Entrepreneurial Finance Review Questions
Course Introduction
Entrepreneurial Finance explores the key financial concepts and tools necessary for launching, managing, and growing new business ventures. The course focuses on understanding sources of funding, financial planning, valuation, deal structuring, and risk management specific to startups and early-stage companies. Students will analyze case studies, construct financial models, and evaluate various financing strategies from the perspectives of entrepreneurs and investors. By the end of the course, participants will be equipped to make informed financial decisions in the dynamic and uncertain environment of entrepreneurship.
Recommended Textbook Business Finance 11th Edition by Graham Peirson
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Page 2
Chapter 1: Introduction
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Q1) The market value of a company is calculated as the sum of the net assets and owners equity on the company's balance sheet:
A)True
B)False
Answer: False
Q2) When formulating financial policy,managers also have to consider the appropriate balance between:
A)receivables and payables.
B)interim and final dividends.
C)short-term and medium-term finance.
D)short-term and long-term finance.
Answer: D
Q3) The possibility that managers may pursue their own objectives rather than shareholder interests is known as the _________ problem.
Answer: agency
Q4) Owners of a sole proprietorship are protected by limited liability.
A)True
B)False
Answer: False
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Chapter 2: Consumption, Investment and the Capital Market
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Q1) An important implication of Fisher's separation theorem is that:
A)while the level of investment will depend on management decisions (independent of shareholders' wishes),shareholders will have a preference for given levels of dividend.
B)shareholders and firm management will have separate interests and directions in decisions on investment,financing and especially dividends,and these have come to be known as an agency problem.
C)the extent to which a firm should invest can be determined by a simple rule.
D)the extent of investment undertaken will determine the amount of finance to be raised,and whether that finance will be debt or equity.
Answer: C
Q2) Share prices change as a result of investors' reaction to _________ provided through investment,financing and dividend decisions made by the managers of a company.
Answer: information
Q3) In the absence of _______________ companies are unable to make decisions about dividend policy that will please all share holders.
Answer: capital markets
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Page 4
Chapter 3: The Time Value of Money: An Introduction to Financial Mathematics
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Sample Questions
Q1) The distinguishing feature of an annuity due is that the time period between the payment of each successive cash flow differs to the frequency with which the interest compounds.
A)True
B)False
Answer: False
Q2) What is the present value of $500 payable in 10 years' time if the interest rate is 6% p.a.?
A)$290.50
B)$335.60
C)$895.40
D)$279.20
Answer: D
Q3) What is the difference between daily and monthly compounding for a nominal interest rate of 7% per annum?
A)0.06%
B)0.04%
C)0.02%
D)0.01%
Answer: C
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Chapter 4: Applying the Time Value of Money to Security Valuation
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Sample Questions
Q1) The connection between term and interest rates is called:
A)interest rate risk.
B)price risk.
C)term structure of interest rates.
D)default structure of interest rates.
Q2) A company just paid a dividend of $1.20.If this is expected to increase by 3% p.a.indefinitely,and the required rate of return is 8%,then the theoretical share price is $15.
A)True
B)False
Q3) Interest rate risk refers to:
A)the risk-free rate of interest.
B)the risk premium demanded on a bond in case of default.
C)the random behaviour of past bond prices.
D)the unforeseen losses to an investor if interest rates change.
Q4) When interest rates increase,interest receipts can be rolled over into a new investment with a higher interest rate.This is known as the _____________ effect.
Q5) An increase in interest rates results in a _________ in the price of a bond.
Page 6
Q6) Once a bond has been issued,its promised future cash flows are ___________.
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Chapter 5: Project Evaluation: Principles and Methods
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Sample Questions
Q1) The net present value method of project evaluation is preferred to the internal rate of return method because:
A)the internal rate of return method may give multiple rates of return or zero rates of return in some cases,but not for mutually exclusive projects.
B)the internal rate of return method may give an inconsistent ranking due to the magnitude or timing of cash flows.
C)most projects are independent rather than mutually exclusive.
D)the internal rate of return method yields net present value profiles that do not intersect for mutually exclusive projects.
Q2) Which of the following items of information is not necessary for project evaluations?
A)The initial cash outlay.
B)The life of a project.
C)The internal rate of return.
D)The required rate of return.
Q3) The problems associated with ranking mutually exclusive projects using the internal rate of return methodology can be overcome by determining the __________ internal rate of return.
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Chapter 6: The Application of Project Evaluation Methods
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Q1) The inclusion of ______________ as cash flows in a net present value analysis would result in double counting.
