $40 and ABC is trading at $86.What should you do?
A) Exercise the option now and take the profits.
B) Buy the stock of ABC Corp because option traders seem to be optimistic about its prospects.
C) Sell your ABC stock before its price declines.
D) Sit and wait until the June expiration.
Q3) Which one of the following is true for the owner of a call option?
A) The loss potential is unlimited.
B) The profit potential is unlimited.
C) The option price exceeds the exercise price.
D) There is no expiration date, unless the option is a European call.
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Chapter 24: Risk Management
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Sample
Questions
Q1) What happens to the price of a futures contract as expiration draws closer?
A) The futures price exceeds the spot price of the asset.
B) The futures price is exceeded by the spot price of the asset.
C) The futures price approaches the spot price of the asset.
D) There is no relationship between the futures price and spot price as the contract approaches expiration.
Q2) Which one of the following futures contract holders is speculating?
A) A wheat farmer who sells wheat futures
B) A cattle rancher who buys live cattle futures
C) A candy maker who buys sugar futures
D) An oil producer who sells crude oil futures
Q3) If you buy a forward contract,you agree to buy the product:
A) at a later date at a price to be set in the future.
B) today at its current price.
C) at a later date at a price set today.
D) if and only if its price rises above its exercise price.
Q4) An oil producer would sell,rather than buy,crude oil futures to protect against falling oil prices.
A)True
B)False
Page 26
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