Business Finance
Practice Questions
Course Introduction
Business Finance explores the fundamental principles and practices of financial management within a business context. The course covers essential topics such as financial statement analysis, time value of money, capital budgeting, risk and return, cost of capital, and working capital management. Students will learn how organizations make investment decisions, raise capital, manage financial resources, and evaluate financial performance. Through case studies and problem-solving exercises, the course equips students with the analytical tools and decision-making skills needed to address real-world financial challenges in various business environments.
Recommended Textbook Fundamentals of Investment Management 9th Edition by Geoffrey A. Hirt
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Page 2
Chapter 1: The Investment Setting
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Sample Questions
Q1) _____,because of increasing replacement value and scarcity,perform best in periods of high inflation.
A)Real assets
B)Common stock
C)Preferred stock
D)Financial assets
E)More than one of the above
Answer: A
Q2) To achieve maximum diversification benefits,an investor should invest in projects which are highly correlated.
A)True
B)False
Answer: False
Q3) Liquidity can be measured by the ability of the investor to convert an investment into cash within a relatively long period of time at its fair book value.
A)True
B)False
Answer: False
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Chapter 2: Security Markets: Present and Future
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Sample Questions
Q1) The major exchange for warrants,options and commodity futures is the
A)American Stock Exchange
B)New York Stock Exchange
C)NASDAQ
D)None of the above
Answer: D
Q2) One characteristic of efficient markets is that prices adjust rapidly to new information.
A)True
B)False Answer: True
Q3) One of the main reasons institutional investors like ECNs is that they allow anonymity in trading.
A)True
B)False Answer: True
Q4) The Cincinnati Stock Exchange is the largest of the regional stock exchanges.
A)True
B)False
Answer: False
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Chapter 3: Participating in the Market
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Sample Questions
Q1) The Dow Jones Industrial Average is not the most accurate market measure,because of its blue chip stock composition,and its bias toward high priced stocks.
A)True
B)False
Answer: True
Q2) The Dow Jones Industrial Average is not adjusted for stock splits.
A)True
B)False
Answer: False
Q3) The Nasdaq 100 includes high tech firms such as
A)IBM,Oracle,Cisco Systems
B)Microsoft,Intel,Cisco Systems
C)Hewlett Packard,Cisco Systems,Compaq
D)All of the above
Answer: B
Q4) The NYSE sets margin requirements.
A)True
B)False Answer: False
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Chapter 4: Sources of Investment Information
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Sample Questions
Q1) Value Line Investment Survey follows 1700 companies,using a unique valuation system which depends on historical relationships and regression analysis.
A)True
B)False
Q2) The SEC currently sells its data to the public on the Internet.
A)True
B)False
Q3) You can access each of the 12 Federal Reserve Banks either through the Federal Reserve Board or each bank's individual Internet Site.
A)True
B)False
Q4) A Federal Reserve Bulletin is published monthly by each of the 12 Federal Reserve Banks in the Federal Reserve System.
A)True
B)False
Q5) Economic information is available on the Internet for a fee on HYPERLINK "http://www.economy.com/freelunch" www.economy.com/freelunch.
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Page 6
Chapter 5: Economic and Industry Analysis
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Q1) If the Fed buys securities,the money supply goes down,along with interest rates.
A)True
B)False
Q2) The primary purpose of fundamental stock valuation is
A)To eliminate stock of those companies that are potential losers from the portfolio
B)To identify for purchase those companies that are fundamentally undervalued
C)To learn to identify peaks and troughs of the business cycle
D)Two of the above.
Q3) The Federal Open Market Committee (FOMC)determines the monetary policy for the U.S.economy.
A)True
B)False
Q4) When comparing international growth in real GDP between 1993 and 2005,the United States,Japan,China,Germany and the United Kingdom,the United States clearly is at the top of the group of countries.
A)True
B)False
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Chapter 6: Industry Analysis
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Sample Questions
Q1) Which of the following is the most significant detriment to the future profitability of the pharmaceutical industry?
A)Government regulation
B)Demographic trends
C)Generic drugs
D)Use of too much debt in their capital structure
Q2) Due to intense needs for capital to fund growth,Stage I companies rarely pay cash dividends.
A)True
B)False
Q3) When using the top-down approach to company valuation,which is the proper order for an analyst to use?
A)Macro-economic environment,company analysis,industry analysis
B)Company analysis,industry analysis,macro-economic environment
C)Macro-economic environment,industry analysis,company analysis
D)Industry analysis,company analysis,macro-economic environment
E)Company analysis,macro-economic environment,industry analysis
Q4) It is always a safe bet to invest in companies in growing industries.
A)True
B)False
8
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Chapter 7: Valuation of the Individual Firm
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Sample Questions
Q1) What is the value of a stock which has a current dividend (D0)of $1.50 and is growing at the rate of 7%.The investor's required rate of return is 12%.
