Financial Analysis and Planning
Final Test Solutions
Course Introduction
Financial Analysis and Planning explores the fundamental concepts and tools necessary for evaluating an organizations financial health and making informed business decisions. The course covers the interpretation of financial statements, ratio analysis, forecasting, and budgeting techniques. Students learn to assess profitability, liquidity, solvency, and risk, as well as to develop comprehensive financial plans that support strategic objectives. Emphasizing both quantitative analysis and critical thinking, the course prepares students to apply financial planning in real-world scenarios, contributing to the sustainable growth and success of organizations.
Recommended Textbook
Practical Financial Management 7th Edition by William R. Lasher
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19 Chapters
3308 Verified Questions
3308 Flashcards
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Page 2
Chapter 1: Foundations
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Sample Questions
Q1) Which of the following is not true regarding bonds?
A) Both principal and interest are paid to the investor
B) Bondholders are owners of the borrowing firm
C) Buying a bond means lending money
D) All of the above
Answer: B
Q2) The S-corporation was designed to address the concerns of shareholders of large, publicly traded companies that wanted to avoid the double taxation of their income.
A)True
B)False
Answer: False
Q3) The prices that investors pay for securities are determined by:
A) The collateral of the firm's liabilities and the profitability of the firm.
B) The profits of the firm and the stability of those profits.
C) What financial advisors think of the company.
D) The cash flows investors expect to receive from owning them.
Answer: D
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Chapter 2: Financial Background: a Review of Accounting, Financial Statements,
and Taxes
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Sample Questions
Q1) EBIT is a business's profit before consideration of financing charges. A)True
B)False
Answer: True
Q2) Selected accounts are listed below. How much is the firm's operating income?
\(\begin{array}{ll}
\text { Accrued payroll } & \$ 2,000 \\
\text { Sales } & 45,000 \\
\text { Cost of goods sold } & 26,000 \\
\text { Interest expense } & 1,000 \\
\text { Expenses (other than interest) } & 8,000
\end{array}\)
A) $8,000
B) $10,000
C) $9,000
D) $11,000
Answer: D
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Chapter 3: Cash Flows and Financial Analysis
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Sample Questions
Q1) If a firm has an ROA of 5% and desires an ROE of 10%, what debt-to-equity ratio will accomplish this?
A) 1.00
B) 0.50
C) 1.50
D) 2.00
Answer: A
Q2) A firm's current ratio is 1.5, and its quick ratio is 1.0. If its current liabilities are $10,000, what are its inventories?
A) $5,000
B) $10,000
C) $15,000
D) None of the above
Answer: A
Q3) Ratio analysis is of significant value in comparing the performance of a firm against its history, its budget, and its competitors.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Financial Planning
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Sample Questions
Q1) How have personal computers affected financial planning. Have they made planning something that anyone can do? Explain.
Q2) A firm is planning to increase its inventory turnover by 1.5 turns next year. This year's inventory is $40M on revenues of $850M. Revenues are planned to grow at 10% next year. The firm's cost ratio (COGS as a percent of sales) is 40%, and is not expected to change in the near future. Calculate the inventory figure that should be included in next year's plan. Calculate using the cost of goods sold (COGS) formulation of inventory turnover and using year-end balances only.
Q3) Payables are entirely due to inventory purchases at Cosmo Inc. COGS is 70% materials, and the company pays its bills in 50 days. This year's revenue is $1,000,000 and is forecast to grow by 15% next year. The cost ratio (COGS as a % of revenue) is planned at 40% next year. Forecast next year's ending payables balance.
Q4) The financial plan is especially important in:
A) predicting cash and borrowing needs.
B) designing corporate strategies.
C) structuring relations with stockholders.
D) anticipating business downturns.
Q5) Which is harder, planning for a new or an existing business? Why?
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Chapter 5: The Financial System, Corporate Governance, and Interest
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Sample Questions
Q1) Murphy Bin Ltd. granted stock options to its executive employees. Each executive received options on 10,000 shares of stock 2 years ago at an exercise price of $12 per share. The options can be exercised today at the current market price of $34.14. How much will an executive's income be this year if his salary is $1,050,000 and he exercises all of his options today?
Q2) Floor brokers:
A) trade on the floor of the stock exchange.
B) specialize and make markets in designated securities.
C) take orders for buyers and sellers, and execute transactions.
D) Floor brokers do all of these things.
Q3) An unapproved prospectus is called:
A) a red letter.
B) a saltwater investment.
C) a red herring.
D) an unapproved offering.
Q4) Money market securities are generally more liquid than capital market securities.
A)True
B)False
Page 7
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Chapter 6: Time Value of Money
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Sample Questions
Q1) A business is expected to generate the following cash flows over the next five years after which it will be dissolved. How much is the business worth today if the interest rate is 8%? \(\begin{array}{ll}
\text { Year }& \text { Cash Fiow } \\
1 & \$ 10,000 \\
2 & \$ 15,000 \\
3 & \$ 30,000 \\
4 & \$ 40,000
\end{array}\)
A) $77,615
B) $68,304
C) $75,333
D) $100,025
Q2) Interest rates are quoted by stating the ____ followed by the compounding period.
