Business Finance
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Course Introduction
Business Finance provides students with a fundamental understanding of the financial principles and practices essential for effective business management. The course covers topics such as financial statement analysis, time value of money, risk and return, capital budgeting, cost of capital, financing decisions, and working capital management. By exploring the tools and frameworks used to evaluate investment opportunities and financial strategies, students gain the skills to make informed decisions that enhance value for both firms and stakeholders. The course also emphasizes real-world applications and the importance of ethical considerations in financial decision-making.
Recommended Textbook
Foundations of Financial Management 14th Edition by Stanley B. Block
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Page 2
Chapter 1: The Goals and Functions of Financial Management
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Sample Questions
Q1) Recently, the emphasis of financial management has been on the relationship between risk and return.
A)True
B)False Answer: True
Q2) In terms of revenues and profits, the corporation is by far the most important form of business organization in the United States.
A)True
B)False Answer: True
Q3) Agency Theory examines the relationship between companies and their customers. A)True
B)False Answer: False
Q4) Profits of a Subchapter S corporation are taxed at corporate tax rates.
A)True
B)False Answer: False
Page 3
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Chapter 2: Review of Accounting
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Sample Questions
Q1) Which of the following would not be included in the balance sheet investment account?
A) Stocks of other corporations
B) Long term government bonds
C) Marketable securities
D) Investments in other corporations
Answer: C
Q2) The sale of a firm's securities is a source of funds, whereas the payment of dividends is a use of funds.
A)True
B)False Answer: True
Q3) Stockholders' equity minus preferred stock is the same thing as what is sometimes called net worth or book value.
A)True
B)False Answer: True
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Page 4
Chapter 3: Financial Analysis
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Sample Questions
Q1) Analysts agree that extraordinary gains/losses should be excluded from ratio analysis because they are one time events, and do not measure annual operating performance.
A)True
B)False
Answer: True
Q2) Fiercely competitive industries such as the computer industry have had lower profit margins and return on equity in recent years even though they are under extreme pressure to maintain high profitability.
A)True
B)False
Answer: True
Q3) An increasing average collection period indicates
A) the firm is generating more income.
B) accounts receivable are going down.
C) the company is becoming more efficient in its collection policy.
D) the company is becoming less efficient in its collection policy.
Answer: D
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Chapter 4: Financial Forecasting
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Sample Questions
Q1) It is helpful to break down the income statement into smaller monthly periods to enable evaluation of seasonal patterns of cash inflows and outflows.
A)True
B)False
Q2) Companies generally prefer to maintain some minimum cash balance.
A)True
B)False
Q3) Pro forma income statements and balance sheets refer to projected financial statements.
A)True
B)False
Q4) Sales projections and the ability to accurately predict the future have a large impact on cash flow targets.
A)True
B)False
Q5) The primary purpose of the cash budget is to forecast income.
A)True
B)False
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) Heavy use of long-term debt may be beneficial in an inflationary economy because
A) the debt may be repaid in more "expensive" dollars.
B) nominal interest rates exceed real interest rates.
C) inflation is associated with the peak of a business cycle.
D) the debt may be repaid in "cheaper" dollars.
Q2) Cash breakeven analysis
A) is helpful in analyzing the short-term outlook of the firm, particularly when it is in trouble financially.
B) is important when analyzing long-term profitability.
C) includes depreciation expense as a fixed cost when calculating the degree of financial leverage.
D) None of these.
Q3) If economic conditions were expected to be favorable, an investor would likely prefer a firm with a low degree of leverage.
A)True
B)False
Q4) Operating income is not the same thing as EBIT.
A)True
B)False
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) Interest rates and inflation are inversely related.
A)True
B)False
Q2) By using long-term capital to cover short-term needs, the firm is virtually assured of becoming technically insolvent.
A)True
B)False
Q3) It is not necessary to understand interest rate movements when deciding the structure of short-term debt relative to long-term debt.
A)True
B)False
Q4) Cash, accounts receivables, and inventory all move monthly in the same direction under level production.
A)True
B)False
Q5) Only the market segmentation theory has any significant impact on interest rates.
A)True
B)False
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Chapter 7: Current Asset Management
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Sample Questions
Q1) When using the economic order quantity model
A) ordering costs increase as the level of inventory increases.
B) carrying costs decrease as the level of inventory increases.
C) costs are minimized when total carrying costs and total ordering costs are equal.
D) none of these
Q2) Characteristics of a money market deposit account include
A) a lower risk than money market funds.
B) insured by federal agencies.
C) generally a limit of three deposits or withdrawals per month.
D) all of these
Q3) Cash balances are usually determined by the amount of cash flowing through the firm on a yearly basis.
A)True
B)False
Q4) The economic order quantity helps a firm determine the most efficient order size to place.
