Finance for Business Exam Bank
Course Introduction
Finance for Business provides students with a comprehensive understanding of the fundamental concepts and tools necessary for effective financial decision-making in a business environment. The course covers key topics such as financial statement analysis, capital budgeting, risk and return assessment, time value of money, and sources of business financing. It emphasizes the application of financial principles to real-world situations, enabling students to analyze financial information, develop strategic financial plans, and contribute to the financial health and growth of an organization. Through practical cases and exercises, students will develop the critical thinking skills needed to address complex financial challenges in various business settings.
Recommended Textbook
Fundamentals of Corporate Finance Third Canadian Edition by Jonathan Berk
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Page 2
Chapter 1: Corporate Finance and the Financial Manager
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Sample Questions
Q1) Whose interests should a financial manager consider paramount when making a decision?
A)the stockholders who have risked their money to become owners of the company
B)the employees and associated stakeholders who are employed by the company
C)the public who consume the company's goods and services
D)the senior management and associated colleagues at the executive level within the company
E)the financial manager's own interests
Answer: A
Q2) Using the above information,how much would you pay for a share of BHP Billiton stock?
A)$41.91
B)$41.93
C)$41.65
D)$41.59
E)$41.54
Answer: B
Q3) What is the principal guiding factor for the financial manager?
Answer: Maximizing shareholder wealth is the paramount guiding factor for the financial manager.
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) Consider the above Income Statement for Xenon Manufacturing.All values are in millions of dollars.Calculate the operating margin for 2014 and 2015.What does the change in the operating margin between these two years imply about the company?
A)The efficiency of Xenon Manufacturing has significantly risen between 2014 and 2015.
B)The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them rose between 2014 and 2015.
C)The efficiency of Xenon Manufacturing has significantly fallen between 2014 and 2015.
D)The leverage of Xenon Manufacturing fell slightly between 2014 and 2015.
E)The revenues available to equity holders fell slightly between 2014 and 2015.
Answer: C
Q2) Shareholders' equity is the difference between a firm's assets and liabilities,as shown on the statement of financial position.
A)True
B)False
Answer: True
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4
Chapter 3: The Valuation Principle: the Foundation of Financial Decision Making
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Q1) Why should interest rates be generally positive?
Answer: An investor should be compensated for forgoing current consumption and,everything else remaining the same,a positive interest rate serves to compensate the investor.
Q2) You see on Kijiji that a used XBOX One sells for $100 and a new XBOX One sells for $300.Is this an arbitrage opportunity?
A)No.,because the market for a used XBOX One is not the same as the market for a new XBOX One.
B)No,because the market for a used XBOX One is a competitive market.
C)Yes,because the market for a used XBOX One is a competitive market.
D)Yes,because the market for a used XBOX One is not the same as the market for a new XBOX One.
E)No,because Kijiji is not a competitive market.
Answer: A
Q3) Explain why a dollar today is worth more than a dollar tomorrow.
Answer: A dollar today can be invested to earn interest,which will make it worth more than a dollar tomorrow.
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Page 5
Chapter 4: The Time Value of Money
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Q1) Trial and error is the only way to compute the internal rate of return (IRR)when interest is calculated over five or more periods.
A)True
B)False
Q2) You are interested in purchasing a new automobile that costs $35,000.The dealership offers you a special financing rate of 6% APR (0.5%)per month for 48 months.Assuming that you do not make a down payment on the auto and you take the dealer's financing deal,then your monthly car payments would be closest to:
A)$729
B)$822
C)$842
D)$647
E)$789
Q3) When the net present value (NPV)of an investment is positive,the benefits exceed the costs and the investment should be made.
A)True
B)False
Q4) Why must a growing perpetuity have a growth rate less than the discount rate?
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Chapter 5: Interest Rates
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Q1) The present value (PV)of receiving $1000 per year with certainty at the end of the next three years is closest to:
A)$2737
B)$2723
C)$2733
D)$2744
E)$3000
Q2) You decide to take out a car loan at 4.5% APR for 60 months.If your monthly payments are $512.68,what is the price of your car?
