Course Introduction
Business Finance
Test Preparation
Business Finance explores the fundamental principles and techniques of financial management in a corporate setting. The course covers essential topics such as financial statement analysis, time value of money, capital budgeting, risk and return, cost of capital, and financial planning. Students will learn how businesses make investment and financing decisions, manage working capital, and evaluate the financial performance of firms. Through theoretical frameworks and practical applications, this course equips students with the analytical tools necessary to understand and solve real-world financial challenges faced by modern organizations.
Recommended Textbook
Financial Management Core Concepts 2nd Edition by Raymond Brooks
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Page 2
Chapter 1: Financial Management
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Sample Questions
Q1) Which of the following is NOT an example of an equity market transaction?
A) Mary sells her shares of Apple stock.
B) Mark contacts his broker and requests a purchase of IBM bonds.
C) Sahid buys shares of a small company stock traded on the NASDAQ.
D) All of the above are equity market transactions.
Answer: B
Q2) Of the following activities, which is NOT likely to be an interaction between the financial manager and the marketing manager?
A) Costing of products
B) Setting credit policies
C) Determining that there are a sufficient number of trained workers to develop the product
D) Setting advertising budgets
Answer: C
Q3) In the lending/borrowing process, a financial intermediary function is to bear the risk that the borrower will not repay.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Financial Statements
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Sample Questions
Q1) Which of the sections below is NOT contained in the annual report?
A) Prediction of competitors' returns
B) Company highlights
C) President's letter to the shareholders
D) Description of the company's activities (usually with pictures and graphs)
Answer: A
Q2) Cash flow from assets is derived from ________.
A) cash flow from operating activities and cash flow from investing activities
B) cash flow from operating activities and cash flow from financing activities
C) cash flow from financing activities and cash flow from investing activities
D) cash flow from creditors and cash flow from investing activities
Answer: A
Q3) Stimulus Industries Inc has 2011 total current assets of $14,871,000. Last year the total current assets were equal to $12,462,000, The change in total current assets is a ________ of cash in the amount of ________.
A) source; $14,871,000
B) source; $2,409,000
C) use; $2,409,000
D) There is not enough information to answer this question.
Answer: C
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Chapter 3: The Time Value of Money Part 1
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Sample Questions
Q1) You need $32,000 at the end of 6 years. If you can earn 0.625% per month, how much would you need to invest today to meet your objective?
A) $17,600
B) $18,319
C) $20,735
D) $20,433
Answer: D
Q2) If your bank offers a 5% annual rate of return compounded annually, then at the end of one year your $1.00 deposit would grow by $0.05 to $1.05. However, in the second year, your deposit would increase by $0.0525 to a total ending value of $1.1025. Explain why the second year earns more interest on the investment than the first year.
Answer: The student should understand that in the second and subsequent years the investment is earning interest on the interest already earned in the earlier period, as well as interest on the initial principal. Thus, in each period the $1.00 initial investment earns $0.05 and in the second year the interest earned on the interest is ($0.05) (.05) = .$0.0025.
Q3) Compare and contrast the discount rate with the compound (or growth) rate. Answer: 11ea6dfa_8f0d_f735_8816_eff4860aa601_TB2644_00
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Chapter 4: The Time Value of Money Part 2
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Sample Questions
Q1) You have just won the Reader's Digest lottery of $5,000 per year for twenty years, with the first payment today followed by nineteen more start-of-the-year cash flows. At an interest rate of 5%, what is the present value of your winnings?
A) $100,000.00
B) $65,426.60
C) $62,311.05
D) $47,641.18
Q2) Present values and interest rates are inversely related. This means that if you deposit $1,000 into an interest-earning account today, it will take longer to reach a future value of $5,000 at an interest rate of 6% than at a rate of 4%.
A)True
B)False
Q3) Given positive equal annual cash flows and a positive interest rate, the future value of an annuity will be greater than the sum of the cash flows.
A)True
B)False
Q4) Discuss the nature and importance of the TVM equation.
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Chapter 5: Interest Rates
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Sample Questions
Q1) The ________ compensates the investor for the additional risk that the loan will not be repaid in full.
A) default premium
B) inflation premium
C) real rate
D) interest rate
Q2) The risk-free rate (for the three-month U.S. Treasury bill) in the United States has varied from slightly under 1% to a high of 15% in the period from 1950 to 1999.
A)True
B)False
Q3) Suppose you invest $1,000 today, compounded quarterly, with the annual interest rate of 5.00%. What is your investment worth in one year?
A) $1,025.00
B) $1,500.95
C) $1,025.27
D) $1,050.95
Q4) What does the historical record of interest rates and inflation in the United States look like?
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Chapter 6: Bonds and Bond Valuation
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Sample Questions
Q1) When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value.
A) coupon rate, premium over B) coupon rate, discount to C) time to maturity, discount to D) time to maturity, same price as
Q2) The ________ is the written contract between the bond issuer and the bondholder.
A) debenture
B) sinking fund
C) indenture
D) corpus
Q3) If a bond is selling at a premium above the par value, that means that the yield to maturity is greater than the coupon rate.