Q2) Sensitivity analysis examines the effect of changing one or more ______________ to observe the effect on results.
Q3) Under the equivalent annual value method,the criterion for project acceptance is:
A)the project with the higher equivalent annual value is preferred.
B)the project with the lower equivalent annual value is preferred.
C)the project with the shorter life is preferred.
D)the project with the higher equivalent annual value is preferred,provided that both projects have the same cost of capital.
Q4) A limitation of the chain of replacement methods of project evaluation is the unrealistic assumption that replacement assets in a chain are identical.
A)True
B)False
Q5) The term ________________ is used to describe a situation where the firm is prevented,through a shortage of funds,from undertaking all acceptable projects.
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Chapter 7: Risk and Return
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Sample Questions
Q1) Claus and Thomas (2001)use forecasts by security analysts and conclude that the market risk premium is approximately:
A)2% p.a.
B)3% p.a.
C)4% p.a.
D)1% p.a.
Q2) Which of the following two investments would a risk seeker choose: Investment A with an expected outcome of $1000 and standard deviation of $500,or Investment B with an expected outcome of $1000 and standard deviation of $200?
A)Investment A because if Investment B is chosen the expected utility from the increase in spread of expected returns below $1000 outweighs the expected utility from the increase in spread of expected returns above $1000.
B)Investment A because it offers the chance of more wealth.
C)Investment A because the downside risk is greater.
D)Investment B because the downside risk is less.
Q3) Explain the key differences between the Capital Market Line and the Security Market Line.
Q4) Standard deviation is measured as the _______________ of variance.
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Page 9
Chapter 8: The Capital Market
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Sample Questions
Q1) Which of the following is not one of the four main functions of investment banks?
A)the wholesale banking operation
B)the investment management function
C)making a market in foreign exchange and derivative securities
D)regulating the stock exchange
Q2) In an ___________________ market there is no organised exchange and the market consists of financial institutions that trade with clients and each other.
Q3) Classify the following financial institutions according to whether they are financial agency institutions,financial intermediaries or investing institutions.
A)Banks
B)Superannuation funds
C)Stockbrokers
D)Insurance companies
Q4) The financing process involves a flow of funds from the:
A)savings deficit to savings surplus units.
B)savings surplus to savings deficit units.
C)primary market to secondary market.
D)central bank to the savings deficit unit.
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Chapter 9: Sources of Finance: Equity
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Sample Questions
Q1) Dill owns five per cent of the outstanding shares in Pickle Ltd,which has just announced a one for five rights issue with a subscription price of $1.90.The current 'cum rights' price for Pickle shares is $2.20.The number of outstanding shares in Pickle Ltd is 5000.Calculate the value of Dill's investment ex-rights.
A)$537.50
B)$645.00
C)$550.00
D)$615.00
Q2) Business angels only invest in mature companies with a long history of success.
A)True B)False
Q3) The closer the subscription price on a rights issue is set to the market price of the share:
A)the greater is the market value of the right.
B)the smaller is the dilution in investors' wealth.
C)the more likely that the rights issue will be fully subscribed.
D)the greater is the need to have the issue underwritten.
Q4) Following a one-for-one bonus share issue,the share price of the company should decrease by _________.
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Chapter 10: Sources of Finance: Debt
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Sample Questions
Q1) Which of the following statements with regard to factoring is true?
A)When the customer makes payment,the money initially goes to the factor,which then passes it to the company,plus a factor charge.
B)The discount charged by the factor is generally calculated at a rate approximately equal to the secured overdraft rate.
C)From the factor's viewpoint,the company accelerates its cash inflow from accounts receivable.
D)Some banks and bank subsidiaries may provide factoring.
E)None of the given options.
Q2) Which of the following permits a company to run its current account into deficit up to an agreed date?
A)Direct loan.
B)Overdraft.
C)Secured loan.
D)Short-term loan.
Q3) An interest rate swap involves an exchange of principles and interest payments.
A)True
B)False
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12
Chapter 11: Payout Policy
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Sample Questions
Q1) Assume the current share price of Company A is $4.50 and on the following day these shares will begin trading ex-dividend.If the dividend is 20 cents per share,what is the expected ex-dividend share price?
A)$4.50
B)$4.70
C)$4.30
D)$3.60
Q2) To be entitled to receive a dividend,an investor must purchase shares:
A)before the ex-dividend date.
B)after the ex-dividend date.
C)after the ex-dividend date but before the 'books closing' date.
D)before the ex-dividend date but before the 'books closing' date.
Q3) Miller and Modigliani hypothesised that dividend policy has a significant impact on shareholder wealth,as it involves a trade-off between higher or lower dividends and issuing or repurchasing ordinary shares.
