Essentials of Finance
Final Exam Questions
Course Introduction
Essentials of Finance introduces students to the fundamental principles and practices that underpin financial decision-making in both personal and business contexts. The course covers core topics such as financial statement analysis, time value of money, risk and return, asset valuation, capital budgeting, and basic financial markets and institutions. Students will develop a strong understanding of financial concepts, learn analytical tools for evaluating investment projects, and gain practical skills in budgeting, saving, and investment strategies that are crucial for both day-to-day financial management and long-term financial planning.
Recommended Textbook Principles of Managerial Finance 13th Edition by Lawrence J. Gitman
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Chapter 1: The Role of Managerial Finance
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Sample Questions
Q1) An effective ethics program can
A) weakened corporate value.
B) had no effect on a corporation's value
C) enhance a corporation's value.
D) be thought of as unimportant to corporate owners.
Answer: C
Q2) The part of finance concerned with design and delivery of advice and financial products to individuals, business, and government is called
A) Managerial Finance.
B) Financial Manager.
C) Financial Services.
D) none of the above.
Answer: C
Q3) Profit maximization as the goal of the firm is not ideal because A) profits are only accounting measures.
B) cash flows are more representative of financial strength.
C) profit maximization does not consider risk.
D) profits today are less desirable than profits earned in future years.
Answer: C
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Page 3
Chapter 2: The Financial Market Environment
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Sample Questions
Q1) The nonexclusive sale of either bonds or stocks to the general public is called
A) private placement.
B) public offering.
C) organized selling.
D) none of the above.
Answer: B
Q2) A public offering is the sale of a new security issue typically debt or preferred stock directly to an investor or group of investors.
A)True
B)False
Answer: False
Q3) Most businesses raise money by selling their securities in a A) public offering.
B) private placement.
C) direct placement.
D) stock exchange.
Answer: A
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Chapter 3: Financial Statements and Ratio Analysis
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Sample Questions
Q1) Ratio analysis merely directs the analyst to potential areas of concern; it does not provide conclusive evidence as to the existence of a problem.
A)True
B)False
Answer: True
Q2) Present and prospective shareholders are mainly concerned with a firm's
A) risk and return.
B) profitability.
C) leverage.
D) liquidity.
Answer: A
Q3) The higher the value of ________ ratio, the better able the firm is to fulfill its interest obligations.
A) debt
B) average collection period
C) times interest earned
D) average payment period
Answer: C
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Chapter 4: Cash Flow and Financial Planning
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Sample Questions
Q1) In the statement of cash flows, the financing flows are cash flows that result from debt and equity financing transactions, including incurrence and repayment of debt, cash inflow from the sale of stock, and cash outflows to repurchase stock or pay cash dividends.
A)True
B)False
Q2) Cash budgets and pro forma statements are useful not only for internal financial planning but also are routinely required by the Internal Revenue Service (IRS).
A)True
B)False
Q3) A firm has actual sales in November of $1,000 and projected sales in December and January of $3,000 and $4,000, respectively. The firm makes 10 percent of its sales for cash, collects 40 percent of its sales one month following the sale, and collects the balance two months following the sale. The firm's total expected cash receipts in January
A) are $700.
B) are $2,100.
C) are $1,900.
D) cannot be determined with the information provided.
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Chapter 5: Time Value of Money
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Sample Questions
Q1) Hayley makes annual end-of-year payments of $6,260.96 on a five-year loan with an 8 percent interest rate. The original principal amount was
A) $31,000
B) $30,000
C) $25,000
D) $20,000
Q2) The present value of $1,000 received at the end of year 1, $1,200 received at the end of year 2, and $1,300 received at the end of year 3, assuming an opportunity cost of 7 percent, is
A) $2,500.
B) $3,043
C) $6,516.
D) $2,856.
Q3) The future value of a $2,000 annuity due deposited at 8 percent compounded annually for each of the next 10 years is
A) $28,974.
B) $31,292.
C) $14,494.
D) $13,420.
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Chapter 6: Interest Rates and Bond Valuation
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Sample Questions
Q1) A sinking-fund requirement is a restrictive provision often included in a bond indenture providing for periodic payments representing only interest and a large lump-sum payment at the maturity of the loan representing the entire loan principal.
A)True
B)False
Q2) Convertible bonds are normally
A) debentures.
B) income bonds.
C) subordinated debentures.
D) mortgage bonds.
Q3) Based on the table 6.1, on this trading day, the number of Ford bonds which changed hands was
A) 5,100.
B) 51,000.
C) 510,000.
D) 5,100,000.
Q4) (a) Calculate the current value of Bond L. (See Table 6.2)
(b) What will happen to the value/price as the bond approaches maturity?