A)True
B)False
Q4) Zero-coupon bonds are priced at deep discounts.
A)True
B)False
Q5) Describe the relationship between the yield to maturity and the coupon rate of a bond.
8
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Chapter 7: Stocks and Stock Valuation
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Sample Questions
Q1) In a stream of past dividends, the initial dividend is $0.75 and the most recent dividend is $1.25. The number of years between these two dividends (n) is 8 years. What is the average growth rate during this eight-year period? Use a calculator to determine your answer.
A) 6.59%
B) 6.62%
C) 6.69%
D) 6.72%
Q2) Which of the following statements is FALSE?
A) Preferred stock usually has a stated or par value but unlike bonds, this par value is not repaid at maturity because preferred stocks do not have a maturity date.
B) The only time the par value of preferred stock would be paid to the shareholder is if the company ceases operations or retires the preferred stock.
C) Skipped preferred dividends become a liability of the company.
D) Preferred stock cannot be converted into common stock.
Q3) Define treasury shares, distinguishing between treasury shares and outstanding shares. Is a company limited in treasury shares that it may own? Briefly explain.
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Chapter 8: Risk and Return
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Sample Questions
Q1) Assume the following information about the market and JumpMasters' stock. JumpMasters' beta = 1.50, the risk-free rate is 3.50%, the market risk premium is 10.0%.
Using the SML, what is the expected return for JumpMasters' stock?
A) 7.50%
B) 13.50%
C) 18.50%
D) 27.00%
Q2) Which of the following investments is considered to be default risk-free?
A) Currency options
B) AAA rated corporate bonds
C) Common stock
D) Treasury bills
Q3) Robert invested in stock and received a positive return over a 9-month period. Which of the following types of returns will be greater?
A) Holding period return (HPR)
B) Effective annual return
C) Annual percentage rate
D) There is not enough information to make a definitive choice.
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Chapter 9: Capital Budgeting Decision Models
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Sample Questions
Q1) Find the Modified Internal Rate of Return (MIRR) for the following series of future cash flows, given a discount rate of 11%: Year 0: -$22,000; Year 1: $5,000; Year 2: $6,000; Year 3: $7,000; Year 4: $7,500; and, Year 5: $8,000.
A) About 12.13%
B) About 12.88%
C) About 13.04%
D) About 13.12%
Q2) Corbett and Sullivan Enterprises (CSE) use the Modified Internal Rate of Return (MIRR) when evaluating projects. CSE's cost of capital is 9.5%. What is the MIRR of a project if the initial costs are $10,200,000 and the project lasts seven years, with each year producing the same after-tax cash inflows of $1,900,000?
A) About 7.95%
B) About 8.01%
C) About 8.24%
D) About 8.88%
Q3) Name and describe three key observations that we can make about the capital budgeting decision.
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11
Chapter 10: Cash Flow Estimation
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Sample Questions
Q1) When a depreciable asset is sold, a tax gain or tax loss on disposal is calculated, based on the book value of the asset at the time of disposal. If a ________ has occurred, a ________ is recorded.
A) gain, tax credit
B) gain, tax reduction
C) loss, tax credit
D) loss, tax increase
Q2) Churchill Ltd. purchases an asset for $150,000. This asset qualifies as a five-year recovery asset under MACRS with the fixed depreciation percentages as follows: year 1 = 20.00%; year 2 = 32.00%; year 3 = 19.20%; year 4 = 11.52%. Churchill has a tax rate of 35%. If the asset is sold at the end of four years for $40,000, what is the cash flow from disposal?
A) $36,089
B) $35,072
C) $34,931
D) $33,678
Q3) Operating Cash Flow (OCF) = EBIT + Depreciation + Taxes.
A)True
B)False
Q4) Briefly describe MACRS depreciation.
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Chapter 11: The Cost of Capital
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Sample Questions
Q1) Use the dividend growth model to determine the required rate of return for equity. Your firm intends to issue new common stock. Your investment bankers have determined that the stock should be offered at a price of $20.00 per share and that you should anticipate paying a dividend of $0.75 in one year. If you anticipate a constant growth in dividends of 3.00% per year and the investment banking firm will take 8.00% per share as flotation costs, what is the required rate of return for this issue of new common stock?
A) 6.83%
B) 7.08%
C) 7.19%
D) 10.20%
Q2) You have learned how to use NPV and IRR to evaluate projects as part of a capital budgeting decision-making process. How is WACC used in each of these capital-budgeting processes?
Q3) Unused capital budget funds are assumed to earn the same rate of return as the average IRR of accepted projects.
A)True
B)False
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Chapter 12: Forecasting and Short-Term Financial Planning
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Sample Questions
Q1) The amount of sales a company predicts is a function of two types of data. Which of the types below is one of these two types?
A) Accounting data
B) Internal data
C) Rationing data
D) Legal data
Q2) A line of credit is a secured bank loan whereby the bank agrees to lend a company up to a specific amount of cash, at the discretion of the company. In other words, it is just a pre-arranged loan.
