Essentials of Finance Practice Questions
Course Introduction
Essentials of Finance provides a foundational understanding of financial principles and practices that underpin decision-making in business and personal contexts. The course explores key topics such as time value of money, financial statement analysis, budgeting, investment fundamentals, risk management, and the role of financial markets. Students will learn to interpret financial data, evaluate investment opportunities, and understand the ethical and regulatory environment of finance. By integrating theoretical concepts with real-world applications, the course equips students with the critical skills required for effective financial planning and resource management.
Recommended Textbook
Principles of Finance 6th Edition by Scott Besley
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17 Chapters
1889 Verified Questions
1889 Flashcards
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Page 2
Chapter 1: An Overview of Finance
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42 Verified Questions
42 Flashcards
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Sample Questions
Q1) Throughout the twentieth century, the banking industry has often been the subject of a great deal of regulation, much of which has placed banks at a competitive disadvantage compared with other financial institutions in the United States and other banks throughout the world.
A)True
B)False
Answer: False
Q2) Which of the following are NOT factors that have made the trend toward globalization mandatory for many businesses?
A) Lower trade barriers
B) Demand for high-quality, low-cost products
C) Increased volatility of exchange rates for foreign currency
D) Increased development costs
E) Improvements in transportation and communications.
Answer: C
Q3) Managerial finance refers to analysis and management of one's investment portfolio.
A)True
B)False Answer: False
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Chapter 2: Financial Assets Instruments
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111 Flashcards
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Sample Questions
Q1) As with common stock, preferred stock always has a par value, and also, like common stock, the par value is unimportant in the event of liquidation.However, the preferred stock dividend does depend on the par value and the dividend is usually stated as a percentage of par.
A)True
B)False
Answer: False
Q2) A French firm is buying $1,000,000 of optical cable from a firm in the United States.The French firm will pay for the cable in thirty days.To protect itself from changes in the exchange rate between the Euro and dollar, the French firm enters into a futures contract to purchase $1,000,000 at a price of $1.25/ .How many Euros will it cost the French firm to purchase $1,000,000 using the futures contract?
A) 125,000,000
B) 2,500,000
C) 1,250,000
D) 1,000,000
E) 800,000
Answer: E
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Page 4
Chapter 3: Financial Markets and the Investment Banking Process
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47 Verified Questions
47 Flashcards
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Sample Questions
Q1) If you purchase stock from a firm conducting a seasoned equity offering, this transaction will take place in ____ markets and ____ markets.
A) capital; primary
B) capital; secondary
C) money; primary
D) money; secondary
Answer: A
Q2) ____ efficiency states that all information contained in past price movements only is fully reflected in the current market prices.
A) Weak-form
B) Semistrong-form
C) Strong-form
D) Economic
Answer: A
Q3) A prospectus is a document describing a new security issue and the issuing company.
A)True
B)False
Answer: True
Page 5
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Chapter 4: Financial Intermediaries and the Banking System
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Sample Questions
Q1) The Federal Reserve System controls the money supply and is not a bank regulator.
A)True
B)False
Q2) All of the following are reasons to regulate depository institutions except A) to promote safety and soundness.
B) to affect the structure of banking.
C) to make sure banks' earnings are competitive with other financial institutions.
D) to protect the interest of consumers.
E) None of the above.
Q3) Depository institutions create money when they use their excess reserves to make loans or acquire new investments.
A)True
B)False
Q4) Goldsmiths became banks when they began to hold fractional reserves and make loans.
A)True
B)False
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Chapter 5: The Cost of Money Interest Rates
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65 Verified Questions
65 Flashcards
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Sample Questions
Q1) The nominal rate of interest is defined as the sum of the nominal risk-free rate of return and the expected inflation rate.
A)True B)False
Q2) The return realized by investors comes only from the change in value of an asset over time
A)True B)False
Q3) The price of a bond bought at a discount cannot go down in the financial markets. A)True B)False
Q4) A downward sloping yield curve is considered normal. A)True B)False
Q5) Expectations of high inflation lead to low interest rates and vice versa. A)True B)False
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Page 7
Chapter 6: Business Organizations and the Tax Environment
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96 Verified Questions
96 Flashcards
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Sample Questions
Q1) Most firms today use executive stock options, as opposed to other incentive methods, to induce management to act in the best interests of stockholders.