A)True
B)False
Q4) A __________ share buyback is a type of buyback where offers are made to only some of the shareholders in a company.
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Chapter 12: Principles of Capital Structure
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Q1) Other things being equal,as the tax deductibility of depreciation on assets increases:
A)the firm borrows more.
B)the firm borrows less.
C)there will be no effect on the firm's borrowings.
D)the firm's effective tax rate decreases.
Q2) Arbitrage refers to:
A)the ability to make a profit.
B)the ability to make a risk-free profit resulting from mispriced securities.
C)settling of disputes between management and shareholders.
D)none of the given options.
Q3) A trade-off between the benefits of debt finance and the costs of financial distress may lead to a company increasing its debt/equity ratio because:
A)of the low probability of encountering severe financial difficulties.
B)its existing debt/equity ratio is high.
C)the expected increase in financial distress is expected to outweigh the tax benefits.
D)agency costs of equity increase as the level of debt increases.
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14
Chapter 13: Capital Structure Decisions
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Q1) A survey of financial managers by Allen (1991)found that:
A)the vast majority of Australian companies,as opposed to US companies,do not have a policy of maintaining a substantial 'cushion' of reserve borrowing capacity.
B)financial slack is valuable for all companies.
C)Australian companies,on average,have considerably more financial slack than the expansive US companies.
D)None of the given options is applicable.
Q2) Which of the following is an implication drawn from the pecking order theory:
A)Internal financing is a last resort due to shareholders' desire for current income.
B)Debt financing is a last resort due to the large direct and indirect bankruptcy costs associated with this form of financing.
C)Due to high information costs associated with riskier securities,companies will only issue equity as a last resort.
D)Managers have no preference about the form of financing they employ.
Q3) Leverage is found to be _________ related to investment opportunities,as measured by the ratio of market to book value.
Q4) Evidence from surveys of CFOs provides support to the _____________ theory.
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Chapter 14: The Cost of Capital and Taxation Issues in Project Evaluation
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Q1) If the reducing balance method is used the allowable depreciation rate is generally:
A)two times the straight-line rate.
B)2.5 times the straight-line rate.
C)three times the straight-line rate.
D)1.5 times the straight-line rate.
Q2) Which of the following statements describes a limitation of the WACC approach?
A)The WACC approach can give misleading results if it is used to analyse investment decisions rather than financing decisions.
B)There is no consensus on the taxation issues surrounding the inclusion of strategic options in the WACC approach,which can lead to incorrect inferences.
C)Has no practical application.
D)Can only be used directly for the whole company and to evaluate new projects that are identical to the company's existing operations.
Q3) For a diversified company,the use of the WACC is likely to result in incorrect investment decisions.
A)True
B)False
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Page 16
Chapter 15: Leasing and Other Equipment Finance
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Q1) The default costs of a lease agreement are often significantly higher than the default costs of other forms of debt.
A)True
B)False
Q2) Companies may seek to take advantage of differences between tax regulations of different countries through a ___________________ lease.
Q3) In a perfect capital market,investors are _____________ between leasing and buying an asset.
Q4) A loan secured by a mortgage over movable property is known as a:
A)hire-purchase agreement.
B)chattel mortgage.
C)leveraged lease.
D)sale and lease-back agreement.
Q5) A finance lease is a short-term,cancellable lease.
A)True
B)False
Q6) A leveraged lease differs from an ordinary finance lease in that it involves at least ________ parties.
Q7) In the lease contract,the party that owns the asset is called the _________.
Page 17
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Chapter 16: Capital Market Efficiency
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Q1) One weakness of the event study methodology is the difficulty in determining the instance in which information was released to the market.
A)True
B)False
Q2) If fund managers display superior investment performance,it can then be said that:
A)the market is strong-form efficient.
B)the market is not strong-form efficient but is at least semi-strong-form efficient.
C)fund managers do not use past information to derive trading strategies.
D)this evidence provides an indirect test of strong-form efficiency.
Q3) In a market that is strong form efficient,___________ information cannot be acted upon to generate abnormal returns.
Q4) Returns greater or less than those which the market expects from a security are known as:
A)inferior returns.
B)normal returns.
C)abnormal returns.
D)true returns.
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18
Chapter 17: Futures Contracts
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Q1) A futures price must be greater than or equal to the current spot price,plus the carrying cost.
A)True
B)False
Q2) A futures contract can be defined as:
A)a contract which provides something to be sold at a future date at a price decided today.
B)a contract which provides something to be sold at a future date at a price decided upon expiry of the contract.