A)$26.75
B)$30.00
C)$32.10
D)$21.42
E)$13.38
Q2) Every valuation method has its limitations.
A)True
B)False
Q3) There is little relationship between R&D expenditures as a percent of sales and growth of earnings per share.
A)True
B)False
Q4) For cyclical companies,the most accurate price-earnings ratio would be derived by dividing the current stock price by the latest 12 months earnings.
A)True
B)False
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Page 9
Chapter 8: Financial Statement Analysis
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Sample Questions
Q1) DuPont analysis deals primarily with the current and quick ratio.
A)True
B)False
Q2) The primary sections of a statement of cash flows are:
A)Cash flows from investing,operating,and financing activities
B)Cash flows from investing and operating activities plus investments
C)Cash flows from investing,financing,and accounting activities
D)Cash flows from investing,operating,financing,and accounting activities
Q3) Which of the following statements are ?
A)Debt to equity and debt to asset ratios measure capital structure and vary widely among industries
B)Debt utilization ratios alone do not measure a firm's ability to meet its cash obligations
C)DuPont analysis considers the impact of debt on the profitability of the firm
D)Two of the above are true
Q4) The primary purpose of the liquidity ratios is to determine
A)How much working capital is tied up in inventory
B)The relative level of short-term debt
C)How well a firm is able to pay off short-term obligations
D)More than one of the above
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Chapter 9: A Basic View of Technical Analysis and Market
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Q1) The ideas that stock prices tend to move in trends that persist for long periods and that these trends can be detected in charts are basic assumptions of fundamental analysis.
A)True
B)False
Q2) High mutual fund cash positions would represent withdrawal from the market and thus a possible future market decline.
A)True
B)False
Q3) Technical analysis is based on all of the following assumptions except
A)Market value is determined by the interaction of demand and supply
B)Stocks with strong earnings gains will outperform the market
C)The assumption that though there are minor fluctuations in the market,stock prices tend to move in trends that persist for long periods of time
D)Shifts in demand and supply can be detected sooner or later
E)Reversals of trends are caused by shifts in demand and supply.
Q4) Odd-lot traders have never outguessed professional traders.
A)True
B)False
11
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Chapter 10: Investment in Special Situations and Anomalies
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Sample Questions
Q1) Research indicates that large,prestigious investment bankers generally provide lower initial returns to investors than smaller investment banking houses.
A)True
B)False
Q2) Before investing in a new stock issue,the investor should consider the management of the firm,past performance record,and intended use of funds.
A)True
B)False
Q3) The study by Barry and Jennings of new stock issues indicates that 90 percent of the gain occurs in the opening transaction.
A)True
B)False
Q4) The weak form of the EMH is generally confirmed by research evidence. A)True
B)False
Q5) Positive abnormal returns on stocks may represent a measurement error. A)True B)False
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Chapter 11: Bond and Fixed Income Fundamentals
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Sample Questions
Q1) Changes in the market rate of interest are reflected in the semiannual interest payments of a variable rate note,while the price remains stable.
A)True
B)False
Q2) As the yield spread between high and low rating categories increases,this indicates a gain of confidence in the economy.
A)True
B)False
Q3) All of the following are available to individual investors except A)Commercial paper
B)Bankers' acceptances
C)Money market funds
D)All of the above are available to individual investors
Q4) Preferred stock dividends are tax deductible to the corporation,and also provide tax advantages to the corporate investor.
A)True
B)False
Q5) What is the dollar value of a U.S.government bond quoted at 98 8/32 ?
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Chapter 12: Principles of Bond Valuation and Investment
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Sample Questions
Q1) Inflationary expectations have no effect on bond prices.
A)True
B)False
Q2) Assuming interest rates are expected to fall,which of the following will most likely maximize price increase?
A)Commercial paper
B)U.S.Treasury bills
C)30 year Corporate bonds
D)There is not enough information to tell
Q3) a)What is the approximate yield to maturity of a 10 percent coupon rate,$1000 par value bond which is currently priced at $1200 with 11 years to maturity?
b)What would be the yield to call if the call can be made in 7 years at a price of $1025?
Q4) The term structure of interest rates depicts the relationship between maturity and interest rates.
A)True
B)False
Q5) What would be the current yield of a 6 percent coupon bond priced at $950?
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Chapter 13: Duration and Reinvestment Concepts
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Sample Questions
Q1) Immunization protects the portfolio value against upward movement in interest rates but not downward movement in interest rates.
A)True
B)False
Q2) You are considering the purchase of two $1000 bonds,both issued by Tranig Corp.Your expectation is that interest rates will drop and you want to buy the bond which provides the maximum capital gains potential.The first Tranig bond has a coupon rate of 6 percent with five years to maturity,while the second has a coupon rate of 9 percent and comes due six years from now.If market rates of interest are 8 percent for both bonds,which bond has the best price potential? (Use duration to answer the question.)
