Finance for Non-Finance Majors
Exam Materials
Course Introduction
This course introduces the fundamental concepts of finance to students without a background in the subject. It covers essential topics such as financial terminology, the interpretation of financial statements, budgeting, time value of money, risk and return, and basic investment principles. Emphasizing practical application, the course equips students with the skills to make informed financial decisions in both personal and professional contexts. Through real-world examples and case studies, participants will gain confidence in understanding financial information and communicating effectively with finance professionals.
Recommended Textbook M Finance 4th Edition by Marcia Cornett
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Page 2
Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) Outside parties that monitor the firm include all of the following EXCEPT
A) credit agencies.
B) the New York Stock Exchange.
C) analysts.
D) bankers.
Answer: B
Q2) The increase in oil production in the United States characterizes which of the following key financial concepts presented in this book?
A) the Rule of 72
B) time value of money
C) risk and return
D) capital budgeting
Answer: D
Q3) Methods to minimize agency problem include all EXCEPT
A) offer the managers an equity stake in the firm.
B) award the CEO stock options.
C) allow the CEO to purchase stock via an employee stock option plan.
D) allow the CEO to purchase bonds via an employee bond option plan.
Answer: D
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Page 3
Chapter 2: Reviewing Financial Statements
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Sample Questions
Q1) Glo's Glasses balance sheet lists net fixed assets as $20 million.The fixed assets could currently be sold for $25 million.Glo's current balance sheet shows current liabilities of $7 million and net working capital of $3 million.If all the current accounts were liquidated today,the company would receive $9 million cash after paying $7 million in liabilities.What is the book value of Glo's assets today? What is the market value of these assets?
A) $10 million, $16 million
B) $10 million, $35 million
C) $30 million, $35 million
D) $30 million, $41 million
Answer: D
Q2) Which financial statement reports a firm's assets,liabilities,and equity at a particular point in time?
A) balance sheet
B) income statement
C) statement of retained earnings
D) statement of cash flows
Answer: A
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4
Chapter 3: Analyzing Financial Statements
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Sample Questions
Q1) What is the debt ratio for a firm with an equity multiplier of 3.5?
A) 44.09 percent
B) 58.51 percent
C) 66.25 percent
D) 71.43 percent
Answer: D
Q2) Common-size financial statements
A) allow for an easy comparison of balance sheets and income statements across firms in the industry.
B) provide quantitative clues about the direction that the firm is moving.
C) are obtained by dividing all income statement accounts by net sales and all balance sheet accounts by total assets.
D) All of these choices are correct
Answer: D
Q3) Which of the following activities will increase a firm's current ratio?
A) sale of inventory for a profit
B) buy equipment with a long-term bank loan
C) pay the current month's rent
Answer: A
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Page 5
Chapter 4: Time Value of Money 1: Analyzing Single Cash Flows
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Sample Questions
Q1) How much would be in your savings account in 7 years after depositing $100 today if the bank pays 5 percent interest per year?
A) $135.00
B) $140.71
C) $735.00
D) $814.20
Q2) What annual rate of return is earned on a $200 investment when it grows to $850 in 10 years?
A) 3.25 percent
B) 4.25 percent
C) 13.47 percent
D) 15.57 percent
Q3) Assume you borrow $500 from a payday lender.The terms are that you must pay a fee of $75 in advance (today)and one year from now you need to repay $750.What implied interest rate are you paying?
A) 43.09 percent
B) 55.78 percent
C) 76.47 percent
D) 81.03 percent
6
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Chapter 5: Time Value of Money 2: Analyzing Annuity Cash Flows
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Sample Questions
Q1) When saving for future expenditures,we can add the ________ of contributions over time to see what the total will be worth at some point in time.
A) present value
B) future value
C) time value to money
D) payment
Q2) When computing the future value of an annuity,the higher the compound frequency
A) the lower the future value will be.
B) the higher the future value will be.
C) the less likely the future value can be calculated.
