Business Finance
Review Questions
Course Introduction
Business Finance is an essential course that explores the fundamental principles and practices of financial management within a business context. Topics include the analysis of financial statements, time value of money, capital budgeting, risk and return, cost of capital, and sources of long-term and short-term financing. Students will learn how to make informed financial decisions, manage working capital, evaluate investment opportunities, and understand the impact of financial markets on business operations. By integrating theoretical concepts with practical financial decision-making tools, this course provides a strong foundation for anyone pursuing a career in finance or management.
Recommended Textbook
Financial Management Principles and Applications 11th Edition by Sheridan Titman
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Chapter 1: Getting Started-Principles of Finance
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Sample Questions
Q1) In terms of organizational costs,which of the following sequences is generally correct,moving from lowest to highest cost?
A)General partnership,sole proprietorship,limited partnership,corporation
B)Sole proprietorship,general partnership,limited partnership,corporation
C)Corporation,limited partnership,general partnership,sole proprietorship
D)Sole proprietorship,general partnership,corporation,limited partnership
Answer: B
Q2) Discuss the risk/return tradeoff and how it relates to finance.
Answer: As people are risk averse,they need a higher return as the risk gets higher.This means that investors will need a higher return on bonds that they do not consider to be as safe as other bonds,and they will need a higher return on stock when the company in question's stock seems to be riskier than the stock of other companies.
Q3) Ultimate control in a corporation is vested in the board of directors.
A)True
B)False
Answer: False
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Chapter 2: Firms and the Financial Market
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Sample Questions
Q1) In financial markets,borrowers pay savers by giving them a return on investment.
A)True
B)False
Answer: True
Q2) Describe the tax benefits to a corporation of issuing debt rather than issuing stock.
Answer: The greatest advantage to issuing debt is that the interest payments on debt are tax deductible,and that dividend payments are not tax deductible.In addition,the interest payment is a known amount,and the required return on debt is generally lower than the investor required return on equity because the cash flows to investors are more predictable for debt than they are for equity.
Q3) Investors in securities markets do not use a financial intermediary. A)True
B)False Answer: True
Q4) A bond matures in less than 10 years. A)True
B)False
Answer: False
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4
Chapter 3: Understanding Financial Statements, taxes, and Cash Flows
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Sample Questions
Q1) The balance sheet describes the financial position of a firm on a given date.
A)True
B)False Answer: True
Q2) Which of the following is the least liquid current asset?
A)Accruals
B)Marketable securities
C)Accounts receivable
D)Inventory
Answer: D
Q3) Under current accounting rules,plant and equipment appear on a company's balance sheet valued at replacement value.
A)True
B)False Answer: False
Q4) Cash flows from assets will always be less than cash flows from financing due to dividends.
A)True
B)False Answer: False
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Chapter 4: Financial Analysis-Sizing up Firm Performance
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Sample Questions
Q1) Lorna Dome,Inc.has an annual interest expense of $30,000.Lorna Dome's times-interest-earned ratio is 4.2.What is Lorna Dome's operating income?
A)$96,000
B)$57,000
C)$126,000
D)$57,600
Q2) Based on the information in Table 1,the inventory turnover ratio is:
A)0.29 times.
B)2.35 times.
C)0.43 times.
D)3.47 times.
Q3) According to the DuPont Analysis,an increase in net profit margin will decrease return on assets.
A)True
B)False
Q4) One weakness of the times-interest-earned ratio is that it includes only the annual interest expense as a finance expense that must be paid.
A)True
B)False
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Chapter 5: Time Value of Money-The Basics
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Sample Questions
Q1) The nominal interest rate on two different investments will equal the annual percentage yield on the two investments only if interest on both investments is compounded annually.
A)True
B)False
Q2) As the number of compounding periods increases,the ________ increases.
A)quoted
B)annual percentage yield
C)effective annual rate
D)both B and C
Q3) Determining the specified amount of money that you will receive at the maturity of an investment is an example of a future value equation.
A)True
B)False
Q4) It is easy to choose a discount rate in an international setting due to stability of inflation.
A)True
B)False
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Chapter 6: The Time Value of Money-Annuities and Other Topics
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Sample Questions
Q1) You are considering a home loan with monthly payments at an annual percentage yield of 5.116%.What is the quoted rate of interest on the loan?