A)True
B)False
Q2) Although over half of all corporations select the S corporation status when filing taxes, these firms generate only around 25 percent of the total revenues provided by corporations.
A)True
B)False
Q3) Deciding upon the form of organization for a business is an important financial decision with potentially significant consequences for the future wealth of the owners.
A)True
B)False
Q4) The text makes the point that due to competitive pressures and the continuing need of firms to attract capital, most socially beneficial but cost increasing actions will have to be made mandatory by government.
A)True
B)False
Page 8
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Chapter 7: Analysis of Financial Statements
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Sample Questions
Q1) Since ROA measures the firm's effective utilization of assets (without considering how these assets are financed), two firms with the same EBIT must have the same ROA.
A)True
B)False
Q2) Other things held constant, if a firm holds cash balances in excess of their optimal level in a non-interest bearing account, this will tend to lower the firm's
A) Operating profit margin.
B) Total asset turnover.
C) Return on equity.
D) All of the above.
E) Answers b and c above.
Q3) A(n) ____ is a statement summarizing the firm's revenue and expenses over an accounting period.
A) income statement
B) balance sheet
C) statement of cash flows
D) statement of retained earnings
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Page 9
Chapter 8: Financial Planning and Control
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Sample Questions
Q1) The Price Company will produce 55,000 widgets next year.Variable costs will equal 40 percent of sales, while operating fixed costs will total $110,000.At what price must each widget be sold for the company to achieve an EBIT of $95,000?
A) $2.00
B) $4.45
C) $5.00
D) $5.37
E) $6.21
Q2) Operating costs include variable costs, depreciation and interest charges.
A)True
B)False
Q3) Which of the following is a key determinant of operating leverage?
A) Level of debt.
B) Physical location of production facilities.
C) Cost of debt.
D) Technology.
E) Capital structure.
Q4) The higher a firm's operating leverage, the higher is its business risk.
A)True
B)False
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Chapter 9: Time Value of Money
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Sample Questions
Q1) A recent advertisement in the financial section of a magazine carried the following claim: "Invest your money with us at 14 percent, compounded annually, and we guarantee to double your money sooner than you imagine." Ignoring taxes, how long would it take to double your money at a simple rate of 14 percent, compounded annually?
A) Approximately 3.5 years
B) Approximately 5 years
C) Exactly 7 years
D) Approximately 10 years
E) Exactly 14 years
Q2) At an effective annual interest rate of 20 percent, how many years will it take a given amount to triple in value? (Round to the closest year.)
A) 5
B) 8
C) 6
D) 10
E) 9
Q3) The effective annual rate of 5% compounded monthly is approximately 5.12%.
A)True
B)False
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Chapter 10: Valuation Concepts
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Sample Questions
Q1) Assume that McDonald's and Burger King have similar $1,000 par value bond issues outstanding.The bonds are equally risky.The Burger King bond has interest payments of $80 paid annually and matures 20 years from today.The McDonald's bond has interest payments of $80 paid semiannually, and it also matures in 20 years.If the simple required rate of return, r<sub>d</sub>, is 12 percent, semiannual basis, for both bonds, what is the difference in current market prices of the two bonds?
A) No difference.
B) $2.20
C) $3.77
D) $17.53
E) $6.28
Q2) A bond is more likely to be called when market interest rates decline.
A)True
B)False
Q3) If two bonds have the same maturity and the same expected rate of return, but one has a higher coupon, the price of the low coupon bond will be more affected by a given change in interest rates.
A)True
B)False
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Page 12
Chapter 11: Risk and Rates of Return
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104 Verified Questions
104 Flashcards
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Sample Questions
Q1) The risk and return characteristics of an investment should not be evaluated in isolation; instead, the risk return and return of an individual security should be analyzed in terms of how that security affects the risk and return of the portfolio in which it is held.
A)True
B)False
Q2) Which of the following statements is most correct?
A) If beta doubles, the required return doubles.
B) If a stock has a negative beta, its required return is negative.
C) Higher beta stocks have more company-specific risk, but do not necessarily have more market risk.
D) If a portfolio's beta increases from 1.2 to 1.5, its required rate of return will increase by an amount equal to its market risk premium.