A)$30,000
B)$10,581
C)$30,761
D)$32,145
E)$27,500
Q3) How are interest and return of principal handled in an amortizing loan payment?
Q4) When there are large numbers of people looking to save their money and there is little demand for loans,one would expect interest rates to be high.
A)True
B)False
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Chapter 6: Bonds
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Q1) Suppose Alex purchases a 10-year,zero-coupon bond with a yield to maturity of 7.5% and face value of $10,000.If he sold it 3 years later,what would be the rate of return of his investment,given that the yield to maturity is now 6%?
A)7.72%
B)6%
C)1.5%
D)11.08%
E)13.5%
Q2) How are the cash flows of a coupon bond different from an amortizing loan?
Q3) Assuming that this bond trades for $1035.44,then what is the YTM for this bond?
Q4) What care,if any,should be taken regarding the timing of the cash flows while drawing the timeline and associated cash flows of a coupon bond?
Q5) A bond is said to mature on the date when the issuer repays its notional value.
A)True
B)False
Q6) Prior to its maturity date,the price of a zero-coupon bond is its face value.
A)True
B)False
Q7) Why do bond traders typically quote bond yields rather than bond prices?
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Chapter 7: Valuing Stocks
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Sample Questions
Q1) The net present value (NPV)of a stock is calculated by discounting cash flows arising from this stock using the risk-free interest rate.
A)True
B)False
Q2) Tarmac Airlines has 115 million shares outstanding and expects earnings at the end of this year of $370 million.Tarmac plans to pay out 40% of its earnings as a dividend and 20% of its earnings through share repurchases.The firm has an equity cost of capital of 8%.If Tarmac' earnings are expected to grow by 3% per year and these payout rates remain constant,what is Tarmac's share price?
A)$38.61
B)$24.13
C)$64.35
D)$25.74
E)$16.09
Q3) In an efficient market,investors will only find positive-NPV trading opportunities if they have some form of competitive advantage over other investors.
A)True
B)False
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Chapter 8: Investment Decision Rules
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Sample Questions
Q1) A janitorial services firm is considering two brands of industrial vacuum cleaner to equip their staff.Option A will cost $1500,will require servicing of $200 per year,and last five years.Option B will cost $1000,require servicing of $100 per year,and last three years.If the cost of capital is 8%,which is the better option,given that the firm has an ongoing requirement for vacuum cleaners?
A)Option A,since it has a lower equivalent annual annuity.
B)Option B,since it has a lower equivalent annual annuity.
C)Option A,since it has a greater equivalent annual annuity.
D)Option B,since it has a greater equivalent annual annuity.
E)Both options have the same equivalent annual annuity.
Q2) The net present value (NPV)of project B is closest to:
A)12.6 B)23.3
Q3) Why is the internal rate of return (IRR)inadequate when comparing mutually exclusive investments with different timing of the cash flows?
Q4) What is the general shape of the net present value (NPV)profile?
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Chapter 9: Fundamentals of Capital Budgeting
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Sample Questions
Q1) A textile company invests $12 million in an open-end spinning machine.The machine belongs to asset class 43 and has a capital cost allowance (CCA)rate of 30%.If the company sold it immediately after the end of year 3 for $8 million,what would be the present value of the lost CCA tax shields from the sale of this asset,given a tax rate of 40%,and a cost of capital of 12%?
A)$654,336
B)$928,910
C)$1,452,613
D)$1,626,926
E)$2,285,714
Q2) An analysis that breaks the net present value (NPV)calculation into its component assumptions and shows how the net present value (NPV)varies as one of the underlying assumptions changes is called:
A)scenario analysis.
B)internal rate of return (IRR)analysis.
C)accounting break-even analysis.
D)sensitivity analysis.
