Finance and Accounting Test Bank
Course Introduction
Finance and Accounting is an integral course that provides students with foundational knowledge and practical skills in managing financial resources and interpreting financial information. The course covers essential topics such as financial statement analysis, budgeting, cost management, investment evaluation, and the principles of financial reporting. Students will explore how organizations make financing decisions, assess risk, and comply with relevant regulations. Through case studies and real-world applications, the course equips learners to understand the language of business, make informed strategic decisions, and contribute effectively to an organizations financial health.
Recommended Textbook
Financial Management Principles and Applications 11th Edition by Sheridan Titman
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Page 2
Chapter 1: Getting Started-Principles of Finance
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Sample Questions
Q1) The owners of a corporation are liable for the corporation's obligations up to the amount of their investment.
A)True
B)False
Answer: True
Q2) Which one of the following categories of owners enjoys limited liability?
A)General partners in a limited partnership
B)Shareholders (common stock)of a corporation
C)Sole proprietors
D)Both A and B
Answer: B
Q3) In regard to the agency problem,________ are the principal owners of a corporation.
A)shareholders
B)managers
C)employees
D)suppliers
Answer: A
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Chapter 2: Firms and the Financial Market
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Sample Questions
Q1) Organized security exchanges do not physically occupy space.
A)True
B)False Answer: False
Q2) A bond matures in less than 10 years.
A)True
B)False Answer: False
Q3) A stock's market value is dependent on investors' expectations of future cash flows to the firm.
A)True
B)False Answer: True
Q4) Owners of common stock are the owners of the firm.
A)True
B)False Answer: True
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Page 4
Chapter 3: Understanding Financial Statements, taxes, and Cash Flows
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Sample Questions
Q1) Based on the information contained in Table 2,what was Bird Industries' cash balance as of December 31,1996?
A)$300
B)$400
C)$100
D)$1,100
Answer: B
Q2) Your firm has the following income statement items: sales of $50,250,000;income tax of $1,744,000;operating expenses of $10,115,000;cost of goods sold of $35,025,000;and interest expense of $750,000.What is the amount of the firm's gross profit?
A)$18,000,000
B)$15,225,000
C)$5,000,110
D)$6,632,000
Answer: B
Q3) The income statement provides a statement of results for the firm's operations.
A)True
B)False
Answer: True
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Chapter 4: Financial Analysis-Sizing up Firm Performance
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Sample Questions
Q1) Sputter Motors has sales of $3,450,000,total assets of $1,240,000,cost of goods sold of $2,550,000,and an inventory turnover of 6.38.What is the amount of Sputter's inventory?
A)$421,054
B)$638,112
C)$543,000
D)$399,687
Q2) The quick ratio is a better measure of liquidity than the current ratio if the firm has current assets composed primarily of:
A)cash.
B)work in process inventory.
C)marketable securities.
D)accruals.
Q3) Which of the following is NOT a component of operating income return on investment?
A)Total assets
B)Cost of goods sold
C)Sales
D)Taxes
Q4) Discuss the limitations of ratio analysis.
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Chapter 5: Time Value of Money-The Basics
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Sample Questions
Q1) When George Washington was president of the United States in 1797,his salary was $25,000.If you assume an annual rate of inflation of 2.5%,how much would his salary have been in 1997?
A)$1,025,000
B)$954,719
C)$2,525,548
D)$4,085,920
E)$3,489,097
Q2) The present value of $1,000 to be received at the end of five years,if the discount rate is 10%,is:
A)$621.
B)$784.
C)$614.
D)$500.
Q3) Which of the following provides the lowest return to an investor?
A)12%,compounded annually
B)12%,compounded semiannually
C)12%,compounded quarterly
D)12%,compounded monthly
E)12%,compounded daily
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Chapter 6: The Time Value of Money-Annuities and Other Topics
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Sample Questions
Q1) A compound annuity involves depositing or investing a single sum of money and allowing it to grow for a certain number of years.
A)True
B)False
Q2) A commercial bank will loan you $7,500 for two years to buy a car.The loan must be repaid in 24 equal monthly payments.The annual interest rate on the loan is 12% of the unpaid balance.What is the amount of the monthly payments?