A) effective annual rate
B) nominal rate
C) yield
D) coupon rate
E) none of the above
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Chapter 7: The Valuation and Characteristics of Bonds
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Sample Questions
Q1) Call provisions usually arise when the issuing company wants the option to:
A) retire the bonds earlier than planned because it has more capital than it needs.
B) require the retirement of bonds if market interest rates rise substantially above the coupon rate.
C) retire high interest rate bonds replacing them with lower cost debt when interest rates drop.
D) refund their debt because interest rates are escalating.
Q2) An unsecured bond is referred to as a(n):
A) indenture.
B) debenture.
C) mortgage bond.
D) subordinated mortgage bond.
Q3) Which of the following statements is most correct?
A) Bonds are non-amortized debt.
B) Bonds are promissory notes and serve as legal evidence of debt.
C) Bondholders are creditors of the companies that issue the bonds.
D) Both a. and b. are correct.
E) All of the above are correct.
Q4) Why are bond ratings so important to companies?
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Chapter 8: The Valuation and Characteristics of Stock
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Sample Questions
Q1) There is a strong similarity between bonds and stocks because of the nature of the cash flows. Both bonds and stocks offer assurance of regular payments through either dividend or interest, the final sale of stock is similar to the final return of a bond's principal.
A)True
B)False
Q2) You have been offered Synergy Inc.'s preferred stock at a price of $31.50. It pays a dividend of $4.41 per year. Calculate the return on the stock.
A) 11%
B) 12%
C) 13%
D) 14%
Q3) If one expects the annual dividend to be $0.95 five years from today when the current dividend is $0.62, the annual dividend growth rate must be:
A) 9%.
B) 11%.
C) 7%.
D) 13%.
Q4) Are growth rate models such oversimplifications of reality that they're useless?
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Chapter 9: Risk and Return
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Sample Questions
Q1) The coefficient of variation is an absolute measure of variation.
A)True
B)False
Q2) Because events causing business-specific risks are random, their effects simply cancel out when added together over a substantial number of stocks. This canceling effect enables us to say that business-specific can be "diversified away."
A)True
B)False
Q3) A variance cannot be ____.
A) positive
B) zero
C) the same sign as the standard deviation
D) negative
Q4) Market risk is:
A) caused by things that affect all stocks.
B) the chance that an investor will lose money in the stock market.
C) diversified away.
D) the variance of the probability distribution.
Q5) What is the market risk premium?
Q6) Explain systematic risk and unsystematic risk.
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Chapter 10: Capital Budgeting
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Sample Questions
Q1) When the NPV and IRR methods conflict, for the most part, IRR is preferred over NPV.
A)True
B)False
Q2) Mutually exclusive projects:
A) are usually different alternatives to meeting the same need.
B) occur where the acceptance or rejection of one alternative project has no bearing on the acceptance or rejection of other projects.
C) are best analyzed by the profitability index.
D) None of the above
Q3) Which of the following can be used to make a comparison of projects with unequal lives?
A) Replacement Chain Method
B) Equivalent Annual Annuity Approach
C) Profitability Index
D) Both a & b
E) All of the above
Q4) MIRRs are generally lower and more realistic than the IRRs.
A)True
B)False
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Chapter 11: Cash Flow Estimation
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Sample Questions
Q1) The basic capital budgeting principles involved in determining after-tax incremental operating cash flows require us to:
A) include sunk costs, but ignore opportunity costs.
B) include opportunity costs, but ignore sunk costs.
C) ignore both opportunity costs and sunk costs.
D) include both opportunity and sunk costs.
Q2) In Step Video is considering expanding its video rental library to 8,000 tapes. The purchase price of the additional videos will be $80,000 and the shipping cost is another $4,000. To house the tapes, the owner will have to spend another $10,000 for display shelves, increase net working capital by $5,000, and interest expenses will add another $8,000 to the operating cost. What is the net investment to In Step Video for this project?
A) $95,000
B) $99,000
C) $84,000
D) $107,000
Q3) Sunk costs are also called opportunity or alternative costs.
A)True
B)False
Q4) Define sunk costs and explain their role in capital budgeting.
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Chapter 12: Risk Topics and Real Options in Capital
Budgeting
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Sample Questions
Q1) An abandonment option will have an upfront cost of $1.0 million. There is a 40% chance that the abandonment option would be used, in which case cash outflows of $800,000 in Year 4, $1,400,000 in Year 5 and $1,200,000 in Year 6 will be avoided. If the discount rate is 7.0%, should the abandonment option be exercised?
A) Yes because its impact on expected NPV about $101,000.
B) No because its impact on expected NPV is about ($37,000).
C) Yes because its impact on expected NPV is about $47, 600.
D) No because its impact on expected NPV is about ($23,700).
Q2) Flexibility options let companies respond more easily to changes in business conditions.
A)True B)False
Q3) The existence of an abandonment option raises a project's risk.