C)a right given to a buyer to sell something at a price determined in advance.
D)a contract that expires when the object of the transaction changes hands.
Q3) The process of adjusting traders account balances to reflect changes in market prices is known as:
A)margin call.
B)marking to call.
C)marking to market.
D)spread.
Q4) The SPI 200 futures contract is only used for speculation.
A)True
B)False
Page 19
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Chapter 18: Options and Contingent Claims
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Q1) Calculate the price of a one-month European put option given the following information: the exercise price is $19,the current share price is $15 and the risk-free interest rate is 12% p.a.Furthermore,the share price is expected to be either $20 or $13 at the end of the month.Assume a risk-neutral world.
A)$2.74
B)$4.12
C)$1.82
D)$1.22
Q2) An option creates the obligation for delivery of the underlying asset at a pre-determined point of time in the future.
A)True
B)False
Q3) If the share price at the expiry of a call option is less than the exercise price,the call is worth:
A)zero.
B)the difference between the exercise price and the share price.
C)the market price of the share.
D)an undefined amount.
Q4) A convertible bond is an example of a ____________ claim.
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Chapter 19: Analysis of Takeovers
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Q1) The net cost in a cash takeover is defined as the amount of cash paid,minus the value of the target as an independent entity.
A)True
B)False
Q2) A likely shortcoming in valuing a target based on deducting total liabilities from total assets is:
A)that balance sheet figures do not represent market values.
B)intangible assets may not be included in the balance sheet.
C)there may be complementarity between assets.
D)all of the given options.
Q3) A problem with valuing a target using P/E ratios is:
A)the assumption that risk differences between the bidder and target can be captured in the discount rate.
B)the assumption that 'future maintainable earnings' can represent a company's future earnings.
C)the assumption that the risk of the target can be fully captured in the discount rate. D)all of the given options.
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21
Chapter 20: International Financial Management
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Sample Questions
Q1) You observe the following spot exchange rates:
A$1 = £0.4
A$1 = US$0.85
£1 = US$2.125
Assuming no transaction costs,an arbitrage opportunity is possible in this instance.
A)True
B)False
Q2) A _____________ loan is debt that is raised in a country other than the currency of the country in which the loan was raised.
Q3) The difference between spot and forwards rates is called the ______________.
Q4) What is the expected one-year forward exchange rate between $A (AUD)and UK pounds (GBP)that maintains interest parity if interest rates on government securities in Australia yield 5.2% p.a.and 4.6% p.a.in the UK,and the spot exchange rate is AUD 1 = GBP 0.45?
A)AUD 1 = GBP 0.4474
B)AUD 1 = GBP 0.3113
C)AUD 1 = GBP 0.4532
D)AUD 1 = GBP 0.4500
Q5) Foreign currency ___________ are a suitable way to undertake contingent hedging.
Page 22
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Chapter 21: Management of Short-Term Assets: Inventory
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Q1) The level of carrying costs incurred per year is equal to:
A)total annual carrying cost multiplied by average inventory.
B)total annual carrying cost multiplied by total number of orders.
C)annual carrying cost per unit of inventory multiplied by average number of orders.
D)annual carrying cost per unit of inventory multiplied by average inventory.
Q2) Which of the following statements is false?
A)Acquisition costs decline at a diminishing rate as the order size increases,irrespective of whether the order size is greater than the economic order quantity.
B)Carrying costs increase as the order size increases.
C)Total costs decline at a diminishing rate as the order size approaches the economic order quantity,beyond which they start to rise.
D)None of the given options.
Q3) The relevant costs to be included in the economic order quantity model are __________ costs.
Q4) Current assets are those assets that will normally be converted into cash within a ________.
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Page 23
Chapter 22: Management of Short-Term Assets: Liquid
Assets and Accounts Receivable
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Q1) Assuming that ABC Corporation runs two different departments to handle cash outflows and cash inflows,what is the cost to the company of decentralised liquidity management if $100 000 is required to purchase plant and on the same day $175 000 will be received as payment from a customer,if the time period is one month,and the borrowing and lending rates are 15 per cent and 10 per cent,respectively?
A)$1250.00
B)$208.33
C)$625.00
D)$416.67
Q2) If XYZ Ltd begins with a cash balance of $300 000 and its cash outflows exceed its inflows by $100 000 each week,what is its average weekly cash balance if,when it runs out of cash,it converts short-term securities to $300 000 cash?
A)$150 000
B)$100 000
C)$300 000
D)$133 333
Q3) The sale of a company's accounts receivable to a financial institution is known as
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