Business Finance
Study Guide Questions
Course Introduction
Business Finance is a foundational course that introduces students to the principles and practices of financial management within a business context. The course covers essential topics such as financial analysis, planning, and control; valuation of assets; risk and return; capital budgeting; cost of capital; and the structure of financial markets. Students will learn how businesses raise capital, allocate resources, and make investment decisions to maximize shareholder value. Through case studies and problem-solving exercises, the course develops analytical skills and financial literacy critical for effective decision-making in both entrepreneurial and corporate environments.
Recommended Textbook
Fundamentals of Corporate Finance 4th Edition Jonathan Berk
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Page 2
Chapter 1: Corporate Finance and the Financial Manager
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Q1) Which of the following people may not manage the operations of a firm in which they are part or full owners?
A) stockholders in S corporations
B) stockholders in C corporations
C) limited partners in a limited partnership
D) general partners in a limited partnership
Answer: C
Q2) Which of the stock markets listed below is the smallest, as judged by trading volume?
A) Deutsche Börse
B) London Stock Exchange
C) NASDAQ
D) NYSE Euronext (US)
Answer: A
Q3) Explain some of the measures taken to reduce the agency conflict problem.
Answer: The agency conflict problem can be reduced by taking measures that align the managers interests with those of the shareholders. For example, incentive-based compensation, such as employee stock options, helps align the interests of these two constituents.
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Page 3
Chapter 2: Introduction to Financial Statement Analysis
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Q1) Which of the following firms would be expected to have a high ROE?
A) a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals
B) a high-end fashion retailer that has a very high mark-up on all items it sells
C) a brokerage firm that has high levels of leverage
D) a grocery store chain that has very high turnover, selling many multiples of its assets per year
Answer: D
Q2) A 30-year mortgage loan is a ________.
A) long-term liability
B) current liability
C) current asset
D) long-term asset
Answer: A
Q3) How does a firm select the date for preparation of its balance sheet?
Answer: The balance sheet is prepared on the fiscal closing date for the accounts of a firm that may or may not coincide with the calendar year-end of December 31st.
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4
Chapter 3: Time Value of Money: an Introduction
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Q1) You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the present value of this cash flow?
A) It will cause the present value to fall.
B) It will cause the present value to rise.
C) It will have no effect on the present value.
D) The effect cannot be determined with the information provided.
Answer: A
Q2) Which of the following statements is INCORRECT based on the time value of money?
A) In general, money today is worth more than money in one year.
B) We define the risk-free interest rate (r<sub>f</sub>) for a given period as the interest rate at which money can be borrowed or lent without risk over that period.
C) We refer to (1 - r<sub>f</sub>) as the interest rate factor for risk-free cash flows.
D) For most financial decisions, costs and benefits occur at different points in time. Answer: C
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Chapter 4: Time Value of Money: Valuing Cash Flow
Streams
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Questions
Q1) Dan buys a property for $210,000. He is offered a 30-year loan by the bank, at an interest rate of 8% per year. What is the annual loan payment Dan must make?
A) $18,653.76
B) $22,384.51
C) $26,115.26
D) $29,846.02
Q2) A perpetuity will pay $1000 per year, starting five years after the perpetuity is purchased. What is the future value (FV) of this perpetuity, given that the interest rate is 3%?
A) $1456
B) $19,867
C) $21,320
D) There is no solution to this problem.
Q3) A bank offers a home buyer a 20-year loan at 8% per year. If the home buyer borrows $130,000 from the bank, how much must be repaid every year?
A) $15,888.95
B) $18,537.11
C) $21,185.26
D) $13,240.79
Page 6
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Chapter 5: Interest Rates
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Q1) The annual percentage rate indicates the amount of interest, including the effect of any compounding.
A)True
B)False
Q2) You are in the process of purchasing a new automobile that will cost you $25,000. The dealership is offering you either a $1,000 rebate (applied toward the purchase price) or 3.9% financing for 60 months (with payments made at the end of the month). You have been pre-approved for an auto loan through your local credit union at an interest rate of 7.5% for 60 months. Should you take the $1,000 rebate and finance through your credit union or forgo the rebate and finance through the dealership at the lower 3.9% APR?
Q3) Which of the following reasons for considering long-term loans inherently more risky than short-term loans is most accurate?
A) There is a greater chance that inflation may fall in a longer time frame.
B) The penalties for closing out a long term loan early make them unattractive to many investors.