A)$282.43
B)$390.52
C)$369.82
D)$353.05
Q3) Michael Bilkman has an opportunity to buy a perpetuity that pays $24,350 annually.His required rate of return on this investment is 14.25%.At what price would Michael be indifferent to buying or not buying the investment? Round off to the nearest $1.
A)$83,470
B)$170,877
C)$95,621
D)$121,709
Page 8
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Chapter 7: An Introduction to Risk and Return-History of
Financial Market Returns
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Sample Questions
Q1) Which of the following best measures the risk of holding an asset in isolation (i.e. ,stand-alone risk)?
A)The mean co-variance
B)The standard deviation
C)The coefficient of optimization
D)The standard asset pricing model
E)The correlation
Q2) The holding period return is always positive.
A)True
B)False
Q3) 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
Q4) The expected rate of return is the sum of each possible return times it likelihood of occurrence.
A)True
B)False
Page 9
Q5) Under the efficient market hypothesis,would securities be properly priced.
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Chapter 8: Risk and Return-Capital Market Theory
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Sample Questions
Q1) If an investor must choose between investing in either Asset X or Asset Z,then:
A)he will always choose Asset X over Asset Z.
B)he will always choose Asset Z over Asset X.
C)he will be indifferent between investing in Asset X and Asset Z.
D)none of the above.
Q2) Which of the following statements is true?
A)A stock with a beta of zero has a very low level of systematic risk.
B)A stock with a beta greater than 1.0 has lower nondiversifiable risk than a stock with a beta of 1.0.
C)A stock with a beta less than 1.0 has lower nondiversifiable risk than a stock with a beta of 1.0.
D)A stock with a beta less than 1.0 has higher nondiversifiable risk than a stock with a beta of 1.0.
Q3) A stock with a beta greater than 1.0 has lower nondiversifiable risk than a stock with a beta of 1.0.
A)True
B)False
Q4) Briefly discuss why there is no reason to believe that the market will reward investors with additional returns for assuming unsystematic risk.
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Chapter 9: Debt Valuation and Interest Rates
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Sample Questions
Q1) Six years ago,Colt,Inc.sold an issue of 30-year,$1,000 par value bonds.The coupon rate of 5.25% is payable annually.Investors presently require a rate of return of 8.375%.What is the current market price (intrinsic value)of the bonds? Round off to the nearest $1.
A)$1,050
B)$932
C)$681
D)$1,111
Q2) Which of the following is generally NOT a characteristic of a bond?
A)Voting rights
B)Par value
C)Claims on assets and income
D)Indenture
Q3) Zoro Sword Company bonds pay an annual coupon rate of 9 1/2%.They have eight years to maturity and face value,or par,of $1,000.Compute the value of Zoro bonds if investors' required rate of return is 10%.
A)$1,516.18
B)$973.33
C)$1,027.17
D)$950.00
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Chapter 10: Stock Valuation
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Sample Questions
Q1) A company may issue multiple classes of preferred stock.
A)True
B)False
Q2) The stock valuation model D<sub>1</sub>/(R<sub>c</sub> - g)requires R<sub>c</sub> > G.
A)True
B)False
Q3) Petrified Forest Skin Care,Inc.pays an annual perpetual dividend of $1.70 per share.If the stock is currently selling for $21.25 per share,what is the expected rate of return on this stock.
A)36.13%
B)12.5%
C)8.0%
D)13.6%
Q4) Preferred stock cannot be retired.
A)True
B)False
Q5) When bankruptcy occurs,the claims of the common shareholders may go unsatisfied.
A)True B)False
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Chapter 11: Investment Decision Criteria
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Sample Questions
Q1) A new forklift under consideration by Home Warehouse requires an initial investment of $100,000 and produces annual cash flows of $50,000,$40,000,and $30,000.Which of the following will not change if the required rate of return is increased from 10% to 12%.
A)The net present value.
B)The internal rate of return.
C)The profitability index.
D)The modified internal rate of return.
