Business Finance
Question Bank
Course Introduction
Business Finance is designed to provide students with a comprehensive understanding of the principles, concepts, and analytical tools essential for effective financial management in business organizations. The course covers topics such as financial statement analysis, time value of money, risk and return, capital budgeting, cost of capital, financial planning, and working capital management. Emphasis is placed on the application of financial theories to real-world business decisions, including investment evaluation, financing options, and dividend policy. By the end of the course, students will be equipped to make informed financial decisions and understand the impact of financial strategies on a firm's performance and value.
Recommended Textbook Fundamentals of Corporate Finance Third Canadian Edition by Jonathan Berk
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Chapter 1: Corporate Finance and the Financial Manager
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Sample Questions
Q1) A corporate raider gains a controlling fraction of the shares of a poorly managed company and replaces the board of directors.How does the corporate raider hope to make a profit in this case?
A)by the sale of the assets held by the company that hold most of its value
B)by the rise in the value of the stock held by the raider when the new board of directors is judged to be superior to the ousted board of directors
C)by motivating the board of directors and other stakeholders in the company to make difficult short-term decisions that will increase the long-term viability of the company
D)by removing the employees' expectations of the continued poor performance of the company
E)by paying itself a large portion of the firm's cash flows
Answer: B
Q2) What are the main differences between the TSX and the TSX Venture Exchange?
Answer: The TSX has more stringent listing standards than the TSX Venture Exchange,and bid-ask spreads tend to be lower.The TSX Venture Exchange is an exchange for relatively small company stocks.
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Chapter 2: Introduction to Financial Statement Analysis
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Sample Questions
Q1) The balance sheet and income statement of a particular firm are shown above.What does the accounts receivable days ratio tell you about this company?
A)It takes on average about 4 weeks to collect payment from its customers.
B)It takes on average about 6 weeks to collect payment from its customers.
C)It takes on average about 7 weeks to collect payment from its customers.
D)It takes on average about 8 weeks to collect payment from its customers.
E)It takes on average about 11 weeks to collect payment from its customers.
Answer: A
Q2) Refer to the statement of financial position above.If in 2015 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share,then Luther's market-to-book ratio would be closest to:
A)0.39
B)0.76
C)1.29
D)2.57
E)0.31
Answer: C
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Chapter 3: The Valuation Principle: the Foundation of Financial Decision Making
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Q1) Which of the following best explains why market prices are useful to a financial manager when performing a cost-benefit analysis?
A)They can be used to determine how much an asset can be sold for.
B)They can be used to convert different services and commodities into equivalent cash values which can be compared.
C)They allow all commodities and services to be assigned a fixed and unchanging value.
D)They can be evaluated to determine whether the market in which the manager exchanges goods and services offers true value.
E)They can be used to determine the correct value for assets to be purchased.
Answer: B
Q2) Dollar amounts received at different points in time cannot be compared in absolute terms.
A)True
B)False
Answer: True
Q3) How does arbitrage help the Law of One Price?
Answer: Any arbitrage opportunity will exploit any mispricing to restore the Law of One Price.
Page 5
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Chapter 4: The Time Value of Money
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Q1) You have been offered the following investment opportunity: if you pay $2500 today,you will receive $1000 at the end of each of the next three years.Assuming that you could otherwise earn 10% per year on your money,the net present value (NPV)for this opportunity is closest to:
A)$12
B)$18
C)-$13
D)$500
E)-$18
Q2) Suppose the current interest rate is 8.5%,what is the future value of a $15 million investment in 10 years?
A)$16.275 million
B)$33.915 million
C)$17.858 million
D)$150 million
E)$15 million
Q3) Suppose a second entrepreneur approaches Joe and offers him $250,000 today for the business.Should Joe accept the new entrepreneur's offer or stick with the original offer of $100,000 and the series of payments over three years? Why?