Q3) As the yield to maturity on a bond increases,the duration also increases,because of the effect of present value on duration.
A)True
B)False
Q4) The duration of a 20-year zero coupon bond is equal to the maturity regardless of the market rate.
A)True
B)False
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Page 15
Chapter 14: Convertible Securities and Warrants
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Q1) When warrants are exercised,the company goes through an accounting process to determine the new number of shares created.This process assumes that the company
A)Creates one new share for every warrant exercised
B)Reduces the number of shares created by the amount of shares that can be bought in the market with the proceeds of the cash generated by the exercise of the warrants
C)Creates one new share in the ratio of the exercise price and the current stock price
D)None of the above
Q2) A convertible bond has a face value of $1000 and the conversion price is $40 per share.The stock is selling at $30 per share.The bond pays $65 per year in interest and is selling in the market for $950.It matures in 7 years.Market rates are 10 percent annually.
(a)What is the conversion ratio?
(b)What is the conversion value?
(c)What is the conversion premium (in dollars and percent)?
(d)What is the floor or pure bond value? (use annual analysis)
(e)Compute the downside risk as a percentage.
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Page 16
Chapter 15: Put and Call Options
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Sample Questions
Q1) An investor striving for maximum leverage will generally buy options that are:
A)In-the-money,or slightly out-of-the-money
B)Out-of-the-money,or slightly in-the-money
C)Deep in-the-money
D)At-the-money
Q2) The total premium (option price)is a combination of a time premium and a speculative premium.
A)True
B)False
Q3) A major disadvantage of using call options to hedge a short position is
A)Hedging increases the risk of loss on the short sale
B)The option premium and commission reduce profit potential
C)The price of the stock may go up
D)None of the above
Q4) At the time of expiration,the premium (price)on a call option
A)Reflects risk in addition to intrinsic value
B)Will be equal to the intrinsic value
C)May be above or below the intrinsic value
D)None of the above
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Chapter 16: Commodities and Financial Futures
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Q1) There is no real difference in loss potential in the options and the commodities markets.
A)True
B)False
Q2) Commodities can usually be purchased with a very small margin requirement.
A)True
B)False
Q3) Which of the following statements about the margin requirements on commodities contracts is NOT ?
A)Use of margin is less common than trading with actual cash dollars
B)They are generally much lower than those on stock transactions
C)It is merely a good faith payment against losses
D)All of the above are true
Q4) Hedging is the basic reason for the existence of the commodity exchanges.
A)True
B)False
Q5) Cash prices and spot prices are very different in nature.
A)True
B)False
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Chapter 17: Stock Index Futures and Options
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Q1) A tax hedge is used to reduce or eliminate tax on the capital gains on a portfolio.
A)True
B)False
Q2) The value of an option to purchase a stock index futures contract depends on the outlook of the futures contract.
A)True
B)False
Q3) Program trading calls for
A)Computer-based trigger points for large trades
B)The use of computer programs to measure performance
C)The use of only call options
D)All of the above
Q4) Futures contracts exist for the
A)Dow Jones Industrial Average
B)NASDAQ 100 Stock Index
C)S & P 500
D)All of the above
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Chapter 18: Mutual Funds
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Q1) The prospectus is designed to provide a broad overview of the mutual fund but is not required to disclosure its investment focus or investment style that it represents.
A)True
B)False
Q2) Federal income tax on investment income and capital gains of a mutual fund
A)Must always be paid by both the fund and the shareholder
B)Must be paid only by the shareholder
C)Is not required of the fund if it distributes at least 90% of its net investment income and capital gains
D)Is not required either of the fund or of its shareholders
Q3) The difference between a load fund and a no-load fund is that:
A)No-load funds do not charge commissions and are sold directly by the investment company
B)Load funds do not charge commissions and are sold directly by the investment company
C)No-load funds charge higher commissions than load funds
D)No-load funds charge lower commissions than load funds
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Chapter 19: International Securities Markets
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Sample Questions
Q1) An advantage to investing in foreign markets is:
A)Diversification
B)That it is easy to profit from foreign currency exchange
C)That there is more potential to profit from foreign markets than domestic markets
D)There is less risk involved in investing in foreign markets
Q2) Which of the following reasons might explain why international investing might offer diversification benefits?
A)Companies operating in different countries will be affected differently by international events such as crop failures,energy prices,wars,tariffs,etc
B)Since the introduction of the euro,European and U.S.markets have a tendency to move in the same direction on an annual basis
C)World markets are highly correlated to the U.S.market since the U.S.is the engine of economic growth around the world
D)U.S.companies operating in foreign countries automatically provide the investor with diversification against foreign currency fluctuations
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Chapter 20: Investment in Real Assets
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Q1) A limited partnership can be either private or public in nature.