D) the more likely the future value can be calculated.
Q3) Payday loans are very short-term loans that charge very high interest rates.You can borrow $500 today and repay $550 in two weeks.What is the compound annual rate implied by this 10 percent rate charged for only two weeks?
A) 10.50 percent
B) 12.00 percent
C) 1091.78 percent
D) 110.50 percent
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Chapter 6: Understanding Financial Markets and Institutions
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Sample Questions
Q1) Which of the following is the continual increase in the price level of a basket of goods and services?
A) deflation
B) inflation
C) recession
D) stagflation
Q2) Which of the following factors cause the supply of funds curve to shift?
A) total wealth risk of the financial security
B) future spending needs
C) All of these choices are correct.
Q3) Which of the following occurs as the utility derived from an asset purchased with borrowed funds increases?
A) The willingness of market participants to borrow decreases.
B) The absolute dollar value borrowed increases.
C) At every interest rate the demand for loanable funds decrease.
Q4) Which of the following are suppliers of loanable funds?
A) households
B) government units
C) foreign investors
D) All of these choices are correct.
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Chapter 7: Valuing Bonds
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Sample Questions
Q1) Consider the following three bond quotes; a Treasury note quoted at 102.30,and a corporate bond quoted at 99.45,and a municipal bond quoted at 102.45.If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000,what is the price of these three bonds in dollars?
A) $1,002.30, $1,000, $1,000, respectively
B) $1,000, $1,000, $5,000, respectively
C) $1,002.30, $994.50, $5,012.25 respectively
D) $1,023.00, $994.50, $5,122.50, respectively
Q2) A 6.75 percent coupon bond with 13 years left to maturity can be called in two years.The call premium is one year of coupon payments.It is offered for sale at $919.75.What is the yield to call of the bond? Assume interest payments are paid semi-annually and par value is $1,000.
A) 12.14 percent
B) 7.27 percent
C) 14.54 percent
D) 8.29 percent
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Chapter 8: Valuing Stocks
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Sample Questions
Q1) ABC has a net profit margin of 4.3 percent on Sales of $12,000,000.The firm has 250,000 shares outstanding.If the firm's P/E is 16 times,how much is the stock selling for?
A) $41.72
B) $35.96
C) $25.40
D) $33.02
Q2) A stock is expected to pay a $4.00 dividend per share.The growth rate is expected to be 5 percent.If investors demand 10 percent on this stock,what is the expected price of the stock 10 years from now?
A) $94.68
B) $92.17
C) $130.31
D) $126.93
Q3) Which of these are valued as a special zero-growth case of the constant growth rate model?
A) Common stock
B) Preferred stock
C) Future dividends
D) Future stock prices
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Chapter 9: Characterizing Risk and Return
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Sample Questions
Q1) Noble stock was $60.00 per share at the end of last year.Since then,it paid a $2.00 per share dividend last year.The stock price is currently $58.If you owned 400 shares of Noble,what was your percent return?
A) 3.33 percent
B) 0 percent
C) 3.33 percent
D) 3.45 percent
Q2) The optimal portfolio for you will be:
A) the one that offers the lowest correlation.
B) the one that offers the highest returns.
C) the one that reflects the amount of risk that you are willing to take.
D) the one that offers the most diversification.
Q3) If you own 1,000 shares of Alaska Corporation at $19.95,250 shares of Best Company at $17.50,and 250 shares of Motor Company at $2.50,what are the portfolio weights of each stock?
A) Alaska = 0.1000, Best = 0.2500, Motor = 0.2500
B) Alaska = 0.4994, Best = 0.4380, Motor = 0.0626
C) Alaska = 0.7996, Best = 0.1754, Motor = 0.0250
D) Alaska = 0.1995, Best = 0.1750, Motor = 0.0250
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Page 11
Chapter 10: Estimating Risk and Return
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Sample Questions
Q1) The annual return on the S&P 500 Index was 12.4 percent.The annual T-bill yield during the same period was 5.7 percent.What was the market risk premium during that year?