A)True
B)False
Q3) One method a company may handle a cash shortfall is to draw cash from savings. A)True B)False
Q4) Name three things that a pro forma income statement can tell us.
Q5) Products, but not services, need to be available to customers at the time customers need them.
A)True
B)False
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Chapter 13: Working Capital Management
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Sample Questions
Q1) The time between when a raw material is ordered and received and when it is paid for is called the cash conversion cycle.
A)True
B)False
Q2) Perfect Purchase Electronics Selected Income Statement Items, 2009
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Perfect Purchase Electronics
Selected Balance Sheet Accounts 12/31/2009 12/31/2008 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
Using the information provided, what is the collection cycle for the firm?
A) 6.84 days
B) 7.60 days
C) 10.34 days
D) 12.41 days
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Page 15
Chapter 14: Financial Ratios and Firm Performance
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Q1) The debt-to-equity ratios for Firm 1, Firm 2, Firm 3, and Firm 4 are 0.2, 0.3, 0.35, and 0.4, respectively. The earnings per share for Firm 1, Firm 2, Firm 3, and Firm 4 are $4, $3, $2.5, and $2, respectively. Everything else equal, which firm is placing more burdens on its borrowing?
A) Firm 1
B) Firm 2
C) Firm 3
D) Firm 4
Q2) ________ is the percentage of sales dollars that reaches net income on the common-size statements.
A) The return on assets
B) The income margin
C) The profit margin
D) The return on equity
Q3) If the stock price is $20, earnings per share is $1, and the earnings growth rate is 5%, then the PEG ratio is four.
A)True
B)False
Q4) Name and describe two primary financial statements produced by a company.
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Chapter 15: Raising Capital
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Q1) ________ bankruptcy calls for a company to cease business, sell remaining assets, and distribute the proceeds as governed by a bankruptcy court.
A) Reorganization
B) Chapter 11
C) Chapter 7
D) None of the above
Q2) Citizens' Bank of Business commercial loans are currently posted as having an 8.50% APR, with monthly payments due over a three-year period. If your firm takes out a $25,000 loan, what is the monthly payment, and what is the EAR? Use a financial calculator to determine your answer.
Q3) Amalgamated Appliance Inc has planned a 3-month issue of commercial paper with a face value of $25,000,000. The paper is set to sell at 98.5% of face value. What is the discounted selling price of the firm's commercial paper?
A) $25,000,000
B) $25,325,000
C) $24,625,000
D) $24,300,000
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Page 17
Chapter 16: Capital Structure
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Q1) In a perfect financial world, a company's value is dependent on its capital structure.
A)True
B)False
Q2) Capital structure refers to how the firm finances its operations and growth through a combination of ________.
A) equity types
B) security types
C) types of earnings
D) types of debt
Q3) Investors Al and Bea lend $100,000 to each new idea. Al's history is that he selects low-risk projects or ideas that hit 50% of the time. Bea's history is that she takes on high-risk projects that hit 20% of the time. What rate of return must each successful project pay Al and Bea for them to break even?
A) Al's rate is 200% and Bea's rate is 450%.
B) Al's rate is 100% and Bea's rate is 400%.
C) Al's rate is 200% and Bea's rate is 400%.
D) Al's rate is 450% and Bea's rate is 100%.
Q4) Why is financial leverage attractive?
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Page 18
Chapter 17: Dividends, Dividend Policy, and Stock Splits
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Q1) Which of the following is NOT a common bondholder covenant?
A) Dividends cannot be paid unless there is sufficient cash to cover the next coupon payment.
B) Dividends may be prohibited above a certain percentage of current earnings.
C) If the firm has insufficient cash to cover required coupon payments, shareholders will pay interest directly from their own accounts on a pro rata basis.
D) All of the above are common bondholder covenants.
Q2) Reverse splits are used when
A) firms decide to divide the company's stock into a fewer number of outstanding shares.
B) firms want to change directions in product development.
C) firms are reversing complex derivative security contracts.
D) None of the above
Q3) Which of following is a reason for a high-dividend-payout policy?
A) Dividends are generally taxed at a lower rate than capital gains.
B) All investors prefer high dividend payments over low dividend payments.
C) Cash payments today are preferred over uncertain payments in the future.
D) More cash is left in the company for investing in company projects.
Q4) List and describe three reasons for a low-dividend-payout policy.
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Chapter 18: International Financial Management
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Sample Questions
Q1) The euro was introduced as a physical currency in January 2002 at an exchange rate of $1.16/ . Today, relative to that beginning value, the euro has depreciated against the United States dollar.
A)True
B)False
Q2) The current direct exchange rate is $1.2963/ . The anticipated annual inflation rate is 2% in the United States and 5% in the Euro zone. What is the forward exchange rate?
A) $1.2117/
B) $1.2593/
C) $1.3344/
D) $1.3776/
Q3) There are three basic defensive mechanisms that can guard against the extreme case of nationalized assets. Which of the mechanisms below is NOT one of these?
A) Keeping critical operations private
B) Making critical operations public
C) Financing operations with local money
D) Financing assets with local money
Q4) Describe business risk and political risk.
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Page 20