A)True
B)False
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9
Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) Kenneth's Arrows and Bows borrow $15,000 for one year at 8 percent interest. What is the effective rate of interest if the loan is discounted?
A) Less than 8.5 percent
B) More than 8.5 percent, but less than 9.5 percent
C) More than 9.5 percent, but less than 10.5 percent
D) More than 10.5 percent
Q2) A self-liquidating loan is preferable to a bank because it generally provides them with a higher return.
A)True
B)False
Q3) It is difficult to acquire a loan in US dollars outside the United States.
A)True
B)False
Q4) The London Interbank Offered Rate (LIBOR)
A) competes with the U.S. prime rate for those companies with an international presence.
B) has been lower than the U.S. prime rate for at least the last decade.
C) is the interbank lending rate for London banks.
D) a and b are correct.
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) Mr. Blochirt is creating a college investment fund for his daughter. He will put in $1,000 per year for the next 15 years and expects to earn a 6% annual rate of return. How much money will his daughter have when she starts college?
A) $11,250
B) $12,263
C) $24,003
D) $23,276
Q2) The concept of time value of money is important to financial decision making because
A) it emphasizes earning a return on invested capital.
B) it recognizes that earning a return makes $1 worth more today than $1 received in the future.
C) it can be applied to future cash flows in order to compare different streams of income.
D) all of these
Q3) The farther into the future any given amount is received, the larger its present value.
A)True
B)False
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11
Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) Risk premiums are higher for riskier securities, but the risk premium cannot be higher than the required return.
A)True
B)False
Q2) The price of preferred stock may react strongly to a change in k<sub>p</sub>because
A) preferred stock may be cumulative.
B) preferred stock dividends have to be paid before common stock dividends.
C) there is no maturity date.
D) corporate recipients of preferred stock dividends may receive a partial tax exemption.
Q3) The fact that small businesses are usually illiquid does not affect their valuation process.
A)True
B)False
Q4) When the interest rate on a bond and its yield to maturity are equal, the bond will trade at par value.
A)True
B)False
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Page 12
Chapter 11: Cost of Capital
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Sample Questions
Q1) Companies prefer to maintain some financing flexibility in order to choose the lowest cost source of funds at a single point in time.
A)True
B)False
Q2) Oak Enterprises has a beta of 1.2, the market return is 8%, and the T-bill rate is 4%. What is their expected required return of common equity?
A) Between 11% and 12%
B) Between 8% and 9%
C) Between 7% and 8%
D) Between 4% and 5%
Q3) Firm X has a tax rate of 30%. The price of its new preferred stock is $75 and its flotation cost is $3.15. The cost of new preferred stock is 8%. What is the firm's dividend?
A) $7.18
B) $5.75
C) $7.56
D) none of these.
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13
Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) There are several disadvantages to the payback method, among them:
A) payback ignores the time value of money.
B) payback emphasizes receiving money back as fast as possible for reinvestment.
C) payback is Basic to use and to understand.
D) payback can be used in conjunction with time adjusted methods of evaluation.
Q2) The payback method is Basic to understand and places a heavy emphasis on liquidity.
A)True
B)False
Q3) In a replacement decision, if an old asset sells below book value, from a tax standpoint
A) there is a decrease in cash flow.
B) there is an increase in cash flow.
C) there is no effect on cash flow.
D) there is a decrease in net present value.
Q4) In a replacement decision, a book loss on an old asset can be a valuable feature.
A)True
B)False
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14
Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) Cyclical businesses are likely to have higher costs of capital than firms with less variability in earnings. Therefore, more cyclical firms should typically use a higher discount rate in project evaluation.
A)True
B)False
Q2) As the time horizon increases, the standard deviation for each forecast of cash flow normally increases.
A)True
B)False
Q3) The "efficient frontier" indicates
A) alternatives with neutral combinations of risk and return.
B) alternatives with the highest returns.
C) alternatives with the best combination of risk and return.
D) alternatives with no risk.
Q4) Which of the following is a false statement?
A) Risky investments may produce large losses.
B) Risky investments may produce large gains.
C) The coefficient of variation is a risk measure.
D) Risk-averse investors cannot be induced to invest in risky assets.
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Chapter 14: Capital Markets
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Sample Questions
Q1) Security markets provide liquidity
A) by allowing corporations to raise funds by selling new issues.
B) by creating a market in which owners may easily turn an investment into cash through its sale.
C) a and b are both correct.
D) neither a nor b are correct.
Q2) In the last decade, the US has invested substantially more in foreign countries than foreign countries have invested back in the US.
A)True
B)False
Q3) Evidence of how global markets are linked was provided in 1997 and 1998 when international markets reacted to
A) the collapse of Asian currencies in Thailand, Indonesia, Malaysia and Korea.