Q2) The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of $30,000 per year in Years 1 through 4,$35,000 per year in Years 5 through 9,and $40,000 in Year 10.This investment will cost the firm $150,000 today,and the firm's cost of capital is 10%.Assume cash flows occur evenly during the year,1/365th each day.What is the discounted payback period for this investment?
A)5.23 years
B)4.86 years
C)4.35 years
D)3.72 years
Q3) Distinguish between revenue enhancement investments,cost-reduction investments,and mandated investments.
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Page 13
Chapter 12: Analyzing Project Cash Flows
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Sample Questions
Q1) Which of the following is included in the terminal cash flow?
A)The expected salvage value of the asset
B)Tax impacts from selling asset
C)Recapture of any working capital
D)All of the above
Q2) Which of the following cash flows should be included as incremental costs when evaluating capital projects?
A)Overhead expenses that are directly related to a project
B)Interest expense that is directly related to the financing of a project
C)Sunk costs that are related to a project
D)Principal payments that are directly related to the financing of a project
Q3) The machine's after-tax incremental cash flow in year five is:
A)$6,980.
B)$5,980.
C)$7,120.
D)$8,620.
Q4) Sales captured from the firm's competitors can be relevant to the capital-budgeting decision.
A)True
B)False
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Chapter 13: Risk Analysis and Project Evaluation
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Sample Questions
Q1) When Charles River Publisher's sales revenue increased from $25 million to $27.5 million,net operation income increased from $3,750,000 to $3,937,500.Quineboag's degree of operating leverage (DOL)is ________.
A).5
B)2
C)6.67
D).05
Q2) Tennessee Fried Chicken is evaluating a proposal to open a fast food restaurant in Westphalia.The restaurant will cost $14.5 million to open.Expected cash flows are $4 million per year for the first five years.At the end of 5 years,the government of Westphalia will either revoke TFC's permit and the restaurant will close,or renew the permit indefinitely.In that case,assume that the $4 million turns into a perpetuity.There is a 30% chance the permit will be revoked and a 70% chance it will be renewed.Compute the expected NPV of the project.Use a discount rate of 12%.
A)$18.83 million
B)($.08 million)
C)$13.16 million
D)$9.43 million
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Page 15
Chapter 14: The Cost of Capital
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Sample Questions
Q1) The proportion of debt in this firm's capital structure is:
A)40%.
B)50%.
C)60%.
D)70%.
Q2) The preferred stock of Wells Co.sells for $15.30 and pays a $1.75 dividend.What is the cost of capital for preferred stock?
Q3) Why are market values preferred to book (balance sheet)values when computing a firm's weighted average cost of capital.
Q4) The firm financed completely with equity capital has a cost of capital equal to the required return on common stock.
A)True
B)False
Q5) Why is it important to use market-based weights rather than balance sheet weights when estimating a company's weighted average cost of capital
Q6) Briefly identify and describe some important uses of a firm's weighted average cost of capital.
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Page 16
Chapter 15: Capital Structure Policy
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Sample Questions
Q1) The Modigliani and Miller Capital Structure Theorem suggests that the cost of equity decreases as financial leverage increases.
A)True
B)False
Q2) The EBIT-EPS indifference point,sometimes called the break-even point,identifies the optimal range of financial leverage regardless of the financing plan chosen by the financial manager.
A)True
B)False
Q3) Lowell Corporation and Lawrence Corporation each have EBIT of $4 million.Lowell has no debt and no interest expense;Lawrence has $2 million in debt at a before-tax rate of 8%.The tax rate is 40%.How much cash does each firm return to its investors.
A)Lowell
$2,400,000,Lawrence $2,144,000
B)Lowell $2,400,000,Lawrence $2,240,000
C)Lowell $2,400,000,Lawrence $2,464,000
D)Lowell $2,400,000,Lawrence $2,304,000
Q4) Why is the Debt to Assets Ratio always higher than the Debt to Value ratio?
Q5) What is meant by the terms "favorable" and "unfavorable" leverage?
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Chapter 16: Dividend Policy
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Sample Questions
Q1) Fred Handel owns 2000 shares of Haydn Inc.stock which is currently selling for $18 per share.If the company repurchases 10% of its outstanding shares at $18 per share and Fred chooses not to sell any shares back to the company,
A)the value of his shares will stay the same and his percentage ownership of the company will increase by 10%.
