Business Finance
Test Bank
Course Introduction
Business Finance is a foundational course that explores the principles and practices involved in managing the financial resources of a business organization. The course covers key topics such as financial statement analysis, budgeting, time value of money, capital investment decisions, risk and return, and sources of financing. Students will develop an understanding of how financial data drives decision-making processes within businesses and learn to apply analytical tools to real-world scenarios. Emphasis is placed on developing skills in financial planning, investment evaluation, and working capital management, preparing students to make informed financial decisions in both entrepreneurial ventures and established corporations.
Recommended Textbook
Financial Management Principles and Applications 11th Edition by Sheridan Titman
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2091 Verified Questions
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Chapter 1: Getting Started-Principles of Finance
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87 Flashcards
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Sample Questions
Q1) Which of the following best describes the goal of the firm?
A)The maximization of the total market value of the firm's common stock
B)Profit maximization
C)Risk minimization
D)None of the above
Answer: A
Q2) In measuring value,the focus should be on:
A)cash flow.
B)accounting profits.
C)time value of money.
D)earnings per share.
Answer: A
Q3) Which of the following is NOT an advantage of the sole proprietorship?
A)Limited liability
B)No time limit imposed on its existence
C)No legal requirements for starting the business
D)None of the above
Answer: A
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3
Chapter 2: Firms and the Financial Market
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Sample Questions
Q1) Each of the following is true of Mutual Funds EXCEPT:
A)Funds can be classified as load or no-load funds.
B)Mutual Fund shares must be bought from or sold to the Fund by investors.
C)An index fund is the fund with the highest expenses payable by investors.
D)The NAV is the total value of stock held by the fund divided by the number of outstanding shares in the mutual fund.
Answer: C
Q2) Mutual Funds and ETFs provide the investor a chance to diversify without having to buy shares in numerous corporations.
A)True
B)False
Answer: True
Q3) Organized security exchanges do not physically occupy space.
A)True
B)False
Answer: False
Q4) A bond matures in less than 10 years.
A)True
B)False
Answer: False
Page 4
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Chapter 3: Understanding Financial Statements, taxes, and Cash Flows
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63 Flashcards
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Sample Questions
Q1) A & K's marginal tax rate for 2004 will be:
A)38 percent.
B)35 percent.
C)34 percent.
D)unknown because too little information is provided.
Answer: A
Q2) Which of the following is NOT considered a fixed asset?
A)Land
B)Equipment
C)Patents
D)Building Answer: C
Q3) Which of the following best represents operating income?
A)Income after financing activities
B)Earnings before interest and taxes
C)Income from capital gains
D)Income from discontinued operations
Answer: B
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Chapter 4: Financial Analysis-Sizing up Firm Performance
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114 Flashcards
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Sample Questions
Q1) 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.
Q2) In 1995,ABC's average collection period is:
A)30 days.
B)32.5 days.
C)25 days.
D)35 days.
Q3) Since 1994,ABC's liquidity has:
A)improved.
B)deteriorated.
C)remained the same.
D)been variable across components of the liquidity measures.
Q4) There is no such thing as a liquidity ratio being too high.
A)True
B)False
Q5) What is the purpose of using common size balance sheets and common size income statements?
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Chapter 5: Time Value of Money-The Basics
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Sample Questions
Q1) If you are a borrower,which of the choices would lower your APR?
A)Repay your loan in monthly installments
B)Repay your loan in quarterly installments
C)Repay your loan in semiannual installments
D)Repay your loan in annual installments
E)You would be indifferent to how frequent your loan payments are.
Q2) Earnings per share for XYZ,Inc.grew constantly from $7.99 in 1974 to $12.68 in 1980.What was the compound annual growth rate in earnings-per-share over the period?
Q3) If you put $600 in a savings account that yields an 8% rate of interest compounded weekly,what will the investment be worth in 37 weeks (round to the nearest dollar)?
A)$648
B)$635
C)$634
D)$645
Q4) The discount rate for the time value of money should reflect delaying consumption.
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) A friend of yours borrows $19,500 from the bank at 8% annually to be repaid in 10 equal annual end-of-year installments.The interest paid on this loan in year three is:
A)$1,336.01.