C) Long-term loans typically have ongoing costs that accumulate over the life of the loan.
D) The loan values are very sensitive to changes in market interest rates.
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Page 7
Chapter 6: Bonds
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Q1) Which of the following risk-free, zero-coupon bonds could be bought for the lowest price?
A) one with a face value of $1,000, a YTM of 4.8%, and 5 years to maturity
B) one with a face value of $1,000, a YTM of 3.2%, and 8 years to maturity
C) one with a face value of $1,000, a YTM of 6.8%, and 10 years to maturity
D) one with a face value of $1,000, a YTM of 5.9%, and 20 years to maturity
Q2) Before it matures, the price of any bond is always less than its face value.
A)True
B)False
Q3) Shown above is information from FINRA regarding one of Caterpillar Financial Services' bonds. How much would the holder of such a bond earn each coupon payment for each $100 in face value if coupons are paid annually?
A) $1.38
B) $3.95
C) $4.00
D) $4.36
Q4) Prior to its maturity date, the price of a zero-coupon bond is its face value.
A)True
B)False
Q5) Under what situation can a zero-coupon bond be selling at par to its face value?
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Chapter 7: Stock Valuation
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Q1) A stock is bought for $23.00 and sold for $27.00 one year later, immediately after it has paid a dividend of $1.50. What is the capital gain rate for this transaction?
A) 3.48%
B) 8.70%
C) 13.91%
D) 17.39%
Q2) What is the relationship between the growth rate and the cost of equity implied in the dividend-discount model?
Q3) The Busby Corporation had a share price at the start of the year of $26.10, paid a dividend of $0.59 at the end of the year, and had a share price of $29.50 at the end of the year. Which of the following is closest to the rate of return of investments in companies with equal risk to The Busby Corporation for this period?
A) 14%
B) 13%
C) 12%
D) 15%
Q4) What role do dividends play in stock investing?
Q5) What is a major assumption about growth rate in the dividend-discount model?
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Chapter 8: Investment Decision Rules
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Q1) Internal rate of return (IRR) can reliably be used to choose between mutually exclusive projects.
A)True
B)False
Q2) What is the decision criteria using internal rate of return (IRR) rule?
Q3) The following show four mutually exclusive investments. Which one is the best investment?
A) Initial investment: $1.1 million; Cash flow in year 1: $160,000; Annual Growth Rate: 2%; Cost of Capital: 9.1%
B) Initial investment: $1.2 million; Cash flow in year 1: $150,000; Annual Growth Rate: 2%; Cost of Capital: 7.2%
C) Initial investment: $1.3 million; Cash flow in year 1: $160,000; Annual Growth Rate: 1%; Cost of Capital: 5.6%
D) Initial investment: $1.4 million; Cash flow in year 1: $150,000; Annual Growth Rate: 2%; Cost of Capital: 8.4%
Q4) If your new strip mall will have 16,000 square feet of retail space available to be leased, to which businesses should you lease and why?
Q5) What is the Net Present Value rule?
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Chapter 9: Fundamentals of Capital Budgeting
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Sample Questions
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 $8 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-rate of 35% on its pretax income, what effect will the advertising for the new pen have on its taxes?
A) It will increase taxes by $8 million.
B) It will increase taxes by $2.8 million.
C) It will have no effect on taxes.
D) It will reduce taxes by $2.8 million.
Q2) To evaluate a capital budgeting decision, it is sufficient to determine its consequences for the firm's earnings.
A)True
B)False
Q3) What are sunk costs?
Q4) Why does the option to abandon a project have value?
Q5) How do we handle interest expense when making a capital budgeting decision?
Q6) What do you understand by break-even analysis?
Q7) If available, should MACRS be preferred to straight-line depreciation?
Q8) If available, should MACRS be preferred to straight-line depreciation?
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Chapter 10: Stock Valuation: a Second Look
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Q1) Which of the following is NOT an advantage of the valuation multiple method as compared to the discounted cash flow method?
A) calculations based upon widely available information
B) based upon actual stock prices of real firms
C) does not rely on estimates of future cash flows
D) takes into account important differences between different firms
Q2) Gonzales Corporation generated free cash flow of $88 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 10%. After that time, the company's free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is 12% and Gonzales Corporation has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is Gonzales Corporation's expected terminal enterprise value in year 2?
A) $1384.24
B) $1245.82
C) $1107.39
D) $968.97
Q3) What additional adjustments are required to find the share price, in case we are using the discounted cash flow model?