E)EBIT break-even analysis.
Q3) What is the most important function of sensitivity analysis?
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Page 11
Chapter 10: Risk and Return in Capital Markets
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Sample Questions
Q1) IGM Realty had a price of $30,$30,$35,$33,and $25 at the end of the last five quarters.If IGM pays a dividend of $2 at the end of each quarter,what is the annual realized return on IGM?
A)8.61%
B)7.6%
C)7.10%
D)8.09%
E)8.24%
Q2) Suppose you invested $55 in CIBC stock one month ago.Today,it paid a dividend of $0.35,and then you sold it for $56.25.What was the return on your investment?
A)2.9%
B)2.3%
C)2.2%
D)2.8%
E)1.6%
Q3) The risk that inflation rates are likely to increase in the next year is an example of common risk.
A)True
B)False
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Page 12
Chapter 11: Systematic Risk and the Equity Risk Premium
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Sample Questions
Q1) You have invested $5,000 in RBC stock,$12,000 in TD stock,and $18,000 in WestJet stock.If you expect the return on RBC to be 4% in the next year,the return on TD to be 5%,and the return on WestJet to be 6%,what is the expected return for your portfolio?
A)5.4%
B)5%
C)4.8%
D)6%
E)5.2%
Q2) The Capital Asset Pricing Model (CAPM)says that the excess return on a stock is equal to its beta times the market risk premium.
A)True
B)False
Q3) The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:
A)8%
B)9%
C)11%
D)6%
E)7%
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13
Chapter 12: Determining the Cost of Capital
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Q1) What is the assumption about risk when using WACC to evaluate a project?
Q2) Internal financing is more costly than external financing because of issuance costs.
A)True
B)False
Q3) The fact that the after-tax cost of debt is lower than the pretax cost of debt implicitly assumes that interest expense can be:
A)deducted.
B)margined.
C)refinanced.
D)salvaged.
E)ignored.
Q4) A firm's sources of financing,which usually consists of debt and equity,represent its: A)total assets.
B)capital.
C)total liabilities.
D)current liabilities.
E)current assets.
Q5) What is the assumption about leverage when using WACC to evaluate a project?
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Chapter 13: Risk and the Pricing of Options
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Q1) A call option on a stock has an exercise price of $12.15.If the stock price at expiration is $11,what is the option payoff for a short call position?
A)$-11
B)$11
C)$1.15
D)-$1.15
E)$0
Q2) Assume you want to sell 20 call option contracts with an exercise price closest to being at-the-money and that expires January 2011.The current price that you would receive for such a contract is:
A)$4500
B)$2600
C)$3900
D)$4000
E)$3500
Q3) What are American options?
Q4) When is an option in-the-money?
Q5) When is an option out-the-money?
Q6) What is the short position of an options contract?
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Chapter 14: Raising Equity Capital
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Q1) Which of the following best describes a firm commitment IPO?
A)The underwriter purchases the entire issue at a small discount and then resells it at the offer price.
B)The underwriter sells new issues directly to the public in an online auction.
C)The underwriter tries to sell the stock for the best possible price but does not guarantee that the stock will be sold.
D)The underwriter solicits bids from investors and chooses the highest price at which there is sufficient demand to sell the entire issue.
E)The underwriter sets a deliberately low price to ensure the entire issue is sold.
Q2) Which of the following is closest to the percentage of the company owned by the founder of the company?
A)11.2%
B)12.5%
C)25.0%
D)37.5%
E)42%
Q3) What are some of the disadvantages of going public?
Q4) What is the general long-run performance of an IPO?
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Page 16
Chapter 15: Debt Financing
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Q1) Which of the following statements regarding bond covenants is most accurate?
A)If the issuer fails to live up to any covenant,the issuer goes into bankruptcy.
B)The stronger the covenants in the bond contract,the less likely the issuer will default on the bond,and so the higher the interest rate investors will require to buy the bond.