Q5) Explain liquidity, default risk, and maturity risk premiums.
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Chapter 7: Stock Valuation
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Sample Questions
Q1) All of the following are examples of marketable securities EXCEPT
A) common stock.
B) a Treasury bill.
C) commercial paper.
D) a negotiable certificate of deposit.
Q2) ________ is the actual amount each common stockholder would expect to receive if the firm's assets are sold, creditors and preferred stockholders are repaid, and any remaining money is divided among the common stockholders.
A) Liquidation value
B) Book value
C) The P/E multiple
D) The present value of the dividends
Q3) The free cash flow valuation model is based on the same principle as dividend valuation models; that is, the value of a share of stock is the present value of future cash flows.
A)True
B)False
Q4) Xiao Xin owns stock in a company which has paid the annual dividends shown in Table 7.1. Calculate the growth rate of these dividends.
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Chapter 8: Risk and Return
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Sample Questions
Q1) Total security risk is the sum of a security's nondiversifiable, diversifiable, systematic, and unsystematic risk.
A)True
B)False
Q2) Combining two negatively correlated assets to reduce risk is known as A) diversification.
B) valuation.
C) liquidation.
D) risk aversion.
Q3) Combining uncorrelated assets can reduce risk not as effectively as combining negatively correlated assets, but more effectively than combining positively correlated assets.
A)True
B)False
Q4) The portfolio with a standard deviation of zero ________. (See Table 8.1)
A) is comprised of Assets A and B
B) is comprised of Assets A and C
C) is not possible
D) cannot be determined
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) As the volume of financing increases, the costs of the various types of financing will ________, ________ the firm's weighted average cost of capital. A) increase, lowering B) increase, raising C) decrease, lowering D) decrease, raising
Q2) A firm has determined it can issue preferred stock at $115 per share par value. The stock will pay a $12 annual dividend. The cost of issuing and selling the stock is $3 per share. The cost of the preferred stock is
A) 6.4 percent.
B) 10.4 percent.
C) 10.7 percent.
D) 12 percent.
Q3) The cost of capital is used to decide whether a proposed corporate investment will increase or decrease the firm's stock price.
A)True B)False
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Chapter 10: Capital Budgeting Techniques
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Sample Questions
Q1) In the case of annuity cash inflows, the payback period can be found by dividing the initial investment by the annual cash inflow.
A)True
B)False
Q2) All of the following are steps in the capital budgeting process EXCEPT A) implementation.
B) follow-up.
C) transformation.
D) decision-making.
Q3) A conventional cash flow pattern is one in which an initial outflow is followed only by a series of inflows.
A)True
B)False
Q4) Net present value profiles are most useful when selecting among independent projects.
A)True
B)False
Q5) Use the IRR approach to select the best group of projects. (See Table 10.5)
Q6) Which projects should the firm implement? (See Table 10.5)
Page 12
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Chapter 11: Capital Budgeting Cash Flows
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Sample Questions
Q1) The portion of an asset's sale price that is above its book value and below its initial purchase price is called
A) a capital gain.
B) recaptured depreciation.
C) a capital loss.
D) book value.
Q2) For Proposal 3, the tax effect on the sale of the existing asset results in ________. (See Table 11.2)
A) $8,000 tax liability
B) $16,000 tax liability
C) $20,000 tax liability
D) $23,200 tax liability
Q3) Given the information in Table 11.4, compute the payback period.
Q4) The net present value of the project is ________. (See Table 11.5)
A) $3,874
B) $2,445
C) $5,614
D) $7,500
Q5) Calculate the initial investment of the new asset. (See Table 11.1)
Q6) Calculate the tax effect from the sale of the existing asset. (See Table 11.1)
Page 13
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Chapter 12: Risk and Refinements in Capital Budgeting
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Sample Questions
Q1) Simulation is a statistics-based behavioral approach that applies predetermined probability distributions and random numbers to estimate risky outcomes.
A)True
B)False
Q2) The Annualized NPV of project A is ________. (See Table 12.6)
A) $22,673
B) $12,947
C) $38,227
D) $21,828
Q3) The danger that an unexpected change in the exchange rate between the dollar and the currency in which a project's cash flows are denominated can increase the market value of that project's cash flow.
A)True
B)False
Q4) The objective of capital rationing is to select the group of projects that provides the quickest overall payback and does not require more dollars than are budgeted.
A)True
B)False
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Chapter 13: Leverage and Capital Structure
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Sample Questions
Q1) The breakeven point in dollars can be computed by dividing the contribution margin into the fixed operating costs.