B)$1,560.00.
C)$2,906.11.
D)$1,947.10.
Q2) You have borrowed $70,000 to buy a sports car.You plan to make monthly payments over a 15-year period.The bank has offered you a 9% interest rate compounded monthly.Calculate the total amount of interest dollars you will pay the bank over the life of the loan.Round to the nearest dollar and assume end-of-month payments.
A)$47,451
B)$51,644
C)$54,776
D)$57,798
Q3) You have decided to invest $500 in a mutual fund today and make $500 end-of-the-year investments in the fund each year until you retire for 40 years.Assuming an opportunity cost of 12%,what do you estimate that you will have in this account at retirement?
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Chapter 7: An Introduction to Risk and Return-History of
Financial Market Returns
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Sample Questions
Q1) Why do the arithmetic average return and the geometric return differ?
Q2) Investors make different investment choices partially because individuals do not all have the same tolerance for risk.
A)True
B)False
Q3) What is the arithmetic average return of Roddy Richard's investment?
A)2.42%
B)3.96%
C)5.18%
D)15.1%
Q4) If a market has weak form efficiency,an investor can make higher than expected profits by studying the past price patterns of a stock.
A)True B)False
Q5) Investments in emerging markets have higher volatility than do U.S.Stocks. A)True
B)False
Q6) Under the efficient market hypothesis,would securities be properly priced.
9
Q7) Are markets moving toward being more efficient or toward being less efficient?
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Chapter 8: Risk and Return-Capital Market Theory
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Sample Questions
Q1) Beta is a statistical measure of:
A)hyperbolic.
B)total risk.
C)the standard deviation.
D)the relationship between an investment's returns and the market return.
Q2) The risk-return relationship for each financial asset is shown on:
A)the capital market line.
B)the New York Stock Exchange market line.
C)the security market line.
D)none of the above.
Q3) The market (systematic)risk associated with an individual stock is most closely identified with the:
A)variance of the returns of the stock.
B)variance of the returns of the market.
C)beta of the stock.
D)standard deviation of the stock.
Q4) Beta is a measurement of the relationship between a security's returns and the general market's returns.
A)True
B)False
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Chapter 9: Debt Valuation and Interest Rates
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Sample Questions
Q1) Assume that you wish to purchase a 30-year bond that has a maturity value of $1,000 and a coupon interest rate of 9.5%,paid semiannually.If you require a 6.75% rate of return on this investment,what is the maximum price that you should be willing to pay for this bond?
A)$1,111
B)$1,450
C)$1,352
D)$675
E)$1,000
Q2) Cassel Corp.bonds pay an annual coupon rate of 10%.If investors' required rate of return is now 8% on these bonds,they will be priced at:
A)par value.
B)a premium to par value.
C)a discount to par value.
D)cannot be determined from information given.
Q3) If provided the nominal rate of interest (r)of 14.2% and the anticipated rate of inflation (i)of 5.5%,what is the real rate of interest (R)?
Q4) Why are longer-term bonds more sensitive to changes in interest rates than shorter-term bonds?
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Chapter 10: Stock Valuation
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Sample Questions
Q1) Which of the following statements concerning preferred stock is correct?
A)Preferred stock generally is more costly to the firm than common stock.
B)Most issues of preferred stock have a cumulative feature.
C)Preferred dividend payments are tax-deductible.
D)Preferred stock is a riskier form of capital to the firm than bonds.
Q2) Marble Corporation's ROE is 17%.Their dividend payout ratio is 20%.The last dividend,just paid,was $2.58.If dividends are expected to grow by the company's sustainable growth rate indefinitely,what is the current value of Marble common stock if its required return is 18%?
A)$14.33
B)$18.27
C)$47.67
D)$66.61
Q3) The stock valuation model D<sub>1</sub>/(R<sub>c</sub> - g)requires R<sub>c</sub> > G.
A)True
B)False
Q4) Discuss two reasons why preferred stock would be viewed as less risky than common stock to investors.