C)Covenants are restrictive clauses in a bond contract that limit the issuer from taking actions that may undercut its ability to repay the bonds.
D)Bond agreements seldom contain covenants that restrict the ability of management to pay dividends.
E)Equity holders try to include as few covenants as possible in a bond agreement.
Q2) Which of the following terms best describes a credit commitment for a specific time period which a company can use as needed?
A)a term loan
B)a revolving line of credit
C)a syndicated bank loan
D)a private placement
E)an asset-backed line of credit
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17
Chapter 16: Capital Structure
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Q1) Assume that MM's perfect capital markets conditions are met and that you can borrow and lend at the same 5% rate as With.You have $5000 of your own money to invest and you plan on buying With stock.Using homemade (un)leverage,how much do you need to invest at the risk-free rate so that the payoff of your account will be the same as a $5000 investment in Without stock?
A)$5000
B)$0
C)$2500
D)$4000
E)-$5000 (borrow $5000)
Q2) An unlevered firm currently has a value of $100 million.The firm has a tax rate of 30%.The firm wishes to replace $50 million of its equity with $50 million of permanent debt.What is the value of the levered firm if it goes ahead with this plan?
A)$115 million
B)$100 million
C)$50 million
D)$150 million
E)$85 million
Q3) What is the capital structure of a firm?
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Page 18
Chapter 17: Payout Policy
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Q1) Including its cash,Omicron's total market value is closest to:
A)$500 million
B)$900 million
C)$400 million
D)$450 million
E)$300 million
Q2) The Record Date falls before the Ex-Dividend Date.
A)True
B)False
Q3) Different investor groups have differing dividend policy preferences that create clientele effects in which dividend policy of a firm is optimized for its investors.
A)True
B)False
Q4) What is the effect on the stock price when a firm repurchases its shares?
Q5) What is the bird-in-the-hand fallacy in dividend theory under perfect capital markets?
Q6) What is greenmail?
Q7) What are the characteristics of special dividend?
Q8) Why do firms issue stock dividends or split their stock?
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Chapter 18: Financial Modelling and Pro Forma Analysis
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Q1) Kendo Corp.is projecting sales of $15 million in the coming year.If the size of the market is $50 million,and Kendo's projected market share is 25%,what is the average sale price of its products?
A)$0.60
B)$0.83
C)$1.00
D)$1.20
E)$1.85
Q2) Compute the after-tax interest expense for a firm with Interest on Excess Cash = $2000,Interest on Debt = $7000,and a tax rate of 30%.
A)$2500
B)$2800
C)$3100
D)$3500
E)$3900
Q3) One of the shortcomings of the percent of sales method is that it does not account for the fact that capacity changes are lumpy and not incremental.
A)True
B)False
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Chapter 19: Working Capital Management
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Q1) Gencom International has inventory days of 12,and accounts receivable days of 33.If its cash conversion cycle is 21 days,what is Gencom's accounts payable days?
A)0 days
B)30 days
C)12 days
D)66 days
E)24 days
Q2) Effective inventory management builds up assets through increases in inventory and thus increases a firm's value.
A)True
B)False
Q3) What are the three reasons why a firm holds cash?
Q4) What are the advantages of holding inventory?
Q5) The difference between a firm's operating cycle and its cash cycle is:
A)its account receivable days.
B)its accounts payable days.
C)its inventory days.
D)how inventory is calculated.
E)how sales are calculated.
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Chapter 20: Short-Term Financial Planning
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Q1) In which quarter(s)are Fancy's seasonal working capital needs the smallest?
A)1
B)2
C)3
D)4
E)3 and 4
Q2) In which quarter(s)are Hasbeen's seasonal working capital needs the greatest?
A)4
B)2
C)3
D)1
E)1 and 2
Q3) Since permanent working capital is invested in short-term assets,it should be financed with short-term sources of funds.
A)True
B)False
Q4) What are commitment fees and what effect does it have on the loan?