A)True
B)False
Q2) Which plan has a higher degree of financial leverage and financial risk? (See Table 13.1)
Q3) A firm has fixed operating costs of $25,000, a per unit sales price of $5, and a variable cost per unit of $3. What is its operating breakeven point if it desires net operating income of $10,000, not $0 (zero)?
A) 12,500 units
B) 15,000 units
C) 17,500 units
D) 25,000 units
Q4) The asymmetric information explanation of capital structure suggests that firms will issue new debt only when the managers believe the firm's stock is overvalued; as a result, issuing new debt is considered a negative signal that will result in a decline in share price.
A)True
B)False
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Chapter 14: Payout Policy
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Sample Questions
Q1) The clientele effect is the argument that a firm attracts shareholders whose preferences with respect to the payment and stability of dividends corresponds to the payment pattern and stability of the firm itself.
A)True
B)False
Q2) The net effect of a stock repurchase is
A) similar to the payment of a stock dividend.
B) similar to a cash dividend.
C) similar to a stock split.
D) similar to a reverse stock split.
Q3) The Jobs Growth Tax Relief Reconciliation Act of 2003 significantly changed the tax treatment of corporate dividends for most taxpayers by dropping the tax rate to the rate applicable on capital gains, which is a maximum rate of 15%.
A)True
B)False
Q4) Reverse stock splits are initiated when a stock is selling at too low a price to appear respectable.
A)True
B)False
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Chapter 15: Working Capital and Current Assets Management
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Sample Questions
Q1) In the ABC system of inventory management, the ________ method or system could be utilized to control C items.
A) basic economic order quantity
B) materials requirement planning
C) red-line
D) just-in-time
Q2) A firm has an average age of inventory of 90 days, an average collection period of 40 days, and an average payment period of 30 days. The firm's operating cycle is ________ days.
A) 110
B) 130
C) 120
D) 70
Q3) In exchange for the tailor-made maturity date provided by the repurchase agreement, the bank or security dealer provides a return slightly below that obtainable through outright purchase of similar marketable securities.
A)True
B)False
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Chapter 16: Current Liabilities Management
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Sample Questions
Q1) Commercial paper is generally issued in multiples of
A) $1,000 or more.
B) $10,000 or more.
C) $100,000 or more.
D) $1,000,000 or more.
Q2) A ________ guarantees the borrower that a specified amount of funds will be available regardless of the tightness of money.
A) revolving credit agreement
B) line of credit
C) short-term self-liquidating loan
D) single payment note
Q3) Lenders recognize that by having an interest in collateral they can reduce losses if the borrowing firm defaults,
A) and the presence of collateral reduces the risk of default.
B) but the presence of collateral has no impact on the risk of default.
C) therefore lenders prefer to lend to customers from whom they are able to require collateral.
D) therefore lenders will impose a higher interest rate on unsecured short-term borrowing.
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Chapter 17: Hybrid and Derivative Securities
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Sample Questions
Q1) Most stock purchase warrants are detachable, which means that the bondholders may sell the warrant without selling the security to which it is attached.
A)True
B)False
Q2) Because a security is first sold with a conversion price above the current market price of the firm's stock, conversion is initially not attractive.
A)True
B)False
Q3) FASB Standard No. 13 requires explicit disclosure of ________ obligation on the firm's balance sheet. For this type of lease, the present value for all of its payments is shown as an asset and the total lease payment obligation is included as a liability on the firm's balance sheet.
A) an operating lease
B) a leveraged lease
C) a sale-leaseback
D) a capital lease
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Chapter 18: Mergers, Lbos, Divestitures, and Business Failure
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Q1) When the ratio of exchange in a merger is equal to one and both the acquiring and the target companies have the same premerger earnings per share, the merged firm's earnings per share will initially
A) decline.
B) remain constant.
C) increase.
D) drop to zero.
Q2) ________ is a pro rata cash settlement of creditor claims.
A) A composition
B) A creditor control agreement
C) An extension
D) A liquidation
Q3) A takeover target's management may not support a proposed takeover due to a very high tender offer.
A)True
B)False
Q4) The synergy of mergers is the economies of scale resulting from the merged firms' lower overhead.
A)True
B)False
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Chapter 19: International Managerial Finance
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Sample Questions
Q1) In general, an international bond is one that is initially sold in the country of the borrower and, then, often distributed in several countries.
A)True
B)False
Q2) The Mercosur Group is a major South American trading bloc that includes countries that account for more than half of the total of Latin America's GDP.
A)True
B)False
Q3) Although several economic and political factors can influence foreign exchange rate movements, by far the most important explanation for long-term changes in exchange rates is fiscal policy that a country adopts.
A)True
B)False
Q4) In the international context, the nominal interest rate is the stated interest rate charged on financing when only the MNC parent's currency is involved.
A)True
B)False
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