A)True B)False
Q4) Modern techniques are very good at incorporating risk into capital budgeting. A)True B)False
Q5) What is Monte Carlo simulation? How is it used in the capital budgeting?
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Chapter 13: Cost of Capital
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Sample Questions
Q1) The cost of retained earnings can be estimated through the ____ approach.
A) CAPM
B) dividend growth
C) MCC
D) Both a & b
E) All of the above
Q2) The dividends paid to investors are adjusted for floatation expenses to arrive at the company's cost.
A)True
B)False
Q3) The cost of capital is:
A) related to the average rate of return required by investors in the firm's securities.
B) the minimum rate of return the firm should require on capital budgeting projects of average risk.
C) approximately 10 percent for most firms.
D) a and b
Q4) The components of a firm's capital are debt, common equity, and preferred stock.
A)True
B)False
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Chapter 14: Capital Structure and Leverage
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Sample Questions
Q1) _____ analysis shows the mix of fixed and variable costs at various output levels and the volume required for zero profit/loss.
A) Income-cost
B) Breakeven
C) Operations
D) Input
Q2) The slopes of EBIT-EPS lines reflect the impact of financial leverage on the sensitivity of EPS to changes in EBIT.
A)True
B)False
Q3) The optimal capital structures can be precisely calculated with the latest technology.
A)True
B)False
Q4) In the breakeven diagram, breakeven is at the intersection of revenue and total cost.
A)True
B)False
Q5) What are the two different types of risk in the context of leverage?
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Chapter 15: Dividends
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Sample Questions
Q1) Everything else held constant, the price of a share of stock should drop by approximately the amount of the dividend on the:
A) declaration date.
B) ex-dividend date.
C) record date.
D) payment date.
Q2) Which of the following is not a direct result of a stock dividend?
A) the number of shares outstanding is increased
B) the market price of each outstanding share is increased
C) the amounts shown in the firm's capital accounts are redistributed
D) a and b
Q3) From an accounting standpoint, stock splits are accomplished by:
A) increasing the number of shares outstanding.
B) increasing par value of existing shares.
C) reducing the par value of existing shares.
D) a and c
Q4) The dividend decision also represents a decision concerning internal vs. external equity financing.
A)True
B)False
Page 17
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Chapter 16: The Management of Working Capital Multiple
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Sample Questions
Q1) Short-term loans are generally used to:
A) finance permanent additions to working capital.
B) finance additions to fixed assets.
C) finance seasonal working-capital requirements.
D) retire equity, thus changing a firm's capital structure.
Q2) Which of the following assets (if any) are not part of a firm's working capital investment?
A) Cash
B) Accounts receivable
C) Inventory
D) None of the above
Q3) Which of the following is an accepted financing wisdom?
A) The maturity of funds used to support a project should roughly match the project's duration.
B) Because firms can use their own equity as they choose, equity can be used to finance projects of any duration.
C) Any project can appropriately be supported by funding with a shorter maturity.
D) Any project can appropriately be supported by funding with a longer maturity.
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Chapter 17: The Management of Working Capital
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Sample Questions
Q1) Spontaneous financing exists because vendors and employees are not generally paid for their products and services immediately.
A)True
B)False
Q2) A firm's net working capital reflects the amount of funds required to support its day-to-day routine operations. The word net reflects the fact that the requirement is net of spontaneous financing.
A)True
B)False
Q3) Most spontaneous financing comes from trade payables created when vendors sell on credit allowing deferred payment.
A)True
B)False
Q4) Bank credit is a minor source of short-term financing for firms.
A)True
B)False
Q5) Cash reserved to make payments to vendors is an example of precautionary demand.
A)True
B)False
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Chapter 18: Corporate Restructuring
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Sample Questions
Q1) When a target company's management and board of directors feel that a combination would be a good idea and agree to cooperate with an acquirer, the result is commonly called:
A) a friendly merger.
B) a friendly consolidation.
C) an agreement in principle.
D) None of the above
Q2) The success of junk bonds in the 1980s was based on a rationale that was eventually proven wrong. That rationale was:
A) the failure rate of risky companies is only slightly higher than that of more reputable firms.
B) risky firms fail only slightly more often than highly rated firms in good economic times.
C) during hard times, risky companies fail a lot more frequently than higher rated firms.
D) None of the above correctly states the junk bond rationale.
Q3) In a consolidation, a new firm is formed from the assets of the combining firms.
A)True
B)False
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20
Chapter 19: International Finance
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Sample Questions
Q1) If the direct quote, forward exchange rate is higher than the spot rate, the forward currency is trading at a:
A) spot rate.
B) discount.
C) premium.
D) forward spot rate.
Q2) When a foreign currency is expected to become more valuable in the future, the forward currency is said to be selling at a premium over the spot rate.
A)True
B)False
Q3) Which of the following is most correct?
A) Translation risk comes from exchange rate gains and losses on international transactions as they occur.
B) Translation gains and losses are reflected on consolidated income statements.
C) Translation gains and losses are only realized if foreign investments are sold.
D) Both a. and c. are correct.
E) All of the above are correct.
Q4) Describe the difference between fixed and floating exchange rate systems.
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