B) Russia's default on its sovereign debt.
C) Japan's seven years of economic stagnation.
D) a and b are true.
Q4) In times of recession, retain earnings decline as a percent of internal funds.
A)True
B)False
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Chapter 15: Investment Banking: Public and Private
Placement
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Sample Questions
Q1) Small investment banking houses may handle distributions for relatively unknown corporations on a "best-efforts" basis.
A)True
B)False
Q2) One purpose of an underwriting syndicate is to distribute securities to the public.
A)True
B)False
Q3) An underwriting syndicate is a group of investment bankers who help to distribute a new issue for a company.
A)True
B)False
Q4) Generally, the larger the dollar value of an issue, the smaller is the spread as a percentage of the offering price.
A)True
B)False
Q5) In investment banking, the equity market is larger than the debt market. A)True
B)False
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) An investor would consider investing in a zero coupon bond because
A) tax benefits of amortization
B) lower volatility
C) ability to lock in to multiplier of investment
D) none of these are reasons to invest in zero coupons
Q2) A debenture represents:
A) unsecured debt.
B) secured debt.
C) a long document covering every detail of a bond issue.
D) debt that is subordinate to preferred stock.
Q3) A bond indenture is a bond with no specific collateral securing it.
A)True
B)False
Q4) Which company is a leader in rating bonds?
A) Goldman Sachs
B) Bloomberg
C) ValueLine
D) Moody's Investor Service
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Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) Common stockholders have a residual claim to income, in other words they are last in line.
A)True
B)False
Q2) Which of the following is not a very common feature of preferred stock?
A) Cumulative dividends
B) Voting rights
C) Call feature
D) Conversion feature
Q3) A corporate investor of preferred stock receiving a before-tax preferred yield of 8.5%, and having a corporate tax rate of 30% would receive an after-tax preferred yield of:
A) 10.2%
B) 7.7%
C) 8.1%
D) 9.3%
Q4) A rights offering is generally financially advantageous to the investor because it provides them with additional shares of stock.
A)True
B)False
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Chapter 18: Dividend Policy and Retained Earnings
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Q1) A corporation may wish to repurchase some of its shares for all the following reasons except
A) the stock may be needed for future mergers.
B) the corporation's executives will financially benefit if the stock is resold later at a substantial profit.
C) it can stabilize or increase the market price of the stock.
D) the stock may be needed for an employee compensation plan.
Q2) When a firm which previously paid regular dividends ceases to do so, the stock is ex-dividend until the firm resumes regular dividend payments.
A)True B)False
Q3) Some researchers feel that stockholders prefer dividends to retained earnings because dividends have information content.
A)True B)False
Q4) When a firm raises its dividend, the information content is usually positive for investors.
A)True B)False
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Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) The face value of a convertible bond divided by the conversion price equals the number of shares a bondholder will receive upon conversion.
A)True
B)False
Q2) The intrinsic value of a warrant to buy 4 shares of Merton stock at $53 per share is $20. What is the current market price of Merton stock?
A) $55.00
B) $59.00
C) $58.00
D) None of these
Q3) Which of the following is true?
A) As the price of common stock increases, the market price of a convertible bond and the conversion premium increase.
B) As the price of common stock increases, the market price of a convertible bond and the conversion value increase.
C) As the price of common stock increases, the conversion value and the floor price increase.
D) Two of the above are true.
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) Which of the following is not a motive for selling by the stockholder's of the acquired company?
A) Opportunity to diversify
B) Tax advantage
C) Attractive price
D) Avoid bias against smaller businesses
Q2) The potential of a tax loss carryforward has no effect when considering the acquisition of a company.
A)True
B)False
Q3) The elimination of overlapping functions and the meshing of two firms' strong areas or products creates the managerial incentive for mergers known as
A) horizontal integration.
B) vertical integration.
C) synergy.
D) the portfolio effect.
Q4) A tax loss carryforward is a benefit to the acquired firm's shareholders.
A)True
B)False
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Chapter 21: International Financial Management
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Sample Questions
Q1) For a U.S. company, foreign business operations are more complex because the
A) host country's economy may be different from the domestic economy.
B) rules of taxation are different.
C) structure and operations of financial markets vary.
D) all of these are true.
Q2) A form of MNC which exposes the firm to the least amount political risk, and is therefore the preferred arrangement by both business and foreign governments is called a (an)
A) exporter.
B) licensing agreement.
C) joint venture.
D) fully-owned foreign subsidiary.
Q3) As Exchange rates change, they
A) change the relative purchasing power between countries.
B) can affect imports and exports between those two countries.
C) will affect the flow of funds between the countries.
D) all of these are true.
Q4) Translation exposure occurs because of changes in foreign exchange rates.
A)True
B)False
23
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