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Chapter 5: Interest Rates
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Q1) A homeowner has a $200,000 home with a 20-year mortgage,paid monthly at a quoted APR of 7.25%.After five years he receives $50,000 as an inheritance.If he pays this $50,000 toward his mortgage along with his regular payment,by approximately how many years will it reduce the amount of time it takes him to pay off his mortgage?
A)6 years
B)5 years
C)4 years
D)3 years
E)2 years
Q2) The annual percentage rate indicates the amount of interest,including the effect of any compounding.
A)True
B)False
Q3) Can the nominal interest rate ever be negative? Can the real interest rate ever be negative? Explain.
Q4) Everything else remaining the same,under what situation will APR and EAR be equal?
Q5) What is a mortgage?
Q6) How are interest and return of principal handled in an amortizing loan payment?
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Chapter 6: Bonds
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Q1) Assuming that Luther's bonds receive a AA rating,the number of bonds that Luther must issue to raise the needed $25 million is closest to:
A)24,655
B)25,000
C)24,477
D)26,681
E)25,114
Q2) A bond is currently trading below par.Which of the following must be TRUE about that bond?
A)The bond's yield to maturity is less than its coupon rate.
B)The bond's yield to maturity is equal to its coupon rate.
C)The bond's yield to maturity is greater than its coupon rate.
D)The bond is close to maturity.
E)The bond has just been issued.
Q3) A bond is said to mature on the date when the issuer repays its notional value.
A)True
B)False
Q4) Prior to its maturity date,the price of a zero-coupon bond is its face value.
A)True
B)False
Page 8
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Chapter 7: Valuing Stocks
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Q1) You expect that Bean Enterprises will have earnings per share of $2 for the coming year.Bean plans to retain all of its earnings for the next three years.For the subsequent two years,the firm plans on retaining 50% of its earnings.It will then retain only 25% of its earnings from that point forward.Retained earnings will be invested in projects with an expected return of 20% per year.If Bean's equity cost of capital is 12%,then the price of a share of Bean's stock is closest to:
A)$17.00
B)$10.75
C)$27.75
D)$43.50
E)$37.50
Q2) In the method of comparables,the known values of a firm's cash flows are used to estimate the unknown cash flows of a similar firm.
A)True
B)False
Q3) Stocks that do not pay a dividend must have a value of $0.
A)True
B)False
Q4) What are the major limitations of valuation using multiples?
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Chapter 8: Investment Decision Rules
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Q1) The Net Present Value rule implies that we should compare a projects net present value (NPV)to zero.
A)True
B)False
Q2) The payback period for project B is closest to:
A)2.5 years
B)2.0 years
C)2.2 years
D)2.4 years
E)3.0 years
Q3) A furniture store offers no money down and no payment for two years.You decide to purchase a table,which you will take home today,and pay the $1,500 purchase price two years from now.If interest rates are 7%,what is the NPV of this offer?
A)-$1500
B)$189.84
C)$98.13
D)$0
E)$217.35
Q4) What is the decision criteria using the Net Present Value rule?
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Chapter 9: Fundamentals of Capital Budgeting
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Q1) A stationery company plans to launch a new type of indelible ink pen.Advertising for the new product will be heavy and will cost the company $10 million,although the company expects general revenues of $280 million next year from sources other than sales of the new pen.If the company has a corporate tax of 40% on its pretax income,what effect will the advertising for the new pen have on its taxes?
A)increase taxes by $10 million
B)increase taxes by $4 million
C)It will have no effect on taxes.
D)reduce taxes by $4 million
E)reduce taxes by $10 million
Q2) A restaurant invests $240,000 in a new food truck for mobile lunch sales.The truck will have a capital cost allowance (CCA)rate of 20%.If the opportunity cost of capital is 8.5%,and the restaurant's marginal tax rate is 30%,what is the present value of the CCA tax shield?
A)$48,547
B)$48,000
C)$50,526
D)$35,938
E)$14,400
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Chapter 10: Risk and Return in Capital Markets
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Q1) Suppose you invested $98 in the Ishares High Yield Fund (HYG)a month ago.It paid a dividend of $0.47 today and then you sold it for $99.What was your dividend yield and capital gains yield on the investment?
