Business Finance
Pre-Test Questions
Course Introduction
Business Finance is a foundational course that introduces students to the principles and practices of financial management within organizations. The course covers key topics such as financial statement analysis, budgeting, financial planning, time value of money, risk and return, capital structure, and investment decision-making. Students will learn how businesses acquire, allocate, and manage funds to maximize value and achieve strategic objectives. Through case studies and practical examples, the course aims to develop the analytical and decision-making skills necessary for effective financial management in a dynamic business environment.
Recommended Textbook
Financial Management Principles and Applications 11th Edition by Sheridan Titman
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Page 2
Chapter 1: Getting Started-Principles of Finance
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Sample Questions
Q1) A limited liability company (LLC)is:
A)able to retain limited liability for owners.
B)taxed like a corporation.
C)a cross between a partnership and a corporation.
D)A and C.
E)all of the above.
Answer: D
Q2) Only a few financial decisions involve some sort of risk-return tradeoff.
A)True
B)False
Answer: False
Q3) In a sole proprietorship,the owner is personally responsible without limitation for the liabilities incurred.
A)True
B)False
Answer: True
Q4) Ethical dilemmas frequently exist in finance.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Firms and the Financial Market
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Sample Questions
Q1) Financial intermediaries help bring savers and borrowers together.
A)True
B)False
Answer: True
Q2) Which of the following is true about Preferred Stock?
A)Preferred shareholders always have voting rights.
B)If at a time a dividend is due on preferred stock,if the company does not have the funds to pay the dividend,the right of the preferred shareholders to collect that dividend lapses.
C)Preferred dividends are not tax deductible to the corporation.
D)Like bonds,preferred stock always has a maturity date at which time the issue price must be repaid to shareholders.
Answer: C
Q3) Private equity firms are financial intermediaries that are not traded on public capital markets.
A)True
B)False
Answer: True
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4
Chapter 3: Understanding Financial Statements, taxes, and Cash Flows
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Sample Questions
Q1) Your firm has the following income statement items: sales of $50,250,000;income tax of $1,744,000;operating expenses of $8,750,000;cost of goods sold of $35,025,000;depreciation and amortization of $1,365,000;and interest expense of $750,000.For purposes of determining free cash flow,what is the amount of the firm's after-tax cash flow from operations?
A)$255,223
B)$4,731,000
C)$2,385,000
D)$7,775,000
Answer: B
Q2) The income statement represents a snapshot of account balances at one point in time.
A)True
B)False Answer: False
Q3) An income statement reports a firm's profit relative to its total investment in plant and equipment.
A)True
B)False Answer: False
Page 5
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Chapter 4: Financial Analysis-Sizing up Firm Performance
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Sample Questions
Q1) The question "Did the common stockholders receive an adequate return on their investment?" is answered through the use of:
A)liquidity ratios.
B)profitability ratios.
C)coverage ratios.
D)leverage ratios.
Q2) Assume that a particular firm has a total asset turnover ratio lower than the industry norm.In addition,this firm's current ratio and acid test ratio also meet industry standards.Based on this information,we can conclude that this firm must have excessive:
A)accounts receivable.
B)fixed assets.
C)debt.
D)inventory.
Q3) Which of the following industries has the highest average inventory turnover ratio?
A)Retail clothing stores
B)Jewelry stores
C)Automobile dealerships
D)Supermarkets
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Chapter 5: Time Value of Money-The Basics
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Sample Questions
Q1) Discounting is the opposite of:
A)compounding.
B)future value.
C)opportunity costs.
D)both A and C.
Q2) Which of the following statements is FALSE?
A)Quarterly compounding has a higher annual percentage yield than monthly compounding.
B)On monthly compounding loans,the annual percentage yield will be less than the nominal or quoted rate of interest.
C)Compounding essentially means earning interest on interest on an initial balance.
D)Perpetuities pay an equal payment forever.
Q3) The present value of a single future sum:
A)increases as the number of discount periods increases.
B)is generally larger than the future sum.
C)depends upon the number of discount periods.
D)increases as the discount rate increases.
Q4) If you invest $450 today and it increases to $6,185 at the end of 20 years,what rate of return have you earned?