A)4.5%
B)4.75%
C)5%
D)6%
Q2) An investment will pay $500 in three years,$700 in five years,and $1,000 in nine years.If the opportunity rate is 6%,what is the present value of this investment?
Q3) You have just purchased a share of preferred stock for $50.00.The preferred stock pays an annual dividend of $5.50 per share forever.What is the rate of return on your investment?
A).055
B).010
C).110
D).220
Q4) If your opportunity cost is 10%,how much are you willing to pay for an investment promising $750 per year for the first four years and $450 for the next six years?
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Chapter 7: An Introduction to Risk and Return-History of
Financial Market Returns
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Sample Questions
Q1) What is the arithmetic average return of Roddy Richard's investment?
A)2.42%
B)3.96%
C)5.18%
D)15.1%
Q2) What is the standard deviation of an investment that has the following expected scenario? 18% probability of a recession,2.0% return;65% probability of a moderate economy,9.5% return;17% probability of a strong economy,14.2% return.
A)3.68%
B)1.23%
C)8.47%
D)6.66%
Q3) Spartan Sofas,Inc.is selling for $50.00 per share today.In one year,Spartan will be selling for $48.00 per share,and the dividend for the year will be $3.00.What is the cash return on Spartan stock?
A)0%
B)2%
C)6%
D)10%
Page 9
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Chapter 8: Risk and Return-Capital Market Theory
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Sample Questions
Q1) Security A has an expected rate of return of 22% and a beta of 2.5.Security B has a beta of 1.20.If the Treasury bill rate is 10%,what is the expected rate of return for security B?
Q2) The capital asset pricing model:
A)provides a risk-return trade-off in which risk is measured in terms of the market returns.
B)provides a risk-return trade-off in which risk is measured in terms of beta.
C)measures risk as the coefficient of variation between security and market rates of return.
D)depicts the total risk of a security.
Q3) Briefly discuss why there is no reason to believe that the market will reward investors with additional returns for assuming unsystematic risk.
Q4) What is a practical measure that is used to quantify the risk of a single investment?
A)The systematic variation
B)The Fisher effect
C)The IRP
D)The standard deviation
Q5) Provide an intuitive discussion of beta and its importance for measuring risk.
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Page 10
Chapter 9: Debt Valuation and Interest Rates
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Sample Questions
Q1) Caldwell,Inc.sold an issue of 30-year,$1,000 par value bonds to the public.The bonds carry a 10.85% coupon rate and pay interest semiannually.It is now 12 years later.The current market rate of interest on the Caldwell bonds is 8.45%.What is the current market price (intrinsic value)of the bonds? Round off to the nearest $1.
A)$751
B)$1,177
C)$1,220
D)$976
Q2) Calculate the value of a bond that is expected to mature in 13 years with a $1,000 face value.The interest coupon rate is 8%,and the required rate of return is 10%.Interest is paid annually.
Q3) Why are longer-term bonds more sensitive to changes in interest rates than shorter-term bonds?
Q4) Sterling Corp.bonds pay 10% annual interest and are selling at 97.The market rate of interest:
A)is less than 10%.
B)is greater than 10%.
C)equals 10%.
D)cannot be determined.
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Chapter 10: Stock Valuation
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Sample Questions
Q1) Listing requirements for the New York Stock Exchange include:
A)profitability.
B)market value.
C)breadth of ownership.
D)all of the above.
Q2) Preferred stock is similar to common stock in that:
A)it has no fixed maturity date.
B)the nonpayment of dividends can bring on bankruptcy.
C)dividends are limited in amount.
D)all of the above.
Q3) The XYZ Company,whose common stock is currently selling for $40 per share,is expected to pay a $2.00 dividend in the coming year.If investors believe that the expected rate of return on XYZ is 14%,what growth rate in dividends must be expected?
A)5%
B)14%
C)9%
D)6%
Q4) Texon's preferred stock sells for $85 and pays $11 each year in dividends.What is the expected rate of return?