A)0.45%,1.09%
B)0.48%,1.02%
C)0.48%,1.08%
D)1.02%,1.12%
E)0.75%,0.98%
Q2) What is the expected payoff for Big Cure's Blockbuster drug?
A)$100 million
B)$0
C)$1 billion
D)$500 million
E)$50 million
Q3) On average,stocks have delivered higher returns than bonds in the long run.
A)True
B)False
Q4) Is volatility a reasonable measure of risk when evaluating the investment in a single stock?
Q5) Which type of investment has historically had the lowest volatility?
Page 12
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Chapter 11: Systematic Risk and the Equity Risk Premium
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Q1) You have invested $10,000 in RBC stock and $21,000 in TD stock.If you expect the return on RBC to be 5% in the next year,and the return on TD to be 6.5%,what is the expected return for your portfolio?
A)5.75%
B)5%
C)6.5%
D)6%
E)5.5%
Q2) The expected return of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:
A)15%
B)14%
C)29%
D)44%
E)22%
Q3) In a two-asset portfolio,what happens to the portfolio weight of the better performing asset?
Q4) While we are using historic return to estimate a stock's beta,why can't we use historic data to forecast the expected return for the stock?
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Chapter 12: Determining the Cost of Capital
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Sample Questions
Q1) Bell Media has common stock trading at a price of $74,and a market capitalization of $23 billion.The firm also has preferred stock worth a total of $6 billion,currently trading at $54 per share and paying a dividend of $4.50 per share.The firm's beta is 1.2,the risk-free rate is 2.4%,and the market risk premium is 6%.The firm has $28 billion of debt with a yield to maturity of 4%.If the firm's tax rate is 30%,what is Bell's WACC?
A)6.41%
B)7.19%
C)6.61%
D)7.31%
E)7.71%
Q2) Manitou Inc has preferred stock paying an annual dividend of $2.25,and common stock paying an annual dividend of $0.85.If the current preferred stock price is $18.75,what is Manitou's cost of preferred stock capital?
A)11%
B)12%
C)4.5%
D)10%
E)13%
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Chapter 13: Risk and the Pricing of Options
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Q1) According to put-call parity,which of the following would cause the value of a call option to decrease?
A)a decrease in the present value of future dividends
B)a decrease in the present value of the strike price
C)an increase in the stock price
D)a decrease in the price of the put
E)an increase in the price of the put
Q2) Suppose you purchase a call option for $4 and a strike price of $30.On the expiration day,the price of the stock is $40.What is the return on the call option if you hold your position until maturity?
A)125%
B)130%
C)150%
D)170%
E)250%
Q3) Although the payouts on a long position in an options contract are never negative,the profit from purchasing and holding it could be negative.
A)True
B)False
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Chapter 14: Raising Equity Capital
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Q1) Which of the following statements regarding SEOs is most accurate?
A)Secondary shares are new shares issued by the company.
B)Today,investors become informed about the impending sale of stock by the news media,via a road show,or through the book-building process,so tombstones are purely ceremonial.
C)In a cash offer,the firm offers the new shares to existing shareholders.
D)In a rights offer,the firm sells rights to new shareholders.
E)Rights offers expose existing shareholders to underpricing.
Q2) What share of the company will David own after the IPO?
A)11%
B)14%
C)16%
D)22%
E)50%
Q3) Managers will try to protect their existing shareholders by selling new shares at a price that correctly values or overvalues their firm,leading investors to reason that the announcement of an SEO indicates that a company is over-valued.
A)True
B)False
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Chapter 15: Debt Financing
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Q1) A covenant that restricts a company from making loans or otherwise providing credit is best viewed as a restriction on which of the following?
A)issuing new debt
B)dividends and share repurchases
C)mergers and acquisitions
D)asset disposition
E)investment opportunities
Q2) When a callable bond sells at a discount,the bond's coupon rate is ________ than market yields and the yield to worst is the yield to ________.