B)his investment in the company and his percentage of ownership will stay the same.
C)his investment in the company will decrease by $3,600 and his percentage of ownership will stay the same.
D)the value of his remaining shares will stay the same and his percentage of ownership will increase by 11.11%.
Q2) If a firm were to unexpectedly omit payment of its quarterly dividend,that firm's stock price would probably drop.
A)True
B)False
Q3) When considering taxes,most investors prefer capital gains over dividend income.
A)True B)False
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Chapter 17: Financial Forecasting and Planning
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Sample Questions
Q1) What are the key questions that a strategic plan attempts to answer? How does it relate to financial plans?
Q2) The cash budget ignores discretionary financing.
A)True B)False
Q3) The projected change in retained earnings equals projected net income less any dividends to be paid.
A)True
B)False
Q4) If the firm's current fixed assets are sufficient to support the projected level of new sales,then these assets would be projected to remain unchanged for the forecast period. A)True
B)False
Q5) All of the following are found in the cash budget EXCEPT: A)a net change in cash for the period. B)inventory.
C)cash disbursements. D)new financing needed.
Q6) Discuss the basic functions that budgets perform for a firm.
Page 19
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Chapter 18: Working Capital Management
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Sample Questions
Q1) Bank Two extends a $3 million line of credit to Capital Corp.The stated rate of interest is 9.5%.Bank Two requires Capital to maintain compensating balances equal to 10% of the amount of the line.Assuming that Capital would not normally carry any deposits at the bank,what is the effective annual rate of interest on the loan?
A)9.5%
B)10.6%
C)11.6%
D)12.3%
Q2) Pledging accounts receivable as a source of short-term credit:
A)is a type of loan secured by accounts receivable.
B)is a form of spontaneous credit.
C)involves the outright sale of accounts receivable to a financial institution.
D)is an inexpensive but risky source of short-term financing.
Q3) Trade credit is an example of which of the following sources of financing?
A)Spontaneous
B)Temporary
C)Permanent
D)Both A and B
Q4) Describe the differences between secured and unsecured short-term credit.
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Chapter 19: International Business Finance
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Sample Questions
Q1) What is the role of arbitrage in the foreign exchange markets?
Q2) Because a large part of a subsidiary's equity funds comes from the parent,the subsidiary should use the same cost of equity as the parent.
A)True
B)False
Q3) Forward exchange rates:
A)reduce uncertainty about future value of currencies.
B)are always slightly lower than the spot rate.
C)reflect expectations about the future value of currencies.
D)both A and C.
Q4) The spot exchange rate for the Thai bhat is 33.135 bhat to the dollar.The Host Hotel Company will be able to repatriate profits from its luxury resort hotel in Phuket in 5 years.It has estimated the 5 year forward rate at 38 bhat to the dollar.The risk-free rate in the U.S.is 4% and Host uses an 11 % risk premium for investments of this type.If the expected accumulated profits after 5 years are 100 million bhat,what is their present value in U.S.dollars.
Q5) Assume that the interest rate in India is 10% while in Europe it is 3% and that the exchange rate is 65.50 rupees to the euro.What would we expect the 6 month exchange rate to be?
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Chapter 20: Corporate Risk Management
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Sample Questions
Q1) A seller of commodities who has entered into forward contracts with customers will profit if prices fall before the purchase is concluded.
A)True
B)False
Q2) The major risks assumed by firms include:
A)demand risk.
B)foreign-exchange risk.
C)operational risk.
D)all of the above.
Q3) A firm agrees to accept payments on a $1,000,000 loan with a fixed interest rate of 8% in exchange for making the payments on a loan with floating rate payments based on LIBOR.Payments are interest only with principal due in 10 years.The firm will benefit:
A)if LIBOR falls.
B)if LIBOR rises .
C)if Libor remains unchanged.
D)if LiIBOR fluctuates randomly.
Q4) What is the general rule that firms should follow when deciding how much risk to assume?
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