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Chapter 11: Investment Decision Criteria
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Sample Questions
Q1) Webley Corp.is considering two expansion options,but does not have enough capital to undertake both,Project W requires an investment of $100,000 and has an NPV of $10,000.Project D requires an investment of $80,000 and has an NPV of $8,200.If Webley use the profitability index to decide,it should:
A)choose D because it has a higher profitability index.
B)choose W because it has a higher profitability index.
C)choose D because it has a lower profitability index.
D)choose W because it has a higher profitability index
Q2) Central Mass Ambulance Service can purchase a new ambulance for $200,000 that will provide an annual net cash flow of $50,000 per year for five years.Calculate the NPV of the ambulance if the required rate of return is 9%.(Round your answer to the nearest $1. )
A)$50,000
B)$(5,061)
C)$(5,517)
D)$5,517
Q3) Briefly describe the actual capital budgeting methods of large U.S.corporations.
Q4) If the NPV of a project is zero,then the profitability index should equal one.
A)True
B)False
Page 13
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Chapter 12: Analyzing Project Cash Flows
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Sample Questions
Q1) Sunk costs are a type of incremental cash flow that should be included in all capital-budgeting decisions.
A)True
B)False
Q2) In 2010,Sunny Electronics expects to sell 100,000 3-D television sets for an average price of $1,000.Expected production costs are $600 per unit.In 2011,volume is expected to increase by 10%,while inflation will increase both the sales price and the cost per unit by 3%.In real dollars,expected gross profit for 2011 is:
A)$40 million.
B)$45.32 million.
C)$48.2 0 million.
D)$50 million.
Q3) The machine's after-tax incremental cash flow in year five is:
A)$6,980.
B)$5,980.
C)$7,120.
D)$8,620.
Q4) What is the advantage,if any,to using MACRS rather than straight line depreciation?
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Page 14
Chapter 13: Risk Analysis and Project Evaluation
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Sample Questions
Q1) The form of risk analysis which examines the effect of various combinations of value drivers is known as:
A)scenario analysis.
B)sensitivity analysis.
C)value driver analysis.
D)expected value analysis.
Q2) Enchanted Hearth expects to sell 1,200 wood pellet stoves in 2011 at an average price of $2,400 each.It believes that unit sales will grow between -5% and +5% per year and prices will rise or fall by as much as 5% per year.Forecast sales revenue for 2013 if the number of units sold increases by 5% per year and prices remain flat.
A)$2,880,000
B)$3,168,000
C)$3,333,960
D)$3,175,200
Q3) What is the approximate five year survival rate for new businesses?
A)20%
B)40% C)60% D)80%
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Chapter 14: The Cost of Capital
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Sample Questions
Q1) Pony Corporation is undertaking a capital budgeting analysis.The firm's beta is 1.5.The rate on 10-year U.S.Treasury bonds is 5%,and the return on the S & P 500 index is 12%.What is the cost of Pony's common equity?
A)13.3%
B)15.5%
C)17.7%
D)19.9%
Q2) Flotation costs increase the amount of funds that must be raised to finance an investment.
A)True
B)False
Q3) A firm's weighted marginal cost of capital increases when internal equity financing is exhausted but is unaffected by an increase in the cost of other financing sources. A)True
B)False
Q4) The preferred stock of Wells Co.sells for $15.30 and pays a $1.75 dividend.What is the cost of capital for preferred stock?
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16
Chapter 15: Capital Structure Policy
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Sample Questions
Q1) From the information below,select the optimal capital structure for Mountain High Corp.
A)Debt = 40%;Equity = 60%;EPS = $2.95;Stock price = $26.50
B)Debt = 50%;Equity = 50%;EPS = $3.05;Stock price = $28.90
C)Debt = 60%;Equity = 40%;EPS = $3.18;Stock price = $31.20
D)Debt = 80%;Equity = 20%;EPS = $3.42;Stock price = $30.40
E)Debt = 70%;Equity = 30%;EPS = $3.31;Stock price = $30.00
Q2) High coverage ratios,compared with a standard,imply unused debt capacity.
A)True
B)False
Q3) If a firm chose to increase its debt ratio from 20% to 40%,what is the potential risk?
A)The average cost of capital would most likely rise.
B)The price of the firm's common stock would definitely decline.
C)If economic forces cause a reduction of sales,the firm's EPS might decline.