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Chapter 6: The Time Value of Money-Annuities and Other Topics
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Sample Questions
Q1) One characteristic of an annuity is that an equal sum of money is deposited or withdrawn each period.
A)True
B)False
Q2) The present value of a perpetuity decreases when the ________ decreases.
A)number of investment periods
B)annual discount rate
C)perpetuity payment
D)both B and C
Q3) It is January 1st and Darwin Davis has just established an IRA (Individual Retirement Account).Darwin will put $1,000 into the account on December 31st of this year and at the end of each year for the following 39 years (40 years total).How much money will Darwin have in his account at the beginning of the 41st year? Assume that the account pays 12% interest compounded annually,and round to the nearest $1,000.
A)$93,000
B)$766,000
C)$767,000
D)$850,000
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Chapter 7: An Introduction to Risk and Return-History of
Financial Market Returns
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Sample Questions
Q1) If an investor holds a stock for six years,the value at the end of six years will be the initial cost times (1 + geometric average return)to the sixth power.
A)True
B)False
Q2) The expected rate of return is the sum of each possible return times it likelihood of occurrence.
A)True
B)False
Q3) Expected return and realized return are the same thing.
A)True
B)False
Q4) Treasury Bills have less default risk than do Government Bonds.
A)True
B)False
Q5) Are markets moving toward being more efficient or toward being less efficient?
Q6) The higher the standard deviation,the less risk the investment has.
A)True
B)False
9
Q7) Why do the arithmetic average return and the geometric return differ?
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Chapter 8: Risk and Return-Capital Market Theory
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Sample Questions
Q1) The risk-free rate is currently 6.5%.Acid Battery Company stockholders require a rate of return of 27.5%,and the stock has a beta of 2.1.What is the current market risk premium?
A)6.90%
B)21.00%
C)13.65%
D)10.00%
Q2) The CAPM designates the risk-return tradeoff existing in the market,where risk is defined in terms of beta.
A)True
B)False
Q3) Calculate the current beta for Mercury,Inc.The rate on 30-year U.S.Treasury bonds is currently 8%.The market risk premium is 5%.Mercury returned 18% to its stockholders in the latest year.
A)1.00
B)1.75
C)1.25
D)2.00
E)1.50
Q4) Provide an intuitive discussion of beta and its importance for measuring risk.
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Chapter 9: Debt Valuation and Interest Rates
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Sample Questions
Q1) The longer the time to maturity,the more sensitive a bond's price to changes in market interest rates.
A)True
B)False
Q2) You are considering the purchase of Hytec bonds that were issued 14 years ago.When the bonds were originally sold,they had a 30-year maturity and a 14.375% coupon interest rate that is payable semiannually.The bond is currently selling for $1,508.72.What is the yield to maturity on the bonds?
A)8.50%
B)14.38%
C)11.11%
D)7.67%
Q3) The issuance of bonds to raise capital for a corporation:
A)magnifies the returns to the stockholders.
B)increases risk to the stockholders.
C)is a cheaper form of capital than the issuance of common stock. D)all of the above.
E)none of the above.
Q4) Compare and contrast current yield and yield to maturity.
Q5) What elements determine what the yield to maturity will be for a bond?
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Chapter 10: Stock Valuation
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Sample Questions
Q1) KDP's most recent dividend was $2.00 per share and is selling today in the market for $70.The dividend is expected to grow at a rate of 7% per year for the foreseeable future.If the market return is 10% on investments with comparable risk,should you purchase the stock?
A)No,because the stock is overpriced $1.33.
B)No,because the stock is overpriced $3.33.
C)Yes,because the stock is underpriced $1.33.
D)Yes,because the stock is underpriced $3.33.
Q2) Discuss two reasons why preferred stock would be viewed as less risky than common stock to investors.
Q3) An decrease in the ________ will increase the value of preferred stock.
A)expected rate of return
B)life of the investment
C)dividend paid
D)both A and C
Q4) Texon's preferred stock sells for $85 and pays $11 each year in dividends.What is the expected rate of return?
Q5) Determine the rate of return on a preferred stock that costs $50 and pays a $6 per share dividend.
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Chapter 11: Investment Decision Criteria
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Sample Questions
Q1) The equivalent annual cost method is most appropriate in which of the following situations? In each case,assume that several mutually exclusive options are available.