A) 5.7 percent
B) 6.7 percent
C) 12.4 percent
D) 18.1 percent
Q2) Which of the following is NOT a necessary condition for an efficient market?
A) many buyers and sellers
B) no prohibitively high barriers to entry
C) free and readily available information available to all participants
D) no trading or transaction costs
Q3) Which of the following is most correct?
A) In an efficient market, investors will buy overvalued stock which will drive its price down.
B) In an efficient market, investors will sell undervalued stock which will drive its price down.
C) In an efficient market, investors will sell overvalued stock which will drive its price down.
D) none of these choices are complete.
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Chapter 11: Calculating the Cost of Capital
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Sample
Questions
Q1) ADK has 30,000 15-year 9 percent annual coupon bonds outstanding.If the bonds currently sell for 111 percent of par and the firm pays an average tax rate of 36 percent,what will be the before-tax and after-tax component cost of debt?
A) 7.74 percent; 4.95 percent
B) 7.91 percent; 5.06 percent
C) 8.05 percent; 5.15 percent
D) 9 percent; 5.76 percent
Q2) Carrie D's has 6 million shares of common stock outstanding,2 million shares of preferred stock outstanding,and 10 thousand bonds.If the common shares are selling for $15 per share,the preferred shares are selling for $28 per share,and the bonds are selling for 109 percent of par,what would be the weight used for equity in the computation of Carrie D's WACC?
A) 33.33 percent
B) 57.36 percent
C) 61.64 percent
D) 75.00 percent
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Chapter 12: Estimating Cash Flows on Capital Budgeting Projects
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Sample Questions
Q1) Suppose you sell a fixed asset for $10,000 when its book value is $2,000.If your company's marginal tax rate is 35 percent,what will be the effect on cash flows of this sale (i.e.,what will be the after-tax cash flow of this sale)?
A) $2,800
B) $7,200
C) $5,200
D) $6,500
Q2) A manufacturing firm is planning on expanding its existing operations.The expansion project is significant and will require the firm to house the expansion in a different location.The firm is considering building on a lot they own across town.The lot is currently vacant and it was paid for nearly 20 years ago.Given this information,which of the following statements is correct?
A) The lot is not an incremental cash flow because it is not being utilized at this time.
B) The lot is an incremental cash flow because it represents an opportunity cost.
C) The lot is an incremental cash flow because it represents a sunk cost.
D) The lot is not an incremental cash flow because it has already been paid for.
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Chapter 13: Weighing Net Present Value and Other Capital
Budgeting
Criteria
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Sample Questions
Q1) Which of the following is a capital budgeting technique that converts a project's cash flows using a more consistent reinvestment rate prior to applying the Internal Rate of Return,IRR,decision rule?
A) Discounted payback
B) Net present value
C) Modified internal rate of return
D) Profitability index
Q2) A graph of a project's ________ is a function of cost of capital.
A) internal rate of return
B) net present value
C) modified internal rate of return
D) all choices are a function of cost of capital
Q3) Which of these is a capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows?
A) Discounted payback
B) Net present value
C) Internal rate of return
D) Profitability index
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Chapter 14: Working Capital Management and Policies
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Sample Questions
Q1) What must the rate be less than to be worth it to incur a compensating balance of $2,000 in order to get a 2 percent lower interest rate on a one-year,pure discount loan of $50,000?
A) The rate must be less than 48 percent.
B) The rate must be greater than 48 percent.
C) The rate must be greater than 48 percent.
D) The rate must be less than 48 percent.
Q2) "The net amount of current assets that the firm has to fund,above and beyond those that someone else funds for them" is referred to as:
A) net working capital.
B) excess capacity.
C) safety stock.
D) unfunded assets.
Q3) If a firm has a cash cycle of 10 days and an operating cycle of 43 days,what is its average payment period?
A) 10
B) 33
C) 43
D) 53
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Page 16