D)The firm's WACC might decline.
Q4) U.S.companies differ very little in their capital structures.
A)True
B)False
Q5) Why is the Debt to Assets Ratio always higher than the Debt to Value ratio?
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Chapter 16: Dividend Policy
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Sample Questions
Q1) Immediately after the stock split,the stock price will be approximately:
A)$42.
B)$84.
C)$2.00.
D)$8.00.
Q2) Fred Handel owns 2000 shares of Haydn Inc.stock which is currently selling for $18 per share.If the company repurchases 10% of its outstanding shares at $18 per share and Fred chooses not to sell any shares back to the company,
A)the value of his shares will stay the same and his percentage ownership of the company will increase by 10%.
B)his investment in the company and his percentage of ownership will stay the same.
C)his investment in the company will decrease by $3,600 and his percentage of ownership will stay the same.
D)the value of his remaining shares will stay the same and his percentage of ownership will increase by 11.11%.
Q3) Why has the popularity of stock repurchases been growing faster than the cash dividends as a method for companies to distribute cash to their stockholders.
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Chapter 17: Financial Forecasting and Planning
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Q1) Under which of the following conditions would the percent-of-sales method of financial forecasting be most accurate?
A)If assets must be purchased in discrete quantities
B)When asset requirements can be accurately forecasted as a constant percent of sales
C)If economic circumstances beyond a firm's control drastically change from one year to the next
D)When economies of scale can be realized from investing in specific assets
Q2) The preparation of a cash budget serves which of the following purposes?
A)To estimate the amount and timing of cash flows that are needed in order to optimize the price of the firm's common stock
B)To calculate the amount of future cash flows that would be needed in order to achieve the optimal level of financing during the forecast period
C)To determine the amount and timing of short-term financing that would be required for the operation of a business during the forecast period
D)To estimate the amount of sales volume that would be required in order to achieve the break-even point
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Chapter 18: Working Capital Management
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Sample Questions
Q1) Which of the following is NOT considered a permanent source of financing?
A)Corporate bonds
B)Common stock
C)Preferred stock
D)Commercial paper
Q2) A major risk in using commercial paper for short-term financing is the inflexible repayment schedule.
A)True
B)False
Q3) Management of a firm's liquidity involves management of the firm's investment in current assets.
A)True
B)False
Q4) An increase in ________ would increase a firm's liquidity.
A)notes payable
B)inventories
C)cash
D)both B and C
Q5) Discuss the advantages of using commercial paper.
Q6) Describe the differences between secured and unsecured short-term credit.
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Chapter 19: International Business Finance
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Sample Questions
Q1) In 2010,the U.S.A.comprised ________ of the world's stock market capitalization.
A)20%
B)just under 50%
C)75%
D)90%
Q2) Transactions carried out in the foreign exchange markets include:
A)spot transactions.
B)forward exchange contracts which allow the exchange of one currency for another today.
C)swaps.
D)both A and B.
Q3) Assume that a buyer of Italian wine saw the following quotes: spot rate of .75 euros to the U.S.dollar;30-day forward rate of .747 euros to the U.S.dollar;90-day forward rate of .744 euros to the U.S.dollar.What does this information imply?
A)The forward euro is selling at a premium as compared with the spot euro.
B)The dollar is expected to maintain the same value in the near future relative to the euro.
C)The forward euro is selling at a discount as compared with the spot euro.
D)None of the above.
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Page 21
Chapter 20: Corporate Risk Management
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Sample Questions
Q1) Firms that wish to minimize risk will attempt to:
A)minimize the standard deviation of expected cash flows.
B)maximize the standard deviation of expected cash flows.
C)maximize expected cash flows.
D)balance expected cash flows with the standard deviation of expected cash flows.
Q2) In 2010,a deep water oil drilling rig owned by British Petroleum exploded in the Gulf of Mexico resulting in the deaths of several crew members,one of the worst ecological disasters in history,and major financial damage to the company.How could the five step corporate risk management process have avoided or mitigated this disaster.
Q3) An investor would buy a ________ if he or she believes that the price of the underlying stock or asset will fall in the near future.
A)call option
B)convertible bond
C)put option
D)futures contract to take delivery of an asset at a future date
Q4) 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?
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