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Page 12
Chapter 11: Risk and Return in Capital Markets
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Q1) The risk premium of a stock is NOT affected by its ________.
A) undiversifiable risk
B) typical risk
C) systematic risk
D) unsystematic risk
Q2) Which of the following investments offered the lowest overall return over the past eighty years?
A) small stocks
B) Treasury bills
C) S&P 500
D) corporate bonds
Q3) Suppose the quarterly arithmetic average return for a stock is 10% per quarter and the stock gives a return of 15% each over the next two quarters. The arithmetic average return over the six quarters is ________.
A) 15.17%
B) 11.67%
C) 12.83%
D) 16.33%
Q4) Which type of investment has historically had the highest volatility?
Q5) What are the two components of realized return from a stock investment?
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Chapter 12: Systematic Risk and the Equity Risk Premium
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Q1) What role does the standard deviations of two assets play in computation of the expected return of the two asset portfolio?
Q2) Stocks tend to move together if they are affected by ________.
A) company specific events
B) common economic events
C) events unrelated to the economy
D) idiosyncratic shocks
Q3) The price of Microsoft is $25 per share and that of Apple is $50 per share. The price of Microsoft increases to $36 per share after one year and to $41 after two years. Also, shares of Apple increase to $56 after one year and to $66 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio return over year 1 and year 2? Assume no dividends are paid.
A) 21.53%, 14.67%
B) 22.67%, 16.30%
C) 24.93%, 18.75%
D) 22.21%, 18.26%
Q4) How does the S&P 500 index rank in terms of number and market capitalization of U.S. public firms?
Q5) Is it possible for a stock to have high total risk but low systematic risk?
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Chapter 13: The Cost of Capital
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Q1) Assume JUP has debt with a book value of $20 million, trading at 120% of par value. The bonds have a yield to maturity of 7%. The firm's book value of equity is $16 million, and it has 2 million shares trading at $19 per share. The firm's cost of equity is 12%. What is JUP's WACC if the firm's marginal tax rate is 35%?
A) 10.03%
B) 9.12%
C) 9.57%
D) 7.29%
Q2) Which of the three costs-debt, preferred stock and common equity-is most difficult to estimate?
Q3) Assume General Motors has a weighted average cost of capital of 10%. GM is considering investing in a new plant that will save the company $30 million over each of the first two years, and then $25 million each year thereafter. If the investment is $150 million, what is the net present value (NPV) of the project?
A) $65.2 million
B) -$76.1 million
C) -$86.9 million
D) $108.7 million
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Chapter 14: Raising Equity Capital
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Q1) Equity investors in a private company usually plan to realize a return on their investment by selling their stock when that company is acquired by another firm or sold to the public in a public offering.
A)True
B)False
Q2) Which of the following statements regarding best efforts IPOs is FALSE?
A) For smaller IPOs, the underwriter commonly accepts the deal on this basis.
B) The underwriter does not guarantee that the stock will be sold, but instead tries to sell the stock for the best possible price.
C) Often these arrangements have an all-or-none clause: either all of the shares are sold in the IPO, or the deal is called off.
D) If the entire issue does not sell out, the underwriter is on the hook.
Q3) What are some of the advantages of going public?
Q4) Newly listed firms tend to perform relatively poorly in the three to five years after their IPOs.
A)True
B)False
Q5) What are some of the highlights of Google's IPO process?
Q6) How does IPO pricing puzzle financial economists?
Page 16
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Chapter 15: Debt Financing
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Q1) Clearview Corporation, a company that deals mainly with the financing and distribution of music, issues debt with a maturity of 15 years. In the case of bankruptcy, holders of this debt will have claim to the intellectual property of Clearview. Which of the following best describes this type of corporate debt?
A) a note
B) a debenture
C) a mortgage bond
D) an asset-backed bond
Q2) A company issues a callable (at par) ten-year, 6% coupon bond with annual coupon payments. The bond can be called at par in one year after release or any time after that on a coupon payment date. On release, it has a price of $104 per $100 of face value. What is the yield to call of this bond when it is released?
A) 0.60%
B) 1.50%
C) 1.92%
D) 5.47%
Q3) What are notes?
Q4) What are secured debt?
Q5) What are the implications of stronger bond covenants?
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Chapter 16: Capital Structure
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Q1) When a firm's investment decisions have different consequences for the value of equity and the value of debt, managers may take actions ________.