E) If two stocks have the same standard deviation and the correlation coefficient between the returns of two stocks equals zero, an equally weighted portfolio of the two stocks will have a standard deviation lower than that of the individual stocks.
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13
Chapter 12: The Cost of Capital
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Sample Questions
Q1) Which of the following statements is most correct?
A) The before-tax cost of preferred stock may be lower than the before-tax cost of debt, even though preferred stock is riskier than debt.
B) If a company's stock price increases, this increases its cost of equity capital.
C) If the cost of equity capital is low enough, it may be cheaper to issue common stock than it is to finance projects with retained earnings.
D) Both a and b are correct.
E) Answers a, b, and c are all correct.
Q2) The lower the firm's tax rate, the lower will be the firm's after-tax cost of debt and WACC, other things held constant.
A)True B)False
Q3) The items in the asset section of the balance are its capital components. A)True B)False
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14
Chapter 13: Capital Budgeting
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Sample Questions
Q1) A major disadvantage of the payback period method is that it
A) Is useless as a risk indicator.
B) Ignores cash flows beyond the payback period.
C) Does not directly account for the time value of money.
D) All of the above are correct.
E) Only answers b and c are correct.
Q2) Stanton Inc.is considering the purchase of a new machine which will reduce manufacturing costs by $5,000 annually and increase earnings before depreciation and taxes by $6,000 annually.Stanton will use the MACRS method to depreciate the machine, and it expects to sell the machine at the end of its 5-year operating life for $10,000 before taxes.Stanton's marginal tax rate is 40 percent, and it uses a 9 percent required rate of return to evaluate projects of this type.If the machine's cost is $40,000, what is the project's NPV?
A) $1,014
B) $2,292
C) $7,550
D) $817
E) $5,040
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Page 15
Chapter 14: Capital Structure and Dividend Policy Decisions
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Sample Questions
Q1) Refer to Copybold Corporation.What is the difference between the EPS forecasts for Feast and Famine under the aggressive capital structure?
A) $0
B) $1.48
C) $0.62
D) $0.98
E) $2.40
Q2) The optimal capital structure is that capital structure which strikes a balance between risk and return such that the firm's stock price is maximized.
A)True
B)False
Q3) What is the single most important determinant of capital structure for a company?
A) Business risk
B) Financial risk
C) Exchange rate risk
D) Interest rate risk
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Page 16
Chapter 15: Working Capital Management
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174 Flashcards
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Sample Questions
Q1) Accruals represent a source of "free" financing in the sense that no explicit interest is paid on these funds.
A)True
B)False
Q2) The pledging of receivables differs from factoring in that, under pledging, the lender normally has recourse against the borrower.
A)True
B)False
Q3) When a firm pledges its accounts receivable, if a customer that purchased goods from the firm does not pay, the selling firm must take the loss.
A)True
B)False
Q4) Which of the following are legitimate financial reasons for holding marketable securities?
A) Expansion of inventory for the summer selling season.
B) Payment of dividends.
C) The firm just sold long-term securities.
D) All of the above.
E) Only answers a and c above.
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Chapter 16: Investment Concepts
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103 Verified Questions
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Sample Questions
Q1) An order that gives instructions to cancel the order if the price conditions are not met when the order reaches the market is called a ____ order.
A) Market
B) Stop
C) Limit
D) Day
E) Fill or kill
Q2) Investors are individuals who try to make a quick profit based on short-term market adjustments.
A)True
B)False
Q3) When an investor places a stop order, he or she is telling the broker to "stop" an order that was placed previously but hasn't been executed yet.
A)True
B)False
Q4) When the market is rising, it is called a bull market.
A)True
B)False
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Page 18
Chapter 17: Security Valuation and Selection
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Sample Questions
Q1) The economic value added (EVA) valuation method might be the most attractive valuation method because it does not require estimation of unknown factors and it ties the value creation process to changes in a firm's capital structure and changes in a firm's efficiency.
A)True
B)False
Q2) What is the expected price for the stock of a company that just paid a dividend of $3.00? The company has a dividend payout ratio of 50 percent, discount rate of 25 percent, and a P/E of 10.
A) $60.00
B) $30.00
C) $12.00
D) $45.00
E) $22.50
Q3) A business cycle is the measure of all the goods and services produced in the economy during a specific time period.
A)True
B)False
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