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Chapter 11: Investment Decision Criteria
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Sample Questions
Q1) A machine has a cost of $5,575,000.It will produce cash inflows of $1,825,000 (Year 1);$1,775,000 (Year 2);$1,630,000 (Year 3);$1,585,000 (Year 4);and $1,650,000 (Year 5).At a discount rate of 16.25%,the project should be:
A)accepted.
B)rejected.
C)discounted at a lower rate.
D)abandoned after the first year.
Q2) Project H requires an initial investment of $100,000 and produces annual cash flows of $50,000,$40,000,and $30,000.Project T requires an initial investment of $100,000 and the produces annual cash flows of $30,000,$40,000,and $50,000.The projects are mutually exclusive.The company accepts projects with payback periods of 3 years or less.
A)Project H will be accepted.
B)Project T will be accepted.
C)H and T will both be accepted.
D)Neither projected will be accepted.
Q3) What is the NPV of a $45,000 project that is expected to have an after-tax cash flow of $14,000 for the first two years,$10,000 for the next two years,and $8,000 for the fifth year? Use a 10% discount rate.Would you accept the project?
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Page 13
Chapter 12: Analyzing Project Cash Flows
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Sample Questions
Q1) The machine's NPV is:
A)$1,556.56.
B)$2,556.56.
C)$1,123.99.
D)$2,123.99.
Q2) The machine's after-tax incremental cash flow in year five is:
A)$6,980.
B)$5,980.
C)$7,120.
D)$8,620.
Q3) ABC already spent $85,000 on a feasibility study for a machine that will produce a new product.The machine will cost $2,575,000.Required modifications will cost $375,000.ABC will need to invest $75,000 for additional inventory.The machine has an IRS approved useful life of 7 years;it is presumed to have no salvage value.It will only be operated for 3 years,after which it will be sold for $600,000.What is the total investment amount required for the machine?
A)$3,025,000
B)$2,950,000
C)$2,575,000
D)$2,350,000
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Chapter 13: Risk Analysis and Project Evaluation
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103 Flashcards
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Sample Questions
Q1) Boulangerie Bouffard expects to sell 1 million croissants next year for $1.25 each.Variable cost of a croissant is $0.75.Fixed costs are $150,000,depreciation $200,000 and the tax rate is 25%.If the bakery can increase the price of a croissant to $1.50 and all other variables remain the same,free cash flow will increase by ________.
A)$37,500
B)$150,000
C)$187,500
D)$250,000
Q2) List at least four typical value drivers that could seriously impact the outcome of a project.
Q3) Which of the following is a real option with respect to a capital budgeting decision?
A)A call option on the company's stock.
B)A put option on securities sold to finance the project.
C)An option to expand the scale of the project.
D)An option to purchase that will be used for the manufacturing facility.
Q4) In reality,anticipated cash flows are only estimates and are thus uncertain.
A)True
B)False
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Page 15
Chapter 14: The Cost of Capital
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Sample Questions
Q1) The firm financed completely with equity capital has a cost of capital equal to the required return on common stock.
A)True
B)False
Q2) The cost of newly issued common stock is greater than the current cost common equity because of:
A)capital gains taxes on retained earnings.
B)flotation costs on newly issued common stock.
C)capital gains taxes on newly issued common stock.
D)all of the above
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) Why is it important to use market-based weights rather than balance sheet weights when estimating a company's weighted average cost of capital
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Chapter 15: Capital Structure Policy
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Sample Questions
Q1) The Tradeoff theory of capital structure suggests that if a firm moves from zero debt in its capital structure to moderate usage of debt,the result is an increase in a firm's:
A)stock price.
B)cost of equity.
C)dividend payout.
D)both A and C.
Q2) Briefly explain what the empirical evidence suggests about financial managers' actions as they relate to the capital structure theory.
Q3) The total interest obligation will be:
A)$105,000 under alternative I and $9,000 under alternative II.
B)$9,000 under alternative I and $105,000 under alternative II.
C)zero under alternative I and $96,000 under alternative II.
D)$105,000 under both alternative I and alternative II.
Q4) Under what conditions are shareholders likely to incur agency costs when managers make capital budgeting decisions?
Q5) What is meant by the terms "favorable" and "unfavorable" leverage?
Q6) 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) Information asymmetry takes into account the higher stock price that can be achieved due to certainty from the accessibility of information between management and investors.