A)True
B)False
Q2) Compared to other investments,which of the following is not a disadvantage of investing in real assets?
A)The initial amount of money is usually large
B)The absence of a relatively efficient,liquid market
C)High transaction and incidental costs
D)All of the above are disadvantages
Q3) In a(n)____ arrangement,the borrower may end up making payment to cover not only the loan amortization,but also interest on deferred interest from an earlier period.
A)Graduated payment mortgage
B)Shared appreciation mortgage
C)Adjustable rate mortgage
D)More than one of the above
Q4) Collectible items are considered to be real assets.
A)True
B)False
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Chapter 21: A Basic Look at Portfolio Management and Capital Market Theory
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Q1) The capital market line can be used to determine the expected return on any portfolio based on
A)Unsystematic risk
B)The degree of risk on that portfolio
C)The market rate of return
D)None of the above
Q2) Points along the Capital Market Line represent a combination of a risk-free asset and M (the market portfolio)with the possibility of borrowing beyond point M.
A)True
B)False
Q3) A stock with a beta of 1.9 would be most likely to be found in what industry (use your best judgment).
A)Airlines
B)Grocery stores
C)Public utilities
D)Insurance
Q4) Risk is generally associated only with loss from possible investments.
A)True
B)False
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Chapter 22: Measuring Risks and Returns of Portfolio Managers
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Q1) Major studies have shown than fund managers in general are unable to efficiently diversify the portfolios primarily due to a small number of securities.
A)True
B)False
Q2) In an index fund
A)Returns are adjusted for changes in the consumer price index
B)Funds are invested in a mutual fund that attempts to replicate the performance of a major market index
C)Investors are guaranteed returns equal to a major market index
D)High commissions and management fees are charged because of attempts to beat the market
Q3) A portfolio manager with a beta less than one should be expected to provide higher returns than the market.
A)True
B)False
Q4) Assume a second firm that evaluates portfolios uses the Treynor approach to measuring performance.This firm is also evaluating the three portfolios.The portfolio betas are as shown below:
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Chapter 23: Sustainable Growth Model
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Q1) A firm had earnings per share of $3.25 for the year.The book value per share at the beginning of the year was $13.What was the firm's return on equity for the year?
A)25%
B)20%
C)42.25%
D)75%
E)40%
Q2) Based on the sustainable growth model,an increase in the dividend payout ratio (1the retention ratio)will increase the growth in earnings per share in the future.
A)True
B)False
Q3) The sustainable growth model is appropriate for highly cyclical firms.
A)True
B)False
Q4) The sustainable growth model is appropriate for firms that exhibit a constant pattern of growth and reinvestment.
A)True
B)False
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Chapter 24: a Black Scholes Option Pricing Model
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Q1) The Black and Scholes option pricing model makes an assumption that markets are frictionless.
A)True
B)False
Q2) For call options the price is positively related to
A)The stock's price changes and the volatility of the stock price changes
B)To the time to maturity and the riskless rate of interest
C)The strike price
D)A)and B)
Q3) What does the Black and Scholes Option Pricing model mean by "markets are frictionless"?
A)There are no taxes
B)There are no transactions costs
C)All securities are infinitely divisible
D)All market participants may borrow or lend at the known constant riskless rate of interest
E)All of the above are correct
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26
Chapter 26: A Comprehensive Analysis for Real Estate
Investment Decisions
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Q1) An apartment complex has net operating income of $15,000,depreciation of $8,000,and interest expense of $13,000.The tax rate is 30 percent.
(a)What is taxable income or loss?
(b)what is the tax shield benefit or tax owed?
Q2) A duplex was purchases for $120,000 and depreciation of $3,300 has been taken for the last seven years.The net proceeds from the sale of the property is $135,000.
(a)Assuming the property qualifies for capital gains treatment at a 15% rate,what is the tax owed?
(b)What are the net funds from the sale?
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Chapter 25: Unit Investment Trusts Uits
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Q1) Unit investment trusts have all of the following features except
A)They usually invest in tax-exempt municipals
B)Stipulated end to the life of the fund
C)Little interest rate risk
D)Actively trading the bonds in the portfolio
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Chapter 27: The Makeup of Institutional Investors
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Q1) ___________ represent permanent capital funds that are donated to universities,churches or civic organizations.
A)Trusts
B)Endowments
C)Commingled funds
D)Annuities
Q2) Foundations represent profitable organizations set up to accomplish social,educational,or charitable purposes.
A)True
B)False
Q3) Pension funds represent a declining segment of the institutional market.
A)True
B)False
Q4) The largest category of institutional investor's are:
A)Foundations
B)Personal trusts
C)Mutual savings banks
D)Pension funds
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