Q5) How can positive cash flow shocks affect short-term financing needs?
Q6) What are loan origination fees and what effect does it have on the loan?
Q7) How does seasonality lead to short-term financing needs?
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Chapter 21: Risk Management
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Q1) The ability of a firm to pass on cost increases to its customers or revenue decreases to its suppliers is known as:
A)a natural hedge.
B)vertical integration.
C)adverse selection.
D)operating insurance.
E)supply management.
Q2) To insure their assets against hazards such as fire,storm damage,vandalism,earthquakes,and other natural and environmental risks,firms commonly purchase:
A)key personnel insurance.
B)business liability insurance.
C)business interruption insurance.
D)property insurance.
E)damage insurance.
Q3) Adverse selection is a market friction that raises the cost of insurance.
A)True
B)False
Q4) What is business interruption insurance?
Q5) What is adverse selection?
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Chapter 22: International Corporate Finance
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Q1) A ________ exchange rate means that the rate changes constantly depending on the quantity supplied and demanded for the currency.
A)fixed B)floating
C)banded
D)pegged
E)spot
Q2) A Canadian firm is planning to make an investment in Europe.The firm estimates that the project will generate a single cash flow of 200,000 euros after one year.If the one year forward exchange rate is 1.34 CAD/EUR,and the Canadian cost of capital is 6%,what is the PV of the project cash flow?
A)$252,830
B)$158,209
C)$140,805
D)$188,679
E)$268,000
Q3) What is covered interest parity?
Q4) When would a firm be affected by exchange rate risk?
Q5) Why might firms prefer hedging with options rather than forward contracts?
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Chapter 23: Leasing
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Q1) For a lease in which the lessor bears the risk of the residual value,why does the lease improve incentives and lower agency costs when the lessor is the manufacturer of the asset?
Q2) Consider the above balance sheet for your firm (in thousands of dollars).You plan on acquiring some new equipment using a $700,000 operating lease.If you go through with the lease,what will be the change in your firm's debt-equity ratio?
A)0.44
B)0.56
C)0
D)0.80
E)1.69
Q3) What is a lease-equivalent loan?
Q4) Calculate the monthly lease payments for a four-year $1.00 out lease of the bulldozer.
Q5) Calculate the monthly lease payments for a four-year fixed price lease that allows the lessee to buy the Bulldozer at the end of the lease for $8,000.
Q6) What is the difference between an operating lease and a finance lease?
Q7) What is the difference between a true tax lease and a non-tax lease?
Page 25
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Chapter 24: Mergers and Acquisitions
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Q1) Mayo Corporation is currently trading at $30 per share.There are 10 million shares outstanding and the company has no debt.You believe that the value of the company would increase by 50% if the management were replaced.How much would you need to offer in total to acquire 50% of Mayo's shares?
A)$300 million
B)$150 million
C)$100 million
D)$10 million
E)$50 million
Q2) The merger of two companies in the same industry that make products required at different stages of the production cycle is called:
A)economies of scope.
B)vertical integration.
C)economies of scale.
D)horizontal integration.
E)efficiency gains.
Q3) What is a poison pill,and how does it prevent a hostile takeover?
Q4) If Martin pays no premium to acquire Luther,what will the earnings per share be after the merger?
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Chapter 25: Corporate Governance
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Q1) Activist investors can only achieve their goals by putting their issues to a shareholder vote.
A)True
B)False
Q2) The conflict of interest that arises when a shareholder who has a controlling interest in multiple firms moves profits away from companies in which he has relatively less cash flow rights toward firms in which he has relatively more cash flow rights is called:
A)expropriation.
B)earnings management.
C)tunnelling.
D)profit mining.
E)cash extraction.
Q3) One way for families to gain control over firms,even when they do not own more than half the shares,is to issue:
A)dual class shares.
B)more debt.
C)more equity.
D)restricted shares.
E)commercial paper.
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Page 27