A) to increase debt values
B) to decrease costs of distress
C) that benefit shareholders at the expense of debt holders
D) to reduce fixed costs
Q2) What considerations should managers have while deciding on firms' capital structure?
Q3) A firm will give a one-time cash flow of $24,000 after one year. If the project risk requires a return of 10%, what is the levered value of the firm with perfect capital markets?
A) $17,454.55
B) $26,181.82
C) $21,818.18
D) more information needed
Q4) What are some implications of market imperfections?
Q5) What are direct costs of financial distress?
Q6) What are the issues in determining the optimal leverage for a firm?
Q7) What are indirect costs of financial distress?
Page 18
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Chapter 17: Payout Policy
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Q1) What is the effect on the stock price when a firm repurchases its shares?
Q2) Omicron Technologies has $60 million in excess cash and no debt. The firm expects to generate additional free cash flows of $48 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Omicron's unlevered cost of capital is 10% and there are 12 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $60 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock. Including its cash, Omicron's total market value is closest to ________.
A) $432.00 million
B) $648.00 million
C) $1080.00 million
D) $540.00 million
Q3) When a firm offers to buy its shares at a pre specified price during a short time period it is also known as a(n) ________.
A) open market repurchase
B) tender offer
C) targeted repurchase
D) greenmail
Q4) What are the different ways a firm can repurchase shares?
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Chapter 18: Financial Modeling and Pro Forma Analysis
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Q1) Total working capital rather than changes in working capital has implications for cash flows.
A)True
B)False
Q2) Calgary Doughnuts had sales of $300 million in 2007. Its cost of sales were $200 million. If sales are expected to grow at 15% in 2008, compute the forecasted costs using the percent of sales method.
A) $210 million
B) $215 million
C) $225 million
D) $230 million
Q3) A services firm does all its business in cash only. The firm projects a cash balance of $3,000 in its account after all taxes and costs are paid. The owners plan to invest $8,000 and pay a dividend of $1000. How much net new financing is needed?
A) $4,000
B) $5,000
C) $6,000
D) $7,000
Q4) How do we compute net new financing?
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Chapter 19: Working Capital Management
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Q1) The amount of cash a firm holds to counter the uncertainty surrounding its future cash needs is known as a(n) ________.
A) speculative balance
B) compensating balance
C) operating balance
D) precautionary balance
Q2) Which of the following statements is FALSE?
A) The aging schedule is also sometimes augmented by analysis of the payments pattern, which provides information on the percentage of monthly sales that the firm collects in each month after the sale.
B) Because accounts receivable days can be calculated from the firm's financial statement, outside investors commonly use this measure to evaluate a firm's credit management policy.
C) If the aging schedule gets "top-heavy"-that is, if the percentages in the upper half of the schedule begin to increase, the firm will likely need to revisit its credit policy.
D) Seasonal sales patterns may cause the number calculated for the accounts receivable days to change depending on when the calculation takes place.
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Chapter 20: Short-Term Financial Planning
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Q1) What is the average and maximum maturity of commercial paper?
Q2) A firm has a committed line of credit with a maximum of $2.5 million and an interest rate of 9% (EAR) with a certain bank. The commitment fee is 0.65% (EAR). The firm borrows $2 million at the start of the year, and then repays it at the end of the year. What is the total cost of the loan?
A) $180,000
B) $183,250
C) $193,000
D) $212,500
Q3) Stuart Mining is offered a $4,000,000 line of credit for three months at an APR of 6%. The bank requires that the firm keep an amount equal to 10% of the loan principal in an account with the bank as long as the loan remains outstanding. This account pays 2% APR with quarterly compounding. What is the actual three-month interest paid on this loan?
A) 1.6%
B) 6.6%
C) 12.6%
D) 14.6%
E) 60.9%
Q4) What do we understand by negative cash flow shocks?
Page 22
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Chapter 21: Option Applications and Corporate Finance
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Q1) Suppose that a stock sells at a price of $60 on the expiration date. Compute the payoff to the seller of a put option if the option strike price is $20.
A) -$20
B) -$10
C) 0
D) $40
Q2) Suppose that a stock sells at a price of $40 on the expiration date. Compute the price of a put option if the option strike price is $20.
A) $0
B) $10
C) $20
D) $30
Q3) ________ options allow the holder to exercise the option only on the expiration date.
A) Canadian
B) American
C) European
D) None of the above
Q4) What is a put option?