A)higher,call
B)higher,maturity
C)lower,call
D)lower,maturity
E)higher,par
Q3) A firm raising capital by issuing callable bonds instead of non-callable bonds will either have to pay a higher coupon rate or accept lower proceeds.
A)True
B)False
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Chapter 16: Capital Structure
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Q1) According to MM Proposition I,the stock price for With is closest to:
A)$8.00
B)$24.00
C)$6.00
D)$12.00
E)$18.00
Q2) Equity in a firm with debt is called:
A)risk-free equity.
B)risky equity.
C)shareholders' equity.
D)unlevered equity.
E)levered equity.
Q3) Managerial entrenchment means that managers ________ and run the firm for their own best interests.
A)may face little threat of being fired
B)are overseen by equity holders
C)are overseen by debt holders
D)are well compensated
E)wish to leave the firm
Q4) How do capital structure choices differ across industries?
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Chapter 17: Payout Policy
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Q1) Assume that Omicron uses the entire $50 million to repurchase shares.The number of shares that Omicron will have outstanding following the repurchase is closest to:
A)8.8 million
B)1.2 million
C)9.0 million
D)8.9 million
E)7.8 million
Q2) A firm issues a 50% stock dividend.This transaction is equivalent to a:
A)3:2 stock split.
B)1:2 stock split
C)2:1 stock split
D)2:3 stock split
E)1:1 stock split
Q3) Share repurchases have a tax advantage over dividends because:
A)dividend payments are tax deductible.
B)share repurchases increase the value of debt.
C)capital gains can be deferred by long-term investors.
D)repurchases are associated with increased customer loyalty.
E)dividends are not taxed.
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Chapter 18: Financial Modelling and Pro Forma Analysis
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Q1) Assuming that Ideko has a EBITDA multiple of 9.4,then the continuation EV/Sales ratio of Ideko in 2015 is closest to:
A)1.9
B)1.7
C)1.6
D)1.8
E)1.5
Q2) How do we know if expansion is a good idea for the firm?
Q3) What is minimum required cash?
Q4) Using the percent of sales method,and assuming 20% growth in sales,estimate Billy's Burgers' accounts payable for 2016.
A)$21.0 million
B)$25.2 million
C)$18.0 million
D)$21.6 million
E)$19.5 million
Q5) Why is EBITDA multiple used for valuation rather than sales or earnings?
Q6) What is net new financing?
Q7) What are a firm's options when it generates more cash than planned?
Q8) How do we compute net new financing?
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Chapter 19: Working Capital Management
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Q1) Commercial Supply Corp.bills its accounts on terms of 2/10 net 30.The firm's accounts receivable include $200,000 that has been outstanding for ten or fewer days,$126,000 outstanding for 11 to 30 days,$98,000 outstanding for 31 to 40 days,$12,000 outstanding for 41 to 50 days,$20,000 outstanding for 51 to 60 days,and $7000 outstanding for more than 60 days.Is the aging schedule for Commercial Supply Corp.bottom heavy?
A)No,since 70% of the outstanding sales are on time and the percentage of long-term outstanding payments are low.
B)Yes,since the percentage of payments that are late is greater than the percentage of payments that are on time.
C)No,since since the percentage of payments that are late are greater than the percentage of payments that are on time.
D)Yes,since the percentage of payments that are on time are greater than the percentage of payments that are late.
E)No,since the percentage of payments that are on time is equal to the percentage of payments that are late.
Q2) Can a firm's cash cycle be longer than a firm's operating cycle?
Q3) What is a firm's cash cycle?
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Chapter 20: Short-Term Financial Planning
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Q1) Which of the following types of loans bears the highest interest rate?
A)trust receipt
B)floating lien
C)field warehouse arrangement
D)public warehouse arrangement
E)floor planning
Q2) In which quarter(s)are Fancy's seasonal working capital needs the greatest?