A)Introducing a new product line
B)Adding another store to a chain of retail stores
C)Installation of federally mandated safety equipment
D)Equipment to reduce production costs
Q2) What is payback for Project Z?
A)Two years
B)One year
C)Zero years
D)Project Z does not payback the original investment.
Q3) Project January has a NPV of $50,000,project December has a NPV of $40,000.Which of the following circumstances could make it possible to choose December over January?
A)January has a shorter payback period.
B)The projects are mutually exclusive.
C)The projects have unequal lives.
D)The projects are mandated.
Q4) Why is it so difficult for firms to find good investment ideas?
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Chapter 12: Analyzing Project Cash Flows
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Sample Questions
Q1) If SuperMart decides to offer a line of groceries at its discount retail outlet,inventories are expected to increase by $1,200,000,accounts receivable by $300,000 and accounts payable by $500,000.What is the cash outflow for working capital requirements?
A)$2,000,000
B)$1,700,000
C)$1,500,000
D)$1,000,000
Q2) It is not necessary to consider depreciation in estimating cash flows for a new capital project.
A)True
B)False
Q3) Sales captured from the firm's competitors can be relevant to the capital-budgeting decision.
A)True
B)False
Q4) Cape Cod Cranberries will finance a new organic juice production facility with a $10,000,000 bond issue.Interest on the bonds will be $637,500 per year for the life of the project.Should the interest payments be subtracted from the project's incremental cash flows?
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Chapter 13: Risk Analysis and Project Evaluation
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Sample Questions
Q1) ________ is a risk analysis technique in which the best- and worst-case net present values are compared with the project's expected net present value.
A)Project standing alone risk
B)Decision tree analysis
C)Scenario analysis
D)Pure play method
Q2) There is a 20% probability that the NPV of a project will be $20 million,a 50% probability that it will be sold for $45 million and a 30% probability that it will be for $15 million.What is the expected NPV of the project?
A)$17.5 million
B)$45 million
C)$31 million
D)$26.67 million
Q3) Most of the variables used in forecasting cash flows are known with certainty. A)True
B)False
Q4) Why is it important to consider real options in the capital budgeting process? Give two specific examples.
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15
Chapter 14: The Cost of Capital
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Sample Questions
Q1) The after-tax cost of common stock is:
A)14.67%.
B)13.23%.
C)12.41%.
D)11.65%.
Q2) Gibson Industries is issuing a $1,000 par value bond with an 8% semi-annual interest coupon rate and that matures in 11 years.Investors are willing to pay $972 for these bonds.Gibson is in the 34% tax bracket.What will be the after-tax cost of debt of the bond?
Q3) J & B,Inc.has $5 million of debt outstanding with a coupon rate of 12%.Currently,the yield to maturity on these bonds is 14%.If the firm's tax rate is 40%,what is the after-tax cost of debt to J & B?
A)12.0%
B)14.0%
C)8.4%
D)5.6%
Q4) Vipsu Corporation plans to issue 10-year bonds with a par value of $1,000 that will pay $55 every six months.The net amount of capital to the firm from the sale of each bond is $840.68.If Vipsu is in the 25% tax bracket,what is the after-tax cost of debt?
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Chapter 15: Capital Structure Policy
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Sample Questions
Q1) Young Enterprises is financed entirely with 3 million shares of common stock selling for $20 a share.Capital of $4 million is needed for this year's capital budget.Additional funds can be raised with new stock (ignore dilution)or with 13% 10-year bonds.Young's tax rate is 40%.
a.Calculate the financing plan's EBIT indifference point.
b.Does the "indifference point" calculated in question (a)above truly represent a point where stockholders are indifferent between stock and debt financing? Explain your answer.
Q2) Useful ratios for benchmarking a firm's capital structure include:
A)the Debt ratio.
B)Times Interest Earned ratio.
C)EBITDA coverage ratio.
D)all of the above.
Q3) Which of the following is a good reason for a company to have higher than average debt ratios.
A)The company's cash flows are difficult to predict.
B)The company generates little taxable income.
C)Customer support is an important aspect of the company's business.
D)The company faces high marginal tax rates.
Q4) What is meant by the terms "favorable" and "unfavorable" leverage?