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Chapter 22: Mergers and Acquisitions
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Q1) For a hostile takeover to succeed, the acquirer must appeal to the target shareholders; this is usually done through ________.
A) a tender offer and a proxy fight
B) a tender offer and a poison pill
C) a white knight and a proxy fight
D) a staggered board and a white knight
Q2) Which of the following questions is FALSE?
A) Any acquirer shares received in full or partial exchange for target shares triggers an immediate tax liability for target shareholders.
B) In a friendly takeover, the target board of directors supports the merger, negotiates with potential acquirers, and agrees on a price that is ultimately put to a shareholder vote.
C) How the acquirer pays for the target affects the taxes of both the target shareholders and the combined firm.
D) If the acquirer purchases the target assets directly (rather than the target stock), then it can step up the book value of the target's assets to the purchase price.
Q3) What is a white knight?
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Chapter 23: International Corporate Finance
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Q1) What is a currency forward contract?
Q2) ________ is a term used to describe the transfer of profits from a foreign subsidiary to the home country.
A) Repatriation
B) Depreciation
C) Privatization
D) Reversion
Q3) You are a U.S. investor who is trying to calculate the present value (PV) of £15 million cash inflow that will occur one year from now. The spot exchange rate is $1.5742/£ and the forward rate is F<sub>1</sub> = $1.5682/£. The appropriate dollar discount rate for this cash flow is 1.05% and the appropriate £ discount rate is 1.45%. What is the present value of the dollar cash inflow computed by first converting the £ into dollars and then discounting the dollars?
A) $23,275,505
B) $23,186,792
C) $23,278,575
D) $23,367,640
Q4) How are exchange rates quoted in the Wall Street Journal?
Q5) What are the timings of the foreign exchange market?
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Chapter 24: Leasing
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Q1) The lease is treated as a capital lease (financial lease) for the lessee and must be listed on the firm's balance sheet if it satisfies any of the following conditions EXCEPT:
A) The lease contains an option to purchase the asset at its fair market value.
B) The present value of the minimum lease payments at the start of the lease is 90% or more of the asset's fair market value.
C) The title to the property transfers to the lessee at the end of the lease term.
D) The lease term is 75% or more of the estimated economic life of the asset.
Q2) A lease that gives the lessee the option to purchase the asset at its fair market value at the termination of the lease is called a ________.
A) fair market value cap lease
B) fair market value lease
C) $1.00-out lease
D) fixed price lease
Q3) In the chapter, the lease versus buy decision was called an unfair comparison. Why? What is the correct comparison?
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Chapter 25: Insurance and Risk Management
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Q1) Luther Industries needs to borrow $50 million in cash. Currently long-term AAA rates are 9%. Luther can borrow at 9.75% given its current credit rating. Luther is expecting interest rates to fall over the next few years, so it would prefer to borrow at the short-term rates and refinance after rates have dropped. Luther management is afraid, however, that its credit rating may fall which could greatly increase the spread the firm must pay on new borrowings. How can Luther benefit from the expected decline in future interest rates without exposure to the risk of the potential future changes to its credit ratings bring?
Q2) To protect the firm against the loss of earnings if the business operations are disrupted due to fire, accident, or some other insured peril a firm would purchase
A) property insurance
B) key personnel insurance
C) business liability insurance
D) business interruption insurance
Q3) What is the duration of a five-year zero-coupon bond?
A) 2.5 years
B) 1 year
C) 5 years
D) 0 years
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Chapter 26: Corporate Governance
Available Study Resources on Quizplus for this Chatper
45 Verified Questions
45 Flashcards
Source URL: https://quizplus.com/quiz/69743
Sample Questions
Q1) Which of the following is an example of an agency problem?
A) managers not working as diligently if they are not the sole owner of the business
B) the board of directors firing an incompetent manager
C) the manager owning a great deal of stock in the company
D) a corporate raider attempting to purchase the company
Q2) Which of the following statements is FALSE?
A) When the CEO is also chairman of the board, the nominating letter offering a seat to a new director comes from her. This process merely serves to reinforce the sense that the outside directors owe their positions to the CEO and work for the CEO rather than for the shareholders.
B) Over time, most of the independent directors will have been nominated by the CEO. Even though they have no business ties to the firm, they are still likely to be friends or at least acquaintances of the CEO.
C) Researchers have found the surprisingly robust result that larger boards are associated with greater firm value and performance.
D) The CEO can be expected to stack the board with directors who are less likely to challenge her.
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