A)True
B)False
Q2) Kelly owns 10,000 shares in McCormick Spices,which currently has 500,000 shares outstanding.The stock sells for $86 on the open market.McCormick's management has decided on a 2-1 split.
a.Will Kelly's financial position alter after the split,assuming that the stocks will fall proportionately?
b.Assuming only a 35% fall on each stock,what will be Kelly's value after the split?
Q3) Noblesville Auto Supply Company's stock is trading ex-dividend at $5 per share.The company just paid a 10% stock dividend.The P/E ratio for the stock is 10.What was the price of the stock prior to trading ex-dividend?
Q4) We typically expect to find rapidly growing firms to have high payout ratios.
A)True
B)False
Q5) Compare the Stable Dividend Payout to the Residual Dividend Policy.
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Chapter 17: Financial Forecasting and Planning
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Sample Questions
Q1) Miller Metalworks had sales in November of $60,000,in December of $40,000,and in January of $80,000.Miller collects 40% of sales in the month of the sale and 60% one month after the sale.Calculate Miller's cash receipts for January.
A)$44,000
B)$56,000
C)$64,000
D)$72,000
Q2) A budget is a forecast of future events.
A)True
B)False
Q3) What is the most important ingredient in developing a firm's financial plan?
A)A forecast of sales revenues
B)Determining the amount of dividends to pay shareholders
C)Projecting the rate of interest on proposed new debt
D)Deciding upon which method of depreciation a firm should utilize
Q4) The percentages used in the percent-of-sales method comes from pro forma financial statements.
A)True
B)False
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Chapter 18: Working Capital Management
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Sample Questions
Q1) If Quick Corp.foregoes the discount and pays for its purchases according to the terms of its trade credit,what is Quick's effective cost of using this source of credit?
A)26.67%
B)31.48%
C)36.73%
D)51.32%
Q2) A firm will borrow $1 million for six months on a discount basis.The annual interest rate on the loan is 12%.What is the annual percentage cost of the loan?
A)11.00%
B)12.77%
C)13.00%
D)14.23%
Q3) Commercial paper offers the borrower the same flexibility that exists when bank credit is used to meet financing needs.
A)True
B)False
Q4) Describe the differences between secured and unsecured short-term credit.
Q5) Discuss the advantages of using commercial paper.
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Chapter 19: International Business Finance
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Sample Questions
Q1) Which of the following international business activities constitutes a foreign direct investment? All firms mentioned are U.S.based.
A)Yanqui Spirits imports a 1000 cases of rum from the Dominican Republic.
B)WMT Inc.opens a big-box retail facility in Nicaragua.
C)Condor University runs training sessions for Indonesian civil servants on its California Campus.
D)Merkizer Pharmaceuticals licenses an Indian company to manufacture a drug under its patents.
Q2) An important (additional)consideration for a direct foreign investment is:
A)political risk.
B)maximizing the firm's profits.
C)attaining a high international P/E ratio.
D)all of the above.
Q3) What keeps foreign exchange quotes in two different countries in line with each other?
A)Cross rates
B)Forward rates
C)Arbitrage
D)Spot rates
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Page 21
Chapter 20: Corporate Risk Management
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Sample Questions
Q1) How can a currency futures contract be used as a hedge against a potentially dramatic appreciation of a foreign currency that a U.S.company is expecting to convert into U.S.dollars?
A)The U.S.company should sell the foreign currency using futures contracts.
B)The U.S.company should buy more foreign currency futures contracts than it should sell.
C)The U.S.company should buy the foreign currency using futures contracts.
D)This is a standard business situation that would be favorable if it were to happen,so no hedge is needed.
Q2) Swenson Oil & Gas allows its customers to prepurchase heating oil in June for the coming winter.Swenson's customers who take advantage of the offer:
A)are speculating that fuel prices will be higher in the future.
B)have purchased a form of call option for heating fuel.
C)are entering into a futures contract to offset the risk of higher fuel prices during the winter.
D)are purchasing a form of insurance against fuel shortages.
Q3) Options contracts all expire on the last trading day of the month.
A)True
B)False
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Page 22