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Chapter 16: Dividend Policy
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Sample Questions
Q1) Company managers strive to gradually increase dividend series over the long-term future.
A)True
B)False
Q2) For accounting purposes,a stock split has been defined as a stock dividend exceeding:
A)25%.
B)35%.
C)45%.
D)55%.
Q3) European firms tend to pay out more dividends than U.S.firms.
A)True
B)False
Q4) In the absence of taxes or transaction costs,investors:
A)would prefer immediate dividends to future capital gains.
B)who did not want a dividend could use dividends to purchase more shares.
C)could create their own dividends by selling the appropriate number of shares.
D)Both B and C are correct.
Q5) What is meant by "dividend clienteles"? Give specific examples.
Q6) What are the effects of stock splits and stock dividends? Why are they popular?
Page 18
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Chapter 17: Financial Forecasting and Planning
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Sample Questions
Q1) Depreciation expense is a deduction from cash flow in the cash budget.
A)True
B)False
Q2) Which of the following expenses should be included as a cash outlay in the preparation of a cash budget?
A)The payment of accounts payable
B)The payment of depreciation expense
C)The payment of accrued income taxes
D)All of the above
Q3) A discretionary form of financing would be:
A)notes payable.
B)accounts payable.
C)accrued expenses.
D)none of the above.
Q4) Broad Cloth,Inc.'s average collection period is 15 days.The vice-president of marketing has projected credit sales of $2.million for October,$2.5 million for November and $3 million for December.Purchases equal 60% of sales and are made one month in advance of budgeted sales.Payments are made 1 month after the date of purchase.Compute payments for purchases for the months of November and December.
Page 19
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Chapter 18: Working Capital Management
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Sample Questions
Q1) A negotiable certificate of deposit (CD)is a marketable receipt for funds deposited in a bank.
A)True
B)False
Q2) King Co.'s inventory turnover ratio is 12.It's inventory conversion period is:
A)12 days.
B)30.4 days.
C)2.5 days.
D)There is not enough information.
Q3) A firm can reduce net working capital by substituting long-term financing,such as bonds,with short-term financing,such as a one-year notes payable.
A)True
B)False
Q4) Maximus,Inc.is planning to borrow $2 million for 9 months at a discounted interest rate of 4.5%.What is the annual percentage rate on the loan?
Q5) As the inventory turnover ratio decreases,the inventory conversion cycle increases.
A)True
B)False
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Chapter 19: International Business Finance
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Sample Questions
Q1) When multinational companies evaluate capital investments in foreign countries,they discount:
A)pre-tax earnings of the foreign subsidiary.
B)foreign earnings at home country discount rates.
C)only earnings that are expected to be transferred back to the parent company.
D)all cash flows in the foreign currency at the host country discount rates.
Q2) Jean-Marc lives in Besançon,a French city near the Swiss border.The exchange rate is 1.47 Swiss francs to the euro.If Jean-Marc's shopping cart of groceries typically costs him 80 euros,what should it cost him if he drives across the border to Switzerland? Do you think that purchase price parity would apply in this situation?
Q3) A dealer in New York offers to buy U.K.pounds for $1.60 and sell them for $1.605.The different prices are due to:
A)arbitrage.
B)a tax on currency transactions.
C)the bid-ask spread.
D)supply and demand.
Q4) A narrow spread indicates efficiency in the spot exchange market.
A)True
B)False
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Chapter 20: Corporate Risk Management
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Sample Questions
Q1) What motivates users of raw materials to hedge future prices by entering into futures contracts? What is the disadvantage of this practice?
Q2) How can a gold futures contract be used as a hedge against a potentially dramatic decrease in the price of the gold needed as an input into the production of computer microprocessors?
A)The computer company should sell gold futures contracts.
B)The computer company should sell more gold futures contracts than it should buy.
C)This is a standard business situation,which would be favorable if it were to happen,so no hedge is needed.
D)The computer company should lower its finished product prices now in anticipation of the decrease in the price of gold inputs.
Q3) What are some of the means by which firms can transfer risk to other parties? Should firms always transfer risks when it is possible to do so?
Q4) Workers' compensation insurance provides coverage for on-the-job injuries suffered by employees.
A)True
B)False
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