A)1
B)2
C)3
D)4
E)1 and 2
Q3) A firm issues one-month commercial paper with a $500,000 face value and receives $495,000.What is the EAR the firm is paying for these funds?
A)12.8%
B)1.01%
Q4) How can a conservative financing policy reduce firm value?
Page 22
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Chapter 21: Risk Management
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Q1) The six month LIBOR rate for a reference period is 6.8% (annualized).The fixed six-month coupon rate for the same period is 3.9%.Compute the payment to the floating-rate payer if the notional principal is $100 million.
A)$0.5 million
B)$1 million
C)$1.5 million
D)$2 million
E)$2.5 million
Q2) Suppose oil futures prices are as given in the above table (price per barrel).Suppose you buy 100 crude oil futures contracts,each for 1000 barrels of crude oil,at the current futures price of $108 per barrel on day 0.What is your cumulative profit/loss in your margin account by the end of day 5?
A)-$300,000
B)$300,000
C)$400,000
D)-$400,000
E)$0
Q3) What are some of the disadvantages of long-term supply contracts?
Q4) What is the purpose of a deductible?
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Chapter 22: International Corporate Finance
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Q1) A ________ exchange rate is the rate that a firm can tie in for a future transaction date.
A)fixed
B)forward
C)floating
D)spot
E)pegged
Q2) The one-year forward exchange rate for the British pound is 1.80 CAD/GBP.If the one-year Canadian interest rate is 4.5% and the one-year British interest rate is 6%,compute the implied spot exchange rate in CAD/GBP.
A)1.75
B)1.79
C)1.83
D)1.88
E)1.92
Q3) With internationally integrated capital markets,the value of an investment depends on the currency used in the analysis.
A)True
B)False
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Chapter 23: Leasing
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Q1) What will Luther's balance sheet look like if they acquire the new fleet of delivery trucks using a finance lease?
Q2) If Danby's borrowing cost is 7%,and its tax rate is 35%,what is the NPV of leasing versus borrowing?
A)$96,747
B)$369,671
C)$348,253
D)-$363,441
E)$75,329
Q3) What is the difference between a true tax lease and a non-tax lease?
Q4) Consider the above balance sheet for your firm (in thousands of dollars).You plan on acquiring some new equipment using a $700,000 finance lease.If you go through with the lease,what will be the change in your firm's debt-equity ratio?
A)0.44
B)0.56
C)0
D)0.80
E)1.69
Q5) What is a lease-equivalent loan?
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Chapter 24: Mergers and Acquisitions
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Q1) What is a poison pill,and how does it prevent a hostile takeover?
Q2) A merger in which the target and acquirer operate in unrelated industries is called a(n):
A)horizontal merger.
B)vertical merger.
C)conglomerate merger.
D)industrial merger.
E)complementary merger.
Q3) If Martin pays no premium to acquire Luther,what will the earnings per share be after the merger?
Q4) Purchasing a corporation requires a more accurate estimate of value than can be achieved using the method of comparables.
A)True
B)False
Q5) Explain the difference between a horizontal merger and a vertical merger.
Q6) What are synergies?
Q7) In addition to the presence of takeover defences,what is the most likely explanation for the large premiums that acquirers pay to the target company's shareholders?
Q8) What are risk arbitrageurs? Do their actions represent true arbitrage?
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Chapter 25: Corporate Governance
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Q1) In the absence of monitoring,conflict of interest between managers and owners can be mitigated by closely aligning their interests through the managers' compensation policy.
A)True
B)False
Q2) Directors who are NOT employees,former employees,or family members of employees and who do not have existing or potential business relationships with the firm are called:
A)monitoring directors.
B)independent directors.
C)grey directors.
D)inside directors.
E)unelected directors.
Q3) ________ is a person making a trade based on privileged information.
A)Rogue trading
B)Illegal trading
C)Standard trading
D)Insider trading
E)Exchange trading
Q4) Describe the main requirements of the Sarbanes-Oxley Act of 2002.
Page 27
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